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Form 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission File
December 31, 1996 Number O-14146
S2 GOLF INC.
------------
(Exact name of registrant as specified in charter)
New Jersey 22-2388568
- - ---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 Gloria Lane
Fairfield, N.J. 07004
- - --------------- -----
(Address of principal executive offices) (Zip Code)
(201) 227-7783
(Registrant's telephone number, including area code)
Securities registered pursuant to 12 (b) of the Act: None
Securities registered pursuant to 12 (g) of the Act:
Common Stock, Par Value $.01
-----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [ ]
As of February 24, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $1,244,677. This calculation
is based upon the closing price of the Registrant's common stock on February 24,
1997.
The number of shares of the Registrant's Common Stock outstanding as of February
24, 1997 was 2,211,803.
Part I
Item 1. Business.
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General Development of Business
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S2 Golf Inc. (the "Company") was incorporated under the laws of the State of New
Jersey in February 1982. The Company manufactures and markets a proprietary
line of golf equipment including golf clubs, golf bags, golf balls and
accessories. The Company markets these products under the tradename and
trademark SQUARE TWO /R/ and uses several additional trademarks including
S2/R/, PCX/R/, XGR/R/, ZCX/R/, Totally Matched/R/ and Posiflow/R/, among others.
The Common Stock of the Company (the "Common Stock") trades on the National
Association of Securities Dealers Automated Quotation System (NASDAQ) under the
trading symbol "GOLF."
During 1996, the Company introduced the "Classic Lady" line of graphite golf
clubs for the entry level player. The Company also introduced three new drivers
called the E.T. (Energy Transfer) which feature the Company's patented TriBar
internal reinforcement cell plus two boron rings in the graphite shaft that
sequentially store and release energy for additional clubhead speed.
The Company continued to expand its sales efforts through golf retailers in
1996. In the top 500 business markets around the United States, the Company
examines the characteristics of each market through research on golf
participation data as well as business data. The Company then forms business
relationships with those retailers that the Company believes best suit the needs
of the particular market.
Also during 1996, in partnership with the Ladies Professional Golf Association
(LPGA), the Company continued its "Square Two Custom Club Fitting System"
schools. Two-day seminars are held to educate LPGA and non-LPGA members in the
art of clubfitting. As a result of these seminars, the Company has over 100
clubfitters.
During 1994, the Company signed an exclusive dealer and licensing agreement with
Dalewin Limited of Hong Kong. The agreement allowed Dalewin to promote, market
and sell the Company's golf products, specifically golf clubs, golf equipment,
golf clothing and all other devices and products associated with the game of
golf, in Hong Kong, Macao, and the Peoples Republic of China. The agreement had
a three-year term and expired on February 28, 1997. The Company expects to
renew this agreement on a two-year term in 1997.
-1-
Also during 1994, the Company entered into an agreement with Black Rock, LLC, a
Colorado limited liability company, which provided the Company with the
exclusive right to manufacture and assemble two new products, the Black Rock
Putter and Black Rock Driver, to be marketed and sold by Black Rock in the
United States and Canada. The 1994 agreement ended at December 31,1995. A new
agreement with Black Rock became effective January 1, 1996. Under this agreement
the Company received a $3.00 royalty for each club sold by Black Rock, LLC which
incorporates the "Tri Bar" technology for which the Company holds a patent. This
agreement expired on December 31, 1996.
Description of Business
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Club Design
The Company designs products for men and women of all ages and has two broad
design approaches: one which targets the steel shaft market, and one which
targets the graphite shaft market, since each has peculiarities demanding
different approaches.
A. Steel Shaft Market
For many years, simple swingweight matching was the state of the art and the
basis for all golf clubs.
The Company's patented steel shafted "Totally Matched" concept, consisting of
matching four key physical properties, is designed to enhance a steel shafted
club's performance. These properties are:
1) Swingweight,
2) Total Weight,
3) Centers of percussion, and
4) Centers of gravity.
The Company's steel shaft clubs help the golfer create a smoother, more
repeatable swing by providing this total matching. To insure that each of these
properties is matched, the Company manufactures its clubs one set at a time,
instead of producing large batches of each club like some other manufacturers.
Every set is stamped with its own unique serial number for greater quality
control and consistency.
B. Graphite Shaft Market
In recent years, the graphite shaft market has experienced tremendous growth.
The lighter weight and design flexibility of graphite shafts gives significant
advantages over steel shafts. The Company, recognizing that graphite is rapidly
reducing the demand for steel shafts, especially in women's products, is
concentrating its development efforts in this area.
-2-
During 1996, the Company continued to improve and expand its graphite shaft
selection. The Company continued to market its Synchro Speed System/TM/ 1 and
Synchro Speed System 2 graphite shafts which were introduced in 1994 and offer
multiple flexes for all levels of play. In 1996, the Company introduced its
Boron Thruster Rings powered E.T. and Lady E.T. shafts. The shaft flex is
matched to the player's swing speed and driver carry, with the intent of
maximizing energy transfer at impact. The Company now offers 7 graphite shaft
club lines while maintaining 2 steel shaft club lines.
Products
The Company currently markets the following full line of golf equipment for both
men and women:
The PCX II steel line was redesigned in 1996 with medallions and features cavity
back, oversize elliptical head design for irons with oversize metal woods. The
driver features a Synchro Speed System 1 graphite shaft while the 3 and 5 woods
are lightweight steel. The irons feature lightweight steel shafts and are
Totally Matched. PCX II clubs are available for men and women with LPGA logo in
both right and left hand models as well as Lady Petite/R/.
The Light and Easy/TM/ line was redesigned in 1996 with medallions and features
the LPGA logo, lightweight steel or graphite shafted, cavity back, oversize,
stainless steel irons with steel or graphite shafted oversize, perimeter
weighted metal woods. Light and Easy/TM/ clubs are available in ladies and Lady
Petite for right hand golfers.
The Power Circle/TM/ line was redesigned in 1996 with medallions- Introduced in
early 1995, these irons, which are available in either steel or graphite shafts,
feature oversize, full cavity design with four corner cavity muscle back
designed to resist twist at impact. Metal woods feature steel or graphite
shafts with oversize head designs incorporating rails on the 3, 5 and 7 woods.
Power Circle clubs are available in men's right hand and left hand models.
The PCX II line was graphite redesigned in 1996 with medallions and features
power cavity muscle back stabilizers designed to resist twisting at impact on
these oversize irons. The oversize stainless steel metal woods have expanded
sweet spots. Irons and woods feature the Synchro Speed System 1 graphite shafts
which are matched to the player's swing speed. The PCX II graphite clubs are
available in men's right and left hand as well as ladies and Lady Petite with
LPGA logo.
The Company continues to market the ZCX line of clubs. The irons feature 4 way
cambered rectangular step sole and a high moment of inertia designed to resist
twist at impact. The woods feature the Company's patented Tri-Bar internal
reinforcement cell. All of these clubs feature high modulus, high frequency
Synchro Speed System 2 graphite shafts matched to the player's swing speed.
The Company continues to market the Tri-Force/TM/ line of men's irons and woods.
The oversize irons feature a deep cavity design and incorporate the Company's
patented Posiflow weighting system. The oversize metal woods feature the
Company's patented Tri-Bar internal reinforcement cell.
During 1996, the Company continued to market the WPD (Women's Power Design) to
golf course pro shops and fitting centers. The oversize irons and metal woods
are available in five flexes for women. The Synchro Speed System 2 graphite
shafts can be matched to most womens' swing speed and characteristics.
-3-
In 1996, the Company introduced the E.T. (Energy Transfer) and Lady E.T.
drivers. These drivers, which are available in right hand only, are available
in 46" and 48" models in mens and 44" in ladies. All models feature the
Company's exclusive boron thruster rings. These rings sequentially store and
release energy for additional club head speed and power through impact.
In 1996, the Company introduced its value line of womens graphite shafted club,
the Classic Lady. These clubs feature oversize stainless matrix irons and
oversize perimeter weighted titanium alloy woods.
The Company continued to sell Hi-tech golf bags for men and women as well as a
new tripod design for the walking golfer.
The Company continues to market a line of men's and women's golf balls and golf
gloves.
The ladies golf ball and glove packaging for 1995 was designed as part of the
LPGA Ladies Boutique approach to marketing ladies products.
The Company continues to market its full line of woods and wedges known as the
"Devil Series." This line includes the trademarks Distance Devil/R/, Tee
Devil/R/, Turf Devil/R/, Ruff Devil/R/ and Sand Devil/R/. During 1995, three new
Devil clubs were introduced, the Super 7, the Super 9, and the "Devil" Driving
Iron. This line is designed to meet the market need for "loose" or single club
sales (which are strongest in woods and wedges). The lines of woods and wedges
are available in both steel and graphite shafts.
Manufacturing
The Company's clubs are assembled at its facility located in Fairfield, New
Jersey. Finished heads are purchased from several sources in Taiwan, Thailand
and The Peoples Republic of China which manufacture them to the Company's
appearance and weight specifications, while steel shafts, grips, and accessories
are supplied by various domestic and foreign shaft manufacturers. The Company
obtains its graphite shafts from several domestic and foreign shaft suppliers.
All graphite shafts are manufactured to the Company's design specifications. In
the course of assembly, the Company applies its proprietary weighting and
balancing techniques to achieve the unique design and construction of Totally
Matched steel shafted clubs.
Seasonality
The golf industry is seasonal. While manufacturing goes on throughout the year,
demand for the Company's clubs is greatest in March through June. At December
31, 1996, the Company had committments from dealers to purchase products having
an aggregate sales value of approximately $1,800,000, subject to the Company's
ability to deliver on time, all of which the Company reasonably believes will be
filled on time. On the same date in 1995, the Company had commitments of
approximately $1,100,000.
-4-
Inventory Supply
The Company tries to maintain at least two sources of supply for irons and metal
wood heads from foreign suppliers. These suppliers generally require 90 to 120
day periods to deliver heads to the Company. Domestic suppliers of shafts and
grips are more plentiful and, under normal circumstances, can provide components
to the Company on relatively short notice. While the Company does not
anticipate long-term shortages of either components or sources of supply from
its domestic or foreign suppliers, no assurance can be given that the Company
will not experience shortages in the future. Delays are not anticipated to be
longer than two weeks and are not anticipated to materially affect the Company's
ability to deliver the product.
Prior to the Company's placement of an order with its foreign suppliers, the
Company must obtain a letter of credit in favor of that supplier in an amount
equal to the order. The Company has a line of credit in the amount of
$3,000,000 with PNC Bank pursuant to which PNC Bank may make available a credit
facility of up to $1,750,000 in the form of standby or documentary letters of
credit and demand loans. The amount and number of letters of credit outstanding
at any given time will vary on a daily basis depending on the dollar volume of
material being ordered and supplies received.
Industry Background
The National Golf Foundation estimates that in 1995 there were in excess of 25
million golfers in the United States. (1996 numbers are not yet available.)
The compound annual growth rate from 1995 to 1996 was 2.6%. The popularity of
the sport has created a significant market for golf clubs. In competition for a
share of the market, various manufacturers have developed golf clubs using
various materials, differing types of construction and the latest engineering
technology. It is anticipated that manufacturers will increase their research
and development efforts as well as their advertising expenditures.
Marketing & Distribution
Until approximately 15 years ago, top of the line golf equipment was sold almost
exclusively by golf professionals at private clubs. Currently, off course
specialty golf shops, sporting goods retailers, discounters and mail order
houses account for a substantial share of the golf club market.
The golf equipment industry is one in which advertising and promotion is
required to create market awareness of a company's products.
The Company advertises its LPGA endorsed products as required under the terms of
its agreement with the LPGA.
As of February 24, 1997, the Company had established a network of approximately
1,600 retailers with approximately 2,000 retail outlets. The Company has
prepared a comprehensive catalog for its dealers.
In 1996, no customer accounted for more than 5% of the Company's total sales.
The Company does not believe that the loss of any single customer would
materially affect its business.
-5-
The Ladies Professional Golf Association Agreement
The Company has entered into an agreement with the LPGA Tournament Players
Corporation (operating as the Ladies Professional Golf Association) which grants
the Company the exclusive right to use the LPGA name and logo on its women's
golf clubs and the non-exclusive right to use the LPGA name and logo on certain
of its other products, including golf bags. The Company has renewed the
exclusive licensee agreement through the year 2000 at which time the agreement
will become non-exclusive through 2003. At the end of 2003, the Company will
have the option to renew for two consecutive years under the same terms and
conditions. The agreement entitles the Company to use the license granted on a
worldwide basis. The Company is obligated to pay a license fee to the LPGA and
a royalty fee based on sales volume. To the extent the sum of 5% of sales of
the first $1,000,000 of women's golf equipment bearing the LPGA logo, plus
2-1/2% of all sales of LPGA logo equipment over that amount exceeds the minimum
annual license fee, such excess constitutes the annual royalty fee. The minimum
annual license fee for the term of the agreement is $175,000 in 1997 and
$200,000 each consecutive year through 2003.
The Company is obligated to spend a minimum of $100,000 each year on advertising
of LPGA - endorsed products under the terms of the agreement.
Competition
The golf club industry is highly competitive and is dominated principally by
approximately 15 nationally known manufacturers of sporting goods equipment.
Such manufacturers, including Callaway, Ping, Wilson, Spalding, MacGregor,
Taylor Made, Cobra and Titlist possess greater financial and other resources
than those of the Company. The Company primarily competes with these entities
based upon the uniqueness of the Totally Matched concept, the exclusive LPGA
endorsement of its women's clubs and the quality of its products and service.
However, there is no assurance that the Company will be able to continue to
successfully compete with such manufacturers in the future.
Golf clubs are also manufactured by lesser known, lower volume companies who
assemble clubs from components manufactured by others. While these
manufacturers of clubs are generally smaller than the Company, their products
also compete with those manufactured by the Company.
Patents and Trademarks
The Company holds three United States patents. One encompasses the Totally
Matched concept of weighting clubs, the second protects the concept of Posiflow
weighting in iron heads and the third patent protects the internal triangular
reinforcement cell for metal woods.
-6-
The Company has registered the following trademarks with the United States
Patent and Trademark Office:
TOTALLY MATCHED/R/ SQUARE TWO/R/ ONYX/R/
PCX/R/ MICRO-TORQUE/R/ S2/R/ (Stylized)
POSIFLOW/R/ TMP/R/ LADY PETITE/R/
BASHIE/R/ DYNA-BALANCE/R/ XGR/R/
ENGINEERED EXCELLENCE/R/ SSX/R/ SAND DEVIL/R/
ZCX/R/ DISTANCE DEVIL/R/ TURF DEVIL/R/
TEE DEVIL/R/ RUFF DEVIL/R/ TRI-BAR/R/
During 1996, the Company continued to systematically register its principal
trademarks in foreign countries with significant golf markets. The Company
believes the systematic protection will enhance its ability to develop future
worldwide brand recognition.
Given the competitive climate within the golf industry worldwide and the recent
counterfeiting of clubhead design, the Company believes that it is imperative to
protect the Company's tradenames, trademarks and patentable inventions and
designs.
Employees
As of December 31, 1996, the Company employed forty-one persons, including
thirty-eight fulltime employees of which three were executive officers. Thirty-
three of these were hourly employees and four were management and marketing
personnel. Additional hourly employees are hired during peak production periods
and management anticipates no problems in finding adequate employees. The
employees of the Company are not represented by any labor organization. The
Company believes that its present staff is adequate. However, if sales of the
Company's clubs should increase, it is anticipated that additional production,
clerical and management personnel may be necessary to meet product demand.
Special Note on Forward-Looking Statements
The business, financial condition and results of operations of the Company may
be adversely affected by a number of factors. Certain statements and
information contained herein constitute "forward-looking statements" within the
meaning of the Federal Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance, or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, the risks inherent in the development and
introduction of new products; the Company's dependence on consumer tastes which
fluctuate from time to time; seasonality and prevailing weather conditions as
protracted periods of inclement weather could disrupt consumer demand for golf-
related products; unanticipated shortages of components or delays in component
delivery and the significant competition in the Company's line of business, as
well as other risks and uncertainties.
-7-
Item 2. Properties.
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The Company currently leases its manufacturing, sales and executive offices
located at 18 Gloria Lane, Fairfield, New Jersey 07004. The Company exercised
its option to renew its lease at such facility through December 31, 1997. The
lease covers 20,612 square feet. The Company believes that this space is
adequate for its current production levels. See Note 7, Leased Properties, of
Notes to Financial Statements for additional information regarding this lease.
The Company has the option to renew the lease for one additional year.
Item 3. Legal Proceedings.
-----------------
No material lawsuits or claims are presently pending against the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
There were no matters submitted to shareholders for vote during the quarter
ended December 31, 1996.
Executive Officers of the Company
See Part III, Item 10 of this report.
-8-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
---------------------------------------------------------------------
The Common Stock of the Company is traded on NASDAQ under the trading symbol
"GOLF." The following table sets forth the high and low bid price for the
Common Stock as provided by NASDAQ for the periods indicated. These prices
represent quotations between dealers, do not include retail markups, markdowns
or commissions and do not necessarily represent prices at which actual
transactions were effected.
PERIODS: COMMON STOCK BID PRICES:
High Low
---- ---
1995 1st Quarter $ 2.00 $ 1.88
1995 2nd Quarter $ 1.88 $ 1.88
1995 3rd Quarter $ 2.50 $ 1.88
1995 4th Quarter $ 1.88 $ .81
1996 1st Quarter $1.56 $ .96
1996 2nd Quarter $1.50 $1.06
1996 3rd Quarter $1.75 $ .94
1996 4th Quarter $1.25 $ .81
On February 24, 1997, the number of holders of record of the Company's common
stock was approximately 268. No dividends have been paid to date and it is not
anticipated that dividends will be paid in the near future.
Item 6. Selected Financial Data.
-----------------------
Year Ended December 31,
------------------------
1996 1995 1994 1993 1992
Operating Results:
Net Sales $8,563,588 $7,243,207 $8,788,962 $8,947,430 $10,785,948
Net Income (Loss) 118,884 (80,468) 225,501 (378,969) 430,065
Net Income (Loss)
per Share 0.05 (0.04) 0.10 (0.17) 0.20
Weighted Average
Number of Shares
Outstanding 2,208,311 2,205,647 2,194,009 2,186,084 2,297,048
Cash Dividend 0 0 0 0 0
At Year End:
Working Capital 2,401,904 2,320,912 2,237,524 2,018,110 2,385,580
Total Assets 5,153,651 4,726,353 5,406,726 5,487,104 5,359,153
Total Liabilities 2,513,551 2,205,137 2,830,012 3,152,550 2,663,644
Long Term
Obligations: 253,498 315,206 343,214 424,893 418,206
Shareholder's
Equity 2,640,100 2,521,216 2,576,714 2,334,554 2,695,509
Market Price of
Common Stock
High-Low 1.75-.081 2.50-.081 2.75-1.75 3.38-2.00 4.88-2.75
-9-
1993 net income includes $423,129 for the cumulative effect of the adoption of
SFAS No. 109 "Accounting for Income Taxes."
1992 net income includes $112,452 for the extraordinary gain related to the
tax benefit of the utilization of net operating loss carryforwards.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations.
- - -------------
Results of Operations
Sales
- - -----
1996 Compared to 1995
For the year ended December 31, 1996, net sales were $8,563,588 versus
$7,243,307 for the year ended December 31, 1995, an increase of $1,320,281. The
increase in sales volume is primarily the result of the following: 1) more
attractive price points of women's merchandise to retailers, 2) increased sales
coverage via an increased outside sales force and, 3) a more cosmetically
appealing women's product line. In 1996, sales of the women's line accounted
for approximately 60% of total sales and sales of the men's line accounted for
approximately 40%, in 1995, mens sales accounted for approximately 60% and the
women's line accounted for approximately 40% of total sales. The change in
product sales mix is attributable to those factors associated with the overall
increase in sales volume.
1995 Compared to 1994
For the year ended December 31, 1995, net sales were $7,243,307 versus
$8,788,962 for the year ended December 31, 1994, a decrease of $1,545,655. The
decreased sales volume was primarily due to 1) the continued rapid growth of
three of the Company's competitors: Cobra, Callaway and Taylor Made; 2) several
key customers experiencing financial difficulty; and 3) price pressure from
other companies.
Gross Profit
- - ------------
1996 Compared to 1995
Gross profit on sales for the year ended December 31, 1996 was 32.2% versus
31.3% for the year ended December 31, 1995. The increase of approximately 1% is
primarily the result of the lower material costs as well as increased sales
volume and more attractive price points.
1995 Compared to 1994
Gross profit on sales for the year ended December 31, 1995 was 31.3% versus
33.1% for the year ended December 31, 1994. This 1.8% decrease was primarily
the result of lower sales volume.
-10-
Selling Expenses
- - ----------------
1996 Compared to 1995
Selling Expenses for the year ended December 31, 1996 were $1,251,688 versus
$812,105 for the year ended December 31, 1995, an increase of $439,583. This
increase was the result of increased costs associated with advertising as well
as sales salaries and commisson expenses due to the higher sales volume.
1995 Compared to 1994
Selling Expenses decreased $20,410 to $812,105 for the year ended December 31,
1995 compared to selling expenses of $832,515 in 1994. Advertising and public
relations expenses increased $106,405 from 1994 to 1995. The overall decrease
was the result of tighter cost controls in other areas.
General Administrative
- - ----------------------
1996 Compared to 1995
General and Administrative expenses decreased $200,509 to $1,115,631 for the
year ended December 31, 1996 compared to $1,316,140 for the year ended December
31, 1995. This decrease was the result of reduced office salaries as well as a
reduction in costs associated with rent for the Company's facility.
1995 Compared to 1994
General and Administrative expenses decreased $331,669 to $1,316,140 for the
year ended December 31, 1995 compared to $1,647,809 for the year ended December
31, 1994. This decrease was the result of lower legal costs, medical insurance
costs and bad debt expense.
Interest
- - --------
1996 Compared to 1995
Interest expense decreased $18,120 to $232,832 for the year ended December 31,
1996 compared to $250,952 for the year ended December 31, 1995. The reduction
is attributable to: 1) A reduction of approximately $7,000 of interest on the
average outstanding loan balance due to lower interest rates, 2) a reduction of
approximately $7,500 in interest to vendors and 3) a $3,600 reduction in
interest expense associated with the non-compete agreement.
1995 Compared to 1994
Interest expense increased to $250,952 in 1995 from $220,850 in 1994. This
increase was attributable to an increase in interest rates offset in part by a
decrease in the average loan balance. During 1995, the Company's average loan
balance was $1,659,656 as compared to $2,042,938 in 1994.
-11-
Income Taxes
- - ------------
1996 Compared to 1995
The Company had a 1996 tax benefit of $6,217 compared to a benefit of $30,671
for the year 1995. The 1996 tax benefit is attributable to the Company's
utilization of Net Operating Loss carryforwards.
1995 Compared to 1994
The Company had a 1995 tax benefit of $30,671 compared to a benefit of $16,360
for the year 1994. The benefit in 1995 was attributable to the Company's
operating loss for the period.
Liquidity and Capital Resources
The Company's working capital increased $80,992 to $2,401,904 for the year ended
December 31, 1996 as compared to $2,320,912 for the year ended December 31,
1995. This change was the result of an increase in current assets of $451,114
offset by an increase in current liabilities of $370,122. The increase in
current assets is attributable to an increase of $340,049 in accounts receivable
due to an overall increased sales volume as well as an increase in inventory of
$177,955 due to increased purchasing in the 4th quarter of 1996 versus the same
quarter of 1995. The increase in purchasing also resulted in an increase in
current liabilities with the amount due on the credit facility increasing
$327,225 from $1,445,021 for the year ended December 31, 1995 to $1,772,246 for
the year ended December 31, 1996. The increased activity in inventory purchases
was the result of the introduction of the 1997 product line in 1996 producing an
increased demand for product in the first quarter of 1997 over the same quarter
in 1996.
Cash used by operating activities in 1996 amounted to $168,961 as compared to
cash provided by operations of $35,919 and $424,915 in 1995 and 1994,
respectively. Cash used in operating activities resulted from higher inventory
and accounts receivable levels due to increased demand for product in the first
quarter of 1997 and overall increase in the sales volume in the fourth quarter
1996.
Credit Facility
In 1994, the Company obtained a credit line in the amount of $3,000,000 from
Midlantic Bank N.A. (subsequently acquired by PNC Bank) under an agreement dated
December 29, 1994. The Company's availability of funds from this credit line
varies as it is based on current receivables and inventory both of which the
Company has pledged as collateral against any outstanding loan balance and any
standby letters of credit issued on behalf of the Company. In accordance with
the agreement, the Company is charged interest on the outstanding loan balance
at the rate of prime plus 2%.
-12-
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS No. 129
"Disclosure of Information About Capital Structure". This statement establishes
standards for disclosing information about an entities capital structure. The
Statement is effective for Financial Statements for periods ending after
December 15, 1997.
Refer to the Index to Financial Statements and Financial Statement Schedule on
page F-1, for the required information.
Item 9. Change in and Disagreements with Accountants on Accounting and
--------------------------------------------------------------
Financial Disclosure.
- - ---------------------
None.
-13-
Part III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
Management
Directors and Executive Officers
The Company's current directors and executive officers are:
Name Age Position with the Company
- - -------------------------------------------------------------------------
Robert L. Ross 52 Chairman of Board and Chief Executive
Officer
Douglas A. Buffington 41 Director, President, Chief Financial Officer,
Chief Operating Officer and Treasurer
Randy A. Hamill 41 Senior Vice President of Manufacturing
and Resources and Assistant Secretary
Richard M. Maurer 48 Director and Secretary
Mary Ann Jorgenson 56 Director
Frederick B. Ziesenheim 70 Director
ROBERT L. ROSS has been a director of the Company since 1988 and Chairman of the
Board since October 1995. Effective in January 1996, Mr. Ross became Chief
Executive Officer of the Company. He has been Co-Managing Partner of Wesmar
Partners Limited Partnership ("Wesmar Partners"), the majority shareholder of
the Company, since 1985. Prior to the formation of Wesmar Partners, Mr. Ross
was associated with The Hillman Company, a private investment firm from 1978 to
1985. Mr. Ross is a Certified Public Accountant and was associated with Haskins
& Sells and with Westinghouse Electric Corporation prior to joining The Hillman
Company.
DOUGLAS A. BUFFINGTON joined the Company in January 1994 as Vice President of
Sales and Marketing, became Chief Financial Officer and Chief Operating Officer
in June 1994, became President in December 1994, a director in February 1995 and
Treasurer in January 1996. From 1992 until joining the Company, Mr. Buffington
served as General Manager of Simon-Duplex, a $25 million capital goods division
of Simon Engineering, a company based in the United Kingdom. From 1990 to 1992,
he served as Vice President of Finance of Simon-Ltd., a $35 million division of
Simon Engineering.
RANDY A. HAMILL has been Senior Vice President of Manufacturing and Resources
with the Company since July 1991 and is in charge of all manufacturing and
purchasing. Effective in January 1996, Mr. Hamill became Assistant Secretary of
the Company. He was formerly Vice President of Manufacturing of the Company
from 1981 to July 1991.
-14-
RICHARD M. MAURER has been a director of the Company since 1988. Effective in
January 1996, Mr. Maurer became Secretary of the Company. He has been Co-
Managing Partner of Wesmar Partners, the majority shareholder of the Company,
since 1985. Prior to the formation of Wesmar Partners, Mr. Maurer was
associated with The Hillman Company, a private investment firm, from 1978 to
1985. Mr. Maurer is a Certified Public Accountant and was associated with Price
Waterhouse prior to joining The Hillman Company.
MARY ANN JORGENSON has been a director of the Company since 1992. She has been
a partner with the law firm of Squire, Sanders & Dempsey since 1984 and has been
associated since 1975 with that firm. She also serves as a director of Cedar
Fair Management Company, the general partner of Cedar Fair, L.P., an owner and
operator of amusement parks and is a director and Secretary of Essef
Corporation, a manufacturer of plastic pressure vessels for the water treatment
and systems industry, spa and pool equipment, and containers for hazardous waste
transportation.
FREDERICK B. ZIESENHEIM has been a director of the Company since 1992. He has
been with the law firm of Webb, Ziesenheim, Bruening, Logsdon, Orkin & Hanson,
P.C. (formerly Webb, Burden, Ziesenheim & Webb, P.C.) since 1988 and is
currently Vice President and a member of the management committee of such firm.
Prior to combining his practice with that firm, he was President and a senior
member of the law firm of Buell, Ziesenheim, Beck and Alstadt, P.C., with whom
he had been associated since 1958.
All directors hold office until the next annual meeting of the Company's
shareholders and until their successors have been elected and qualified.
Officers serve at the discretion of the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Company's directors, executive officers and any person
holding ten percent or more of the Company's Common Stock are required to report
their initial ownership of the Company's Common Stock and any changes in that
ownership to the Securities and Exchange Commission. Based solely on a review
of copies of the forms furnished to the Company in 1996 and written
representations from the Company's directors and executive officers, the Company
believes that all Section 16(a) filing requirements applicable to its directors,
executive officers and ten percent shareholders in 1996 were complied with,
except with respect to a former executive officer who failed to file his initial
report upon becoming an executive officer of the Company, failed to file a
report with repect to grants of stock options in 1996 and failed to timely file
a Form 5 at year end. In addition, Frederick Ziesenheim and Mary Ann Jorgenson
failed to timely file a report with respect to two automatic stock grants
pursuant to the Company's Stock Plan for Independent Directors.
-15-
Item 11. Executive Compensation.
-----------------------
The following table sets forth certain information with respect to annual and
long-term compensation for services in all capacities paid by the Company (i)
for the year ended December 31, 1996, to or on behalf of Robert L. Ross, who
became Chief Executive Officer of the Company in January 1996 and (ii) for the
years ended December 31, 1996, 1995 and 1994 to or on behalf of Douglas A.
Buffington who became President of the Company in December 1994. No executive
officer of the Company other than Mr. Buffington earned in excess of $100,000 in
1996.
SUMMARY COMPENSATION TABLE
Long Term
---------
Compensation
------------
Annual Compensation Awards
------------------- ------
- - ----------------------------------------------------------------
Name and Other Securities
Principal Annual Underlying All other
Position Year Salary Bonus Compensation Options Compensation
- - -------------------------------------------------------------------------------------------------
Robert L. Ross,
Chief
Executive
Officer 1996 $ 0 $ 0 $ 0 0 $ 0
Douglas A. 1996 $109,612 $10,000(4) $17,813(1) --- $975(2)
Buffington,
President 1995 $ 89,885 $16,878(1) 27,500 $975(2)
1994 $ 76,154 $10,000(3) $15,961(1) --- $975(2)
(1) Represents an approximation of travel/commuting expenses reimbursed by the
Company.
(2) The Company paid $975 annual premium on a $750,000 insurance policy on the
life of Mr. Buffington, which names Mr. Buffington's wife as the sole
beneficiary.
(3) Bonus earned in 1994, paid in 1995.
(4) Bonus earned in 1996, paid in 1997.
The following table sets forth certain information pertaining to stock options
held by Douglas A. Buffington as of December 31, 1996, on which date the $2.00
exercise price per share for such options exceeded the $1.00 per share market
value of the Common Stock.
1996 FISCAL YEAR END OPTION HOLDINGS
------------------------------------
Number of Securities Underlying
Options at Fiscal Year-End
--------------------------
Name Exercisable Unexercisable
- - --------------------------------------------------------------------
Robert L. Ross - -
Douglas A. Buffington 10,000 17,500
-16-
Directors Compensation
- - ----------------------
The Company compensates its non-employee directors, by granting such persons
shares of the Company's Common Stock having a value of $1,000 for every meeting
of the Board of Directors or committee thereof attended by such person and
effective in 1997, shares of common stock having a value of $500 if such person
participated in a meeting by telephone. The number of shares issued is based on
the closing price of the stock on the exchange where traded on the meeting date
or the preceding date on which such shares were traded. The shares are issued
on the first business day following the meeting. Though not employees of the
Company, Messrs. Maurer and Ross do not participate in this plan. The Company
has entered into a consulting agreement with MR & Associates, an affiliate of
Messrs. Maurer and Ross. See Item 13, Certain Relationships and Related
Transactions.
Employment Agreements
- - ---------------------
In January 1995, the Company entered into an employment agreement with Douglas
A. Buffington with a term ending December 31, 1997. Mr. Buffington's annual
salary under the agreement was $110,000 and $90,000 for the years ended December
31, 1996 and 1995, respectively. The agreement also entitles Mr. Buffington to
receive from the Company health and disability benefits, reimbursement of
certain expenses and a $750,000 life insurance policy with Mr. Buffington's
spouse as beneficiary. If the agreement is terminated, the agreement provides
that Mr. Buffington is only entitled to receive the unpaid balance of his salary
prorated and accrued to the date of termination.
Under the employment agreement, Mr. Buffington was granted an option to acquire
27,500 shares of the Company's Common Stock at $2.00 per share, which exercise
price is equal to the average of the NASDAQ bid and asked closing price per
share on the date of the grant. The option was exercisable immediately with
respect to 5,000 shares, became exercisable with repect to 5,000 shares on
January 1, 1996 and 7,500 shares on January 1, 1997 and providing Mr. Buffington
remains employed by the Company, 10,000 shares will become exercisable on
December 31, 1997. Upon the occurrence of a change in control of the Company,
the option will vest with respect to all 27,500 shares. The exercise price per
share with respect to shares which were previously unvested (the "Accelerated
Exercise Price") would be either (i) one cent or (ii) the lowest exercise price
greater than one cent per share which would not cause the value to Mr.
Buffington of shares acquired upon exercise to be considered to be an "excess
parachute payment" under section 280G of the Internal Revenue Code of 1986, as
amended. The exercise price for previously vested shares would be the lower of
(a) the Accelerated Exercise Price or (b) $2.00.
-17-
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 25, 1997 by (i) each person
who beneficially owned five percent or more of the outstanding Common Stock (ii)
each director, (iii) Robert L. Ross and Douglas A. Buffington and (iv) all
directors and executive officers as a group calculated in accordance with Rule
13d-3 under the Exchange Act. Except as otherwise noted, the persons named in
the table below have sole voting and investment power with respect to the shares
shown as beneficially owned by them.
Amount
Beneficially Percent
Name Owned (1) of Class (1)
- - --------------------------------------------------------------------
L. R. Jeffrey (2) 260,121 11.1
50 Gloucester Road
Summit, NJ 07901
Richard M. Maurer (3) 1,401,096 63.3
Three Gateway Center
Pittsburgh, PA 15222
Robert L. Ross (4) 1,401,096 63.3
Three Gateway Center
Pittsburgh, PA 15222
Mary Ann Jorgenson 9,278 *
4900 Society Center
127 Public Square
Cleveland, OH 44114-1304
Fredierick B. Ziesenheim 9,761 *
700 Koppers Building
436 7th Avenue
Pittsburgh, PA 15219-1818
Douglas A. Buffington 33,500 *
18 Gloria Lane
Fairfield, NJ 07004
Wesmar Partners (5) 1,399,096 63.4
Three Gateway Center
Pittsburgh, PA 15222
All directors and executive
officers as a group (6) (7 persons) 1,561,152 66.7
- - ---------------
*Less than one percent
-18-
(1) The numbers shown include shares covered by options that are currently
exercisable or exercisable within 60 days of December 31, 1996. The numbers and
percentages of shares owned assume that such outstanding options had been
exercised as follows: L. R. Jeffrey, Jr. - 250,000, Douglas A. Buffington -
33,500, and all directors and executive officers as a group - 127,767.
(2) Does not include 2,823 shares owned by various members of Mr. Jeffrey's
family with respect to which shares he disclaims any beneficial ownership.
(3) Includes 2,000 shares which are held directly by two trusts of which Mr.
Maurer is co-trustee and with respect to which he shares voting and investment
power, and 1,399,096 shares owned directly by Wesmar Partners with respect to
which he shares voting and investment power. Mr. Maurer is an officer, director
and principal shareholder of Maurer Ross & Co., Incorporated, the general
partner of MR & Associates, the managing general partner of Wesmar Partners.
(4) Includes 1,399,096 shares owned directly by Wesmar Partners. Mr. Ross is an
officer, director and principal shareholder of Maurer Ross & Co., Incorporated,
the general partner of MR & Associates, the managing general partner of Wesmar
Partners.
(5) Wesmar Partners is a Pennsylvania limited partnership whose partners are
Landmark Equity Partners III, L. P., a Delaware limited partnership, and MR &
Associates, a Pennsylvania limited partnership. MR & Associates is the managing
partner of Wesmar Partners. Messrs. Maurer and Ross are officers, directors and
principal shareholders of Maurer Ross & Co., Incorporated, a Pennsylvania
corporation and the general partner of MR & Associates.
(6) Does not include shares owned by various members of a certain officer's
family with respect to which shares such officer disclaims any beneficial
ownership. Includes 1,399,096 shares owned directly by Wesmar Partners. See
notes 3, 4 and 5 above.
Item 13. Certain Relationships and Related Transactions.
-----------------------------------------------
Transactions with Management and Others
In January 1995, the Company entered into a consulting agreement with George H.
Nichols, a director of the Company until October 1995, under which Mr. Nichols
agreed to provide consulting services to the Company in connection with sales,
marketing and development of the Company's products. This agreement was
terminated in October 1995. During 1995, Mr. Nichols received reimbursement for
certain expenses and $54,000 in consulting fees at the rate of $6,000 per month
from January through September. Under the agreement, Mr. Nichols was granted an
option to acquire 37,500 shares of the Company's Common Stock at $1.875 per
share, which exercise price was equal to the price per share paid for NASDAQ's
last Common Stock sale transaction on the date of the grant. Such option is
currently exercisable in full.
-19-
Pursuant to a consulting agreement with the Company, MR & Associates provides
the Company with business counseling for $5,000 per month. The agreement, which
had been extended, expired on December 31, 1996. Messrs. Maurer and Ross,
directors of the Company, are officers, directors and principal shareholders of
Maurer Ross & Co., Incorporated, the general partner of MR & Associates. MR &
Associates is the managing general partner of Wesmar Partners, a beneficial
owner of approximately 63% of the outstanding Common Stock. In 1995, the
Company paid MR & Associates $70,000 of which $20,000 was due under the
agreement with respect to 1994. At December 31, 1995, $10,000 was due to MR &
Associates. In 1996, the Company paid MR & Associates $15,000 of which $10,000
was due under the agreement with repect to 1995 and $5,000 which represented one
months' payment under this agreement for 1996, with the remaining $55,000 waived
by MR & Associates.
The Company paid Wesmar Partners $19,075 in 1995 for property, liability and
worker's compensation insurance coverage provided by Wesmar Partners to the
Company through Liberty Mutual Insurance Company. In 1996, the Company received
$10,198 from Wesmar Partners representing a retro-adjustment for the 94-95
policy year. Wesmar Partners beneficially owns approximately 63% of the
outstanding Common Stock. Messrs. Maurer and Ross, directors of the Company,
are officers, directors and principal shareholders of Maurer Ross & Co.,
Incorporated, the general partner of MR & Associates, the managing partner of
Wesmar Partners.
During the fiscal years ended December 31, 1996 and 1995, the Company retained
the law firm of Webb, Ziesenheim, Bruening, Logsdon, Orkin & Hanson, P.C. of
which Frederick B. Ziesenheim, a director of the Company, is a Vice President
and member of the Management Committee of such firm, to represent the Company on
various intellectual property matters.
During 1994, the Company finalized a proposal that resulted in the formation of
Squaretwo Golf New Zealand, Ltd ("New Zealand"). The Company contributed
inventory for a 34% ownership of Squaretwo Golf New Zealand, Ltd. Squaretwo
Golf New Zealand, Ltd. was to supply S2 Golf products to the New Zealand and
Australian markets. In November 1996, the Company received their original
investment back from New Zealand thereby dissolving the relationship with New
Zealand. The dissolution resulted in a loss of investment of approximately
$1,000 which is included in other income and expense.
On May 3, 1991, L. R. Jeffrey resigned as an officer and director of the
Company. In connection with such resignation, the Company and Mr. Jeffrey
entered into a Separation Agreement (the " Separation Agreement"). Mr. Jeffrey
agreed that for a period of five years that began on July 1, 1992, he would not
engage in the United States in any activity similar to the Company's business of
designing, manufacturing, marketing and selling golf clubs and equipment. In
return for the covenant not to compete, the Company is obligated to pay Mr.
Jeffrey or his estate $6,000 per month for a period of ten years that began on
April 1, 1992. In each of 1996 and 1995, the Company paid Mr. Jeffrey $72,000
under this agreement. In connection with the Separation Agreement, the Company
granted Mr. Jeffrey a stock option for 250,000 shares of the Company's Common
Stock at a purchase price of $4.48 per share, which was the average of the
closing bid and ask prices of the common stock on the trading date immediately
preceding the effective date of the grant. Subject to certain limitations, the
option was exercisable immediately and will remain exercisable by Mr. Jeffrey,
or upon his death, by his legal representative or beneficiary, until April 16,
2006. If and to the extent that any amount is realized in excess of the
exercise price upon the sale of any Common Stock obtained upon exercise of all
or any part of the option, then 65 percent of such excess amount, subject to
certain limitations, is to be paid to the Company in immediately available funds
concurrent with the realization event.
-20-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
(a) (1) The financial statements listed in the accompanying Index to Financial
Statements and Financial Statement Schedule on Page F-1 is filed as
part of this report.
(2) The financial statement schedule listed in the accompanying Index to
Financial Statements and Financial Statement Schedule on Page F-1 are
filed as part of this report.
(3) The Exhibits listed in the accompanying Exhibit Index are filed as
part of this report.
(b) No current reports on Form 8-K were filed for the fourth quarter ended
December 31, 1996.
-21-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
S2 GOLF INC.
Dated: 3/21/97 By: /s/ Douglas A. Buffington
-------------- --------------------------
Douglas A. Buffington
President, Chief Financial Officer,
Chief Operating Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Douglas A. Buffington Director, President, Chief 3/21/97
- - --------------------------- Financial Officer, Chief ---------------------------
Douglas A. Buffington Operating Officer and Treasurer
/s/ Robert L. Ross Chairman of the Board 3/21/97
- - --------------------------- and Chief Executive Officer ---------------------------
Robert L. Ross
/s/ Richard M. Maurer Director and Secretary 3/21/97
- - --------------------------- ---------------------------
Richard M. Maurer
3/21/97
- - --------------------------- Director ---------------------------
Mary Ann Jorgenson
3/21/97
- - --------------------------- Director ---------------------------
Frederick B. Ziesenheim
-22-
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Financial Statements Page
Independent Auditors' Report F-2
Balance Sheets - As of December 31, 1996
and 1995 F-3
Statements of Operations - For the Years
Ended December 31, 1996, 1995 and 1994 F-4
Statements of Cash Flows - For the Years Ended
December 31, 1996, 1995 and 1994 F-5
Statements of Changes in Shareholders' Equity - For the
Years Ended December 31, 1996, 1995 and 1994 F-6
Notes to Financial Statements F-7
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
and Reserves F-20
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
F-1
Deloitte &
Touche LLP
- - ----------- -----------------------------------------------------------
[LOGO] Two Hilton Court Telephone: (201) 683-7000
P.O. Box 319 Facsimile: (201) 683-7459
Parsippany, New Jersey 07054-0319
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of S2 Golf Inc.:
We have audited the accompanying balance sheets of S2 Golf Inc. as of December
31, 1996 and 1995 and the related statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. Our audits also included the financial statement
schedule listed in the accompanying Index. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of S2 Golf Inc. as of December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
March 21, 1997
- - ---------------
Deloitte Touche
Tohmatsu
International
- - ---------------
S2 GOLF INC.
BALANCE SHEETS
AS OF DECEMBER 31,
ASSETS 1996 1995
----------- -----------
Current Assets
Cash $166,592 $18,995
Accounts Receivable (Net of Allowance
for Doubtful Accounts of $250,131 in 1996
and $284,375 in 1995 2,429,680 2,089,631
Inventory (Note 2) 1,873,201 1,695,246
Prepaid Expenses 42,353 139,968
Prepaid Income Taxes 0 10,000
Deferred Income Taxes (Note 6) 150,131 257,003
----------- -----------
Total Current Assets 4,661,957 4,210,843
Plant and Equipment - Net (Note 3) 112,660 148,365
Non-Current Deferred Income Taxes (Note 6) 187,758 54,079
Investment - Squaretwo Golf New Zealand, Ltd. (Note 12) 0 11,129
Other Assets - Net (Note 4) 191,276 301,937
----------- -----------
Total Assets $5,153,651 $4,726,353
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-Term Borrowings (Note 5) $1,772,246 $1,445,021
Accounts Payable 230,090 172,233
Accrued Expenses 195,301 217,107
Other Current Liabilities 62,416 55,570
----------- -----------
Total Current Liabilities 2,260,053 1,889,931
Non-Current Liabilities 253,498 315,206
----------- -----------
Total Liabilities 2,513,551 2,205,137
Commitments and Contingencies (Note 8)
Shareholders' Equity (Note 11) -
Common Stock, $.01 Par; 12,000,000
Authorized Shares: 2,208,311 Issued and
Outstanding at December 31, 1996
and 1995
22,083 22,083
Additional Paid in Capital 4,025,475 4,025,475
Accumulated Deficit (1,407,458) (1,526,342)
----------- -----------
Total Shareholders' Equity 2,640,100 2,521,216
----------- -----------
Total Liabilities and Shareholders' Equity $5,153,651 $4,726,353
=========== ===========
See notes to financial statements
F-3
S2 GOLF INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
Net Sales $8,563,588 $7,243,307 $8,788,962
Cost of Goods Sold 5,805,895 4,979,651 5,879,244
----------- ----------- -----------
Gross Profit 2,757,693 2,263,656 2,909,718
----------- ----------- -----------
Operating Expenses:
Selling 1,251,688 812,105 832,515
General & Administrative 1,115,631 1,316,140 1,647,809
----------- ----------- -----------
Total Operating Expenses 2,367,319 2,128,245 2,480,324
----------- ----------- -----------
Operating Income 390,374 135,411 429,394
----------- ----------- -----------
Other Income (Expense)
Interest Expense (232,832) (250,952) (220,850)
Other Income (Expense) (44,875) 4,402 3,597
----------- ----------- -----------
Other - Net (277,707) (246,550) (217,253)
----------- ----------- -----------
Income (Loss) Before Income Taxes 112,667 (111,139) 212,141
(Benefit ) for Income Taxes (Note 6) (6,217) (30,671) (16,360)
----------- ----------- -----------
Net Income (Loss) $118,884 ($80,468) $228,501
=========== =========== ===========
Earnings (Loss) Per Common Share $0.05 ($0.04) $0.10
=========== =========== ===========
Weighted Average Number of Shares Outstanding 2,208,311 2,205,647 2,194,009
See notes to financial statements
F-4
S2 GOLF INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
OPERATING ACTIVITIES
- - --------------------
Net Income (Loss) $118,884 ($80,468) $228,501
Adjustments to Reconcile Net Income to Net Cash (used)
Provided By Operating Activities:
Depreciation and Amortization 159,075 175,994 169,590
Loss on Retirement of Equipment - - 3,775
Deferred Income Taxes (26,807) (675) 86,546
Issuance of Stock for Compensation - 24,970 13,659
Cash Flow Provided (Used) by Operating Activities as a - - -
Result of Changes in:
Accounts Receivable (340,049) (248,017) 250,720
Inventory (177,955) 706,369 (153,204)
Prepaid Expenses 97,615 (94,803) (21,549)
Prepaid Income Taxes 10,000 (10,000) 36,140
Other Assets 9,086 11,964 (53,748)
Accounts Payable and Accrued Expenses 36,051 (319,236) (78,490)
Other Current Liabilities 21,135 (99,586) 22,069
Income Taxes Payable - (2,585) 2,585
Other - Net (75,996) (28,008) (81,679)
----------- ----------- -----------
NET CASH (USED) PROVIDED BY OPERATIONS (168,961) 35,919 424,915
----------- ----------- -----------
INVESTING ACTIVITIES
- - --------------------
Purchase of Equipment (21,795) (83,247) (89,718)
Investment in Squaretwo Golf New Zealand, Ltd. 11,129 (29) (11,100)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (10,666) (83,276) (100,818)
FINANCING ACTIVITIES
Proceeds from Line of Credit 8,206,401 7,096,764 5,314,988
Payments on Line of Credit (7,879,177) (7,272,224) (5,502,011)
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 327,224 (175,460) (187,023)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH 147,597 (222,817) 137,074
CASH - BEGINNING OF PERIOD 18,995 241,812 104,738
----------- ----------- -----------
CASH - END OF PERIOD $166,592 $18,995 $241,812
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
Information Cash Paid During the Year For:
Interest $219,728 $235,921 $222,880
Income Taxes (Net of Refunds) 39,039 20,000 (141,630)
See notes to financial statements
F-5
S2 GOLF INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
TOTAL
COMMON STOCK CAPITAL IN TREASURY STOCK SHARE-
----------------- EXCESS OF ----------------- ACCUMULATED HOLDERS'
SHARES AMOUNT PAR VALUE SHARES AMOUNT DEFICIT EQUITY
------ ------ ---------- ------ ------ ----------- --------
Balance - Dec. 31, 1993 2,189,937 $21,899 $3,987,030 0 0 ($1,674,375) $2,334,554
Issuance of Common Stock 5,800 58 13,602 - - - 13,660
Net Income - 1994 - - (1) - 0 228,501 228,500
------------------------------------ ------------------ ------------ -----------
Balance - Dec.31, 1994 2,195,737 21,957 4,000,631 0 (1,445,874) 2,576,714
Issuance of Common Stock 12,574 126 24,844 - - - 24,970
Net Income - 1995 - - - - - (80,468) (80,468)
------------------------------------ ------------------ ------------ -----------
Balance - Dec.31, 1995 2,208,311 22,083 4,025,475 0 0 (1,526,342) 2,521,216
Net Income-1996 - - - - - 118,884 118,884
------------------------------------ ------------------ ------------ -----------
Balance-Dec.31, 1996 2,208,311 $22,083 $4,025,475 ($1,407,458) $2,640,100
==================================== ================== ============ ===========
See notes to financial statements
F-6
S2 GOLF INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
S2 Golf Inc. (the "Company") was incorporated under the laws of The State of New
Jersey on February 2, 1982. The Company manufactures and markets a proprietary
line of golf equipment including golf clubs, golf bags, golf balls and
accessories. The Company markets these products under various tradenames and
uses several additional trademarks.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentration of Credit Risk
The Company sells to customers primarily throughout the United States, with a
small amount sold to customers overseas. The Company does not require collateral
on its trade receivables and while it believes its trade receivables, net of
allowance for doubtful accounts, will be collected, the Company anticipates that
in the event of default it would follow normal collection procedures. Overall,
the Company's credit risk related to its trade receivables is limited due to the
broad range of products and the large number of customers in differing
geographic areas.
Fair Value of Financial Instruments
The fair value of cash, accounts receivable and accounts payable approximate
their carrying values due to the short-term nature of the instruments. The fair
value of short-term borrowings approximates its carrying value due to their
variable interest rate features which reprice quarterly.
Inventory
Inventory is valued at the lower of cost, determined on the basis of the first-
in, first-out method, or market.
F-7
Plant and Equipment
Plant and equipment is stated at cost, less accumulated depreciation and
amortization. Depreciation is provided over the estimated useful service life.
The estimated lives used in determining depreciation are:
Machinery and Equipment 5 Years
Furniture and Fixtures 7 Years
Leasehold improvements are amortized over the lives of the respective leases or
the service lives of the improvements, whichever is shorter.
Maintenance and repairs are charged to operations as incurred.
Revenue Recognition
The Company recognizes revenue upon the shipment of merchandise in fulfillment
of orders.
Other Assets
Other assets principally include patents, trademarks and a covenant not to
compete with a former officer of the Company. The patents and trademarks are
amortized on the straight-line method over 15 years. The covenant not to compete
is being amortized over a five-year period on a straight-line method which began
on July 1, 1992. Management periodically evaluates the recoverability of
intangible assets based upon current and anticipated net income and undiscounted
future cash flows.
F-8
Reclassifications
Certain reclassifications have been made to the prior years financial statements
to conform to classifications used in 1996.
2. Inventory
---------
Inventory consists of the following components at December 31:
1996 1995
---- ----
Finished Goods $ 828,060 $ 831,649
Work in Process 25,000 25,000
Raw Materials 1,020,141 838,597
---------- ----------
$1,873,201 $1,695,246
========== ==========
At December 31, 1996 and 1995, inventory has been pledged as collateral for the
Company's line of credit as discussed in Note 5.
3. Plant and Equipment
-------------------
Plant and equipment at December 31, were as follows:
1996 1995
---- ----
Machinery and Equipment $628,586 $606,791
Furniture and Fixtures 54,485 54,485
Leasehold Improvements 43,554 43,554
-------- --------
Total 726,625 704,830
Less: Accumulated Depreciation
and amortization 613,965 556,465
-------- --------
$112,660 $148,365
======== ========
Depreciation for the years ended 1996, 1995 and 1994 was $57,500, $74,549 and
$68,758, respectively.
F-9
4. Other Assets
------------
Other Assets consists of the following at December 31, 1996, and 1995.
1996 1995
---- ----
Covenant not to Compete $436,277 $436,277
Patents and Trademarks 217,725 212,629
Security Deposits 19,500 20,350
Deferred Loan Charges 0 13,332
-------- --------
Total 673,502 682,588
Less: Accumulated
Amortization 482,226 380,651
-------- --------
$191,276 $301,937
======== ========
Amortization expense for the years ended 1996, 1995 and 1994 was $101,575,
$101,446 and $100,832, respectively.
5. Short Term Borrowings
---------------------
The Company has a revolving line of credit with PNC Bank with a maximum credit
limit of $3,000,000 subject to a borrowing base of 70% of eligible accounts
receivable and depending on the time of year, 40% to 50% of qualified inventory.
The line will expire December 31, 1997. The line of credit is collateralized by
substantially all of the Company's assets and carries an interest rate of prime
plus 2%. The interest rate at December 31, 1996 was 8%. At December 31, 1996 and
1995, the Company had approximately $357,637 and $61,937 of availability under
this facility, respectively.
The Company may issue letters of credit through PNC Bank for up to $1,750,000
against the line of credit. At December 31, 1996 and 1995, the total amount
outstanding of letters of credit were $127,323 and $3,517, respectively.
These facilities contain certain affirmative and negative covenants which, among
other items, require the maintenance of certain financial amounts and ratios
including tangible net worth and working capital. Any event of default under the
facility permits the lender to cease making additional loans thereunder. The
Company was in compliance with all covenants at December 31, 1996.
F-10
6. Income Taxes
------------
The provision (benefit) for income taxes for the years ended December 31, 1996,
1995 and 1994 consists of the following:
1996 1995 1994
---- ---- ----
Current
Federal $ 0 $(21,826) $ 31,100
State 20,590 ( 7,637) 39,086
---------- --------- ---------
20,590 (29,464) 70,186
Deferred
Federal (20,765) ( 1,648) (67,550)
State (6,042) 447 (18,996)
---------- --------- ---------
(26,807) ( 1,207) (86,546)
Total Provision (Benefit) for
Income Taxes $( 6,217) $(30,671) $(16,360)
========== ========= =========
Although the effective statutory rate is 35%, the marginal 34% rate applicable
to taxable income not in excess of $10 million per year, is a significant factor
in the measurement of the deferred tax assets.
As a result of a change in ownership during 1988, the utilization of the net
operating loss carryforward for federal purposes had been determined to be
limited to $232,500 each year until their expiration. In years that the
limitation exceeds the amount of the net operating loss utilized, such excess
amount shall be carried over to the subsequent year.
F-11
A summary of the differences between the actual income tax provision (benefit)
and the amounts computed by applying the statutory Federal income tax rate to
income is as follows:
1996 1995 1994
---- ---- ----
Federal Tax (Benefit) at Statutory Rate $38,307 ($37,787) $ 72,128
Increase (Decrease) in Taxes
Resulting From:
Valuation Allowance (62,967) (109,919)
Travel and Entertainment 3,981 (2,129) 2,996
State Tax, Net of Federal Tax Benefit 7,611 5,755 13,451
Other 6,851 3,490 4,984
--------- ----------- ---------
Total Income Tax Provision (Benefit) $( 6,217) $ (30,671) $(16,360)
========= =========== =========
At December 31, 1996, the Company had a Federal tax operating loss carryforward
of approximately $791,741 for tax purposes, of which $232,500 will expire in
each of the years 1999 through 2002.
F-12
The tax effects of temporary differences and carryforward items that give rise
to significant portions of the current and noncurrent deferred tax assets at
December 31, 1996 and December 31, 1995 are as follows:
December December
31, 1996 31, 1995
-------- --------
Allowance for Doubtful Accounts $115,981 $129,671
Legal Settlement 191 191
Accrued Expenses 90,274 80,193
Other 60,457 46,948
Valuation Allowance (116,772) 0
--------- --------
Current Deferred Income Tax 150,131 257,003
========= ========
Net Operating Loss 233,544 296,511
Non-Compete Agreement (17,829) ( 720)
Valuation Allowance (116,772) ( 296,511)
Other 88,815 54,799
--------- --------
Non Current Deferred Income Tax $187,758 $54,079
========= ========
7. Leased Properties
-----------------
Operating Lease
The Company leases factory and office space at 18 Gloria Lane, Fairfield, New
Jersey. On June 30, 1996, the Company and the lessor amended the lease to extend
its term to December 31, 1997. The Company has an option to renew upon
expiration. The annual base rent for 1997 will be $118,519. In addition to the
base rent, the Company is obligated to pay its pro rata share of real estate
taxes, assessments and water and sewer charges. Total rent expense for the years
ended December 31, 1996, 1995 and 1994 were $118,514, $183,689 and $183,682
respectively.
Capital Lease
In 1995, the Company acquired a new show booth under a capital lease agreement.
At December 31, 1996 and 1995, the total asset value of $40,102 and $38,160 less
accumulated amortization of $26,411 and $12,720, respectively was included in
net property and equipment.
F-13
Year ending December 31: 1996
----
1997 $17,227
1998 2,871
-----
Total minimum lease payments 20,098
Less: Amount representing interest 5,258
-----
Present value of net minimum lease payments $14,840
- - ------------------------------------------- =======
8. Commitments and Contingencies
-----------------------------
Royalties Payable
Under the terms of an agreement with the LPGA Tournament Players Corporation,
the Company is obligated to pay a royalty fee to the LPGA based on sales volume.
The minimum annual royalty is $175,000 in 1997 and $200,000 through 2003, paid
quarterly in January, April, October and upon year end closing results. Payments
of $175,000, $150,000, and $150,000 were included in selling expense for the
years ended December 31, 1996, 1995 and 1994, respectively.
In addition, the Company is obligated to spend a minimum of $100,000 each year
on advertising of LPGA endorsed products under the terms of the agreement.
Other Liabilities
Under the terms of a Separation Agreement, the Company is obligated to pay its
former president $6,000 per month for a period of ten years which began on April
1, 1992 as consideration for his covenant not to compete with the Company (see
Note 4). The obligation is recorded at its present value in other current and
non current liabilities, and accrues interest at 9% per annum.
In connection with the Separation Agreement, the Company granted its former
President stock options for 250,000 shares of the Company's common stock at a
purchase price of $4.48, which was the average of the closing bid and asked
prices of the Company's common stock on the last trading date immediately
preceding the effective date of the grant. Subject to certain limitations, the
options were exercisable immediately and will remain exercisable until April 16,
2006. If, and to the extent that, any amount is realized in excess of the
exercise price upon the sale of any common stock obtained upon exercise of all
or any part of the options, then 65 percent of such excess amount, subject to
certain limitations, is to be paid to the Company in immediately available funds
concurrent with the realization event.
F-14
9. Stock Options
-------------
Stock Incentive Plans
Under the terms of the Company's 1984 Incentive Stock Option Plan ("The 84
Plan") options to acquire an aggregate of 75,000 shares of the Company's common
stock could have been granted through 1994 to officers and certain employees of
the Company. The table below summarizes stock option activity over the past
three years under current and prior plans:
Number Option price
of shares (range per share)
--------- -----------------
Outstanding at January 1, 1994 346,670 4.375-5.00
Cancelled or expired 68,750 4.375-5.00
- - --------------------------------------------------------------------------------
Outstanding at December 31, 1994 277,920 4.375-5.00
Granted ---------- ----------
Exercised ---------- ----------
Canceled or expired ---------- ----------
- - --------------------------------------------------------------------------------
Outstanding at December 31, 1995 277,920 4.375-5.00
Granted ---------- ----------
Exercised ---------- ----------
Canceled or expired 106,250 5.00
- - --------------------------------------------------------------------------------
Outstanding at December 31, 1996 171,670 4.375-5.00
Exercisable December 31, 1996 171,670 4.375-5.00
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," in
October 1995. Under SFAS No. 123, companies can either continue to account for
stock compensation plans pursuant to existing accounting standards or elect to
expense the value derived from using an option pricing model such as Black-
Scholes. The Company will continue to apply existing accounting standards. SFAS
No. 123 requires disclosure of proforma net income and earining per share as if
the Company had adopted the expensing provisions of SFAS No. 123.
Based on Black-Scholes values, pro forma net income (loss) for 1996 and 1995
would be $109,706 and ($157,160), respectively; pro forma earnings (loss) per
common share for 1996 and 1995 would be $.04 and ($.08), respectively.
F-15
The weighted-average Black-Scholes values per option granted in 1996 and 1995,
was $.88 and $.73, respectively. The following weighted-average assumptions were
used in the Black-Scholes option pricing model for options granted in 1996 and
1995.
1996 1995
---- ----
Annualized Volatility 74% 63%
Risk-free interest rate 5% 5%
Expected term of option (in years) 3.5 3.5
Other Options
In September 1991, the Company entered into five agreements with members of the
LPGA Teaching Division to provide consulting in the areas of sales, marketing
and product development of women's golf products. In exchange for these services
each consultant was granted the option to acquire 1,200 shares of common stock
each year on the anniversary date of the agreement provided the agreement was
not terminated. These agreements had a three year term. All of the above options
have an exercise price of $5.625. In September of 1992, the Company entered into
a sixth agreement, with the same terms as the original five except that the
options thereunder have an exercise price of $4.25.
In May 1991, the Company entered into an agreement with its advertising agency
for advertising and public relations services through December 31, 1994. In
exchange for services rendered by the advertising agency, the Company issued to
the advertising agency an option to acquire 6,250 shares of common stock per
annum. As additional incentive, the Company agreed to award additional stock
options for 18,750 total shares of common stock upon the Company achieving
certain annual financial results for 1992, 1993 and 1994. All of the above
options have an exercise price of $4.625 and expire in years ending December 31,
1997 through December 31, 1999. Since the 1992, 1993 and 1994 performance
criteria were not achieved, the 18,750 options were not granted.
In connection with the Separation Agreement between the Company and its former
President, the Company issued the option to acquire 250,000 shares of common
stock to the former President in partial consideration for his covenant not to
compete with the Company for a period of 5 years beginning July 1, 1992. (See
Note 8). Subject to certain limitations, the option may be exercised any time
prior to April 16, 2006 at a price of $4.48 per share.
In January 1995, the Company entered into a consulting agreement with George H.
Nichols, a director of the Company until October 1995, under which Mr. Nichols
agreed to provide consulting services to the Company in connection with sales,
marketing and development of the Company's products. This agreement was
terminated in October 1995.
F-16
During 1995, Mr. Nichols received reimbursement for certain expenses and $54,000
in consulting fees at the rate of $6,000 per month from January through
September. Under the agreement, Mr. Nichols was granted an option to acquire
37,500 shares of the Company's Common Stock at $1.875 per share, which exercise
price was equal to the price per share paid for NASDAQ's last Common Stock sale
transaction on the date of the grant. Such option is currently exercisable in
full.
On November 1, 1995, the Company amended an employment agreement dated July 1,
1991 with the former Senior Vice President of Product Development in regards to
stock options granted. The amendment effectively canceled and forever terminated
stock options for 106,250 shares at an exercise price of $5.00 per share which
were granted under the 1984 stock incentive plan. At that time, the Company
granted, to become effective May 6, 1996, 40,000 shares of "new options" at an
exercise price of $1.6875 which represented the average of the Company's NASDAQ
bid and ask closing price on the grant date.
All of the above amounts have been adjusted to reflect the one for four reverse
stock split which occurred in July 1991.
10. Legal Matters
-------------
The company was a defendant in a patent infringement suit which was filed in the
United States District Court for the Northern District of Illinois in August of
1991 based on the Company's production and sale of metal wood golf clubs. In
October 1993, the Company and Vardon Golf Company, Inc., the plaintiff in such
action, entered into an agreement (the "Agreement") to settle the litigation.
Under the terms of the Agreement, the Company was required to make payments to
the plaintiff in the aggregate amount of $171,922 payable in equal monthly
installments, without interest, over a period of 20 consecutive months. An order
dismissing the action against the Company was entered on November 16, 1993. This
expense was recorded in the General and Administrative expense for year ended
December 31, 1993. At December 31, 1994, the present value of this liability was
recorded in Other Current Liabilities. Payments for 1994 amounted to $103,153.
During 1995, the Company made the final payment to Vardon Golf Company in
settlement in the amount of $42,502.
11. Shareholders' Equity
--------------------
Wesmar Anti-Dilutive Agreement
The Company issued two Common Stock Purchase Warrants and entered into a Stock
Option Agreement granting options to purchase common stock to Wesmar Partners
Limited Partnership in consideration for entering into a one year loan agreement
in 1988. All of the warrants and options were exercised as of December 31, 1988.
F-17
The Warrant Agreement entitled Wesmar Partners to purchase up to that number of
shares of common stock which, when acquired, would result in Wesmar Partners
owning not less than 65% of the outstanding common stock. If, subsequent to
exercise of the Wesmar Partners options and warrants, shares of common stock are
issued to individuals other than Wesmar Partners under warrants, rights or
options which were in existence at the date of Wesmar Partners exercise, Wesmar
Partners would be entitled to receive additional shares for no consideration
which would increase Wesmar Partners, common stock ownership to 65%. In
addition, as a part of the Stock Option Agreement, the Company has entered into
a negative covenant that it will not issue any shares of common stock, rights,
warrants or options which would result in the number of shares issued pursuant
to the Wesmar Partners Warrants and Option Agreements representing less than 60%
of the common stock on a fully diluted basis. During 1991 and 1990, Wesmar
Partners received Common Stock totaling 83,572 and 26,685 shares respectively,
under this antidilutive provision.
12. Related Party Transactions
--------------------------
In 1994 and January through May 1995, Wesmar Partners provided the Company with
insurance coverage through the Liberty Mutual Insurance Company for property,
liability and workers compensation insurance. During 1995, the Company paid
Wesmar Partners $19,075 for such insurance coverage. In 1996, the Company
received $10,198 from Wesmar Partners representing a retrospective adjustment
for the policy year 94-95.
Pursuant to a consulting agreement, with the Company, MR & Associates provides
the Company with business counseling for $5,000 per month. The agreement, which
has been extended periodically, expired on December 31, 1996. Messrs. Maurer and
Ross, directors of the Company, are officers, directors and principal
shareholders of Maurer Ross & Co. , Incorporated, the general partner of MR &
Associates. In 1995 the Company paid MR & Associates $70,000 in connection with
such consulting agreement, of which $20,000 was due under the agreement in
respect to 1994, and $10,000 was due to MR & Associates at December 31, 1995. In
1996, the Company paid MR & Associates $15,000 of which $10,000 was expensed
under the agreement with respect to 1995 and $5,000 which represented one months
payment under this agreement for 1996 with the remaining $55,000 (11 months)
waived by MR & Associates.
F-18
During the fiscal years ended December 31, 1996 and 1995, the Company retained
the law firm of Webb, Ziesenheim, Bruening, Logsdon, Orkin & Hanson PC of which
Frederick B. Ziesenheim, a director of the Company, is a Vice President and
Senior Member, to represent the Company on various intellectual property
matters. The Company had paid Webb, Ziesenheim, Bruening, Logsdon, Orkin &
Hanson P.C. $25,608 and $33,860 in 1996 and 1995 respectively, and was indebted
in the amount of $280 and $4,209 at December 31, 1996 and 1995, respectively.
During 1994, the Company finalized a proposal that resulted in the formation of
Squaretwo Golf New Zealand, Ltd. ("New Zealand"). The proposal provided that New
Zealand would supply S2 Golf products to the New Zealand and Australian markets.
The Company's balance sheet reflects ownership of approximately 34% of Squaretwo
Golf New Zealand, Ltd at December 31, 1995. In November 1996, the Company
received their original investment back from New Zealand thereby dissolving the
relationship with New Zealand. The dissolution of the investment resulted in a
loss of investment of approximately $1,000 which is included in other income and
expense.
In 1992, the Company adopted the 1992 stock plan for independent directors of S2
Golf Inc. The plan compensated certain non-employee directors, by granting such
persons shares of the Company's common stock equal to $1,500 for every meeting
attended. The number of shares issued is based on the closing price of the stock
on the exchange where traded on the meeting date or preceding date on which such
shares were traded. At the 1993 Annual Shareholders Meeting, the shareholders
approved this plan. In 1995, the Company amended the 1992 stock plan for
independent directors of S2 Golf Inc. The amendment provides for the
compensation of its non-employee Chairman of the Board and directors by granting
such persons shares of the Company's common stock equal to $2,000 and $1,000,
respectively, for every meeting attended. Mssrs. Robert Ross and Richard Maurer
represent a non-employee Chairman and Director, respectively, but are not
entitled to these grants.
13. Supplemental Disclosures of Non-cash Transactions
-------------------------------------------------
During 1996 and 1995, the Company recorded certain non-cash charges of $29,150
and $32,825, respectively, representing accrued interest for a liability to its
former president in connection with his Separation Agreement (see Note 8).
Additionally, during 1996, 1995 and 1994, the Company recorded $0, $478 and
$5,882, respectively, representing accrued interest for the Vardon Suit (see
Note 10).
During 1995, the Company issued common stock in the amount of $11,015 for
services rendered in 1995. Also, during 1995, the Company issued stock in the
amount of $13,955 for services rendered in 1994. No stock was issued in 1996.
F-19
S2 GOLF, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Balance at Charged to Charged Balance
Beginning Cost and to Other at End
of Period Expenses Accounts Deductions of Period
--------- -------- -------- ---------- ---------
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
YEAR ENDED:
December 31, 1994 262,960 117,128 --- 18,308 (1) 361,780
December 31,1995 361,780 --- --- 77,405 (1) 284,375
December 31, 1996 284,375 75,000 --- 109,244 (1) 250,131
ALLOWANCE FOR RETURNS
December 31, 1994 45,700 403,541 --- 394,241 55,000
December 31,1995 55,000 222,659 --- 225,052 52,607
December 31, 1996 52,607 212,797 --- 203,404 62,000
ALLOWANCE FOR DISCOUNTS
December 31, 1994 57,323 136,284 --- 153,607 40,000
December 31,1995 40,000 192,798 --- 161,473 71,325
December 31, 1996 71,325 228,117 --- 208,565 90,877
INVENTORY OBSOLESCENCE RESERVE
December 31, 1994 52,880 54,529 --- --- 107,409
December 31,1995 107,409 54,089 --- --- 161,498
December 31, 1996 161,498 38,876 --- --- 200,374
(1) Uncollectible Accounts Written Off, Net of Recoveries
F-20
Exhibit Index
-------------
Exhibit
Number Description of Exhibit*
- - ------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of the Company
dated June 28, 1991 (incorporated by reference to Exhibit 3.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1991).
3.2 Amended and restated By-laws of the Registrant dated December 6,
1991 (incorporated by reference to Exhibit 3.2 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1991).
4.1 Common Stock Purchase Warrant in favor of Wesmar Partners dated
February 28, 1988, (incorporated by reference to Exhibit 4.4 of
the Registrant's Registration Statement No. 33-37371 on Form S-3).
4.2 Common Stock Purchase Warrant in favor of Wesmar Partners dated
February 28, 1988, (incorporated by reference to Exhibit 4.5 of
the Registrant's Registration Statement No. 33-37371 on Form S-3).
4.3 Stock Option Agreement between the Registrant and Wesmar Partners
dated February 29, 1988, (incorporated by reference to Exhibit 4.6
of the Registrant's Registration Statement No. 33-37371 on Form
S-3).
4.4 Credit Agreement and Security Agreement between the Registrant and
Midlantic Bank, National Association dated December 29, 1994
(incorporated by reference to Exhibit 99 of the Registrant's
Current Report on Form 8-K dated December 26, 1994).
4.5 United States Patent No. 4,203,598 issued to the Registrant
(incorporated by reference to Exhibit 10.3 of the Registrant's
Registration Statement No. 33-16931 on Form S-1).
10.0 Agreement between the LPGA Tournament Players Corporation and the
Registrant dated July 31, 1991 (incorporated by reference to
exhibit 4.11 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30,1991).
10.1 Lease Agreement between the registrant and 12 Gloria Lane Limited
Partnership dated June 22, 1989 (incorporated by reference to
exhibit 10.6 of the Registrant's Registration Statement No. 33-
37371 on Form S-3).
F-21
10.2 Modification of Lease Agreement between the Registrant and 12
Gloria Lane Industrial Partnership dated October 3, 1995
(incorporated by reference to Exhibit 10.2 of the Registrants
Annual Report on Form 10-K for the year ended December 31, 1995).
10.3 1984 Incentive Stock Option Plan of the Registrant dated February
10, 1984 (incorporated by reference to Exhibit 10.7 to the
Registrant's Registration Statement No. 33-16931 on Form S-1).
10.4** Employment Agreement between the Registrant and Randy A. Hamill
dated July 1, 1991, (incorporated by reference to Exhibit 10.9 of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991).
10.5 Consulting Agreement between the Registrant and MR & Associates
dated January 1992 (incorporated by reference to exhibit 10.10 of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992).
10.6 Amendment of Consulting Services Agreement between the Registrant
and MR and Associates effective as of February 1, 1996
(incorporated by reference to Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996).
10.7** 1992 Stock Plan for Independent Directors of S2 Golf, Inc. dated
December 28, 1992 (incorporated by reference to Exhibit 10.11 of
the Registrant's Annual Report on form 10-K for the year ended
December 31, 1992).
10.8 Agreement between the Vardon Golf Company and the Registrant dated
October 4, 1993 (incorporated by reference to Exhibit 10.9 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 24, 1993).
10.9** Employment Agreement between the Registrant and Douglas A.
Buffington dated January 1, 1995 (incorporated by reference to
Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994).
11 S2 Golf Inc. Computation of Earnings per share for the years ended
December 31, 1996, 1995 and 1994.
12 Amended and Restated Licensing Agreement between Ladies
Professional Golf Association and the Registrant dated July 1,
1996.
27 Financial Data Schedule.
* In the case of incorporation by reference to documents filed by
the Registrant under the Exchange Act, the Registrant's file
number under theAct is 0-14146.
** Management contract or management compensatory plan or
arrangement.
F-22