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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, 2000 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)
(973) 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: NONE
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 March 13, 2001, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $5,237,437. This calculation
is based upon the closing price of the registrant's common stock on March 13,
2001.
The number of shares of the registrant's Common Stock outstanding as of March
13, 2001 was 3,223,039.
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PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
S2 Golf Inc. (the "Company" or "Square Two(R)") was incorporated under the laws
of the state of New Jersey in February 1982. The Company manufactures and
markets throughout the United States proprietary lines of golf equipment for men
and women, including golf clubs, golf bags, golf shoes, golf balls and
accessories. The Company markets these products under the trade name and
trademark Square Two(R) and the trademarks NancyLopezGolf(TM), Lady Fairway(TM),
and several others, including S2(R) and Posiflow(R).
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."
Throughout 2000, the Company maintained and strengthened its position as a
manufacturer and seller of high-quality, high-performance clubs, especially for
women golfers. Golf equipment for women comprised approximately 71% of the
Company's business in 2000, as compared against 52% in 1996. Two acquisitions
expanded significantly both the Company's range of golf products for women and
its distribution network. In July, the Company acquired from The Arnold Palmer
Golf Company the NancyLopezGolf(TM) product lines of premium golf clubs, golf
balls, golf gloves, golf bags and other golf accessories.
At the end of December, 2000, the Company acquired the Lady Fairway(TM) brand of
women's golf shoes and other golf accessories, through the acquisition, by the
Company's wholly-owned subsidiary S2 Golf Acquisition Corp. ("S2 Acquisition"),
of Ladies Golf Equipment Company, Inc. ("Ladies Golf"), which was merged with
and into S2 Acquisition on December 31, 2000.
During 2000 the Company continued to improve its Square Two(R) brands of
equipment, introducing the Kathy Whitworth monogram series of clubs, redesigning
the Light and Easy(TM) and Power Circle(TM) woods, expanding the Rave(R) line,
introducing the premium Rave(R) II line for women, and launching a new value
line of men's clubs, the XLT(TM). The Company also continued its 20-year
partnership with the Ladies Professional Golf Association ("LPGA(R)"), completed
the first year of an endorsement agreement with Kathy Whitworth, and for a
second year aired its television advertisement, which is aimed exclusively at
women. The Company's sponsorship of the Square Two(R)/LPGA(R) Custom Club
Fitting Program, which began in 1993, provided a forum for design input from
professional women golfers during 6 2-day seminars. Cosmetic changes to the
Company's lines of women's clubs continued to include greater prominence for the
distinctive LPGA(R) logo, which all of the women's clubs marketed under the
Square Two(R) brand carry.
Between 1996 and 2000, the Company's net sales increased from $8,563,588 to
$12,510,314 and shareholders' equity increased from $2,640,000 to $6,795,723.
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(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
For financial information about business segments in which the Company operates,
see Item 8, Financial Statements and Supplementary Data.
(C) NARRATIVE DESCRIPTION OF BUSINESS
Club Design
- -----------
The Company designs products for men and women of all ages and has two broad
design approaches. One targets the steel shaft market, and the other targets the
graphite shaft market.
In recent years, the graphite shaft market has experienced tremendous growth,
particularly among women. Graphite shafts are lighter than steel shafts and have
greater design flexibility. The Company, recognizing that graphite has become
the shaft of choice for the majority of women, has developed an extensive array
of graphite shaft models.
Products
- --------
The Company manufactures and markets throughout the United States proprietary
lines of golf equipment under the trade name and trademark Square Two(R), the
trademark NancyLopezGolf(TM), and a number of other trademarks, including, as of
December 29, 2000, Lady Fairway(TM).
Under the Square Two(R) name the Company manufactures and markets numerous
products for women and men golfers of varying ages and abilities. These products
include the ZCX-Ti(TM), Lady Ti(TM), PCX(R) II, Light and Easy(TM), Power
Circle(TM), Rave(R), Lady Rave(TM), Rave(R) II, Relief(TM), Rough Relief(TM),
Agree(R) and Eight-is-Enough(TM) lines of golf clubs. Many of the Square Two(R)
brand clubs feature cavity-back heads with dual copper sole inserts, which lower
the center of gravity and expand the "sweet spot," making the clubs more
forgiving.
The irons in the PCX(R) II line of golf clubs feature lightweight steel shafts
with the Company's Totally Matched proprietary weighting and balancing system.
The Relief(TM) bi-metal irons and Rave(R) and Lady Rave(TM) high-modulus
graphite-shaft irons and woods feature the Company's patented Posiflow(R)
weighting system, in which the shafts are matched to the player's swing speed,
which reduces long-iron slices and short-iron pulls. In the Light and Easy(TM)
and Power Circle(TM) lines, putters have tri-metal heads that are heel-toe
weighted to reduce torque on off-center hits, and drivers feature club heads
made of titanium. The ZCX-Ti(TM) and Lady Ti(TM) lines feature Posiflow(R)
weighting and titanium inserts for enhanced feel.
Under the NancyLopezGolf(TM) trademark, the Company markets premium golf clubs,
including the Albany(R) and the Sarasota(R) lines and the Streak 78(R), Fame
87(R) and Debut 98(R) classically styled balata-face putters. The Company's
NancyLopezGolf(TM) products also include golf balls, the LopezGrip(R) line of
golf gloves, golf bags, and other golf accessories.
On December 29, 2000, the Company added to its product lines the full line of
Lady Fairway(TM) golf shoes, golf gloves, golf socks and other golf accessories.
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Golf clubs accounted for more than 95% of the Company's revenue in each of 1998,
1999 and 2000.
Manufacturing
- -------------
The Company's clubs are assembled at its facility located in Fairfield, New
Jersey. Finished heads are purchased from several sources. Various domestic and
foreign shaft manufacturers supply steel shafts, grips, and accessories. The
Company obtains its graphite shafts from sources in the People's Republic of
China, Korea and the US, and its finished heads from manufacturers in Taiwan,
Thailand and the People's Republic of China, which manufacture them to the
Company's design specifications. In the course of assembling its PCX(R) II line
of steel-shafted clubs, the Company applies its Totally Matched(R) proprietary
weighting and balancing techniques to achieve the clubs' unique design and
construction.
The Company's Lady Fairway(TM) products are manufactured by third-party
manufacturers in the People's Republic of China, Indonesia and in the US.
Seasonality
- -----------
The golf industry is seasonal. While manufacturing occurs throughout the year,
demand for the Company's clubs is greatest from March through July.
Inventory Supply
- ----------------
The Company tries to maintain at least two sources of supply for each of the
golf club shaft and golf club head products that it purchases from foreign
suppliers. These suppliers generally require 90- to 120-day lead times 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 components 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 2 weeks and are not anticipated to affect materially the Company's ability
to deliver its products. The Company regularly evaluates alternative suppliers.
The Company has a line of credit in the amount of $8,000,000 with PNC Bank,
National Association ("PNC Bank"), pursuant to which PNC Bank may make available
an additional 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 varies 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 2000 there were 26.4 million
golfers in the United States. The rate of growth remained relatively flat from
1997 to 2000. The popularity of
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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.
Marketing & Distribution
- ------------------------
Until approximately 20 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, mail-order houses,
the Internet and infomercials account for a substantial share of sales to the
golf club market.
The Company markets its products primarily through retail shops and also through
private clubs. NancyLopezGolf(TM) brand clubs sell at premium price points,
whereas the Square Two(R) brand products retail at mid-level price points. As of
March 1, 2001, the Company had established a network of approximately 2,250
retailers with approximately 2,800 retail outlets. Square Two(R) has prepared a
comprehensive catalog for its dealers.
The golf equipment industry is one in which advertising and promotion is
required to create market awareness of a company's products. Management
anticipates that it will continue to need to increase its research and
development efforts as well as its advertising expenditures.
In 2000, 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.
The Ladies Professional Golf Association Agreement
- --------------------------------------------------
The Company has entered into an agreement with the Ladies Professional Golf
Association, an Ohio nonprofit corporation, which grants the Company the
exclusive right to use the LPGA(R) name and logo on its women's golf clubs and
the nonexclusive right to use the LPGA(R) name and logo on certain of its other
products, including golf bags. The Company has renewed and restated this
licensing agreement effective January 1, 1999 through December 31, 2003, at
which time the Company has the option to renew the agreement 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 to
the LPGA(R) a license fee and a royalty fee based on sales volume.
The minimum annual license fee for the term of the agreement is $200,000 each
year through 2003. In the event that the sum of (i) 5% of the net sales of the
licensed products (other than golf shoes) up to $1,000,000 in any calendar year,
(ii) 2.5% of the net sales of the licensed products (other than golf shoes) in
excess of $1,000,000 and less than $5,000,000 in any calendar year, (iii) 1% of
the net sales of the licensed products (other than golf shoes) in excess of
$5,000,000, and (iv) 1% of the net sales of golf shoes in any calendar year,
exceeds the minimum license fee, the excess shall be paid as a royalty fee.
Under the agreement, the Company is obligated to be a "Title Sponsor" of the
LPGA(R) Teaching and Club Professionals Division Team Classic at an annual cost
that began at $35,000 in 1999
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and increases by $2,500 per year through 2003. In addition, the Company is
obligated to spend a minimum of $100,000 per year on various advertising
programs.
Kathy Whitworth Endorsement Agreement
- -------------------------------------
The Company has entered into an Endorsement Agreement with former LPGA(R) Tour
Golf Professional Kathy Whitworth, effective January 1, 2000 through December
31, 2005, pursuant to which Ms. Whitworth has granted the Company an exclusive
license to use her name, likeness, image and personal identification, singly or
in any combination, in connection with the production, marketing and sale of a
"Kathy Whitworth" signature line of women's golf clubs. In addition, the Company
has the right to include Ms. Whitworth in 2 print advertisements and 1
television advertisement per year. Ms. Whitworth also has agreed to use only the
golf clubs and golf bags of the Company in any golf event, either professional
or social, during the term of the agreement, and will serve as a golf instructor
at up to 10 golf clinics per calendar year. In addition, Ms. Whitworth
represents the Company at 2 Professional Golf Association merchandise shows each
calendar year. The Company pays Ms. Whitworth a base fee of $36,000 per year in
equal quarterly payments; in addition, Ms. Whitworth will receive a royalty fee
of 2% of net sales of the "Kathy Whitworth" line of clubs.
Nancy Lopez License
- -------------------
The Company has entered into an agreement with Nancy Lopez Enterprises, Inc.
that grants Square Two(R) the exclusive right to use the name, signature, image
and endorsement of Nancy Lopez on certain of its golf clubs and other golf
equipment. This agreement is for an initial term that ends on December 31, 2007,
and shall be extended automatically until December 31, 2010 unless the parties
decide against such extension. Square Two(R) is obligated to pay to Nancy Lopez
Enterprises, Inc. an annual license fee of $200,000, an annual sublicense fee of
25% of fees paid to the Company for certain sublicenses, an annual royalty fee
based on sales volume (3% of revenues of up to $10 million for licensed
products, and 3.5% of such revenues greater than $10 million) less the amounts
of the license fee and the sublicense fee, and bonuses if Ms. Lopez wins or
places at least fifth in specified golf tournaments, or wins other named awards.
The Company is obligated also to issue to Nancy Lopez Enterprises, Inc. options
to purchase Common Stock on the basis of the revenue earned by the Square Two(R)
products covered by the licensing agreement.
Competition
- -----------
In general, the Company competes with manufacturers of sporting goods equipment
for all phases of the recreation industry, and its business is subject to
factors generally affecting the recreation and leisure market, such as economic
conditions, changes in discretionary spending patterns and weather conditions.
The golf club industry is highly competitive and is dominated principally by
approximately 10 nationally known manufacturers of sporting goods equipment.
Such manufacturers, including Callaway(R), Ping(R), Nike(R), Taylor Made(R), and
Cobra/Titleist(R), possess financial and other resources greater than those of
the Company. The Company competes with these entities
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primarily on the basis of the quality and value of Square Two(R)'s products and
service, along with the Company's position as an official sponsor of the
LPGA(R).
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 two United States patents, both of which will expire in 2013.
One protects the concept of Posiflow(R) weighting in iron heads. The second
protects an internal triangular reinforcement cell for metal woods.
The Company has registered the following trademarks with the United States
Patent and Trademark Office:
Totally Matched(R) Allegra(R) Opal(R) Agree(R)
PCX(R) Onyx(R) Rave(R) Melody(R)
Posiflow(R) S2(R)(Stylized) Lady Petite(R)
Square Two(R) S2(R)(Bouncing Ball Design) Ladies Long Driver(R)
Dyna-Balance(R)
"Square Two" is registered in 24 countries. With its acquisition of
NancyLopezGolf(TM) the Company acquired the following trademarks registered with
the United Stated Patent and Trademark office:
Albany(R) Darden(R) Debut 98(R) Defining the Women's Game(R)
Domingo(R) Fame 87(R) LopezGrip(R) NLG(R)
Roswell(R) Sarasota(R) Streak 78(R)
The Company also now owns, through its subsidiary S2 Acquisition, the rights to
the trademarks Outlast(R) and Transpor(R) registered with the United States
Patent and Trademark Office. "Lady Fairway" is registered in the United Kingdom
and in Sweden.
Given the competitive climate within the golf industry worldwide and the recent
counterfeiting of clubhead designs, the Company believes that it is imperative
to protect the Company's trade names, trademarks and patentable inventions and
designs.
Employees
- ---------
As of December 31, 2000, the Company employed 71 persons, including 69 full-time
employees, of which two were executive officers. Sixty-one of these were hourly
employees and ten were management, administrative 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.
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Between December 29, 2000 and December 31, 2000, the Company's subsidiary S2
Acquisition employed 7 persons, including 1 executive office, 4 hourly customer
service employees, 1 office manager and 1 warehouse worker. These employees are
not represented by any labor organization.
The Company believes that its present staff is adequate. However, if sales of
the Company's golf clubs or golf shoes should increase, it is anticipated that
additional production, clerical, sales 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 and
its subsidiary may be adversely affected by a number of factors. Certain
statements and information contained herein reflect the Company's current
expectations with respect to the future performance of the Company and its
subsidiary and may 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 that may cause the actual results, performance, or achievements of
the Company or its subsidiary to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other risks and
uncertainties: the risks inherent in the development and introduction of new
products; 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.
(D) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
It is impracticable for the Company to provide financial information about
geographic areas. Historically, the Company's sales to foreign customers have
not been material. For the fiscal year ended December 31, 2000, the Company's
sales to foreign customers comprised less than 1.4% of net sales.
ITEM 2. PROPERTIES
----------
The Company currently leases its manufacturing facility and sales and executive
offices located at 18 Gloria Lane, Fairfield, New Jersey 07004, comprising a
total of 20,612 square feet of space. As of December 29, 2000, the Company's
subsidiary S2 Acquisition leases sales and executive offices and distribution
facilities for the Lady Fairway(TM) products, comprising a total of 11,328
square feet of space, at suites 400 and 500, 3803 Corporex Park Drive, Tampa,
Florida 33619. Both leases will expire on December 31, 2001.
Both the New Jersey and the Florida facilities serve the needs of the one
segment in which the Company operates, which is the manufacture and marketing of
golf equipment. To accommodate its expanded operations following its 2000
acquisitions of the NancyLopezGolf(TM) and Lady Fairway(TM) product lines, the
Company intends to move to one larger facility at the beginning of 2002.
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ITEM 3. LEGAL PROCEEDINGS
-----------------
In July 21, 1999, a former employee of the Company filed a complaint against the
Company in the Essex County Superior Court of New Jersey in connection with the
termination of his employment contract. This case was settled in the first
quarter of 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
At a Special Meeting held on December 15, 2000, the shareholders of the Company
voted in favor of the Company's acquisition of Ladies Golf. At the meeting,
holders of 1,688,818 shares voted in favor of and holders of 2,537 shares voted
against the approval and adoption of the Agreement and Plan of Reorganization,
dated as of September 22, 2000, by and among the Company, S2 Acquisition, Ladies
Golf, James E. Jones and Brian Christopher. There were no abstentions and no
broker non-votes.
EXECUTIVE OFFICERS OF THE COMPANY
See Part III, Item 10 of this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Common Stock of the Company is traded on the Nasdaq SmallCap Market under
the trading symbol "GOLF." The following table sets forth the high and low bid
prices 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:
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HIGH LOW
---- ---
1999 1st Quarter $4.00 $2.50
1999 2nd Quarter $3.50 $2.18
1999 3rd Quarter $2.71 $2.00
1999 4th Quarter $2.12 $1.62
2000 1st Quarter $2.50 $1.75
2000 2nd Quarter $2.88 $1.75
2000 3rd Quarter $2.75 $1.82
2000 4th Quarter $1.68 $0.75
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On March 13, 2001, the number of holders of record of the Company's Common Stock
was approximately 196. No cash dividends have been paid to date and it is
anticipated that cash dividends will not be paid in the near future.
In 2000, the Company issued 1,463 shares of Common Stock to Frederick B.
Ziesenheim and 1,463 shares of common stock to Mary Ann Jorgenson as
compensation for their service as directors of the Company and participation in
board meetings. As no public offering was involved, the issuance of such shares
was exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended. See Item 11.
ITEM 6. SELECTED FINANCIAL DATA
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YEAR ENDED DECEMBER 31,
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2000 1999 1998 1997 1996
---- ---- ---- ---- ----
OPERATING RESULTS:
Net Sales $12,510,314 $11,003,556 $11,505,000 $12,073,843 $8,563,588
Net Income 220,654 306,126 440,848 855,565 118,884
Net Income
per Share-Basic 0.10 0.14 0.20 0.39 0.05
per Share-Diluted 0.10 0.14 0.19 0.37 0.05
Weighted Average
Number of Shares
Outstanding-Basic 2,226,312 2,219,700 2,219,078 2,214,448 2,208,311
Outstanding-Diluted 2,264,065 2,263,876 2,315,149 2,290,505 2,208,311
Cash Dividend 0 0 0 0 0
At Year End:
Working Capital 1,672,945 4,020,772 3,766,986 3,435,345 2,401,904
Total Assets 13,678,640 5,752,079 7,534,080 7,630,176 5,153,651
Total Liabilities 6,882,918 1,492,011 3,582,138 4,123,082 2,513,551
Long-Term Obligations 512,105 84,822 146,157 202,231 253,498
Shareholders' Equity 5,795,722 4,260,068 3,951,942 3,507,094 2,640,100
Market Price of 2.88/.75 4.00/1.62 11.32/2.00 5.00/.81 1.75/.81
Common Stock
High-Low
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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Square Two(R) operates in one business segment, the manufacture and marketing of
golf equipment, including golf clubs, golf balls, golf gloves, golf bags, and,
starting on December 29, 2000, golf shoes and socks. Square Two(R) markets its
products primarily in the United States.
Certain information in the following Management's Discussion and Analysis of
Financial Condition and Results of Operations constitutes forward-looking
information that involves certain risks and uncertainties. See Item 1, Business,
under caption "Special Note on Forward- Looking Statements."
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Results of Operations
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Sales
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2000 Compared to 1999
---------------------
In 2000, net sales were $12,510,314, versus $11,003,556 in 1999, an increase of
13.7%. Forty-six percent of this increase was the result of an increase in the
volume of sales of the Square Two(R) brand of equipment, and 54% of this
increase was the result of additional sales generated by the addition of the
NancyLopezGolf(TM) product line. The increase in Square Two(R) brand sales arose
from a higher volume of sales of the Light and Easy(TM) model of golf clubs and
the successful introduction of the Kathy Whitworth monogram series of clubs.
1999 Compared to 1998
---------------------
In 1999, net sales were $11,003,556, versus $11,505,000 in 1998, a decrease of
4.4%. This decrease was due to a decline in volume, primarily due to 2 customers
experiencing financial difficulty, tighter credit controls and continued
sluggishness in the industry, particularly in the first half of 1999.
Gross Profit
------------
2000 Compared to 1999
---------------------
In 2000, gross profit on sales (net sales less the cost of sales) was
$4,258,480, or 34.0% of sales, an increase over the 1999 gross profit of
$3,575,426, or 32.5% of sales. The increase in gross profit percentage was the
result of lower material costs and the mix of products sold.
1999 Compared to 1998
---------------------
Gross profit on sales in 1999 was $3,575,426, or 32.4% of sales, versus
$3,837,700, or 33.4% of sales, in 1998. The decrease in gross profit percentage
was due to the mix of products sold.
Selling Expenses
----------------
2000 Compared to 1999
---------------------
Selling expenses increased to $2,093,938 in 2000, versus $1,641,744 in 1999.
This increase was primarily the result of increased salaries and wages, new
costs for player endorsements (by Kathy Whitworth and Nancy Lopez), which were
not incurred in 1999, increased advertising expenses and increased commissions
due to higher revenue.
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1999 Compared to 1998
---------------------
Selling expenses in 1999 were $1,641,744, versus $1,540,048 in 1998. This
increase was the result of increased product advertising expenses arising from
the production and airing of the Company's first national television
advertisement.
General Administrative
----------------------
2000 Compared to 1999
---------------------
General and Administrative expenses were $1,647,827 in 2000, versus $1,302,325
in 1999. This increase of 19.5% was the result of higher consulting expenses,
legal fees, amortization of goodwill arising from the acquisition of the
NancyLopezGolf(TM) product line, and bad debt expenses.
1999 Compared to 1998
---------------------
General and Administrative expenses were $1,302,325 in 1999, versus $1,228,559
in 1998. This increase was the result of increased salaries and wages as well as
increased legal costs associated with the preparation of player endorsement and
licensing contracts.
Interest
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2000 Compared to 1999
---------------------
Interest expense for 2000 was $233,385, an increase of 46.9% over the 1999
interest expense of $158,892. This increase in interest expense resulted from
the higher average outstanding balance of the credit facility in 2000, when the
average balance was $1,788,795, than in 1999, when the average balance was
$1,622,654. The increase in the average outstanding balance on the credit
facility resulted from a 4.9% increase in the average inventory balance, up to
$3,146,173 in 2000 as compared to $2,990,925 in 1999. Average balances for
accounts receivable in 2000 of $3,627,447 were 13.6% greater than the 1999
average balances of $3,134,017.
1999 Compared to 1998
---------------------
Interest expense in 1999 was 56.9% lower than it was in 1998, or $158,892 in
1999 versus $368,285 in 1998. The average outstanding balance of the credit
facility was $1,622,654 in 1999 compared to an average balance of $3,910,051 in
1998. This decrease was attributed to a 33.1% decrease in the average inventory
balance of $2,977,544 in 1999 compared to an average balance of $4,452,970 in
1998. Also, average balances for accounts receivable in 1999 of $3,421,439 were
14.4% lower than the 1998 balance of $3,997,686.
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Income Taxes
------------
2000 Compared to 1999
---------------------
In 2000, the Company had an income tax provision of $57,369, compared to
$166,901 in 1999. The effective tax rate in 2000 decreased as a result of the
elimination of certain reserves. (See the Notes to Financial Statements.)
1999 Compared to 1998
---------------------
In 1999, the Company had an income tax provision of $166,901, compared to
$254,282 in 1998.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital was $1,672,945 in 2000, compared to $4,020,772 for
1999, a decrease of 58.4%. This decrease was the result of an increase in
current assets of $2,615,797 offset by an increase in current liabilities of
$4,963,624. The increase in current assets was due mainly to increases of
$917,517 in accounts receivable and of $1,491,386 in inventories, both resulting
from the 2000 acquisitions of the NancyLopezGolf(TM) and Lady Fairway(TM)
product lines, plus increases in prepaid expenses and deferred income tax of
$146,704 and $50,400, respectively. The 2000 increase in current liabilities is
due to increases of $2,686,360 in short-term borrowings and $1,447,189 in the
current portion of long-term debt, both as a result of the NancyLopezGolf(TM)
and Lady Fairway(TM) product line acquisitions, plus increases of $536,750 in
accounts payable, $270,813 in accrued expenses and $22,512 in other current
liabilities.
Cash provided by operations in 2000 was $1,483,778, compared with $2,082,656 in
1999 and $57,395 in 1998. The decrease in 2000 was due to a decrease in net
income of $82,741 and rising inventory levels.
Credit Facility
- ---------------
The Company has a secured revolving line of credit with PNC Bank, which was
amended and restated as of July 31, 2000 to allow a maximum credit limit of
$8,000,000, less 50% of the aggregate face amount of all outstanding letters of
credit, and subject to various borrowing bases. The availability of funds under
this line of credit varies because it is based, in part, on a borrowing base of
80% of eligible accounts receivable and 60% of qualified inventory.
Substantially all of the Company's assets are used as collateral for the credit
line. Interest rates are at prime plus one-quarter percent, paid monthly; the
interest rate as of December 31, 2000 was 9.75%. At December 31, 2000, funds
available to the Company under the line of credit was approximately $895,000.
The Company had no outstanding letters of credit as of December 31, 2000.
The credit facility contains certain covenants, which among other items require
the maintenance of certain financial ratios including tangible net worth and
working capital. Any event of default under the credit facility permits the
lender to cease making additional loans thereunder. The Company was in
compliance with all covenants and conditions of the facility as of December 31,
2000.
12
14
The credit facility was amended in January, 2001 to make the Company's
wholly-owned subsidiary, S2 Acquisition, a co-borrower.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
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
--------------------
On June 24, 1999, the Company engaged Rothstein, Kass & Company, P.C. to serve
as the Company's independent auditors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The Company's current directors and executive officers are:
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Robert L. Ross 56 Chairman of Board and Chief Executive
Officer
Douglas A. Buffington 45 Director, President, Chief Financial Officer, Chief
Operating Officer and Treasurer
Randy A. Hamill 45 Senior Vice President of Manufacturing and Resources
and Assistant Secretary
Richard M. Maurer 52 Director and Secretary
James E. Jones 38 Director and Vice President of Marketing
Mary Ann Jorgenson 60 Director
Nancy Lopez 43 Director
Frederick B. Ziesenheim 74 Director
13
15
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, and became Chief Financial Officer and Chief Operating
Officer in June 1994, 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 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 Vice President of
Manufacturing of the Company from 1981 to July 1991.
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 L.L.P. 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 of Anthony & Sylvan Pools
Corporation, an installer of concrete in-ground swimming pools.
JAMES E. JONES became the Vice President of Marketing and a director of the
Company on January 1, 2001. He also became the President of S2 Acquisition on
January 1, 2001, following the merger of Ladies Golf with and into S2
Acquisition on December 31, 2000. Mr. Jones, the founder of Ladies Golf, was
President of that company from 1993 through 2000. He was Chief Operating Officer
of International Sporting Goods, a producer of a wide range of sporting goods
products from 1991 until 1993, and a sales representative for the Converse Shoe
Company from 1986 until 1991.
14
16
NANCY LOPEZ became a director of the Company on January 1, 2001. She has been a
member of the Tour Division of the Ladies Professional Golf Association since
1977, and was inducted into the LPGA(R) Hall of Fame in 1987. She has 48 career
victories including 3 major titles. Nancy Lopez was Rookie of the Year in 1978,
a 4-time LPGA(R) player of the year and a 3-time Vare trophy winner for the
lowest scoring average.
FREDERICK B. ZIESENHEIM has been a director of the Company since 1992. He has
been with the law firm of Webb Ziesenheim Logsdon Orkin & Hanson, P.C. since
1988 and is currently Vice Chairman of its Board of Directors. Prior to
combining his practice with that firm, he was President 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 (the "SEC"). Based solely on
a review of copies of the forms furnished to the Company in 2000 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 2000 were complied with,
except as set forth below.
Frederick B. Ziesenheim, a director of the Company, was awarded 400 Common
Shares on July 8, 1999 as compensation for his participation in a meeting of the
Company's Board of Directors; he reported such award on a Form 5 filed with the
SEC on October 13, 2000.
Douglas A. Buffington, a director and President, Chief Financial Officer, Chief
Operating Officer and Treasurer of the Company, was granted options to purchase
20,000 Common Shares on December 31, 2000; he reported such grant on a Form 5
filed with the SEC on March 29, 2001.
Randy A. Hamill, Senior Vice President of Manufacturing and Resources and
Assistant Secretary of the Company, was granted options to purchase 5,000 Common
Shares on December 31, 2000; he reported such grant on a Form 5 filed with the
SEC on March 29, 2001.
15
17
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 for
the years ended December 31, 2000, 1999, and 1998 to or on behalf of Robert L.
Ross, Douglas A. Buffington and Randy A. Hamill (collectively, the "Named
Executives").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------- --------
OTHER SECURITIES
NAME AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ------------------ ---- ------ ----- ------------ ------- ------------
Robert L. Ross, 2000 $ 0 $ 0 $ 0 10,000 $ 0
Chief Executive Officer 1999 $ 0 $ 0 $ 0 7,500 $ 0
1998 $ 0 $ 0 $ 0 0 $ 0
Douglas A. Buffington, 2000 $150,000 $ 35,000(1) $ 19,392(5) 20,000(6) $ 975(9)
President, Chief Financial 1999 $149,808 $ 24,375(3) $ 19,389(5) 14,375(7) $ 975(9)
Officer, Chief Operating 1998 $137,362 $ 7,500(4) $ 19,992(5) 7,500(8) $ 975(9)
Officer, and Treasurer
Randy A. Hamill, 2000 $100,000 $ 20,000(2) $ 0 5,000(6) $ 0
Senior Vice President 1999 $100,000 $ 6,250(3) $ 0 6,250(7) $ 0
of Manufacturing and 1998 $ 99,337 $ 4,375(4) $ 0 4,375(8) $ 0
Resources and Assistant
Secretary
(1) Bonus earned in 2000, paid in 2001.
(2) Bonus earned in 2000, paid in 2000.
(3) Bonus earned in 1999, paid in 2000.
(4) Bonus earned in 1998, paid in 1999.
(5) Travel/commuting expenses reimbursed by the Company.
(6) Awarded for 2000 services, granted in 2000.
(7) Awarded for 1999 services, granted in 2000.
16
18
(8) Awarded for 1998 services, granted in 1999.
(9) The Company paid the $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.
The following table sets forth information pertaining to stock options granted
to the Named Executives in 2000.
2000 OPTION GRANTS
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE OR
UNDERLYING TO EMPLOYEES BASE PRICE EXPIRATION
NAME OPTIONS GRANTED IN 2000 $/SH DATE
- ---- --------------- ------- ---- ----
Robert L. Ross 10,000 (1) 13.7% $1.84375 none
Douglas A. Buffington 14,375 (1) 19.8% $1.84375 (2) 03/09/10 (3)
Douglas A. Buffington 20,000 (1) 27.5% $ .75 (2) 12/31/10 (3)
Randy A. Hamill 6,250 (1) 8.6% $1.84375 03/09/10 (3)
Randy A. Hamill 5,000 (1) 6.9% $ .75 12/31/10 (3)
(1) Immediately exercisable.
(2) Upon certain changes in control, exercise price becomes $.01.
(3) If employment terminates before the expiration date, option expires 3
months after such termination.
The following table sets forth certain information pertaining to stock options
held by the Named Executives as of December 31, 2000. The Named Executives
exercised no options in 2000.
2000 FISCAL YEAR END OPTION HOLDINGS
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END AT FISCAL YEAR END(1)
------------------ ---------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Robert L. Ross 67,500 0 $ 0 $ 0
Douglas A. Buffington 85,375 0 $ 0 $ 0
Randy A. Hamill 59,842 0 $ 0 $ 0
(1) Calculated on the basis of the fair market value of the Common Stock of
$.75 per share on December 31, 2000 less exercise price.
17
19
Compensation of Directors
- -------------------------
The Company compensates its nonemployee, non-consultant directors (Mary Ann
Jorgenson and Frederick B. Ziesenheim) by granting such persons shares of the
Company's Common Stock having a fair market value of $1,000 for every meeting of
the Board of Directors or committee thereof attended by such person, and shares
of Common Stock having a fair market 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.
Certain Agreements
- ------------------
The Company entered into a new employment agreement with Douglas A. Buffington
effective January 1, 1998 and terminating on December 31, 2002 unless terminated
sooner as provided in the agreement. Mr. Buffington's base annual salary under
the agreement was $137,500 for 1998 and $150,000 for each year thereafter. An
incentive cash bonus and stock option program are incorporated into the
agreement. Additional stock options, other than those provided in the incentive
program, may be granted at the discretion of the Company's Board of Directors.
The agreement also provides for certain benefits, in addition to the standard
Company employee fringe benefits, including but not limited to reimbursement of
certain expenses and payment of premiums on a $750,000 life insurance policy
with Mr. Buffington's spouse named as beneficiary. The agreement also contains
"noncompetition" and "invention and secrecy" clauses.
In January 1997, the Company entered into an agreement with Randy A. Hamill
pursuant to which Mr. Hamill was granted an immediately exercisable option to
purchase 40,000 shares of Common Stock at an exercise price of $0.9375 per
share. Upon the occurrence of a change in control of the Company (as defined in
the agreement) the exercise price per share for any unexercised portion of the
option would be the lower of (a) (i) one cent or (ii) the lowest price greater
than one cent per share that would not cause the value to Mr. Hamill of shares
acquired upon exercise to be considered an "excess parachute payment" under
Section 280G of the Internal Revenue Code of 1986 as amended or (b) $0.9375. In
the event that Mr. Hamill should die while employed by the Company and the
Company has received $500,000 as beneficiary of a life insurance policy it
maintains on Mr. Hamill's life, Mr. Hamill's estate will have the right to
require the Company to purchase the option, if unexercised, for $500,000 or,
subject to certain limitations, to purchase up to 39,999 shares received on
exercise of the option for their fair market value at that time.
On December 29, 2000, the Company and S2 Acquisition entered into an employment
agreement with James E. Jones, effective as of January 1, 2001 and terminating
on December 31, 2005 unless terminated sooner as provided in the agreement,
pursuant to which Mr. Jones serves as the Vice President of Marketing of the
Company and the President of S2 Acquisition. Under this agreement, Mr. Jones'
annual base salary is $100,000, he may also receive grants of options to
purchase shares of the Company's Common Stock, and he receives the Company's
standard employee fringe benefits. The agreement also contains "noncompetition"
and "invention and secrecy" clauses.
18
20
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 13, 2001 by (i) each person
who beneficially owned 5% or more of the outstanding Common Stock, (ii) each
director, (iii) each Named Executive 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 AND ADDRESS OWNED(1) OF CLASS(1)
- ---------------- -------- -----------
L. R. Jeffrey (2) 250,000 7.2%
50 Gloucester Road
Summit, NJ 07901
Richard M. Maurer (3) 1,492,696 45.4%
Director and Secretary
Three Gateway Center
Pittsburgh, PA 15222
Robert L. Ross (4) 1,473,596 44.8%
Chairman of the Board
and Chief Executive Officer
Three Gateway Center
Pittsburgh, PA 15222
Mary Ann Jorgenson 11,928 *
Director
4900 Key Tower
127 Public Square
Cleveland, OH 44114-1304
Frederick B. Ziesenheim 11,911 *
Director
700 Koppers Building
436 7th Avenue
Pittsburgh, PA 15219-1818
Douglas A. Buffington 87,375 2.6%
President, Chief Financial
Officer, Chief Operating
Officer and Treasurer
18 Gloria Lane
Fairfield, NJ 07004
19
21
Randy A. Hamill (5) 74,142 2.3%
Senior Vice President
of Manufacturing and Resources
and Assistant Secretary
18 Gloria Lane
Fairfield, NJ 07004
James E. Jones 775,000 24.1%
Director and Vice President
of Marketing
3803 Corporex Park Drive
Tampa, FL 33619
Brian Christopher 225,000 7.0%
3083 Corporex Park Drive
Tampa, FL 33619
Wesmar Partners (6) 1,399,096 43.4%
MR & Associates
Maurer, Ross & Co., Incorporated
Three Gateway Center
Pittsburgh, PA 15222
All directors and executive
officers as a group (7 persons)(7) 2,527,552 72.2%
*Less than 1%
(1) The numbers shown include shares covered by options that are currently
exercisable as of March 13, 2001. The numbers and percentages of shares
owned assume that such outstanding options had been exercised as
follows: L. R. Jeffrey, Jr. - 250,000, Richard M. Maurer - 67,500,
Robert L. Ross - 67,500, Douglas A. Buffington - 85,375, Randy A.
Hamill - 59,892 and all directors and executive officers as a group -
280,267.
(2) Does not include 730 shares owned by various members of Mr. Jeffrey's
family with respect to which shares he disclaims any beneficial
ownership.
(3) Includes 25,300 shares which are held directly by three trusts of which
Mr. Maurer is co-trustee and with respect to which he shares voting and
investment power, 1,399,096 shares owned directly by Wesmar Partners
with respect to which he shares voting and investment power and 67,500
shares underlying the options held directly by Mr. Maurer. Mr. Maurer
is an officer, director and principal shareholder of Maurer Ross & Co.,
Incorporated, the general partner of MR & Associates, and the managing
general partner of Wesmar Partners.
(4) Includes 1,399,096 shares owned directly by Wesmar Partners and 67,500
shares underlying the options held by Mr. Ross. 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.
20
22
(5) Does not include shares owned by various members of Mr. Hamill's family
with respect to which shares Mr. Hamill disclaims any beneficial
ownership.
(6) Wesmar Partners is a Delaware 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.
(7) 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 6 above).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Transactions With Management and Others
- ---------------------------------------
During the fiscal year ended December 31, 2000, MR & Associates provided
consulting services to the Company for $5,000 per month. 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 more than five percent of the Common Stock.
Messrs. Maurer and Ross, as indirect owners of more than five percent of the
Common Stock, had an interest in the Company's acquisition in July of the assets
of NancyLopezGolf(TM), and acquisition in December of 2000, through S2
Acquisition, of Ladies Golf.
Nancy Lopez, a director of the Company as of January 1, 2001, is the President
of Nancy Lopez Enterprises, Inc., which receives royalty payments and options to
purchase Common Stock of the Company under a licensing agreement with the
Company, which the Company entered into pursuant to the July 2000 transaction to
acquire the assets of NancyLopezGolf(TM).
James E. Jones, a director of the Company as of January 1, 2001, became the
holder of more than five percent of the Company's Common Stock and entered into
an employment agreement with the Company and S2 Acquisition pursuant to the
Company's acquisition of Ladies Golf in December of 2000.
During the fiscal year ended December 31, 2000, the Company retained the law
firm of Squire, Sanders & Dempsey L.L.P. ("Squire, Sanders"), of which Mary Ann
Jorgenson, a director of the Company, is a partner, to represent the Company in
various matters, including the Company's acquisitions during 2000, for which the
Company said Squire, Sanders fees of $125,200 during the year.
21
23
PART IV
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 are 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 is filed as part of this report.
(3) The Exhibits listed in the accompanying Exhibit Index are
filed as part of this report.
(b) No reports on Form 8-K were filed for the fourth quarter ended December
31, 2000.
22
24
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: March 29, 2001 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 March 29, 2001
- ------------------------------- Financial Officer, Chief
Douglas A. Buffington Operating Officer and Treasurer
/s/ Robert L. Ross Chairman of the Board March 29, 2001
- ------------------------------- and Chief Executive Officer
Robert L. Ross
/s/ Richard M. Maurer Director and Secretary March 29, 2001
- -------------------------------
Richard M. Maurer
/s/ James E. Jones Director and Vice President March 29, 2001
- -------------------------------
James E. Jones
/s/ Mary Ann Jorgenson Director March 29, 2001
- -------------------------------
Mary Ann Jorgenson
/s/ Nancy Lopez Director March 29, 2001
- -------------------------------
Nancy Lopez
/s/ Frederick B. Ziesenheim Director March 29, 2001
- -------------------------------
Frederick B. Ziesenheim
25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------
Independent Auditors' Reports F-2
Balance Sheets as of December 31, 2000 and 1999 F-4
Statements of Operations For the Years
Ended December 31, 2000, 1999 and 1998 F-5
Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 F-6
Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2000, 1999 and 1998 F-8
Notes to Financial Statements F-9
Financial Statement Schedule II - Valuation and
Qualifying Accounts and Reserves F-21
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
26
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
S2 Golf Inc.
We have audited the accompanying consolidated balance sheets of S2 Golf Inc. as
of December 31, 2000 and 1999, and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows and financial
statement schedule for the years then ended. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting amounts and disclosures in the
consolidated 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of S2 Golf Inc. as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
/s/Rothstein, Kass & Company, P.C.
Roseland, New Jersey
March 6, 2001
F-2
27
[Letterhead of Deloitte & Touche LLP, Parsippany, New Jersey]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of S2 Golf Inc.
We have audited the accompanying statements of operations, changes in
shareholders' equity and cash flows of S2 Golf Inc. for the year ended December
31, 1998. Our audit also included the 1998 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 these financial statements and financial statement
schedule based on our audit.
We conducted our audit 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 our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations of S2 Golf Inc., changes in shareholders'
equity and cash flows for the year ended December 31, 1998 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 the 1998 information set forth therein.
/s/Deliotte & Touche LLP
March 22, 1999
F-3
28
S2 GOLF INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999
2000 1999
----------- -----------
ASSETS
Current Assets
Cash $ 9,886 $ 150
Accounts Receivable - Net 3,567,768 2,650,197
Inventories 4,046,122 2,554,736
Prepaid Expenses 205,982 59,278
Deferred Income Taxes 214,000 163,600
----------- -----------
Total Current Assets 8,043,758 5,427,961
Plant and Equipment - Net 195,907 104,476
Deferred Income Taxes 6,000 82,000
Goodwill - Net 5,307,919
Other Assets - Net 125,056 137,642
----------- -----------
Total Assets $13,678,640 $ 5,752,079
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Portion Long-Term Debt $ 1,447,189 $ --
Short-Term Borrowings 3,460,828 774,468
Accounts Payable 936,614 399,864
Accrued Expenses 442,335 171,522
Other Current Liabilities 83,847 61,335
----------- -----------
Total Current Liabilities 6,370,813 1,407,189
Long-Term Liabilities
Long-Term Debt, less Current Portion 509,847
Other Long-Term Liabilities 2,258 84,822
----------- -----------
Total Liabilities 6,882,918 1,492,011
Commitments
Shareholders' Equity
Common Stock, $.01 Par; 12,000,000 Authorized
Shares: 3,223,039 and 2,220,113 Issued and
Outstanding at December 31, 2000 and 1999,
Respectively 32,231 22,201
Additional Paid-in-Capital 6,347,757 4,042,787
Accumulated Profit 415,734 195,080
----------- -----------
Total Shareholders' Equity 6,795,722 4,260,068
----------- -----------
Total Liabilities and Shareholders' Equity $13,678,640 $ 5,752,079
=========== ===========
The accompanying notes are an integral part of these statements.
F-4
29
S2 GOLF INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ ------------
Net Sales $ 12,510,314 $ 11,003,556 $ 11,505,000
Cost of Goods Sold 8,251,834 7,428,130 7,667,300
------------ ------------ ------------
Gross Profit 4,258,480 3,575,426 3,837,700
------------ ------------ ------------
Operating Expenses:
Selling 2,093,938 1,641,744 1,540,048
General & Administrative 1,647,827 1,302,325 1,228,559
------------ ------------ ------------
Total Operating Expenses 3,741,765 2,944,069 2,768,607
------------ ------------ ------------
Operating Income 516,715 631,357 1,069,093
------------ ------------ ------------
Other Income (Expense)
Interest Expense (233,385) (158,892) (368,285)
Other Income (Expense) (5,307) 562 (5,678)
------------ ------------ ------------
(238,692) (158,330) (373,963)
------------ ------------ ------------
Income Before Income Taxes 278,023 473,027 695,130
Provision for Income Taxes 57,369 166,901 254,282
------------ ------------ ------------
Net Income $ 220,654 $ 306,126 $ 440,848
============ ============ ============
Earnings per Common Share- Basic $ 0.10 $ 0.14 $ 0.20
============ ============ ============
Diluted $ 0.10 $ 0.14 $ 0.19
============ ============ ============
Weighted Average Number of
Shares Outstanding -
Basic 2,226,312 2,219,700 2,219,078
Diluted 2,264,065 2,263,876 2,315,149
The accompanying notes are an integral part of these statements.
F-5
30
S2 GOLF INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
----------- ----------- -----------
OPERATING ACTIVITIES
- --------------------
Net Income $ 220,654 $ 306,126 $ 440,848
Adjustments to Reconcile Net Income to
Net Cash Provided By
Operating Activities:
Depreciation 56,222 46,637 42,329
Amortization 108,003 16,862 14,763
Deferred Income Taxes 25,600 88,428 68,885
Issuance of Stock for Compensation 5,000 2,000 4,000
Allowance for Doubtful Accounts 321,000 272,919 (108,368)
Allowances for Returns 116,410 190,586 (10,000)
Inventory Obsolescence Reserve 45,558 75,000 (60,621)
Changes in Assets and Liabilities:
Accounts Receivable 150,836 199,176 528,414
Inventory 16,529 1,010,387 (485,200)
Prepaid Expenses (73,004) (26,860) 12,242
Other Assets (301) (889) (3,906)
Accounts Payable 454,027 75,015 (283,875)
Accrued Expenses 127,485 (116,656) (48,731)
Other Liabilities (90,241) (56,075) (53,385)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,483,778 2,082,656 57,395
----------- ----------- -----------
INVESTING ACTIVITIES
- --------------------
Acquisitions, Net of Cash Acquired (4,486,687)
Purchase of Equipment (68,273) (91,671) (22,297)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (4,554,960) (91,671) (22,297)
----------- ----------- -----------
FINANCING ACTIVITIES
- --------------------
Proceeds from (Repayments of) Short-Term Borrowings, net 2,285,586 (1,992,411) (154,953)
Proceeds from Long-Term Debt 900,000
Repayments of Long-Term Debt (104,668)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,080,918 (1,992,411) (154,953)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH 9,736 (1,426) (119,855)
CASH - BEGINNING OF PERIOD 150 1,576 121,431
----------- ----------- -----------
CASH - END OF PERIOD $ 9,886 $ 150 $ 1,576
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
- ----------------------------------
Cash Paid During the Year For:
Interest $ 222,719 $ 158,892 $ 361,644
=========== =========== ===========
Income Taxes $ 28,591 $ 79,500 $ 254,282
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-6
31
S2 GOLF INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (CONTINUED)
SUPPLEMENTAL SCHEDULES OF NON-CASH
INVESTING AND FINANCING ACTIVITES
2000 1999 1998
---- ---- ----
Long-Term Debt Incurred in
Connection with Acquisition $1,000,000 $-- $--
========== ===== =====
Common Stock Issued in
Connection with Acquisition $2,310,000 $-- $--
========== ===== =====
Equipment Financed Through
Long-Term Debt $ 21,730 $-- $--
========== ===== =====
The accompanying notes are an integral part of these statements.
F-7
32
S2 GOLF INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Total
Common Stock Additional Share-
------------ Paid In Accumulated holders'
Shares Amount Capital Profit Equity
----------- ----------- ----------- ----------- -----------
Balance - January 1, 1998 2,218,605 $ 22,186 $ 4,036,802 $ (551,894) $ 3,507,094
Issuance of Common Stock 708 7 3,993 -- 4,000
Net Income 1998 440,848 440,848
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1998 2,219,313 $ 22,193 $ 4,040,795 $ (111,046) $ 3,951,942
----------- ----------- ----------- ----------- -----------
Issuance of Common Stock 800 8 1,992 -- 2,000
Net Income 1999 306,126 306,126
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1999 2,220,113 $ 22,201 $ 4,042,787 $ 195,080 $ 4,260,068
----------- ----------- ----------- ----------- -----------
Issuance of Common Stock 2,926 30 4,970 5,000
Issuance of Common Stock
for Acquisition 1,000,000 10,000 2,300,000 2,310,000
Net Income 2000 220,654 220,654
----------- ----------- ----------- ----------- -----------
Balance - December 31, 2000 3,223,039 $ 32,231 $ 6,347,757 $ 415,734 $ 6,795,722
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
F-8
33
S2 GOLF INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
S2 Golf Inc. (the "Company") was incorporated under the laws of the state of New
Jersey on February 2, 1982. The Company and its subsidiary manufacture and
market a proprietary line of golf equipment including golf clubs, golf bags,
golf shoes, golf balls and accessories. The Company markets these products under
various trade names and uses several additional trademarks.
In July 2000, the Company acquired the net assets of NancyLopezGolf (TM), a
product line of The Arnold Palmer Golf Company (Note 8).
In December 2000, S2 Golf Acquisition Corp., a wholly owned subsidiary of the
Company ("Acquisition Corp."), acquired all of the issued and outstanding shares
of Ladies Golf Equipment Company, Inc. ("Ladies Golf") (Note 8). Acquisition
Corp., which was formed in 2000, was inactive with no assets or liabilities
prior to this transaction.
BASIS OF CONSOLIDATION
The consolidated balance sheets contain the accounts of S2 Golf Inc. and its
wholly owned subsidiary. The related statements of operations and cash flows
contain the operations of S2 Golf Inc. for each period and the operations of its
wholly owned subsidiary from its date of formation in 2000. All significant
intercompany accounts and transactions have been eliminated in consolidation.
ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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
allowances, will be collected, the Company anticipates that in the event of
default it would follow normal collection procedures. Overall, management
believes 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.
F-9
34
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values 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 their carrying value due to their
variable interest rate features, which reprise quarterly. The fair value of
long-term borrowings approximate their carrying value due to the interest rate
which is variable based upon the prime rate.
INVENTORIES
Inventories are valued at the lower of cost, determined on the basis of the
first-in, first-out method, or market. Inventories consist of materials, labor
and manufacturing overhead.
PLANT AND EQUIPMENT
Equipment is stated at cost, less accumulated depreciation. 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. As of December 31, 2000 and 1999, the Company had an allowance for
doubtful accounts of $320,936 and $215,000, respectively, allowance for
discounts of $40,000, in each year, and an allowance for returns of $93,000 and
$83,000 respectively.
ADVERTISING COSTS
The Company expenses costs of advertising as incurred. Advertising expenses
included in selling expenses for the years ended December 31, 2000, 1999, and
1998 were approximately $589,000, $511,000 and $321,000, respectively.
INCOME TAXES
The Company complies with Statement of Financial Accounting Standards ("SFAS")
No. 109 "Accounting for Income Taxes," which requires an asset and liability
approach to financial recording for income taxes. Deferred income tax assets and
liabilities are computed for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
F-10
35
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce the deferred tax
assets to the amount expected to be realized.
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
was fully amortized in 1997. Management periodically evaluates the
recoverability of intangible assets based upon current and anticipated net
income and undiscounted future cash flows.
EARNINGS PER SHARE
The Company complies with SFAS No. 128, "Earnings per Share." SFAS No. 128
revises certain methodologies for computing earnings per share ("EPS") and
requires the dual presentation of basic and diluted earnings per share. Basic
EPS excludes dilution and is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if stock
options or other contracts to issue common stock were exercised and resulted in
the issuance of common stock that then shared in the earnings of the Company.
Diluted EPS is computed using the treasury stock method when the effect of
common stock equivalents would be dilutive. The only reconciling item between
the denominator used to calculate basic EPS and the denominator used to
calculate diluted EPS is the dilutive effect of stock options issued to
employees of the Company and other parties. The Company has issued no other
potentially dilutive common stock equivalents.
RECLASSIFICATIONS
Certain reclassifications to prior years' financial statements were made in
order to conform to the 2000 presentation.
2. INVENTORIES
Inventories consists of the following components at December 31:
2000 1999
---- ----
Finished Goods $ 641,522 $ 638,684
Raw Materials 3,404,600 1,916,052
---------- ----------
$4,046,122 $2,554,736
========== ==========
F-11
36
3. PLANT AND EQUIPMENT
Plant and equipment at December 31, 2000 and 1999 were as follows:
2000 1999
---------- ----------
Machinery and Equipment $1,054,746 $ 759,763
Furniture and Fixtures 94,646 54,485
Leasehold Improvements 43,554 43,554
---------- ----------
Total 1,192,946 857,802
Less: Accumulated Depreciation and Amortization 997,039 753,326
---------- ----------
$ 195,907 $ 104,476
========== ==========
Depreciation and amortization for the years ended 2000, 1999 and 1998 was
$56,222, $46,637 and $42,329, respectively.
4. GOODWILL
Goodwill consists of the excess of cost over fair value of net assets purchased
in connection with the acquisitions consummated during 2000. Goodwill is being
amortized over 10 years for NancyLopezGolf(TM) and 25 years for Ladies Golf.
During the year ended December 31, 2000, amortization expense was $91,304.
5. OTHER ASSETS
Other assets consist of the following at December 31, 2000, and 1999:
2000 1999
-------- --------
Covenant Not to Compete $436,277 $436,277
Patents and Trademarks 223,809 223,809
Security Deposits 53,613 49,500
-------- --------
Total 713,699 709,586
Less: Accumulated
Amortization 588,643 571,944
-------- --------
$125,056 $137,642
======== ========
Amortization expense for the years ended 2000, 1999, and 1998 was $16,699,
$16,862, and $14,763, respectively.
6. SHORT-TERM BORROWINGS
The Company has negotiated a new revolving line of credit with PNC Bank,
National Association (the "Bank") allowing a maximum credit limit of $8,000,000,
less 50% of the aggregate face amount of all outstanding letters of credit,
subject to various borrowing bases. The availability of funds under this line of
credit varies as it is based, in part, on a borrowing base of 80% of eligible
accounts receivable
F-12
37
and 60% of qualified inventory. Substantially all of the Company's assets are
used as collateral for the credit line. Interest rates are at prime plus
one-quarter percent, paid monthly; the interest rate as of December 31, 2000 was
9.75% and 8.75% as of December 31, 1999. At December 31, 2000 and 1999, unused
funds available to the Company under the line of credit were approximately
$895,000 and $1,259,000, respectively. There were no outstanding letters of
credit as of December 31, 2000 and 1999.
The credit facility contains certain covenants, which, among other items,
require the maintenance of certain financial ratios including tangible net worth
and working capital. Any event of default under the credit facility permits the
lender to cease making additional loans thereunder.
7. LONG-TERM LOAN
At December 31, 2000 long-term debt consists of the following:
Note payable in monthly installments of $25,000, $ 800,000
through August 2003, plus interest at prime plus
one and one-half percent. The interest rate was
11.0% at December 31, 2000
Promissory note payable, related party 1,000,000
due on December 31, 2001 with interest of
prime plus one fourth of one percent. The interest rate was
9.75% at December 31, 2000
Other 157,036
----------
1,957,036
Less current portion 1,447,189
----------
$ 509,847
Maturities of long-term debt are as follows:
Year ending December 31, $1,447,189
2001 307,400
2002 202,447
----------
2003 $1,957,036
==========
8. PURCHASE TRANSACTIONS
During 2000, the Company made the following acquisitions:
On July 31, 2000, the Company acquired from The Arnold Palmer Golf Company (the
"Seller") substantially all of the net assets of its NancyLopezGolf (TM)
division, for a cash purchase price of $4,633,333 (the "Purchase Price"). The
Purchase Price was a function of projected sales volume, with a post-closing
adjustment to be based on (i) changes in the net asset value between April 29,
2000 and the closing date and (ii) realization on accounts receivable in the
first six months after closing. On the closing date the Company paid $3,000,000
of the Purchase Price to the Seller, using the principal
F-13
38
amount of a $900,000 term loan extended to the Company by the Bank together with
funds available under the Company's existing revolving line of credit with the
Bank. On August 10, the Company, using funds available to it under an amendment
to its existing revolving line of credit with the Bank, deposited $150,000 of
the Purchase Price into escrow pending the final determination of the purchase
price adjustment and paid to the Seller $1,009,405, representing the remaining
balance of the Purchase Price adjusted pursuant to a mutual agreement of the
parties in anticipation of the post-closing purchase price adjustment. The
Company has allocated the excess cost over the fair value of net assets acquired
to goodwill, which amounted to $2,156,369, and is being amortized on a straight
line basis over a period of ten years.
The acquired assets were comprised of intellectual property, accounts
receivable, inventory of golf equipment and manufacturing and other physical
equipment used by the Seller in the manufacture and sale of golf clubs and other
golf equipment. The Company intends to use all equipment and physical property
acquired to continue manufacturing and distributing the NancyLopezGolf(TM)
equipment line.
On December 29, 2000, Acquisition Corp. acquired from James E. Jones and Brian
Christopher (the "Selling Shareholders") all of the issued and outstanding
shares of Ladies Golf, and on December 31, 2000, Ladies Golf was merged with and
into Acquisition Corp., with Acquisition Corp. as the surviving entity. The
purchase price was comprised of 1,000,000 shares of Common Stock of the Company,
par value $0.01 per share, and a promissory note of the Company in the principal
amount of $1,000,000 with a maturity date of December 31, 2001. Consideration
for the acquisition was a function of projected sales volume, with a potential
post-closing adjustment in the merger consideration shares to be based on (i)
realization on accounts receivable in the first six months after the effective
date of the merger, and (ii) losses on non-current inventory in the first nine
months after the effective date of the merger.
The Company has allocated the excess cost over the fair value of net assets
acquired to goodwill, which amounted to $3,242,854 and is being amortized on a
straight line basis over a period of 25 years.
The acquired assets were comprised of intellectual property, accounts
receivable, inventory of Lady Fairway(TM) golf shoes and golf accessories and
other physical equipment used by Ladies Golf in the design and distribution of
women's golf shoes and golf accessories. The Company intends to use all
equipment and physical property acquired to continue designing and distributing
the Lady Fairway(TM) shoe and accessory lines.
Both acquisitions were accounted for using the purchase method of accounting.
The operations of each company acquired have been included in the Company's
Consolidated Statement of Operations from the respective dates of acquisitions.
The purchase price was allocated to the assets and liabilities based on their
estimate fair value as of the dates of acquisitions.
The following unaudited proforma consolidated results of operations are
presented as if the acquisitions had been made at the beginning of the
respective periods.
F-14
39
Year Ended December 31 (unaudited),
2000 1999
---- ----
Net Sale $18,830,000 $17,446,600
Net Loss (152,000) (1,326,000)
Basic loss per common share (.07) (.60)
Diluted loss per common share (.07) (.60)
9. INCOME TAXES
The provision for income taxes for the years ended December 31, 2000, 1999, and
1998 consists of the following:
2000 1999 1998
--------- --------- ---------
Current
Federal $ 13,851 $ 62,173 $ 137,704
State 17,918 16,300 47,693
--------- --------- ---------
31,769 78,473 185,397
--------- --------- ---------
Deferred
Federal 21,760 62,784 53,363
State 3,840 25,644 15,522
--------- --------- ---------
25,600 88,428 68,885
--------- --------- ---------
Total Provision
for Income Taxes $ 57,369 $ 166,901 $ 254,282
========= ========= =========
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:
2000 1999 1998
--------- --------- ---------
Federal Tax at
Statutory Rate $ 94,528 $ 160,829 $ 236,365
Increase (Decrease) in Taxes
Resulting From:
Utilization of Net Operating Loss (20,734)
Permanent Differences 2,081 1,353
State Tax, Net of Federal
Tax Benefit 1,806 28,382 41,722
Reversal of Reserves (15,665) (8,000)
Other (23,300) (16,391) (4,424)
--------- --------- ---------
Total Income Tax Provision $ 57,369 $ 166,901 $ 254,282
========= ========= =========
The tax effects of temporary differences that give rise to significant portions
of the current and noncurrent deferred tax assets at December 31, 2000 and
December 31, 1999 are as follows:
F-15
40
DECEMBER 31, DECEMBER 31,
2000 1999
--------- ---------
Accounts Receivable Allowances $ 181,000 $ 135,200
Accrued Expenses 9,000 4,000
Non-Compete Agreement 24,000 24,400
--------- ---------
Current Deferred Income Tax Assets $ 214,000 $ 163,600
========= =========
Non-Compete Agreement $ 10,000 $ 34,000
Other (4,000) 48,000
--------- ---------
Non Current Deferred Income Tax Assets $ 6,000 $ 82,000
========= =========
10. OPERATING LEASE
The Company leases factory and office space in Fairfield, New Jersey. The
Company has exercised its option to renew this lease through December 31, 2001.
The annual base rent for 2001 will be $131,917. 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, 2000, 1999 and 1998 was $163,977, $152,339, and $119,269
respectively.
The Company also leases office space in Tampa, Florida. The Company has extended
the lease through December 31, 2001. The annual base rent for 2001 will be
$61,000. This lease was assumed as a result of the acquisition of Ladies Golf
and thus no rent expense was recorded by the Company for the year ended December
31, 2000.
11. COMMITMENTS
LICENSING AGREEMENTS
Ladies Professional Golf Association
- ------------------------------------
Under the terms of an agreement with the Ladies Professional Golf Association
(LPGA), the Company is obligated to pay a license and royalty fee based upon
sales volume. Beginning in 1998, the minimum annual license and royalty fee is
$200,000 through December 31, 2003 payable in equal quarterly installments. In
the event that the sum of (A) 5% of the net sales of the licensed products
(other than golf shoes) up to $1,000,000 in any calendar year, (B) 2.5% of the
net sales of the licensed products (other than golf shoes) in excess of
$1,000,000 and less than $5,000,000 in any calendar year, (C) 1% of the net
sales of the licensed products (other than golf shoes) in excess of $5,000,000,
and (D) 1% of the net sales of golf shoes in any calendar year, exceeds the
minimum license fee, the excess shall be paid as a royalty fee. Royalty expense
for years ended December 31, 2000, 1999, and 1998 was $200,000, $200,000, and
$244,829, respectively.
In addition, the Company is obligated to spend a minimum of $100,000 per year on
various advertising programs and to be a "Title Sponsor" of the LPGA Teaching
and Club Professionals Division Team Classic at an annual cost of $35,000
beginning in 1999 and increasing by $2,500 per year through the term of the
agreement.
F-16
41
Kathy Whitworth
- ---------------
In October 1999, the Company entered into an Endorsement Agreement with former
LPGA Tour Golf Professional Kathy Whitworth, effective January 1, 2000 through
December 31, 2005. Under the terms of the agreement, Ms. Whitworth grants the
Company an exclusive license to use her name, likeness, image and personal
identification, singly or in any combination, in connection with the production,
marketing and sale of a "Kathy Whitworth" signature line of women's golf clubs.
In addition, the Company has the right to include Ms. Whitworth in two print and
one-television advertisement per year. The Company will pay Ms. Whitworth a base
fee of $36,000 per year in equal quarterly payments. In addition, Ms. Whitworth
will receive a royalty fee of 2% of net sales of "Kathy Whitworth" line of
clubs.
Ms. Whitworth agrees to use only the golf clubs and golf bags of the Company in
any golf event, either professional or social, during the term of the agreement.
Ms. Whitworth will serve as a golf instructor at up to 10 golf clinics per
calendar year. In addition, Ms. Whitworth will represent the Company at 2
Professional Golf Association merchandise shows as their spokesperson each
calendar year. The Company will reimburse Ms. Whitworth for all reasonable and
necessary travel expenses in connection with her performance of the services.
Royalty expense under this agreement for the year ended December 31, 2000 was
$61,484.
Nancy Lopez Enterprises, Inc.
- -----------------------------
In July 2000, the Company entered into a licensing agreement with Nancy Lopez
Enterprises, Inc., as part of the acquisition of NancyLopezGolf(TM), effective
July 31, 2000 through December 31, 2007. Under the terms of the agreement, the
Company must pay the licensor an annual fixed royalty in the amount of $200,000,
based on reaching certain revenues for licensed products. The Company is
required to pay a royalty based on a percentage of gross revenues as specified
within the agreement if this amount exceeds the fixed royalty amount of
$200,000. In addition, recognition of the increased value of the golfer
identification resulting in achievements in certain tournaments, the Company
agrees to pay bonuses to the licensor as specified within the agreement.
Royalty expense under this agreement for the year ended December 31, 2000 was
$83,332.
EMPLOYMENT AGREEMENTS
The Company entered into a new employment agreement with a key executive officer
effective January 1, 1998 and terminating on December 31, 2002 unless terminated
sooner as provided in the agreement. The base annual salary under the agreement
was $137,500 for 1998 and $150,000 for each year thereafter. An incentive cash
bonus and stock option program are incorporated into the agreement. Additional
stock options, other than those provided in the incentive program, may be
granted at the discretion of the Company. The agreement also contains a
"non-compete" clause and an "invention and secrecy" clause.
On December 29, 2000, the Company and Acquisition Corp. entered into an
employment agreement with a key executive officer effective as of January 1,
2001 and terminating on December 31, 2005
F-17
42
unless terminated sooner as provided in the agreement. Under this agreement, the
key executive officer's annual base salary is $100,000 and he may also receive
grants of options to purchase shares of the Company's Common Stock. The
agreement also contains "non-compete" and "invention and secrecy" clauses.
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 through April 2002
as consideration for his covenant not to compete with the Company. 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
("Common Stock") at an exercise price of $4.48 per share, 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.
12. STOCK OPTIONS AND GRANTS OF STOCK
Options have been granted to current and former officers, employees and
directors of the Company at the discretion of the Company's Board of Directors.
The table below summarizes all outstanding stock options.
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
Outstanding at January 1, 1998 565,670 $ 3.327
Granted 2,000 4.250
-------- --------
Outstanding at December 31, 1998 567,670 3.330
Granted 28,875 2.608
-------- --------
Outstanding at December 31, 1999 596,545 3.295
Granted 76,307 1.394
Cancelled (10,000) 4.375
-------- --------
Outstanding at December 31, 2000 662,852 $ 3.060
======== ========
The Company applies the intrinsic value method in accounting for its stock
plans. Accordingly, no compensation cost has been recognized for stock option
grants issued to employees under any of the Company's stock option plans. If
compensation cost for stock option grants issued during 2000, 1999 and 1998 had
been determined under the provisions of SFAS No. 123, the Company's net income
would have been $177,188, $276,504 and $436,331, respectively. The Company's net
income per
F-18
43
share for basic and diluted in 2000, 1999 and 1998 would have been $.08 and
$.08, $.12 and $.12, and $.20 and $.19, respectively.
The fair value of each stock option granted under the Company's plans was
estimated on the date of grant using the Black-Scholes option pricing model. The
following weighted average assumptions were used to value grants issued under
the plans in 2000, 1999 and 1998:
2000 1999 1998
---- ---- ----
Annualized Volatility 53% 46% 70%
Risk-Free Interest Rate 5% 5% 5%
Expected Term of Option (in years) 3.5 3.5 3.5
Dividend Yield N/A N/A N/A
The weighted average fair values per share of stock options granted during 2000,
1999 and 1998 were $.60, $3.00 and $4.25, respectively.
The exercise price ranges for options outstanding and exercisable at December
31, 2000 were:
NUMBER OF SHARES WEIGHTED
OUTSTANDING AND AVERAGE
EXERCISABLE AT EXERCISE
EXERCISE PRICE RANGE DECEMBER 31, 2000 PRICE
- -------------------- ----------------- -----
$0.50 to $2.00 249,214 $ 1.435
$2.01 to $5.00 413,638 4.039
------------ ---------
Total 662,852 $ 3.060
============ =========
The Company has generally granted options that do not expire.
GRANTS OF STOCK TO DIRECTORS
The Company compensates its non-employee directors by granting such persons
shares of Common Stock having a value of $1,000 for every meeting of the Board
of Directors or committee thereof attended by such person, and 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 value of the shares issued is charged to
operations as incurred.
13. RELATED PARTY TRANSACTIONS
During the fiscal year ended December 31, 2000, MR & Associates provided the
Company with consulting services for $5,000 per month. 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 more than five percent of the Common Stock.
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44
During the fiscal years ended December 31, 2000, 1999, and 1998, the Company
retained the law firm of Webb Ziesenheim Logsdon Orkin & Hanson, P.C., of which
Frederick B. Ziesenheim, a director of the Company, is Vice Chairman of the
Board of Directors, to represent the Company on various intellectual property
matters. The Company had paid fees to Webb Ziesenheim Logsdon Orkin & Hanson,
P.C. of $20,520, $22,807, and $28,122, in 2000, 1999 and 1998, respectively.
During the fiscal years ended December 31, 2000 and 1999, the Company retained
the law firm of Squire, Sanders & Dempsey L.L.P., of which Mary Ann Jorgenson, a
director of the Company, is a partner, to represent the Company on various
matters. The Company had paid Squire, Sanders & Dempsey L.L.P. $125,200 and
$22,494 in 2000 and 1999 respectively.
14. QUARTERLY SELECTED DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
2000
Net Sales $ 2,864,570 $ 3,927,376 $ 3,091,279 $ 2,627,089
Gross Profit 950,843 1,454,317 1,035,529 817,791
Net Income (Loss) 114,037 288,705 60,013 (242,101)
Income per
common and common
equivalent share
Basic .05 .13 .03 (0.11)
Dilutive .05 .13 .03 (0.11)
1999
Net Sales $ 2,675,325 $ 3,514,504 $ 2,536,905 $ 2,276,822
Gross Profit 816,928 1,178,702 854,025 725,771
Net Income (Loss) 6,411 234,630 91,588 (26,503)
Income per
common and common
equivalent share
Basic -- .11 .04 (.01)
Dilutive -- .10 .04 (.01)
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45
S2 GOLF, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
--------- -------- -------- ---------- ---------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
December 31, 1998 320,930 268,450 -- 376,818(1) 212,562
December 31, 1999 212,562 272,919 -- 270,481(1) 215,000
December 31, 2000 215,000 321,000 -- 215,064(1) 320,936
ALLOWANCE FOR RETURNS
December 31, 1998 88,632 135,930 -- 136,562 88,000
December 31, 1999 88,000 190,586 -- 195,586 83,000
December 31, 2000 83,000 116,410 -- 106,410 93,000
ALLOWANCE FOR DISCOUNTS
December 31, 1998 50,000 225,427 -- 235,427 40,000
December 31, 1999 40,000 236,974 -- 236,974 40,000
December 31, 2000 40,000 261,270 -- 261,270 40,000
(1) Uncollectible Accounts Written Off, Net of Recoveries
F-21
46
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT*
3.1 Amended and Restated Certificate of Incorporation of the
registrant 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).
10.0 Loan 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).
10.1 First Amendment to Loan and Security Agreement between the
registrant and Midlantic Bank, National Association made
as of April 9, 1996.
10.2 Second Amendment to Loan and Security Agreement between
registrant and PNC Bank, National Association as successor
in interest of Midlantic Bank, National Association made
as of December 1, 1997 (incorporated by reference to
Exhibit 10.12 of the registrant's Annual Report on Form
10-K for the year ended December 31, 1997).
10.3 Fourth Amendment to Loan and Security Agreement between
the registrant and PNC Bank, National Association dated as
of July 31, 2000 (incorporated by reference to Exhibit
10.14 to the registrant's Registration Statement No.
333-47908 on Form S-4).
10.4 Fifth Amendment to Loan and Security Agreement between the
registrant and PNC Bank, National Association made as of
January 3, 2001.
10.5 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).
47
10.6 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
registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.7 Lease Modification, Extension, Assignment, Assumption and
Consent among Joel Levy as Successor Land Trustee of Trust
Number One under Unrecorded Land Trust Agreement dated as
of November 29, 1999, Ladies Golf Equipment Company, Inc.
and S2 Golf Acquisition Corp., dated as of December 29,
2000.
10.8 Amended and Restated Licensing Agreement between Ladies
Professional Golf Association and the registrant dated
January 1, 1999 (incorporated by reference to Exhibit 10.2
of the registrant's Annual Report on Form 10-K for the
year ended December 31, 1999).
10.9 Endorsement Agreement between the registrant and Kathy
Whitworth dated October 13, 1999 (incorporated by
reference to Exhibit 10.13 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1999).
10.10 Licensing Agreement between Nancy Lopez Enterprises, Inc.
and the registrant made as of July 31, 2000.
10.11 License Agreement between the registrant and Raymond
Lanctot Ltee/Ltd. dated June 28, 1999 (incorporated by
reference to Exhibit 10.12 of the registrant's Annual
Report on Form 10-K for the year ended December 31, 1999).
10.12 Asset Purchase Agreement among the registrant, APGC
Holdings Company, LLC and The Arnold Palmer Golf Company
dated July 31, 2000 (incorporated by reference to Exhibit
2.0 to the registrant's Current Report on Form 8-K
reporting the event dated July 31, 2000).
10.13 Agreement and Plan of Reorganization, dated as of June 22,
2000, among the registrant, S2 Golf Acquisition Corp.,
Ladies Golf Equipment Company, Inc., James E. Jones and
Brian Christopher (incorporated by reference to Exhibit
2.0 of the registrant's Registration Statement No.
333-47908 on Form S-4).
10.14 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).
10.15** 1998 Employee Stock Plan of the registrant.
10.16** Agreement between the registrant and Randy A. Hamill dated
January 2, 1997 (incorporated by reference to Exhibit
10.10 of the registrant's Annual Report on Form 10-K for
the year ended December 31, 1997).
10.17** Employment Agreement between the registrant and Douglas A.
Buffington dated January 1, 1998 (incorporated by
reference to Exhibit 10.9 of the registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000).
10.18** Consulting Services Agreement between the registrant and
MR & Associates made as of December 15, 2000, effective as
of January 1, 2000.
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48
10.19** Employment Agreement among the registrant, S2 Golf
Acquisition Corp. and James E. Jones dated as of January
1, 2001.
21.0 Subsidiaries of the registrant (incorporated by reference
to Exhibit 21.0 of the registrant's Quarterly Report on
Form 10-Q for the quarter ended September 29, 2000).
* In the case of incorporation by reference to documents filed by the registrant
under the Securities Exchange Act, the registrant's file number under the
Securities Exchange Act is 0-14146.
** Management contract or management compensatory plan or arrangement.
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