-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, USAOKD9sqxkPiRL/8wc6DKVxfSwyfHwyEypzK1Aobc1Hcs5+ni1HWPjyLoWam4Tk aKbrvvyjwAPzcvC0qWNKEw== 0000950132-98-000308.txt : 19980331 0000950132-98-000308.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950132-98-000308 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: S2 GOLF INC CENTRAL INDEX KEY: 0000782126 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 222388568 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14146 FILM NUMBER: 98579566 BUSINESS ADDRESS: STREET 1: 18 GLORIA LN CITY: FAIRFIELD STATE: NJ ZIP: 07004 BUSINESS PHONE: 201-227-7783 MAIL ADDRESS: STREET 2: 18 GLORIA LANE CITY: FAIRFIELD STATE: NJ ZIP: 07004 FORMER COMPANY: FORMER CONFORMED NAME: GOLF TECHNOLOGY INC DATE OF NAME CHANGE: 19880804 10-K 1 FORM 10-K 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, 1997 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: 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 18, 1998, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $6,787,614. This calculation is based upon the closing price of the Registrant's common stock on March 18, 1998. The number of shares of the Registrant's Common Stock outstanding as of March 18, 1998 was 2,218,846. Part I Item 1. Business. -------- Description of Business - ----------------------- S2 Golf, Inc. (the "Company" or "Square Two") was incorporated under the laws of the state of New Jersey in February 1982. The Company manufactures and sells golf equipment throughout the United States. A publicly-traded company with several club lines for women and men, Square Two is a proven leader in advanced golf technology. In the last four years the company has effectively repositioned itself as one of the top value brands in the women's golf market, which makes up between 55% and 60% of Square Two's business. By concentrating much of its limited promotional and advertising resources on this market niche, Square Two has developed a growing following among women golfers and the retailers who sell them clubs. Square Two has always sought to provide women golfers with the very best value in state-of-the-art golf technology. One of a few golf equipment manufacturers whose clubs carry a number of U.S. Patents for technical achievements, the Company pioneered improvements in head design and shaft technology for women's clubs. Square Two also began to tap more aggressively into its 17-year partnership with the Ladies Professional Golf Association (LPGA). Using input it received from an advisory board of LPGA teaching professionals and through its sponsorship of the Square Two/LPGA Custom Club Fitting Program, Square Two began to introduce options in women's clubs that other manufacturers did not offer. As a result of its relationship with the LPGA, all of Square Two's women's clubs carry the distinctive LPGA logo. To create more "eye appeal," Square Two made cosmetic changes to those products and began to show the logo more prominently. Square Two has remained committed to providing premium quality, high performance clubs at affordable prices. Because Square Two does not believe that superior designs must sell for superior prices, the Company believes that its clubs match or exceed the performance specifications of clubs costing two to three times more. Because many women are savvy shoppers, the Company believes that Square Two's message of advanced technology at affordable prices has been warmly received by women golfers. -1- Products The Company currently markets the following full line of golf equipment for both men and women: The PCX II steel line features cavity back, oversize elliptical head design for irons with oversize metal woods. The driver features a Synchro Speed System 1 graphite shaft while the 3 and 5 woods are lightweight steel. The irons feature lightweight steel shafts and are Totally Matched. PCX II clubs are available for men only. The Light and Easy/TM/ line was redesigned in 1997 with medallions and features the LPGA logo, lightweight steel or graphite shafted, cavity back, oversize, stainless steel irons with steel or graphite shafted oversize, perimeter weighted metal woods. Light and Easy/TM/ clubs are available in ladies and Lady Petite for right and left-handed golfers. The Power Circle/TM/ line was redesigned in 1997. These irons, which are available in either steel or graphite shafts, feature oversize, full cavity design engineered to resist twist at impact. Metal woods feature steel or graphite shafts with oversize head designs. Power Circle clubs are available in men's right hand and left hand models. The RAVE graphite line was introduced in 1997 and features the Company's patented Posiflow weighting system in its irons. The oversize stainless steel metal woods have expanded sweet spots. Irons and woods feature ultra-light high modulous graphite shafts which are matched to the player's swing speed. The RAVE graphite clubs are available in right and left-handed Mens, Ladies and Lady Petite with the LPGA logo. In 1997, the Company introduced the "Power Circle" and "Light and Easy" Titanium driver series. The heads used on these clubs are 100% 6/4 Titanium. In 1997, the Company improved its value line of womens graphite with the introduction of the "Agree". In 1997, the Company introduced its "ZCX-Ti" line of Titanium faced irons available in left hand only. These irons feature 100% Titanium inserts for enhanced feel and Posiflow weighting for less long iron fades and short iron pulls. In 1997, the Company introduced its "Lady Ti" line of Titanium faced irons. Available in womens only, these irons feature 100% 6/4 Titanium inserts for maximum energy transfer and high modulous lightweight shafts for improved distance. In 1997, the Company introduced its "Eight-Is-Enough" line of clubs for junior golfers. These sets which are available for both young men and women, come in three different lengths and feature four irons, three woods and a putter. In 1997, the Company introduced its "Relief" wood series. Available exclusively for women, the long. middle and short Relief offer V-soles designed to be user friendly in all playing conditions. In 1997, the Company introduced its "WTD" or "Womens Tour Design" wedge system. Designed for women, these wedges feature polymer inserts for better bite on the green. -2- In 1997, the Company introduced its "CASHMASTER" series of mens wedge. Available in right hand and left hand these wedges feature 20 (degree) angled real rails which enable an open club face to glide unimpeded through impact. The Company continued to sell Hi-tech golf bags for men and women as well as a new tripod design for the walking golfer. The Company continues to market a line of women's golf balls and golf gloves. The ladies golf ball and glove packaging for 1997 was re-designed as part of the Company's desire to improve shelf appeal. Manufacturing The Company's clubs are assembled at its facility located in Fairfield, New Jersey. Finished heads are purchased from several sources in Taiwan, Thailand and The Peoples Republic of China which manufacture them to the Company's appearance and weight specifications, while steel shafts, grips, and accessories are supplied by various domestic and foreign shaft manufacturers. The Company obtains its graphite shafts from several foreign shaft suppliers. All graphite shafts are manufactured to the Company's design specifications. In the course of assembly, the Company applies its proprietary weighting and balancing techniques to achieve the unique design and construction of Totally Matched steel shafted clubs. Seasonality The golf industry is seasonal. While manufacturing goes on throughout the year, demand for the Company's clubs is greatest in March through June. At December 31, 1997, the Company had commitments from dealers to purchase products having an aggregate sales value of approximately $3,200,000, subject to the Company's ability to deliver on time, all of which the Company reasonably believes will be filled on time. On the same date in 1996, the Company had commitments of approximately $1,800,000. Inventory Supply The Company tries to maintain at least two sources of supply for irons and metal wood heads from foreign suppliers. These suppliers generally require 90 to 120 day periods to deliver heads to the Company. Domestic suppliers of shafts and grips are more plentiful and, under normal circumstances, can provide components to the Company on relatively short notice. While the Company does not anticipate long-term shortages of either components or sources of supply from its domestic or foreign suppliers, no assurance can be given that the Company will not experience shortages in the future. Delays are not anticipated to be longer than two weeks and are not anticipated to materially affect the Company's ability to deliver the product. The Company continues to evaluate other alternatives in sourcing suppliers. The Company has a line of credit in the amount of $5,000,000 with PNC Bank pursuant to which PNC Bank may make available a credit facility of up to $1,750,000 in the form of standby or documentary letters of credit and demand loans. The amount and number of letters of credit outstanding at any given time will vary on a daily basis depending on the dollar volume of material being ordered and supplies received. -3- Industry Background The National Golf Foundation estimates that in 1996 there were 24.7 million golfers in the United States. (1997 numbers are not yet available.) The rate of growth declined slightly from 1995 to 1996. The popularity of the sport has created a significant market for golf clubs. In competition for a share of the market, various manufacturers have developed golf clubs using various materials, differing types of construction and the latest engineering technology. Marketing & Distribution Until approximately 15 years ago, top of the line golf equipment was sold almost exclusively by golf professionals at private clubs. Currently, off course specialty golf shops, sporting goods retailers, discounters and mail order houses account for a substantial share of the golf club market. The golf equipment industry is one in which advertising and promotion is required to create market awareness of a company's products. It is anticipated that manufacturers will increase their research and development efforts as well as their advertising expenditures. As of February 23, 1998, the Company had established a network of approximately 1,800 retailers with approximately 4,200 retail outlets. The Company has prepared a comprehensive catalog for its dealers. In 1997, 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 LPGA Tournament Players Corporation (operating as the Ladies Professional Golf Association) which grants the Company the exclusive right to use the LPGA name and logo on its women's golf clubs and the non-exclusive right to use the LPGA name and logo on certain of its other products, including golf bags. The Company has renewed the exclusive licensee agreement through the year 2000 at which time the agreement will become non-exclusive through 2003. At the end of 2003, the Company will have the option to renew for two consecutive years under the same terms and conditions. The agreement entitles the Company to use the license granted on a worldwide basis. The Company is obligated to pay a license fee to the LPGA and a royalty fee based on sales volume. To the extent the sum of 5% of sales of the first $1,000,000 of women's golf equipment bearing the LPGA logo, plus 2-1/2 % of all sales of LPGA logo equipment over that amount exceeds the minimum annual license fee, such excess constitutes the annual royalty fee. The minimum annual license fee for the term of the agreement is $200,000 each consecutive year through 2003. The Company is obligated to spend a minimum of $100,000 each year on advertising of LPGA - endorsed products under the terms of the agreement. -4- Competition The golf club industry is highly competitive and is dominated principally by approximately 15 nationally known manufacturers of sporting goods equipment. Such manufacturers, including Callaway, Ping, Spalding, Taylor Made, Cobra/Titleist possess greater financial and other resources than those of the Company. The Company primarily competes with these entities based upon the quality and value of its products and service along with the Company being the official sponsor of the LPGA. Golf clubs are also manufactured by lesser known, lower volume companies who assemble clubs from components manufactured by others. While these manufacturers of clubs are generally smaller than the Company, their products also compete with those manufactured by the Company. Patents and Trademarks The Company holds three United States patents. One encompasses the Totally Matched concept of weighting clubs, the second protects the concept of Posiflow weighting in iron heads and the third patent protects the internal triangular reinforcement cell for metal woods. The Company has registered the following trademarks with the United States Patent and Trademark Office: TOTALLY MATCHED/R/ SQUARE TWO/R/ ONYX/R/ AGREE/R/ PCX/R/ MICRO-TORQUE/R/ S2/R/ (Stylized) MELODY/R/ POSIFLOW/R/ TMP/R/ LADY PETITE/R/ ALLEGRA/R/ BASHIE/R/ DYNA-BALANCE/R/ XGR/R/ ENGINEERED EXCELLENCE/R/ SSX/R/ SAND DEVIL/R/ ZCX/R/ DISTANCE DEVIL/R/ TURF DEVIL/R/ TEE DEVIL/R/ RUFF DEVIL/R/ TRI-BAR/R/ Given the competitive climate within the golf industry worldwide and the recent counterfeiting of clubhead design, the Company believes that it is imperative to protect the Company's tradenames, trademarks and patentable inventions and designs. Employees As of December 31, 1997, the Company employed sixty-six persons, including sixty-one fulltime employees of which four were executive officers. Fifty-seven of these were hourly employees and three were management and marketing personnel. Additional hourly employees are hired during peak production periods and management anticipates no problems in finding adequate employees. The employees of the Company are not represented by any labor organization. The Company believes that its present staff is adequate. However, if sales of the Company's clubs should increase, it is anticipated that additional production, clerical and management personnel may be necessary to meet product demand. -5- Special Note on Forward-Looking Statements The business, financial condition and results of operations of the Company may be adversely affected by a number of factors. Certain statements and information contained herein constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the risks inherent in the development and introduction of new products; the Company's dependence on consumer tastes which fluctuate from time to time; seasonality and prevailing weather conditions as protracted periods of inclement weather could disrupt consumer demand for golf- related products; unanticipated shortages of components or delays in component delivery and the significant competition in the Company's line of business, as well as other risks and uncertainties. Item 2. Properties. ---------- The Company currently leases its manufacturing, sales and executive offices located at 18 Gloria Lane, Fairfield, New Jersey 07004. The Company exercised its option to renew its lease at such facility through December 31, 1998. The lease covers 20,612 square feet. The Company believes that this space is adequate for its current production levels. See Note 7, Leased Properties, of Notes to Financial Statements for additional information regarding this lease. The Company has the option to renew the lease for one additional year. Item 3. Legal Proceedings. ----------------- No material lawsuits or claims are presently pending against the Company. Item 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- There were no matters submitted to shareholders for vote during the quarter ended December 31, 1997. Executive Officers of the Company See Part III, Item 10 of this report. -6- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. --------------------------------------------------------------------- The Common Stock of the Company is traded on NASDAQ under the trading symbol "GOLF." The following table sets forth the high and low bid price for the Common Stock as provided by NASDAQ for the periods indicated. These prices represent quotations between dealers, do not include retail markups, markdowns or commissions and do not necessarily represent prices at which actual transactions were effected.
PERIODS: COMMON STOCK BID PRICES: High Low -------- -------- 1996 1st Quarter $1.56 $ .96 1996 2nd Quarter $1.50 $1.06 1996 3rd Quarter $1.75 $ .94 1996 4th Quarter $1.25 $ .81 1997 1st Quarter $1.94 $ .81 1997 2nd Quarter $2.75 $1.50 1997 3rd Quarter $3.63 $2.38 1997 4th Quarter $5.00 $3.06
On February 24, 1997, the number of holders of record of the Company's common stock was approximately 268. No cash dividends have been paid to date and it is not anticipated that cash dividends will be paid in the near future. In 1997, the Company issued 2,147 shares of Common Stock to Frederick B. Ziesenheim and Mary Ann Jorgenson as compensation for serving as a director of the Company and participating 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. In addition, in 1997 the Company issued 6,000 shares of Common Stock to the Directors of Womens Golf for services rendered in 1995 and 1996. The Director of Women's Golf position has been eliminated. As no public offering was involved, the issuance of such shares was exempt from registration under Section 4(2) of the Securities Act of 1993, as amended. -7- Item 6. Selected Financial Data. -----------------------
Year Ended December 31, ------------------------ 1997 1996 1995 1994 1993 Operating Results: Net Sales $12,073,843 $8,563,588 $7,243,307 $8,788,962 $8,947,430 Net income (Loss) 855,565 118,884 (80,468) 228,501 (378,969) Net Income (Loss) per Share-Basic 0.39 0.05 (0.04) 0.10 (0.17) per Share-Dilutive 0.37 0.05 (0.04) 0.10 (0.17) Weighted Average Number of Shares Outstanding-Basic 2,214,448 2,208,311 2,205,647 2,194,009 2,186,084 Outstanding-Dilutive 2,290,505 2,208,311 2,205,647 2,194,009 2,186,084 Cash Dividend 0 0 0 0 0 At Year End: Working Capital 3,435,345 2,401,904 2,320,912 2,237,524 2,018,110 Total Assets 7,630,176 5,153,651 4,726,353 5,406,726 5,487,104 Total Liabilities 4,123,082 2,513,551 2,205,137 2,830,012 3,152,550 Long Term Obligations: 202,231 253,498 315,206 343,214 424,893 Shareholders Equity 3,507,094 2,640,100 2,521,216 2,576,714 2,334,554
1993 net income includes $423,129 for the cumulative effect of the adoption of SFAS No. 109 "Accounting for Income Taxes." Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations. - ------------- 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". Results of Operations Sales - ----- 1997 Compared to 1996 For the year ended December 31, 1997, net sales were $12,073,843 versus $8,563,588 for the year ended December 31, 1996, an increase of $3,510,255. The increase in sales volume is primarily the result of continued improvement of the sales force, a more cosmetically appealing product line and the addition of a new channel of distribution; specialty sporting goods. -8- 1996 Compared to 1995 For the year ended December 31, 1996, net sales were $8,563,588 versus $7,243,307 for the year ended December 31, 1995, an increase of $1,320,281. The increase in sales volume is primarily the result of the following: 1) more attractive price points of women's merchandise to retailers, 2) increased sales coverage via an increased outside sales force and, 3) a more cosmetically appealing women's product line. In 1996, sales of the women's line accounted for approximately 60% of total sales and sales of the men's line accounted for approximately 40%, in 1995, mens sales accounted for approximately 60% and the women's line accounted for approximately 40% of total sales. The change in product sales mix is attributable to those factors associated with the overall increase in sales volume. Gross Profit - ------------ 1997 Compared to 1996 Gross profit on sales for the year ended December 31, 1997 was 32.8% versus 32.2% for the year ended December 31, 1996. The increase of approximately .6% is the result of the increased sales volume and lower material costs. 1996 Compared to 1995 Gross profit on sales for the year ended December 31, 1996 was 32.2% versus 31.3% for the year ended December 31, 1995. The increase of approximately 1% is primarily the result of the lower material costs as well as increased sales volume and more attractive price points. Selling Expenses - ---------------- 1997 Compared to 1996 Selling expenses for the year ended December 31, 1997 were $1,551,552 versus $1,251,688 for the year ended December 31, 1996, an increase of $299,864. This increase was primarily the result of increased commission expense due to increased sales volume offset by a decrease in sales salaries, as well as increased advertising expense. 1996 Compared to 1995 Selling Expenses for the year ended December 31, 1996 were $1,251,688 versus $812,105 for the year ended December 31, 1995, an increase of $439,583. This increase was the result of increased costs associated with advertising as well as sales salaries and commission expenses due to the higher sales volume. -9- General Administrative - ---------------------- 1997 Compared to 1996 General and Administrative expenses increased $71,813 to $1,187,444 for the year ended December 31, 1997 compared to $1,115,631 for the year ended December 31, 1996. This increase was primarily the result of an increase in the allowance for doubtful accounts offset by a decrease in amortization expense related to a non-compete agreement with a former officer which was fully amortized in June of 1997. 1996 Compared to 1995 General and Administrative expenses decreased $200,509 to $1,115,631 for the year ended December 31, 1996 compared to $1,316,140 for the year ended December 31, 1995. This decrease was the result of reduced office salaries as well as a reduction in costs associated with rent for the Company's facility. Interest - -------- 1997 Compared to 1996 Interest expense increased $45,022 to $277,854 for the year ended December 31, 1997 compared to $232,832 for the year ended December 31, 1996. This is the result of an increase in the average outstanding balance of the credit facility of $2,454,918 in 1997 versus $2,028,714 in 1996. 1996 Compared to 1995 Interest expense decreased $18,120 to $232,832 for the year ended December 31, 1996 compared to $250,952 for the year ended December 31, 1995. The reduction is attributable to: 1) A reduction of approximately $7,000 of interest on the average outstanding loan balance due to lower interest rates, 2) a reduction of approximately $7,500 in interest to vendors and 3) a $3,600 reduction in interest expense associated with a non-compete agreement with a former officer. Income Taxes - ------------ 1997 Compared to 1996 The Company had a 1997 tax provision of $89,230 compared to a benefit of $6,217 in 1996. The provision is the result of total taxable income, net of state tax and deferred benefits, exceeding the available net operating loss carryforward. 1996 Compared to 1995 The Company had a 1996 tax benefit of $6,217 compared to a benefit of $30,671 for the year 1995. The 1996 tax benefit is attributable to the Company's utilization of net operating loss carryforwards. -10- Liquidity and Capital Resources The Company's working capital increased $1,033,441 to $3,435,345 for the year ended December 31, 1997 as compared to $2,401,904 for the year ended December 31, 1996. This change was the result of an increase in current assets of $2,694,239 offset by an increase in current liabilities of $1,660,798. The increase in current assets is due to an increase of $1,293,244 in accounts receivable as a result of increased sales volume. In addition, inventory increased $1,221,101 due to increased purchasing in the fourth quarter of 1997 versus the same quarter of 1996. The increase in inventory purchases also resulted in an increase in current liabilities with the amounts due under on the credit facility increasing $1,149,585 from $1,772,246 for the year ended December 31, 1996 to $2,921,832 for the year ended December 31, 1997. The increased activity in inventory purchases was the result of management's decision to bring in raw materials in the fourth quarter of 1997 to meet the increased demand expected in the first quarter 1998 as evidenced by an increase in customer commitments of approximately $1,400,000 from approximately $1,800,000 at year end December 31, 1996 to approximately $3,200,000 at year end December 31, 1997. Cash used by operating activities in 1997 amounted to $1,177,537 as compared to cash used in and provided by operations of $168,961 and $35,919 in 1996 and 1995, respectively. Cash used in operating activities resulted from higher inventory and accounts receivable levels due to increased demand for product in the first quarter 1998 and an overall increase in sales volume in the fourth quarter. Credit Facility The Company had a revolving line of credit with PNC Bank with a maximum credit limit of $3,000,000 subject to various borrowing bases which expired December 31, 1997. At that time and effective as of June 30, 1997, the Company renegotiated the line to a maximum credit limit of $5,000,000. 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 and 50% of qualified inventory. The line is collateralized by substantially all of the Company's assets and carries an interest rate of prime plus one-quarter percent. The interest rate to the Company at December 31, 1997 was 8 1/2%. At December 31, 1997 and 1996, the Company had approximately $366,791and $357,637 of availability under this facility, respectively. The Company may issue letters of credit through PNC Bank for up to $1,750,000 against the line of credit. At December 31, 1997 and 1996, the total amount outstanding of letters of credit were $0 and $127,323, respectively. These facilities contain certain affirmative and negative covenants which, among other items, require the maintenance of certain financial amounts and ratios including tangible net worth and working capital. Any event of default under the facility permits the lender to cease making additional loans thereunder. The Company was in compliance with all covenants at December 31, 1997. -11- Year 2000 In July 1996, the Emerging Issues Task Force of the Financial Accounting Standards Board ("FASB") reached a consensus on Issue 96-14, "Accounting for the Costs Associated with Modifying Computer Software for the Year 2000 which requires that costs associated with modifying computer software be expensed as incurred. The Company has conducted a review of its internal computer systems to identify those areas that could be affected by the year 2000 issue and believes that with modifications to existing software and conversions to new software, the Year 2000 problem will not pose significant operational problems. The Company currently does not anticipate the year 2000 problem to be material to its financial position or results of operation. At the present time, the Company estimates that expenses related to this project will total approximately $75,000. These expenses are expected to be incurred during fiscal years 1998 and 1999. Currently, the Company is assessing whether any third party non- compliance will have a material effect on the Company. Item 8. Financial Statements and Supplementary Data. -------------------------------------------- Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and related Information," which is effective for the Company beginning January 1, 1998. This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that these enterprises report selected information about operating segments in interim financial reports issued to shareholders. The Company is currently evaluating the impact that the adoptions of SFAS No. 131 will have on its financial statements. Item 9. Change in and Disagreements with Accountants on Accounting and -------------------------------------------------------------- Financial Disclosure. - --------------------- None. -12- Part III Item 10. Directors and Executive Officers of the Registrant -------------------------------------------------- Management Directors and Executive Officers The Company's current directors and executive officers are:
Name Age Position with the Company - -------------------------------------------- --- --------------------------------------------- Robert L. Ross 53 Chairman of Board and Chief Executive Officer Douglas A. Buffington 42 Director, President, Chief Financial Officer, Chief Operating Officer and Treasurer Randy A. Hamill 42 Senior Vice President of Manufacturing and Resources and Assistant Secretary Richard M. Maurer 49 Director and Secretary Mary Ann Jorgenson 57 Director Frederick B. Ziesenheim 71 Director
ROBERT L. ROSS has been a director of the Company since 1988 and Chairman of the Board since October 1995. Effective in January 1996, Mr. Ross became Chief Executive Officer of the Company. He has been Co-Managing Partner of Wesmar Partners Limited Partnership ("Wesmar Partners"), the majority shareholder of the Company, since 1985. Prior to the formation of Wesmar Partners, Mr. Ross was associated with The Hillman Company, a private investment firm from 1978 to 1985. Mr. Ross is a Certified Public Accountant and was associated with Haskins & Sells and with Westinghouse Electric Corporation prior to joining The Hillman Company. DOUGLAS A. BUFFINGTON joined the Company in January 1994 as Vice President of Sales and Marketing, became Chief Financial Officer and Chief Operating Officer in June 1994, became President in December 1994, a director in February 1995 and Treasurer in January 1996. From 1992 until joining the Company, Mr. Buffington served as General Manager of Simon-Duplex, a $25 million capital goods division of Simon Engineering, a company based in the United Kingdom. From 1990 to 1992, he served as Vice President of Finance of Simon-Ltd., a $35 million division of Simon Engineering. RANDY A. HAMILL has been Senior Vice President with the Company since July 1991 and is in charge of all manufacturing and purchasing. Effective in January 1996, Mr. Hamill became Assistant Secretary of the Company. He was formerly Vice President of Manufacturing of the Company from 1981 to July 1991. -13- 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, LLP since 1984 and has been associated since 1975 with that firm. She also serves as a director of Cedar Fair Management Company, the general partner of Cedar Fair, L.P., an owner and operator of amusement parks and is a director and Secretary of Essef Corporation, a manufacturer of plastic pressure vessels for the water treatment and systems industry, spa and pool equipment, and containers for hazardous waste transportation. FREDERICK B. ZIESENHEIM has been a director of the Company since 1992. He has been with the law firm of Webb Ziesenheim Bruening Logsdon Orkin & Hanson, P.C. since 1988 and is currently Vice Chairmen of such firm. 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. Based solely on a review of copies of the forms furnished to the Company in 1997 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 1997 were complied with except that each of Mr. Buffington and Mr. Hamill failed to file reports with respect to options granted in January 1997. In addition, Mr. Maurer, Mr. Ross, MR & Associates and Maurer, Ross & Co., Incorporated filed late report with respect to the option granted to MR & Associates in October 1997 (which option was intended, and was subsequently amended to be options granted to Mr. Maurer and Mr. Ross individually). Additionally, the Company has become aware that each of MR & Associates and Maurer Ross & Co., Incorporated filed one late report with respect to becoming an indirect ten percent shareholder and three late reports with respect to three acquisitions of Common Stock by Wesmar Partners in prior fiscal years. Such transactions were reported earlier by Wesmar Partners and by Messrs. Maurer & Ross. -14- Item 11. Executive Compensation. ----------------------- The following table sets forth certain information with respect to annual and long-term compensation for services in all capacities paid by the Company (i) for the year ended December 31, 1997 and 1996, to or on behalf of Robert L. Ross, who became Chief Executive Officer of the Company in January 1996 and (ii) for the years ended December 31, 1997, 1996 and 1995 to or on behalf of Douglas A. Buffington and Randy A. Hamill (collectively, the "Named Executives"). SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------ Long Term --------- Compensation ----------------- Annual Compensation Awards ------------------- ------------ - -------------------------------------------------------------- Name and Other Securities Principal Annual Underlying All other Position Year Salary Bonus Compensation Options Compensation - ------------------------------------------------------------------------------------------ Robert L. Ross, Chief Executive 1997 $ 0 $ 0 $ 0 50,000(5) $ 0 Officer 1996 $ 0 $ 0 $ 0 0 $ 0 Douglas A. 1997 $126,942 $31,250 (1) $19,387(4) --- $975 (2) Buffington, 1996 $109,612 $10,000 (3) $17,813(4) 16,000 $975 (2) President 1995 $ 89,885 $16,878(4) 27,500 $975 (2) Randy A. 1997 $ 96,688 $20,000 (1) --- 44,267 --- Hamill, 1996 $ 88,636 $ 4,000 (3) --- --- --- Vice President 1995 $ 80,365 --- --- --- ---
(1) Bonus earned in 1997, paid in 1998. (2) The Company paid $975 annual premium on a $750,000 insurance policy on the life of Mr. Buffington, which names Mr. Buffington's wife as the sole beneficiary. (3) Bonus earned in 1996, paid in 1997. (4) Represents an approximation of travel/commuting expenses reimbursed by the Company. (5) In October 1997, an option to purchase 100,000 shares of Common Stock was erroneously granted to MR & Associates. Such option was subsequently amended, as was intended, to be a grant of an option to purchase 50,000 shares of Common Stock to each of Mr. Ross and Mr. Maurer. -15- Set forth below is information with respect to grants of stock options during the fiscal year ended December 31, 1997 to the Named Executives. Option Grants in Last Fiscal Year
Potential Realizable Value at Assumed Rates Number of % of Total of Stock Price Appreciation Securities Options for Option Term(1) Underlying Granted to Options Employees in Exercise 5% 10% Name Granted Fiscal Year Price Appreciation Appreciation - ---- ------------ ----------- ---------- ------------ ------------ Robert L. 50,000 30% $3.0625 $96,095 $247,150 Ross(2) Douglas A. 16,000 10% $0.9375 $ 9,432 $ 23,608 Buffington(2) Randy A. Hamill(2) 44,267 27% $0.9375 $26,096 $ 65,315
(1) These gains are based on assumed rates of annual compound stock price appreciation of five percent and ten percent from the date the option was granted over an assumed ten year term. These assumed annual compound rates of stock appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate of future Common Stock prices. (2) The options granted to each of Messrs. Ross, Buffington and Hamill are fully vested. For additional information concerning one of the options granted to Mr. Hamill, see "Certain Agreements" below. The following table sets forth certain information pertaining to stock options held the by the Named Executives as of December 31, 1997. No options were exercised by the named executives in 1997. 1997 FISCAL YEAR END OPTION HOLDINGS ------------------------------------
Value of Unexercised Number of Securities Underlying In the money options of Options at Fiscal Year End Fiscal Year End (1) Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------- ------------------- ------------- Robert L. Ross 50,000 - $ 59,500 0 Douglas A. Buffington 43,500 0 $114,875 0 Randy A. Hamill 44,267 0 $146,634 0
(1) Calculated based on the fair market value of the Common Stock of $4.25 per share on December 31, 1997 less exercise price. -16- Directors Compensation - ---------------------- The Company compensates its non-employee 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, effective in 1997, 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 - ------------------ In January 1995, the Company entered into an employment agreement with Douglas A. Buffington with a term ending December 31, 1997. Mr. Buffington's annual salary under the agreement was $125,000, $110,000 and $90,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The agreement also entitled Mr. Buffington to receive from the Company health and disability benefits, reimbursement of certain expenses and a $750,000 life insurance policy with Mr. Buffington's spouse as beneficiary. The Company is currently negotiating with Mr. Buffington to renew his employment agreement. Under the 1995 employment agreement, Mr. Buffington was granted an option to acquire 27,500 shares of the Company's Common Stock at $2.00 per share, which exercise price is equal to the average of the NASDAQ bid and asked closing price per share on the date of the grant. The options are fully vested. 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 per share 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 which 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 then fair market value. -17- Item 12. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of March 18, 1998 by (i) each person who beneficially owned five percent or more of the outstanding Common Stock (ii) each director, (iii) each Named Executives and (iv) all directors and executive officers as a group calculated in accordance with Rule 13d-3 under the Exchange Act. Except as otherwise noted, the persons named in the table below have sole voting and investment power with respect to the shares shown as beneficially owned by them.
Amount Beneficially Percent Name Owned (1) of Class (1) - ------------------------------------------------------- L. R. Jeffrey (2) 250,000 10.1% 50 Gloucester Road Summit, NJ 07901 Richard M. Maurer (3) 1,451,096 63.9% Three Gateway Center Pittsburgh, PA 15222 Robert L. Ross (4) 1,451,096 63.9% Three Gateway Center Pittsburgh, PA 15222 Mary Ann Jorgenson 9,832 * 4900 Society Center 127 Public Square Cleveland, OH 44114-1304 Frederick B. Ziesenheim 10,315 * 700 Koppers Building 436 7th Avenue Pittsburgh, PA 15219-1818 Douglas A. Buffington 43,500 1.9% 18 Gloria Lane Fairfield, NJ 07004 Randy A. Hamill (5) 55,517 2.5% 18 Gloria Lane Fairfield, NJ 07004 Wesmar Partners (6) 1,399,096 63.1% MR & Associates Maurer, Ross & Co., Incorporated Three Gateway Center Pittsburgh, PA 15222
-18- All directors and executive officers as a group (6 persons)(7) 1,622,260 67.4
_______________ *Less than one percent (1) The numbers shown include shares covered by options that are currently exercisable or exercisable within 60 days of March 18, 1998. 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 - 50,000, Robert L. Ross - 50,000, Douglas A. Buffington - 43,500, Randy A. Hamill - 44,267 and all directors and executive officers as a group - 187,767. (2) Does not include 2,823 shares owned by various members of Mr. Jeffrey's family with respect to which shares he disclaims any beneficial ownership. (3) Includes 2,000 shares which are held directly by two trusts of which Mr. Maurer is co-trustee and with respect to which he shares voting and investment power and 1,399,096 shares owned directly by Wesmar Partners with respect to which he shares voting and investment power and 50,000 shares underlying the option held directly by MR & Associates. Mr. Maurer is an officer, director and principal shareholder of Maurer Ross & Co., Incorporated, the general partner of MR & Associates, the managing general partner of Wesmar Partners. (4) Includes 1,399,096 shares owned directly by Wesmar Partners. Mr. Ross is an officer, director and principal shareholder of Maurer Ross & Co., Incorporated, the general partner of MR & Associates, the managing general partner of Wesmar Partners. (5) Does not include shares owned by various members of Mr. Hamills 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). -19- Item 13. Certain Relationships and Related Transactions. ----------------------------------------------- Transactions with Management and Others Pursuant to a consulting agreement with the Company, MR & Associates provided the Company with business counseling for $5,000 per month. The agreement, which had been extended, expired on December 31, 1996. Messrs. Maurer and Ross, directors of the Company, are officers, directors and principal shareholders of Maurer Ross & Co., Incorporated, the general partner of MR & Associates. MR & Associates is the managing general partner of Wesmar Partners, a beneficial owner of approximately 63% of the outstanding Common Stock. In 1996, the Company paid MR & Associates $15,000 of which $10,000 was due under the agreement with respect to 1995 and $5,000 which represented one months' payment under this agreement for 1996, with the remaining $55,000 waived by MR & Associates. On October 1, 1997, the Company granted MR & Associates an immediately exercisable option to purchase for 100,000 shares of the Company's common stock in recognition of its services rendered to the Company without fee. This option was intended to and was subsequently amended to be a grant of an option to purchase 50,000 shares of Common Stock to each Messrs. Maurer and Ross. The exercise price for each share of common stock was equal to the closing market value of the Company's common stock on October 1, 1997 of $3.0625. During the fiscal years ended December 31, 1997 and 1996, the Company retained the law firm of Webb, Ziesenheim, Bruening, Logsdon, Orkin & Hanson, P.C. of which Frederick B. Ziesenheim, a director of the Company, is a Vice President and member of the Management Committee of such firm, to represent the Company on various intellectual property matters. On May 3, 1991, L. R. Jeffrey resigned as an officer and director of the Company. In connection with such resignation, the Company and Mr. Jeffrey entered into a Separation Agreement (the " Separation Agreement"). Mr. Jeffrey agreed that for a period of five years that began on July 1, 1992, he would not engage in the United States in any activity similar to the Company's business of designing, manufacturing, marketing and selling golf clubs and equipment. In return for the covenant not to compete, the Company is obligated to pay Mr. Jeffrey or his estate $6,000 per month for a period of ten years that began on April 1, 1992. In each of 1997 and 1996, the Company paid Mr. Jeffrey $72,000 under this agreement. In connection with the Separation Agreement, the Company granted Mr. Jeffrey a stock option for 250,000 shares of the Company's Common Stock at a purchase price of $4.48 per share, which was the average of the closing bid and ask prices of the common stock on the trading date immediately preceding the effective date of the grant. Subject to certain limitations, the option was exercisable immediately and will remain exercisable by Mr. Jeffrey, or upon his death, by his legal representative or beneficiary, until April 16, 2006. If and to the extent that any amount is realized in excess of the exercise price upon the sale of any Common Stock obtained upon exercise of all or any part of the option, then 65 percent of such excess amount, subject to certain limitations, is to be paid to the Company in immediately available funds concurrent with the realization event. -20- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ---------------------------------------------------------------- (a) (1) The financial statements listed in the accompanying Index to Financial Statements and Financial Statement Schedule on Page F-1 is filed as part of this report. (2) The financial statement schedule listed in the accompanying Index to Financial Statements and Financial Statement Schedule on Page F-1 are filed as part of this report. (3) The Exhibits listed in the accompanying Exhibit Index are filed as part of this report. (b) No current reports on Form 8-K were filed for the fourth quarter ended December 31, 1997. -21- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. S2 GOLF INC. Dated: March 18, 1998 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 18, 1998 - --------------------------- Financial Officer, Chief Douglas A. Buffington Operating Officer and Treasurer /s/ Robert L. Ross Chairman of the Board March 18, 1998 - --------------------------- and Chief Executive Officer Robert L. Ross /s/ Richard M. Maurer Director and Secretary March 18, 1998 - --------------------------- Richard M. Maurer - --------------------------- Director March 18, 1998 Mary Ann Jorgenson - --------------------------- Director March 18, 1998 Frederick B. Ziesenheim
-22- INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Financial Statements Page Independent Auditors' Report F-2 Balance Sheets - As of December 31, 1997 and 1996 F-3 Statements of Operations - For the Years Ended December 31, 1997, 1996 and 1995 F-4 Statements of Cash Flows - For the Years Ended December 31, 1997, 1996 and 1995 F-5 Statements of Changes in Shareholders' Equity - For the Years Ended December 31, 1997, 1996 and 1995 F-6 Notes to Financial Statements F-7 Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts and Reserves F-20
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of S2 Golf Inc.: We have audited the accompanying balance sheets of S2 Golf Inc. as of December 31, 1997 and 1996 and the related statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the accompanying Index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of S2 Golf Inc. as of December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Parsippany, NJ March 18, 1998 F-2 S2 GOLF INC. BALANCE SHEETS AS OF DECEMBER 31,
1997 1996 --------- --------- ASSETS Current Assets Cash $121,431 $166,592 Accounts Receivable (Net of Allowance for Doubtful Accounts of$320,930 in 1997 and $250,131 in 1996 3,722,924 2,429,680 Inventory (Note 2) 3,094,302 1,873,201 Prepaid Expenses 44,660 42,353 Deferred Income Taxes (Note 6) 372,879 150,131 ---------- ---------- Total Current Assets 7,356,196 4,661,957 Plant and Equipment - Net (Note 3) 79,474 112,660 Non-Current Deferred Income Taxes (Note 6) 30,034 187,758 Other Assets - Net (Note 4) 164,472 191,276 ---------- ---------- Total Assets $7,630,176 $5,153,651 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-Term Borrowings (Note 5) $2,921,832 $1,772,246 Accounts Payable 608,724 230,090 Accrued Expenses 336,909 195,301 Other Current Liabilities 53,386 62,416 ---------- ---------- Total Current Liabilities 3,920,851 2,260,053 Non-Current Liabilities 202,231 253,498 ---------- ---------- Total Liabilities 4,123,082 2,513,551 Commitments and Contingencies (Note 7 & 8) Shareholders' Equity (Note 8, 9 & 10) Common Stock, $.01 Par; 12,000,000 Authorized Shares: 2,218,605 and 2,208,311 Issued and Outstanding at December 31, 1997 and 1996 22,186 22,083 Additional Paid in Capital 4,036,802 4,025,475 Accumulated Deficit (551,894) (1,407,458) ---------- ---------- Total Shareholders' Equity 3,507,094 2,640,100 ---------- ---------- Total Liabilities and Shareholders' Equity $7,630,176 $5,153,651 ========== ==========
See notes to financial statements F-3 S2 GOLF INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995 ----------- ---------- ---------- Net Sales $12,073,843 $8,563,588 $7,243,307 Cost of Goods Sold 8,115,313 5,805,895 4,979,651 ----------- ---------- ---------- Gross Profit 3,958,530 2,757,693 2,263,656 ----------- ---------- ---------- Operating Expenses: Selling 1,551,552 1,251,688 812,105 General & Administrative 1,187,444 1,115,631 1,316,140 ----------- ---------- ---------- Total Operating Expenses 2,738,996 2,367,319 2,128,245 ----------- ---------- ---------- Operating Income 1,219,534 390,374 135,411 ----------- ---------- ---------- Other Income (Expense) Interest Expense (277,854) (232,832) (250,952) Other Income (Expense) 3,115 (44,875) 4,402 ----------- ---------- ---------- Other - Net (274,739) (277,707) (246,550) ----------- ---------- ---------- Income (Loss) Before Income Taxes 944,795 112,667 (111,139) Provision/(Benefit) for Income Taxes (Note 6) 89,230 (6,217) (30,671) ----------- ---------- ---------- Net Income (Loss) $855,565 $118,884 ($80,468) =========== ========== ========== Earnings (Loss) Per Common Share--Basic $0.39 $0.05 ($0.04) =========== ========== ========== Diluted $0.37 $0.05 ($0.04) =========== ========== ========== Weighted Average Number of Shares Outstanding--Basic 2,214,448 2,208,311 2,205,647 Diluted 2,290,505 2,208,311 2,205,647
See notes to financial statements F-4 S2 GOLF INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995 ---- ---- ---- OPERATING ACTIVITIES Net Income (Loss) $855,565 $118,884 ($80,468) Adjustments to Reconcile Net Income to Net Cash (used) Provided By Operating Activities: Depreciation and Amortization 108,488 159,075 175,994 Deferred Income Taxes (65,024) (26,807) (675) Issuance of Stock for Compensation 11,430 - 24,970 Cash Flow Provided (Used) by Operating Activities as a Result of Changes in: Accounts Receivable (1,293,244) (340,049) (248,017) Inventory (1,221,101) (177,955) 706,369 Prepaid Expenses (2,307) 97,615 (94,803) Prepaid Income Taxes - 10,000 (10,000) Other Assets (31,289) 9,086 11,964 Accounts Payable 378,634 36,051 (319,236) Accrued Liabilities 141,608 21,135 (99,586) Income Taxes Payable - - (2,585) Other - Net (60,297) (75,996) (28,008) ----------- ---------- ---------- NET CASH (USED) PROVIDED BY OPERATIONS (1,177,537) (168,961) 35,919 ----------- ---------- ---------- INVESTING ACTIVITIES Purchase of Equipment (17,209) (21,795) (83,247) Investment in Squaretwo Golf New Zealand, Ltd. - 11,129 (29) ----------- ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (17,209) (10,666) (83,276) FINANCING ACTIVITIES Proceeds from Line of Credit 12,434,713 8,206,401 7,096,764 Payments on Line of Credit (11,285,128) (7,879,177) (7,272,224) ----------- ---------- ---------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 1,149,585 327,224 (175,460) ----------- ---------- ---------- INCREASE (DECREASE) IN CASH (45,161) 147,597 (222,817) CASH - BEGINNING OF PERIOD 166,592 18,995 241,812 ----------- ---------- ---------- CASH - END OF PERIOD $121,431 $166,592 $18,995 =========== ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW Information Cash Paid During the Year For: Interest $261,411 $219,728 $235,921 Income Taxes (Net of Refunds) (9,295) 39,039 20,000
See notes to financial statements F-5 S2 GOLF INC. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
TOTAL COMMON STOCK CAPITAL IN TREASURY STOCK SHARE- ----------------------------- EXCESS OF ----------------------- ACCUMULATED HOLDERS' SHARES AMOUNT PAR VALUE SHARES AMOUNT DEFICIT EQUITY ---------- ----------- ------------- --------- ---------- ------------- ------------ Balance - Dec. 31, 1994 2,195,737 $21,957 $4,000,631 0 0 ($1,445,874) $2,576,714 Issuance of Common Stock 12,574 126 24,844 - - - 24,970 Net Income - 1995 - - - - - (80,468) (80,468) ---------------------------- ------------ ------------------------------------------------------- Balance - Dec. 31, 1995 2,208,311 22,083 4,025,475 0 0 (1,526,342) 2,521,216 Net Income - 1996 - - - - - - 118,884 ---------------------------- ------------ ------------------------------------------------------- Balance - Dec. 31, 1996 2,208,311 $22,083 $4,025,475 ($1,407,458) $2,640,100 ------------------------------------------------------------------------------------------------------ Issuance of Common Stock 10,294 103 11,327 0 0 0 11,430 Net Income - 1997 0 0 0 0 855,565 855,565 ------------------------------------------------------------------------------------------------------ Balance - Dec 31, 1997 2,218,605 $22,186 $4,036,802 0 0 ($551,894) $3,507,094 ======================================================================================================
See notes to financial statements F-6 S2 GOLF INC. NOTES TO FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies ------------------------------------------ S2 Golf Inc. (the "Company") was incorporated under the laws of The State of New Jersey on February 2, 1982. The Company manufactures and markets a proprietary line of golf equipment including golf clubs, golf bags, golf balls and accessories. The Company markets these products under various tradenames and uses several additional trademarks. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of Credit Risk The Company sells to customers primarily throughout the United States, with a small amount sold to customers overseas. The Company does not require collateral on its trade receivables and while it believes its trade receivables, net of allowance for doubtful accounts, will be collected, the Company anticipates that in the event of default it would follow normal collection procedures. Overall, the Company's credit risk related to its trade receivables is limited due to the broad range of products and the large number of customers in differing geographic areas. Fair Value of Financial Instruments The fair value of cash, accounts receivable and accounts payable approximate their carrying values due to the short-term nature of the instruments. The fair value of short-term borrowings approximates its carrying value due to their variable interest rate features which reprice quarterly. Inventory Inventory is valued at the lower of cost, determined on the basis of the first- in, first-out method, or market. F-7 Plant and Equipment Plant and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation is provided over the estimated useful service life. The estimated lives used in determining depreciation are: Machinery and Equipment 5 Years Furniture and Fixtures 7 Years Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Maintenance and repairs are charged to operations as incurred. Revenue Recognition The Company recognizes revenue upon the shipment of merchandise in fulfillment of orders. Other Assets Other assets principally include patents, trademarks and a covenant not to compete with a former officer of the Company. The patents and trademarks are amortized on the straight-line method over 15 years. The covenant not to compete was amortized over a five-year period on a straight-line method which began on July 1, 1992 and ended in June 1997. Management periodically evaluates the recoverability of intangible assets based upon current and anticipated net income and undiscounted future cash flows. Earnings Per Share During the fiscal year ended December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share". SFAS No. 128 requires the dual presentation of basic and diluted earnings per share ("EPS"). 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. All prior periods have been restated to comply with the provisions of SFAS No. 128. 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. F-8 In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and related Information," which is effective for the Company beginning January 1, 1998. This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that these enterprises report selected information about operating segments in interim financial reports issued to shareholders. The Company is currently evaluating the impact that the adoptions of SFAS No. 131 will have on its financial statements. 2. Inventory --------- Inventory consists of the following components at December 31:
1997 1996 ---------- ---------- Finished Goods $ 819,423 $ 828,060 Work in Process 25,000 25,000 Raw Materials 2,249,879 1,020,141 ---------- ---------- $3,094,302 $1,873,201 ========== ==========
At December 31, 1997 and 1996, inventory has been pledged as collateral for the Company's line of credit as discussed in Note 5. 3. Plant and Equipment ------------------- Plant and equipment at December 31, were as follows:
1997 1996 -------- -------- Machinery and Equipment $645,795 $628,586 Furniture and Fixtures 54,485 54,485 Leasehold Improvements 43,554 43,554 -------- -------- Total 743,834 726,625 Less: Accumulated Depreciation and Amortization 664,360 613,965 -------- -------- $ 79,474 $112,660 ======== ========
Depreciation for the years ended 1997, 1996 and 1995 was $50,395, $57,500 and $74,549, respectively. F-9 4. Other Assets ------------ Other Assets consists of the following at December 31, 1997, and 1996:
1997 1996 -------- -------- Covenant not to Compete $436,277 $436,277 Patents and Trademarks 219,014 217,725 Security Deposits 49,500 19,500 -------- -------- Total $704,791 $673,502 Less: Accumulated Amortization 540,319 482,226 -------- -------- $164,472 $191,276 ======== ========
Amortization expense for the years ended 1997, 1996 and 1995 was $58,093, $101,575 and $101,446, respectively. 5. Short Term Borrowings --------------------- The Company had a revolving line of credit with PNC Bank with a maximum credit limit of $3,000,000 subject to various borrowing bases which expired December 31, 1997. At that time and effective as of June 30, 1997, the Company renegotiated the line to a maximum credit limit of $5,000,000. The line is subject to a borrowing base of 80% of eligible accounts receivable and 50% of qualified inventory. The line is collateralized by substantially all of the Company's assets and carries an interest rate of prime plus one-quarter percent. The interest rate to the Company at December 31, 1997 was 8 1/2%. At December 31, 1997 and 1996, the Company had approximately $366,791 and $357,637 of availability under this facility, respectively. This renegotiated line expires September 30, 2000. The Company may issue letters of credit through PNC Bank for up to $1,750,000 against the line of credit. At December 31, 1997 and 1996, the total amount outstanding of letters of credit were $0 and $127,323, respectively. These facilities contain certain affirmative and negative covenants which, among other items, require the maintenance of certain financial amounts and ratios including tangible net worth and working capital. Any event of default under the facility permits the lender to cease making additional loans thereunder. The Company is currently in compliance with all covenants. F-10 6. Income Taxes ------------ The provision (benefit) for income taxes for the years ended December 31, 1997, 1996 and 1995 consists of the following:
1997 1996 1995 --------- ---------- ----------- Current Federal $ 61,912 $ 0 $(21,826) State 92,342 20,590 ( 7,637) -------- -------- -------- 154,254 20,590 (29,464) -------- -------- -------- Deferred Federal (48,127) (20,765) ( 1,648) State (16,897) (6,042) 447 -------- -------- -------- (65,024) (26,807) ( 1,207) -------- -------- -------- Total Provision (Benefit) for Income Taxes $ 89,230 $( 6,217) $(30,671) ======== ======== ========
Although the effective statutory rate is 35%, the marginal 34% rate applicable to taxable income not in excess of $10 million per year, is a significant factor in the measurement of the deferred tax assets. As a result of a change in ownership during 1988, the utilization of the net operating loss carryforward ("NOL")for federal purposes existing at that time had been determined to be limited to $232,500 each year until their expiration. In years that the limitation exceeds the amount of the net operating loss utilized, such excess amount shall be carried over to the subsequent year. F-11 A summary of the differences between the actual income tax provision (benefit) and the amounts computed by applying the statutory Federal income tax rate to income is as follows: 1997 1996 1995 ----- ---- ---- Federal Tax (Benefit) at Statutory Rate $321,230 $38,307 ($37,787) Increase (Decrease) in Taxes Resulting From: Utilization of NOL (259,148) (62,967) ---- Travel and Entertainment 7,600 3,981 (2,129) State Tax, Net of Federal Tax Benefit 45,809 7,611 5,755 Other (26,261) 6,851 3,490 --------- -------- -------- Total Income Tax Provision (Benefit) $ 89,230 $( 6,217) $(30,671) ========= ======== ======== At December 31, 1997, the Company had a Federal tax operating loss carryforward of approximately $31,242 for tax purposes, which will expire in each of the years 1999 through 2002. F-12 The tax effects of temporary differences and carryforward items that give rise to significant portions of the current and noncurrent deferred tax assets at December 31, 1997 and December 31, 1996 are as follows:
December December 31, 1997 31, 1996 --------- --------- Allowance for Doubtful Accounts $ 144,284 $ 115,981 Accrued Expenses 131,070 90,274 Other 97,525 60,648 Valuation Allowance 0 (116,772) --------- --------- Current Deferred Income Tax $ 372,879 $ 150,131 ========= ========= Net Operating Loss 9,372 233,544 Non-Compete Agreement (36,565) (17,829) Valuation Allowance (9,372) (116,772) Other 66,599 88,815 --------- --------- Non Current Deferred Income Tax $ 30,034 $ 187,758 ========= =========
7. Leased Properties ----------------- Operating Lease The Company leases factory and office space at 18 Gloria Lane, Fairfield, New Jersey. On June 30, 1996, the Company and the lessor amended the lease to extend its term to December 31, 1997 with the option to renew for a one year period upon expiration. The Company has renewed this option. The annual base rent for 1998 will be $118,519. In addition to the base rent, the Company is obligated to pay its pro rata share of real estate taxes, assessments and water and sewer charges. Total rent expense for the years ended December 31, 1997, 1996 and 1995 was $118,519, $118,514 and $183,689 respectively. Capital Lease In 1995, the Company acquired a new show booth under a capital lease agreement. At December 31, 1997 and 1996, the total asset value of $46,416 and $40,102 less accumulated amortization of $40,831 and $26,411, respectively was included in net property and equipment. F-13 At December 31, 1997, future minimum lease payments are as follows: 1998 minimum lease payments 2,120 Less: Amount representing interest 751 ------ Present value of net minimum lease payments $1,369 ======
8. Commitments and Contingencies ----------------------------- Royalties Payable Under the terms of an agreement with the LPGA Tournament Players Corporation, the Company is obligated to pay a royalty fee to the LPGA based on sales volume. Beginning in 1998, the minimum annual royalty is $200,000 through 2003, paid quarterly in January, April, October and upon year end closing results. Payments of $175,000, $175,000 and $150,000 were included in selling expense for the years ended December 31, 1997, 1996 and 1995, respectively. In addition, the Company is obligated to spend a minimum of $100,000 each year on advertising of LPGA endorsed products under the terms of the agreement. Other Liabilities Under the terms of a Separation Agreement, the Company is obligated to pay its former president $6,000 per month for a period of ten years which began on April 1, 1992 as consideration for his covenant not to compete with the Company (see Note 4). The obligation is recorded at its present value in other current and non current liabilities, and accrues interest at 9% per annum. In connection with the Separation Agreement, the Company granted its former President stock options for 250,000 shares of the Company's common stock at a purchase price of $4.48 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. F-14 9. Stock Options ------------- Stock Incentive Plans Options have been granted to officers and employees of the Company at the discretion of the Company's Board of Directors. The table below summarizes activity for all employee stock options.
Number Weighted Average of shares Exercise Price --------- -------------- Outstanding at January 1, 1995 277,920 $4.976 Granted 65,000 1.837 Exercised ------- ----- Canceled or expired 40,000 5.000 - ------------------------------------------------------------------------- Outstanding at December 31, 1995 302,920 2.464 Granted 45,000 .101 Exercised ------- ------ Canceled or expired 106,250 5.00 - ------------------------------------------------------------------------- Outstanding at December 31, 1996 241,670 1.653 Granted 164,000 2.232 Exercised ------- Canceled or expired 90,000 5.00 - ------------------------------------------------------------------------- Outstanding at December 31, 1997 315,670 $1.022
The Company applies APB Opinion 25 and related Interpretations in accounting for its stock plans. Accordingly no compensation cost has been recognized for stock option grants issued under any of the Company's stock option plans. Had compensation cost for stock option grants issued during 1997, 1996 and 1995 been determined under the provisions of SFAS No. 123, the Company's net income (loss) would have been $661,172, $109,706 and ($157,160), respectively. The Company's net income (loss) per share for basic and dilutive in 1997, 1996 and 1995 would have been $.29 and $.28, $.04 and $.04 and ($.08) and ($.08), respectively. F-15 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 1997, 1996 and 1995.
1997 1996 1995 -------- ----- ----- Annualized Volatility 66%-83% 74% 63% 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 weighed average fair values per share of stock options granted during 1997, 1996 and 1995 were $1.31, $.88 and $.73, respectively. The exercise price ranges for options outstanding and exercisable at December 31, 1997 were:
Range of Number of Shares Outstanding Weighted Average Exercise Price and Exercisable at 12/31/97 Exercise Price - --------------------------------------------------------------------------- $.50-2.00 274,000 $ 2.06 $2.01-5.00 41,670 4.85 ------- ------ Total 315,670 $1.281
The Company has generally granted options that do not expire. Other Options In September 1991, the Company entered into five agreements with members of the LPGA Teaching Division to provide consulting in the areas of sales, marketing and product development of women's golf products. In exchange for these services each consultant was granted the option to acquire 1,200 shares of common stock each year on the anniversary date of the agreement provided the agreement was not terminated. These agreements had a three year term. All of the above options have an exercise price of $5.625. In September of 1992, the Company entered into a sixth agreement, with the same terms as the original five except that the options thereunder have an exercise price of $4.25. In May 1991, the Company entered into an agreement with its advertising agency for advertising and public relations services through December 31, 1994. In exchange for services rendered by the advertising agency, the Company issued to the advertising agency an option to acquire 6,250 shares of common stock per annum. As additional incentive, the Company agreed to award additional stock options for 18,750 total shares of common stock upon the Company achieving certain annual financial results for 1992, 1993 and 1994. All of the above options have an exercise price of $4.625 and expire in years ending December 31, 1997 through December 31, 1999. Since the 1992, 1993 and 1994 performance criteria were not achieved, the 18,750 options were not granted. F-16 In connection with the Separation Agreement between the Company and its former President, the Company issued the option to acquire 250,000 shares of common stock to the former President in partial consideration for his covenant not to compete with the Company for a period of 5 years beginning July 1, 1992. (See Note 8). Subject to certain limitations, the option may be exercised any time prior to April 16, 2006 at a price of $4.48 per share. In January 1995, the Company entered into a consulting agreement with George H. Nichols, a director of the Company until October 1995, under which Mr. Nichols agreed to provide consulting services to the Company in connection with sales, marketing and development of the Company's products. This agreement was terminated in October 1995. During 1995, Mr. Nichols received reimbursement for certain expenses and $54,000 in consulting fees at the rate of $6,000 per month from January through September. Under the agreement, Mr. Nichols was granted an option to acquire 37,500 shares of the Company's Common Stock at $1.875 per share, which exercise price was equal to the price per share paid for NASDAQ's last Common Stock sale transaction on the date of the grant. Such option is currently exercisable in full. On November 1, 1995, the Company amended an employment agreement dated July 1, 1991 with the former Senior Vice President of Product Development in regards to stock options granted. The amendment effectively canceled and forever terminated stock options for 106,250 shares at an exercise price of $5.00 per share which were granted under the 1984 stock incentive plan. At that time, the Company granted, to become effective May 6, 1996, 40,000 shares of "new options" at an exercise price of $1.6875 which represented the average of the Company's NASDAQ bid and ask closing price on the grant date. The Company compensates its non-employee directors (Mary Ann Jorgenson and Frederick B. Ziesenheim), by granting such persons shares of the Company's Common Stock having a value of $1,000 for every meeting of the Board of Directors or committee thereof attended by such person and, effective in 1997, shares of common stock having a value of $500 if such person participated in a meeting by telephone. The number of shares issued is based on the closing price of the stock on the exchange where traded on the meeting date or the preceding date on which such shares were traded. F-17 10. Related Party Transactions -------------------------- In 1994 and January through May 1995, Wesmar Partners provided the Company with insurance coverage through the Liberty Mutual Insurance Company for property, liability and workers compensation insurance. During 1995, the Company paid Wesmar Partners $19,075 for such insurance coverage. In 1996, the Company received $10,198 from Wesmar Partners representing a retrospective adjustment for the policy year 1994-1995. Pursuant to a consulting agreement, with the Company, MR & Associates provides the Company with business counseling for $5,000 per month. The agreement, which has been extended periodically, expired on December 31, 1996. Messrs. Maurer and Ross, directors of the Company, are officers, directors and principal shareholders of Maurer Ross & Co. , Incorporated, the general partner of MR & Associates. In 1995 the Company paid MR & Associates $70,000 in connection with such consulting agreement, of which $20,000 was due under the agreement in respect to 1994, and $10,000 was due to MR & Associates at December 31, 1995. In 1996, the Company paid MR & Associates $15,000 of which $10,000 was expensed under the agreement with respect to 1995 and $5,000 which represented one months payment under this agreement for 1996 with the remaining $55,000 (11 months) waived by MR & Associates. During the fiscal years ended December 31, 1997 and 1996, the Company retained the law firm of Webb Ziesenheim Bruening Logsdon Orkin & Hanson PC of which Frederick B. Ziesenheim, a director of the Company, is a Vice Chairman, to represent the Company on various intellectual property matters. The Company had paid Webb Ziesenheim Bruening Logsdon Orkin & Hanson P.C. $17,524 and $25,605 in 1997 and 1996, respectively, and was indebted in the amount of $627 and $280 at December 31, 1997 and 1996, respectively. F-18 11. Supplemental Disclosures of Non-Cash Transactions ------------------------------------------------- During 1997 and 1996, the Company recorded certain non-cash charges of $25,130 and $29,150, respectively, representing accrued interest for a liability to its former president in connection with his Separation Agreement (see Note 8). During 1995, the Company issued common stock in the amount of $11,015 for services rendered in 1995. Also, during 1995, the Company issued stock in the amount of $13,955 for services rendered in 1994. No stock was issued in 1996. In 1997, the Company issued stock in the amount of $11,430 for services rendered in 1997. F-19 S2 GOLF, INC. ------------- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES ---------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 -----------------------------------------------------
Balance at Charged to Charged Balance Beginning Cost and to Other at End of Period Expenses Accounts Deductions of Period --------- ---------- ---------- ---------- --------- ALLOWANCE FOR DOUBTFUL ACCOUNTS YEAR ENDED: December 31, 1995 $361,780 $ --- $ --- $ 77,405 (1) $284,375 December 31, 1996 284,375 75,000 --- 109,244 (1) 250,131 December 31, 1997 250,131 159,000 --- 88,194 (1) 320,930 ALLOWANCE FOR RETURNS December 31, 1995 55,000 222,659 --- 225,052 52,607 December 31, 1996 52,607 212,797 --- 203,404 62,000 December 31, 1997 62,000 184,289 163,036 88,632 ALLOWANCE FOR DISCOUNTS December 31, 1995 40,000 192,798 --- 161,473 71,325 December 31, 1996 71,325 228,117 --- 208,565 90,877 December 31, 1997 90,877 128,977 169,854 50,000 INVENTORY OBSOLESCENCE RESERVE December 31, 1995 107,409 54,089 --- --- 161,498 December 31, 1996 161,498 38,876 --- --- 200,374 December 31, 1997 200,374 72,000 49,298 223,076
(1) Uncollectible Accounts Written Off, Net of Recoveries F-20 Exhibit Index -------------
Exhibit Number Description of Exhibit* - ------ ---------------------- 3.1 Amended and Restated Certificate of Incorporation of the Company dated June 28, 1991 (incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991). 3.2 Amended and restated By-laws of the Registrant dated December 6, 1991 (incorporated by reference to Exhibit 3.2 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). 4.1 Common Stock Purchase Warrant in favor of Wesmar Partners dated February 28, 1988, (incorporated by reference to Exhibit 4.4 of the Registrant's Registration Statement No. 33-37371 on Form S-3). 4.2 Common Stock Purchase Warrant in favor of Wesmar Partners dated February 28, 1988, (incorporated by reference to Exhibit 4.5 of the Registrant's Registration Statement No. 33-37371 on Form S-3). 4.3 Stock Option Agreement between the Registrant and Wesmar Partners dated February 29, 1988, (incorporated by reference to Exhibit 4.6 of the Registrant's Registration Statement No. 33-37371 on Form S-3). 10.0 Credit Agreement and Security Agreement between the Registrant and Midlantic Bank, National Association dated December 29, 1994 (incorporated by reference to Exhibit 99 of the Registrant's Current Report on Form 8-K dated December 26, 1994). 10.1 United States Patent No. 4,203,598 issued to the Registrant (incorporated by reference to Exhibit 10.3 of the Registrant's Registration Statement No. 33-16931 on Form S-1). 10.2 Agreement between the LPGA Tournament Players Corporation and the Registrant dated July 31, 1991 (incorporated by reference to exhibit 4.11 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30,1991). 10.3 Lease Agreement between the registrant and 12 Gloria Lane Limited Partnership dated June 22, 1989 (incorporated by reference to exhibit 10.6 of the Registrant's Registration Statement No. 33-37371 on Form S-3).
F-21
10.4 Modification of Lease Agreement between the Registrant and 12 Gloria Lane Industrial Partnership dated October 3, 1995 (incorporated by reference to Exhibit 10.2 of the Registrants Annual Report on Form 10-K for the year ended December 31, 1995). 10.5 1984 Incentive Stock Option Plan of the Registrant dated February 10, 1984 (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement No. 33-16931 on Form S-1). 10.6 Consulting Agreement between the Registrant and MR & Associates dated January 1992 (incorporated by reference to exhibit 10.10 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 10.7 Amendment of Consulting Services Agreement between the Registrant and MR and Associates effective as of February 1, 1996 (incorporated by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.8** 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). 10.9** Employment Agreement between the Registrant and Douglas A. Buffington dated January 1, 1995 (incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 10.10** Agreement between the Registrant and Randy A. Hamill dated January 2, 1997. 10.11 Amended and Restated Licensing Agreement between Ladies Professional Golf Association and the Registrant dated July 1, 1996. (incorporated by reference to Exhibit 12 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). 10.12 Second amendment to loan and security agreement between Registrant and PNC Bank dated December 1, 1997 (incorporated by reference to Exhibit 99 of the Registrant's Current Report on Form 8-K dated December 26, 1994. 27 Financial Data Schedule.
- -------------------------------------------------------------------------------- * In the case of incorporation by reference to documents filed by the Registrant under the Exchange Act, the Registrant's file number under the Act is 0-14146. ** Management contract or management compensatory plan or arrangement. F-22 EX-10.10 2 RANDY A. HAMILL AGREEMENT EXHIBIT 10.10 AGREEMENT This Agreement is made as of this 2nd day of January 1997 by and between S2 Golf Inc., a New Jersey Corporation with its principal place of business in Fairfield, New Jersey ("S2") and Randy A. Hamill of Boonton Township, New Jersey ("RAH") as follows: R E C I T A L S WHEREAS, on May 20, 1991, the Board of Directors of S2 authorized the grant to RAH of common stock options for 360,000 shares of S2's common stock (the "Old Option"). The exercise price for each share of common stock was $1.25 (the "Old Exercise Price"); and WHEREAS, the Old Exercise Price and the number of shares exercisable under the Old Option were adjusted for a subsequent 1 for 4 reverse stock split thereby adjusting (A) the number of shares subject to this Old Option to 90,000 and (B) the Old Exercise Price for such shares to $5.00 per share. The Old Option remains fully exercisable; and WHEREAS, S2 and RAH desire to mutually cancel and forever terminate the Old Option; and WHEREAS, S2 desires to grant new options to RAH. 1 NOW, THEREFORE, in mutual consideration of the covenants and agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Old Options. RAH and S2 hereby mutually agree to cancel and forever ----------- terminate the Old Option, such cancellation and termination to become effective on July 7, 1997. At all times prior to July 7, 1997, the Old Option will be fully exercisable by RAH. 2. New Options. Effective January 2, 1997 (the "Grant Date"), S2 hereby ----------- grants to RAH common stock options for 40,000 shares of S2's common stock (the "New Option"). The exercise price for each share of common stock exercisable shall be the market value of a single share of S2 common stock on the Grant Date (the "Exercise Price"). The market value shall be determined by taking the average of S2's NASDAQ bid and ask closing price per share on the Grant Date. On January 2, 1997, such average was $0.9375 per share. The New Option shall become fully exercisable immediately upon the complete execution of this Agreement. 3. Adjustments. The Exercise Price and the number of shares exercisable ----------- under the New Option shall be adjusted accordingly for any subsequent common stock splits, reverse common stock splits, recapitalizations, etc. 2 4. Change in Control. ----------------- (i) Notwithstanding any other provision of this paragraph 4 to the contrary, if, subsequent to the Grant Date, a "change in control" (as defined below) of S2 occurs, then the exercise price for each previously unexercised share subject to the New Option shall be either (a) one (1) cent ($.01) or (b) the lowest greater exercise price per share which will not cause the value to RAH of all the shares of the New Option exercised upon such "change in control" to be considered an "excess parachute payment" under Section 280G of the Internal Revenue Code of 1986, as amended; provided, however, that in no event shall the exercise price of the then otherwise "exercisable" shares of the New Option be in excess of the Exercise Price. (ii) For purposes of subparagraph 4(i), a "change in control" shall be deemed to have occurred if (A) S2 shall be merged or consolidated with any corporation (other than with any of its subsidiaries), (B) S2 shall sell all or substantially all of its operating properties and assets or (C) any person (including any person, association, corporation or other entity) becomes a beneficial owner, directly or indirectly, of securities of S2 representing more than 50% of the combined voting power of S2's then outstanding securities. 3 5. Redemption Upon RAH's Death. --------------------------- (i) In the event that (A) RAH dies while in the employ of S2; and, --- (B) no portion of the New Option has been exercised by RAH or his estate; and, -- --- (C) S2 has received $500,000 as beneficiary of a life insurance policy on RAH's life, then RAH's estate may sell, assign and transfer the entirety (but not less than the entirety) of RAH's New Option to S2 in exchange for the payment by S2 to RAH's estate of $500,000 in cash. RAH's estate may elect the provisions of this subparagraph 5(i) at any time within one year following the date of RAH's death by written notice to S2. (ii) In the event that (A) RAH dies while in the employ of S2; and, --- (B) some portion (or all) of the New Option has been exercised by RAH or his estate; and, (C) S2 has received $500,000 as beneficiary of a life insurance --- policy on RAH's life, then RAH's estate may, after having exercised all ---- previously unexercised New Options and paying to S2 the applicable Exercise Price therefor, choose either of the following two options with respect to the redemption, by S2, of the shares underlying the New Option: (A) Retain all of the shares; or (B) Redeem up to 39,999 shares, received at any time upon exercise of the New Option, at the then fair market value per share; provided, however, that S2 will not be required to redeem a number of shares any greater than --- that 4 number of shares that would cause the redemption proceeds received by RAH's estate to exceed the sum of (i) the Exercise Price times the number of shares being redeemed plus (ii) $500,000. ---- RAH's estate may elect the provision of this subparagraph 5(ii) at any time within one year following the date of RAH's death by written notice to S2. 6. Maintenance of Life Insurance Policy. S2 covenants and agrees to ------------------------------------ maintain and keep in force throughout the period of RAH's employ, that certain life insurance policy on RAH's life referred to throughout paragraph 5. 7. Binding Effect. This Amendment shall be binding upon the parties -------------- hereto, their heirs, legal representatives, successors and permitted assigns. 8. Governing Law. This Amendment shall in all respects be governed by and ------------- construed in accordance with the laws of the State of New Jersey. 9. Entire Agreement; No Oral Modification. -------------------------------------- This Agreement sets forth the entire understanding and agreement of the parties with respect to the subject matter hereof, supersedes any and all prior or contemporaneous 5 negotiations, offers or agreements with respect hereto and may not be changed, altered, modified or terminated except by a further instrument in writing duly executed by RAH and S2. The failure of any party hereto at any time to enforce any of the provisions of this Agreement shall in no way be construed to be a waiver of such provisions, nor in any way affect the validity of this Agreement or any part thereof, or the right of any party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to be a waiver of any other or subsequent breach. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. S2 GOLF INC. By: /s/ Robert L. Ross ______________________________ Robert L. Ross Chairman and Chief Executive Officer /s/ Randy A. Hamill _____________________________(L.S.) Randy A. Hamill 6 EX-10.12 3 PNC 2ND AMENDMENT LOAN AGREEMENT EXHIBIT 10.12 SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT, made as of the 1st day of December, 1997 (this "Amendment") by and between S2 GOLF INC., a New Jersey corporation having its principal place of business at 18 Gloria Lane, Fairfield, New Jersey 07004 ("Borrower"), and PNC BANK, NATIONAL ASSOCIATION (successor in interest to Midlantic Bank, National Association), a national banking association, having offices at Two Tower Center Boulevard, 8th Floor, East Brunswick, New Jersey 08816 ("Lender"). W I T N E S S E T H: -------------------- WHEREAS, Borrower and Lender are parties to a certain Loan and Security Agreement dated as of December 29, 1994, as amended by the First Amendment to Loan and Security Agreement dated April 9, 1996 (referred to herein as the "Loan Agreement"); and WHEREAS, Borrower has requested that Lender make certain changes to the Loan Agreement; and WHEREAS, Lender, subject to the terms and conditions set forth in this Amendment, is willing to make certain changes in the terms and conditions of the Loan Agreement; NOW, THEREFORE, in consideration of the premises and mutual promises and covenants contained herein, the parties, each intending to be legally bound hereby, agree as follows: ARTICLE I DEFINITIONS ----------- 1.01 Previously Defined Terms. All of the capitalized terms not expressly ------------------------ defined in this Amendment shall have the meanings ascribed to such terms in the Loan Agreement, as such terms may be amended in Section 1.02 of this Amendment. 1.02 Amendments to Previously Defined Terms. The definitions of the -------------------------------------- following terms are amended as follows: (a) All references to "this Agreement" in the Loan Agreement shall be deemed to mean the Loan Agreement as supplemented and amended by this Amendment. (b) All references to the Revolving Note in the Loan Agreement shall be deemed to mean the Restated Note (as defined in Section 2.02 hereof). (c) All references to "Relevant Documents" in the Loan Agreement and this Amendment shall be deemed to include this Amendment and all documents and instruments delivered to the Lender pursuant or incident to this Amendment or the Loan Agreement (i) by Borrower or any Related Entity, (ii) by any pledgor or grantor of a lien, security interest or other right, or (iii) by any other creditor of Borrower respecting the subordination of such creditor's liens, security interests, and rights to payment to Lender's liens, security interests and rights to payment. 1.03 New Terms. As used in this Amendment, the following terms shall --------- have the following meanings (references in this Section 1.03 to "Section" shall be references to Sections of this Amendment): "Restated Note" - as defined in Section 2.02. "Termination Date" - December 1, 2000. ARTICLE II AMENDMENTS TO THE LOAN AGREEMENT RELATING TO AMOUNTS AND TERMS OF THE LOANS ------------------------------------------ 2.01 Revolving Loans. Sections 2A.1(a) and 2A.1(b) of the Loan Agreement --------------- are hereby deleted in their entirety and replaced with the following: (a) Lender may at its discretion, upon the request of Borrower, make loans hereunder to Borrower (a "Revolving Loan" or the "Revolving Loans") from time to time on a revolving loan basis in an aggregate principal amount not in excess at any time outstanding of the Borrower's Revolving Loan Limit; provided that, if the outstanding amount of the Revolving Loans should exceed the Revolving Loan Limit at any time, such excess (i) shall nevertheless be secured by the Collateral and be subject to the terms of this Agreement, and (ii) shall be payable immediately upon demand by Lender. The Revolving Loan shall be payable (x) on the Termination Date, or (y) at such other time as is provided in Section 9, Section 11 or elsewhere in this Agreement, whichever of (x) or (y) shall first occur (the first to occur being referred to as the "Maturity Date"). The Revolving Loans may, but need not, be evidenced by one or more promissory notes (referred to collectively as the "Revolving Note" in the form of Exhibit A annexed to this Agreement); except as may be otherwise --------- provided in a Revolving Note, the Revolving Loans shall be payable in accordance with the terms of this Agreement. (b) Definition of Revolving Loan Limit. Borrower's Revolving ---------------------------------- Loan Limit shall be the lesser of (i) $5,000,000.00 less 50% of the aggregate face amount of all outstanding but undrawn Letters of Credit, or (ii) the amount determined by the following formula: 2 (A) 80% of the face amount of Qualified Accounts (less reserves determined by Lender for advertising allowances, warranty claims and other contingencies), which percentage Lender may increase or decrease from time to time as Lender in its sole and absolute discretion may determine; plus ---- (B) the lesser of (i) 50% of the Net Value of Qualified Inventory or (ii) Two Million Dollars ($2,000,000.00) which percentage or amount Lender may increase or decrease from time to time as Lender in its sole and absolute discretion may determine; minus ----- (C) 50% of the aggregate face amount of all outstanding but undrawn Letters of Credit; minus ----- (D) An amount, as may be determined by Lender, up to the aggregate amount of all taxes, assessments, charges, indebtedness and liabilities, if any, the validity of which Borrower is contesting as permitted under Section 5.2 of this Agreement. Lender shall have the right to increase or decrease the Revolving Loan Limit from time to time. The Revolving Loan Limit shall be subject to the limitation stated in Section 11.3 in the event of notice of termination of this Agreement. If Lender, without prior notice to Borrower, decreases the Revolving Loan Limit to an amount below the then outstanding balance of the Revolving Loans, Borrower will have until the earlier of (A) 15 days after such reduction or (B) the Maturity Date, to repay the amount outstanding in excess of the new Revolving Loan Limit and, until repaid, Lender will have no obligation to accept checks or otherwise advance any additional Revolving Loans. It is further agreed that during the period from January through April in any calendar year while this Agreement is in effect, the maximum amount available to be borrowed with respect to the formulas set forth above shall be increased by up to $250,000.00 in excess of the funds that would normally be available to be borrowed ("Seasonal Advance"). The Seasonal Advance relates only to the formulas set forth above regarding availability. All Seasonal Advances shall be secured by the Collateral and as of May 1 of each calendar year, any outstanding Seasonal Advance shall be immediately due and payable at such time. 2.02 Restated Note. Simultaneously with the execution and delivery of ------------- this Amendment, the Secured Revolving Loan Note dated December 29, 1994, shall be restated in the form attached hereto as Exhibit A (the "Restated Note"), ------- - providing for, among other things, the amendments provided for by this Amendment, and upon the execution and delivery of the 3 Restated Note, the Secured Revolving Loan Note shall be marked "cancelled because restated" and returned to Borrower. 2.03 Revolving Loans, Sections 2A.1(c)(ii)(D) and 2A.1(c)(ii)(E) of the --------------- Loan Agreement are hereby deleted in their entirety and replaced with the following: (D) The Account is invoiced, for payment, on the date Inventory or other goods represented thereby are shipped to the Account Debtor, and the invoice is not more than thirty (30) days past due based on the terms of the invoice, nor in any event has the invoice been outstanding for more than 150 days; (E) The Account is not due from an Account Debtor which has more than sixty-five (65%) percent, in dollar value, of its Accounts due to Borrower which do not qualify under Subsection (D); 2.04 Interest Rate. Section 2A.2 of the Loan Agreement is deleted in its ------------- entirety and replaced with the following: 2A.2 Interest Rate. Effective as of June 30, 1997, the Revolving ------------- Loans shall bear interest at a fluctuating interest rate per annum equal at all times to one-quarter percent (1/4%) above Lender's Prime Rate in effect from time to time, each change in such fluctuating rate to take effect simultaneously with the corresponding change in the Prime Rate, without notice to Borrower. 2.05 Unused Line Fee. Section 2A.8 of the Loan Agreement is deleted in --------------- its entirety. 2.06 Life Insurance. Section 5.7(b) of the Loan Agreement is deleted and replaced with the following: (b) [Intentionally Left Blank]. 2.07 Affirmative Covenants. Section 5.14 of the Loan Agreement is amended --------------------- to read in its entirety as follows: 5.14. Operating Accounts. Borrower shall maintain with Lender ------------------ continuously until the Obligations are finally and fully paid and performed: (i) its operating accounts, (ii) a lockbox account into which all payments on Accounts and other receipts shall be directed, and (iii) its disbursement account. 2.08 Negative Covenants. Section 6.19 of the Loan Agreement is deleted in ------------------ its entirety and replaced with the following: 6.19 Tangible Net Worth. Cause or permit Tangible Net Worth to be ------------------ less than $2,200,000.00 at any time from and after the date hereof; the term Tangible Net Worth meaning, as of the time of any determination thereof, the difference 4 between (a) the sum of (i) the par value (or value stated on the books of Borrower) of the capital stock of all classes of Borrower, plus (or minus in the case of a deficit) (ii) the amount of Borrower's surplus, whether capital or earned, less (b) the sum of treasury stock, unamortized debt discount and expense, good will, trademarks, trade names, patents, deferred charges (exclusive of deferred taxes), leasehold improvements and other intangible assets, and any write-up of the value of any assets, all determined in accordance with generally accepted accounting principles, applied on a consistent basis. 2.09 Termination. Section 11.1 of the Loan Agreement is deleted in its ----------- entirety and Section 11.2 of the Loan Agreement is deleted in its entirety and replaced with the following: 11.2 Termination by Borrower. ----------------------- (a) Borrower may terminate this Agreement only upon: (i) giving ninety (90) days' prior written notice to Lender of the intended termination day; (ii) paying to Lender in full the principal and interest of the Loans, and all other Obligations under this Agreement and the Relevant Documents; and (iii) paying to Lender, as liquidated damages, the applicable amount stated below: (A) If the termination date is on or prior to December 31, 1997, a sum equal to 3% of the Revolving Loan Limit; or (B) If the termination date is after December 31, 1997, a sum equal to 1% of the Revolving Loan Limit. ARTICLE III REPRESENTATIONS AND WARRANTIES ------------------------------ Borrower represents and warrants to Lender, knowing and intending that Lender will rely thereon in entering into this Amendment, that the following statements are true and accurate: 3.01 Affirmation of Representations. All of the representations and ------------------------------ warranties contained in Section 4 of the Loan Agreement, as such Section may be amended by this Amendment, are, immediately after the execution and delivery of this Amendment, true and 5 accurate as of the date hereof with the same force and effect as though such representations and warranties had been more fully set forth herein and made on the date hereof. 3.02 Due Authorization: No Default. ----------------------------- (a) The execution, delivery and performance by Borrower of this Amendment and the Relevant Documents are within Borrower's powers, have been duly authorized by all necessary action on the part of Borrower and (i) do not and will not (A) require any consent or approval of the stockholders of Borrower, or (B) constitute or result in a breach of, or default under (with due notice or passage of time or both) any agreement, undertaking, or instrument to which Borrower is a party or by which it may be affected, or (C) result in the creation or imposition of any lien or restriction on any assets of the Borrower, other than liens in favor of Lender, and (ii) are not and will not be prevented or limited by, or violate, conflict with or breach Borrower's Certificate of Incorporation or By-laws, or any applicable law or regulations, or any judgment, order, award or decree of any judicial body or other governmental authority or arbitrator applicable to Borrower or any of Borrower's assets. (b) This Amendment and the Relevant Documents upon their execution and delivery will have been duly executed and delivered by the Borrower and each such document and the Loan Agreement, as amended by this Amendment, will be legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms and provisions. 3.03 No Governmental Consent Necessary. No authorization, approval or --------------------------------- other action by, and no notice to or filing with, any Person or governmental authority or regulatory body is required for the due execution, delivery and performance by Borrower of this Amendment or any of the Relevant Documents. 3.04 List of Proceedings. Except as described on Schedule 1 to this ------------------- ---------- Amendment, there is no claim, action, suit, proceeding, inquiry, hearing or investigation pending or (to the knowledge of Borrower) threatened against Borrower or any of its assets, in any court of law or equity, or before or by any federal, state or local governmental authority or before any arbitrator. Except as described on Schedule 1 to this Amendment, there are no unsatisfied ---------- judgments or awards against Borrower or any of its assets. 3.05 Brokerage Commissions. No Person is entitled to receive from Borrower --------------------- any brokerage commission, finder's fee or similar fee or payment in connection with the consummation of the transactions contemplated by this Amendment. No brokerage or other fee, commission or compensation is to be paid by Lender by reason of any act, alleged act or omission of Borrower with respect to the transactions contemplated hereby. 3.06 No Defenses to Payment. Borrower has no defenses to the repayment of ---------------------- the Obligations and has no claims or rights of set-off against Lender in connection with the Obligations. 6 ARTICLE IV MISCELLANEOUS ------------- 4.01 Entire Agreement; Amendments; Lender's Consent. This Amendment ---------------------------------------------- (including the Schedules hereto) and the Relevant Documents amend and supplement the Loan Agreement and the Relevant Documents delivered prior to the date hereof, and otherwise supersede, with respect to their subject matter, all prior and contemporaneous agreements, understandings, inducements or conditions between the respective parties, whether express or implied, oral or written. No amendment or waiver of any provision of this Amendment or any of the Relevant Documents, nor consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 4.02 Gender. Throughout this Amendment, the masculine shall include the ------ feminine and vice versa and the singular shall include the plural and vice versa, unless the context of this Amendment indicates otherwise. 4.03 Binding Effect; Governing Law. This Amendment shall be binding upon ----------------------------- and inure to the benefit of Borrower and Lender and their respective successors and assigns, except that Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of Lender. This Amendment, the Relevant Documents and the other documents delivered in connection with this Amendment shall be governed by, and construed in accordance with, the substantive laws (without reference to conflicts of laws) of the State of New Jersey. 4.04 Severability of Provisions. Any provision of this Amendment or any of -------------------------- the Relevant Documents that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Amendment, or such Relevant Documents or affecting the validity or enforceability of such provision in any other jurisdiction. 4.05 Headings. The headings preceding the text of this Amendment are -------- inserted solely for convenience of reference and shall not constitute a part of this Amendment nor affect its meaning, construction or effect. 4.06 Exhibits and Schedules. All of the Exhibits and Schedules to this ---------------------- Amendment are hereby incorporated by reference herein and made a part hereof. 4.07 Loan Agreement; Full Force and Effect. Except, and solely to the ------------------------------------- extent, that the same has been specifically modified, amended or supplemented herein, all of the terms and conditions of the Loan Agreement shall remain in full force and effect. 7 4.08 No Waiver of Default. Borrower hereby acknowledges and agrees that -------------------- the execution, delivery and performance of this Amendment and the Relevant Documents by Lender is not intended, and shall not be deemed, to be a waiver or release of any Event of Default as defined under the Loan Agreement, and that Lender reserves all of its rights and remedies to which it may be entitled, whether an Event of Default occurred at, before or after the date of this Amendment. 4.09 Waiver of Trial By Jury. TO THE FULL EXTENT PERMITTED BY LAW, ----------------------- BORROWER AND LENDER HEREBY WAIVE THEIR RIGHT TO TRIAL BY JURY IN ANY LITIGATION RELATING TO THE LOAN AGREEMENT OR THE RELEVANT DOCUMENTS. 4.10 Conflicts with Loan Agreement. If any term, condition or provision of ----------------------------- this Amendment is inconsistent or conflicts with any term, condition or provision of the Loan Agreement, the term, condition or provision of this Amendment shall govern to the extent of such inconsistency or conflict. IN WITNESS WHEREOF, the undersigned have set their hands and seals or caused these presents to be executed by duly authorized corporate officers and sealed with their seal the day and year first above written. S2 GOLF INC. By: /s/ Douglas Bufffington -------------------------------- Name: DOUGLAS BUFFINGTON Title: President PNC BANK, NATIONAL ASSOCIATION By: /s/ Robert Anchundia ------------------------------- Name: ROBERT ANCHUNDIA Title: Assistant Vice President 8 SCHEDULE I ---------- Proceedings ----------- NONE 9 EXHIBIT "A" ----------- RESTATED SECURED REVOLVING LOAN NOTE --------------------------- $5,000,000.00 As of December 1, 1997 FOR VALUE RECEIVED, the undersigned, S2 GOLF INC., a corporation organized under the laws of New Jersey, ("Borrower"), hereby unconditionally promises to pay to the order of PNC BANK, NATIONAL ASSOCIATION, its successors or assigns ("Lender") upon the Maturity Date, as defined in the Agreement (as hereinafter defined), the principal sum of FIVE MILLION DOLLARS ($5,000,000.00) or, if different, the aggregate unpaid principal amount of all Revolving Loans made by Lender to Borrower pursuant to the Loan and Security Agreement, dated December 29, 1994, as amended by the First Amendment to Loan and Security Agreement dated April 9, 1996 and as amended by the Second Amendment to Loan and Security Agreement, dated the date hereof, and any amendments, extensions or renewals thereof (the "Agreement"), and to pay interest as hereinafter provided on all principal of Revolving Loans remaining unpaid from time to time, from the date of each such Loan until its payment in full. Both principal and interest hereunder shall be payable in lawful money of the United States of America, and in immediately available funds, at the office of Lender located at Two Tower Center Boulevard, East Brunswick, New Jersey 08816, or at such other place as the holder hereof may from time to time designate in writing. All of the provisions of the Agreement are incorporated herein by reference and, in the event of ambiguity or inconsistency between any provisions of the Agreement and this Note, the provisions of the Agreement shall prevail. Any term in initial capitals in this Note and not otherwise defined herein shall have the meaning ascribed thereto in the Agreement. Interest on principal amounts hereunder shall be payable monthly on the first Banking Day in each calendar month, commencing the date hereof, and on the final day when said principal amounts become due, at a fluctuating interest rate per annum equal at all times to one-quarter percent ( 1/4%) per annum above the prime rate of Lender in effect from time to time; provided that any amount of principal (or, to the extent permitted by law, of interest) payable hereunder which is not paid when due (whether after demand, by acceleration or otherwise) and whether before or after judgment shall bear interest payable on demand, from the day when said amount becomes due as aforesaid until it is paid in full, at a fluctuating interest rate per annum equal at all times to the Default Rate (as defined in the Agreement). Each change in the fluctuating interest rate hereunder shall take effect simultaneously with the corresponding change in the prime rate. The prime rate applicable to this Note shall be the rate of interest announced from time to time by Lender as its "prime rate" or "prime lending rate". This rate of interest is determined from time to time by Lender as a means of pricing some loans to its customers and it is neither tied to any external rate of interest or index nor does it necessarily reflect the lowest rate of interest actually charged by Lender to any particular class or category of customers. Lender shall present a monthly invoice to Borrower reflecting the interest payment due, but any failure or delay by Lender in submitting invoices for interest payments shall not discharge or relieve Borrower of the obligation to make such interest payments. The Borrower authorizes the Lender to debit any loan or deposit account maintained by it with the Lender for accrued interest, as and when due. Such authorization shall not affect the Borrower's obligation to pay when due all amounts payable hereunder whether or not there are sufficient funds in any such accounts. The foregoing shall be in addition to and not in limitation of any rights of set-off which Lender may have. This Note has been issued under the Agreement and is secured thereby and entitled to the benefits thereof. Reference is made to the Agreement for a description of the property to be subject thereto from time to time. The Agreement contains, among other terms, provisions for acceleration of the indebtedness hereunder upon the happening of certain stated events. Notwithstanding any other provision of this Note or the Agreement, the maturity hereof shall be accelerated as provided in the Agreement upon termination of the Agreement by Borrower. If this Note is mutilated, lost, stolen or destroyed, then upon surrender thereof (if mutilated) or receipt of evidence and indemnity (if lost, stolen or destroyed) Borrower shall execute and deliver a new promissory note of like tenor. This Note shall be subject to prepayment on such terms and conditions and upon payment of such prepayment penalty, if any, as is provided in the Agreement. Borrower and any endorser, surety or guarantor of this Note hereby each (a) waive presentment for payment, demand notice of dishonor, protest, notice or protest and all other demands and notices in connection with the delivery, performance and enforcement of this Note, except as may be specifically otherwise provided in the Agreement, (b) consent that, without notice to or release of the liability of any such party, the obligations of any party may from time to time, in whole or part, be renewed, extended, modified, accelerated, compromised, settled or released by Lender, and (c) waive all defenses based on suretyship or impairment of collateral. TO THE FULL EXTENT PERMITTED BY LAW BORROWER AND LENDER HEREBY WAIVE THEIR RIGHT TO TRIAL BY JURY IN ANY LITIGATION RELATING TO THIS OBLIGATION AND AS PROVIDED IN THE AGREEMENT. This Restated Secured Revolving Loan Note evidences indebtedness created under the Agreement which indebtedness is continued in full force and effect on a continuous basis, unimpaired and undischarged, under this Restated Secured Revolving Loan Note. This Restated Secured Revolving Loan Note is issued in substitution for, but not as payment or satisfaction of, the Secured Revolving Loan Note issued under the Agreement. IN WITNESS WHEREOF, and intending to be legally bound hereby, Borrower has executed this Note as of the date first above written. S2 GOLF INC. By: /s/ Douglas A. Buffington -------------------------------- Name: DOUGLAS A. BUFFINGTON Title: President [CORPORATE SEAL] Attest: By: /s/ Randy A. Hamill ------------------------------------- Assistant Secretary 2 EX-27 4 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 121,431 0 4,043,854 320,930 3,094,302 7,356,196 743,834 664,360 7,630,176 3,920,851 0 0 0 22,186 3,484,908 7,630,176 12,073,843 12,073,843 8,115,313 2,738,996 (3,115) 0 277,854 944,795 89,230 855,565 0 0 0 855,565 .39 .37
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