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, 2002 Number 0-14146
WOMEN'S GOLF UNLIMITED, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
NEW JERSEY 22-2388568
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
18 GLORIA LANE
FAIRFIELD, N.J. 07004
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(973) 227-7783
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO 12(g) OF THE ACT: NONE
COMMON STOCK, PAR VALUE $.01
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [X]
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes( ) No (X)
As of March 26, 2003, 3,227,215 shares of common stock were outstanding. The
aggregate market value of the voting stock held by non-affiliates of Women's
Golf Unlimited, Inc on March 24, 2003 was $1,774,968. Solely for purposes of
this calculation, the Company deemed every person who, beneficially owned 5% or
more of its common stock and all directors and executive officers to be
affiliates.
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Women's Golf Unlimited, Inc. (the "Company" or "Women's Golf") was incorporated
under the laws of the state of New Jersey in February 1982. The Company
manufactures and markets throughout the United States proprietary lines of golf
equipment for women and men, including golf clubs, golf bags, golf shoes, golf
balls and accessories. The Company markets these products under the trade name
and trademark Square Two(R) and the trademarks NancyLopezGolf(TM), Lady
Fairway(TM), and several others, including S2(R) and Posiflow(R).
The common stock of the Company (the "Common Stock") trades on the
Over-The-Counter Bulletin Board under the symbol "GOLF.OB."
Throughout 2002, the Company maintained and strengthened its position as a
manufacturer and seller of high-quality, high-performance clubs, especially for
women golfers. Golf equipment for women comprised approximately 83% of the
Company's business in 2002, as compared against 62% in 1998. Two acquisitions in
2000 expanded significantly both the Company's range of golf products for women
and its distribution network. In July, 2000, the Company acquired the
NancyLopezGolfTM lines of premium golf clubs and accessories, and on December
31, 2000, the Company acquired the Lady FairwayTM brand of golf shoes and other
accessories.
During 2002, the Company continued to improve its Square Two(R) brands of
equipment, introducing the Light & Easy III, Power Circle III, Onyx LS and the
KW 88V Box set. During 2002 the Company improved its NancyLopezGolf(TM) brand of
equipment by the Albany 250 ST Woods. The Company also continued its 20-year
partnership with the Ladies Professional Golf Association ("LPGA(R)" ),
completed its second year of an endorsement agreement with Nancy Lopez as well
as the third year of an endorsement agreement with Kathy Whitworth. The
Company's sponsorship of the Square Two(R)/LPGA(R) Custom Club Fitting Program,
which began in 1993, provided a forum for design input from professional women
golfers during six 2-day seminars. Cosmetic changes to the Company's lines of
women's clubs continued to include greater prominence for the distinctive
LPGA(R) logo, which all of the women's clubs marketed under the Square Two(R)
brand carry.
Between 1998 and 2002, the Company's net sales increased from $11,505,000 to
$12,115,124 and shareholders' equity increased from $3,951,942 to $5,282,001.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
For financial information about business segments in which the Company operates,
see Item 8, Financial Statements and Supplementary Data.
2
(c) NARRATIVE DESCRIPTION OF BUSINESS
Golf Club Design
The Company designs golf clubs for women and men of all ages, and engages in
continuous processes of refining existing designs and developing new designs.
The Company employs two broad design approaches. One targets the steel shaft
market, and the other targets the graphite shaft market. In recent years, the
graphite shaft market has experienced tremendous growth, particularly among
women. Graphite shafts are lighter than steel shafts and have greater design
flexibility. The Company, recognizing that graphite has become the shaft of
choice for the majority of women, has developed an extensive array of graphite
shaft models.
Products
The Company manufactures and markets throughout the United States proprietary
lines of golf equipment under the trade name and trademark Square Two(R), and a
number of other trademarks, including NancyLopezGolf(TM) and Lady Fairway(TM).
Under the Square Two(R) name, the Company manufactures and markets numerous
products for women and men golfers of varying ages and abilities. These products
include the Light & Easy(R), Power Circle(TM), Rave(R) II, Agree(R) and
Eight-is-Enough(TM) lines of golf clubs.
Under the NancyLopezGolf(TM) trademark, the Company markets premium golf clubs,
including the Albany(R) and the Delma(R) lines and the Streak 78(R), Fame 87(R).
The Company's NancyLopezGolf(TM) products also include golf balls, the
LopezGrip(R) line of golf gloves, golf bags and other golf accessories.
Under the Lady Fairway(TM) line, the Company markets ladies golf shoes,
including the Fashion, Outdoor, Legacy and Athletic collections, as well as golf
gloves, golf socks and other golf accessories.
Golf clubs accounted for more than 84% of the Company's revenue in 2002 and 82%
and 95% in 2001 and 2000, respectively.
Manufacturing
The Company assembles its golf clubs at its facility located in Fairfield, New
Jersey. The Company obtains steel shafts, grips, and accessories from various
domestic and foreign shaft manufacturers, graphite shafts from sources in the
People's Republic of China, Korea and the US, and finished heads from
manufacturers in Taiwan, Thailand and the People's Republic of China, all of
which manufacture components to the Company's design specifications.
The Company's Lady Fairway(TM) products (golf shoes, socks, gloves and other
accessories) are manufactured by third-party manufacturers in the People's
Republic of China, Indonesia and in the US.
3
Inventory and Component Supply
Foreign suppliers of inventory and components to the Company generally require
90- to 120-day lead times to deliver their products. The Company tries to
maintain at least two sources of supply for each of the golf club shaft and golf
club head products that it purchases from foreign suppliers. Domestic suppliers
of shafts and grips are more plentiful and, under normal circumstances, can
provide components to the Company on relatively short notice.
While the Company does not anticipate long-term shortages of components or
inventory 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 or to affect materially the Company's
ability to deliver its products. The Company regularly evaluates alternative
suppliers.
The Company purchases inventory and components through a line of credit in the
amount of $8,000,000 with PNC Bank, National Association ("PNC Bank"), pursuant
to which PNC Bank may make available an additional credit facility of up to
$1,750,000 in the form of standby or documentary letters of credit and demand
loans. See also the discussion of "Liquidity and Capital Resources" under Item
7.
As noted below, the seasonal nature of the golf industry leads to seasonal peaks
in demand for the Company's products, although manufacturing occurs throughout
the year.
Market
The National Golf Foundation estimates that in 2001 there were 26.4 million
golfers in the United States. 2002 statistics are not available. Although the
rate of growth in numbers of golfers has remained relatively flat since 1998,
the general popularity of the sport of golf has created a significant market for
golf clubs and other golf accessories. In competition for a share of the market,
various manufacturers have developed golf clubs using various materials,
differing types of construction and the latest engineering technology.
Marketing & Distribution
Until approximately 20 years ago, top-of-the-line golf equipment was sold almost
exclusively by golf professionals at private clubs. Currently, off-course
specialty golf shops, sporting goods retailers, discounters, mail-order houses,
the Internet and infomercials account for a substantial share of sales to the
golf club market.
The Company markets its products primarily through golf retail shops and also
through private clubs. NancyLopezGolf(TM) brand clubs sell at premium price
points, whereas the Square Two(R) and Lady Fairway brand products retail at
mid-level price points. Women's Golf Unlimited product lines are offered to all
golf retail shops as well as private clubs, but are not sold to all outlets. As
of March 1, 2003, the Company had established a network of approximately 2,250
retailers with approximately 2,800 retail outlets. Each line has a comprehensive
catalog for its dealers.
4
The golf equipment industry is one in which advertising and promotions are
required to create market awareness of a company's products. Management
anticipates that it will continue to invest in its research and development
efforts as well as its advertising expenditures to create brand awareness.
In 2002, 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.
Competition
In general, the Company competes with manufacturers of sporting goods equipment
for all phases of the recreation industry, and its business is subject to
factors generally affecting the recreation and leisure market, such as economic
conditions, changes in discretionary spending patterns and weather conditions.
The golf club industry is highly competitive and is dominated principally by
approximately 10 nationally known manufacturers of sporting goods equipment.
Such manufacturers, including Callaway(R), Ping(R), Nike(R), Taylor Made(R), and
Cobra/Titleist(R), possess greater financial and other resources than those of
the Company. The Company competes with these entities primarily on the basis of
the pricing and quality of the Company's products and services, along with the
Company's position as an official sponsor of the LPGA(R) for the Square Two
brand.
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, they also compete with the
Company.
Seasonality
The golf industry is seasonal. While manufacturing occurs throughout the year,
demand for the Company's clubs and other golf products is greatest from March
through July.
The Ladies Professional Golf Association Agreement
The Company has entered into an agreement with the Ladies Professional Golf
Association, which grants the Company the exclusive right to use the LPGA(R)
name and logo on its women's golf clubs and the nonexclusive right to use the
LPGA(R) name and logo on certain of its other products, including golf bags. The
Company has renewed and restated this licensing agreement effective January 1,
1999 through December 31, 2003, at which time the Company has the option to
renew the agreement for two consecutive years under the same terms and
conditions. The agreement entitles the Company to use the license granted on a
worldwide basis. The Company is obligated to pay to the LPGA(R) a license fee
and a royalty fee based on sales volume.
The minimum annual license fee for the term of the agreement is $200,000 each
year through 2003. In the event that the sum of (i) 5% of the net sales of the
licensed products (other than golf shoes) up to $1,000,000 in any calendar year,
(ii) 2.5% of the net sales of the licensed products (other than golf shoes) in
excess of $1,000,000 and less than $5,000,000 in any calendar year, (iii) 1% of
the net sales of the licensed products (other than golf shoes) in excess of
$5,000,000,
5
and (iv) 1% of the net sales of golf shoes in any calendar year, exceeds the
minimum license fee, the excess shall be paid as a royalty fee.
Under the agreement, the Company is obligated to be a "Title Sponsor" of the
LPGA(R) Teaching and Club Professionals Division Team Classic at an annual cost
that began at $35,000 in 1999 and increases by $2,500 per year through 2003. In
addition, the Company is obligated to spend a minimum of $100,000 per year on
various advertising programs.
Kathy Whitworth Endorsement Agreement
The Company has entered into an Endorsement Agreement with former LPGA(R) Tour
Golf Professional Kathy Whitworth, effective January 1, 2000 through December
31, 2005, pursuant to which Ms. Whitworth has granted the Company an exclusive
license to use her name, likeness, image and personal identification, singly or
in any combination, in connection with the production, marketing and sale of a
"Kathy Whitworth" signature line of women's golf clubs. In addition, the Company
has the right to include Ms. Whitworth in two print advertisements and one
television advertisement per year. Ms. Whitworth also has agreed to use only the
golf clubs and golf bags of the Company in any golf event, either professional
or social, during the term of the agreement. She serves as a golf instructor at
up to ten golf clinics per calendar year, and represents the Company, at the
Company's discretion, at up to two Professional Golf Association merchandise
shows each calendar year. The Company pays Ms. Whitworth a base fee of $36,000
per year in equal quarterly payments and a royalty fee of 2% of net sales of the
"Kathy Whitworth" line of clubs.
Nancy Lopez License
Under an agreement with Nancy Lopez Enterprises, Inc. ("Lopez Enterprises"), the
Company has the exclusive right to use the name, signature, image and
endorsement of Nancy Lopez on certain of its golf clubs and other golf
equipment. This agreement is for an initial term that ends on December 31, 2007,
and shall be extended automatically until December 31, 2010 unless one of the
parties decides against such extension. The Company pays Lopez Enterprises an
annual fixed royalty of $200,000, plus additional royalties if the sum of (i)
25% of any fees paid to the Company for sublicenses and (ii) 3% of revenues of
up to $10 million for licensed products plus 3.5% of such revenues greater than
$10 million exceeds the fixed royalty amount of $200,000. The Company also pays
Lopez Enterprises bonuses if Ms. Lopez wins or places at least fifth in
specified golf tournaments or wins other named awards, and issues Lopez
Enterprises options to purchase Common Stock on the basis of the revenue for
licensed products in excess of a certain threshold.
Patents and Trademarks
The Company holds two United States patents, both of which will expire in 2013.
One protects the concept of Posiflow(R) weighting in iron heads. The second
protects an internal triangular reinforcement cell for metal woods.
6
The Company owns the rights to the following trademarks registered with the
United States Patent and Trademark Office:
AGREE(R) LADIES LONG ONYX(R) S2(R)(STYLIZED)
ALBANY(R) DRIVER(R) OUTLAST(R) SARASOTA(R)
ALLEGRA(R) LADY FAIRWAY(R) OPAL(R) SQUARE TWO(R)
DARDEN(R) LADY PETITE(R) POSIFLOW(R) STREAK 78(R)
DEBUT 98(R) LIGHT & EASY(R) POWER CIRCLE(R) THORPE(R)
DEFINING THE LOPEZGRIP(R) RAVE(R) TOTALLY
WOMEN'S GAME(R) MELODY(R) ROSCOE(R) MATCHED(R)
DOMINGO(R) NLG(R) ROSWELL(R)
FAME 87(R) NLG MATCHPLAY S2(R)(BOUNCING
PROCESS(R) BALL DESIGN)
"Square Two(R)" is registered in 21 countries. "Lady Fairway" is registered in
the United Kingdom and in Sweden.
Given the competitive climate within the golf industry worldwide and the recent
counterfeiting of clubhead designs, the Company believes that it is imperative
to protect the Company's trade names, trademarks and patentable inventions and
designs.
Employees
As of December 31, 2002, the Company employed 44 persons, including 43 full-time
employees, 2 of whom were executive officers. Thirty-one of these were hourly
employees and 13 were management, administrative and marketing personnel.
Additional hourly employees are hired during peak production periods, and
management anticipates no problems in finding adequate employees. The employees
of the Company are not represented by any labor organization.
The Company believes that its present staff is adequate. However, if sales of
the Company's golf clubs or golf shoes should increase additional production,
clerical, sales and management personnel may be necessary to meet product
demand.
Special Note on Forward-Looking Statements
The business, financial condition and results of operations of the Company may
be adversely affected by a number of factors. Certain statements and information
contained herein reflect the Company's current expectations with respect to the
future performance of the Company and may constitute "forward-looking
statements" within the meaning of the Federal Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other risks and
uncertainties: the risks inherent in the development and introduction of new
products; dependence on consumer tastes, which fluctuate from time to time;
seasonality and prevailing weather conditions, as protracted periods of
inclement weather could disrupt consumer demand for golf-related products;
economic conditions as they impact the availability
7
of discretionary income; unanticipated shortages of components or delays in
component delivery; and the significant competition in the Company's line of
business.
(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
It is impracticable for the Company to provide financial information about
geographic areas. Historically, the Company's sales to foreign customers have
not been material. For the fiscal year ended December 31, 2002, the Company's
sales to foreign customers comprised less than 2.5% of net sales. Women's Golf
Unlimited works with distributors in Europe, Australia and Canada, on a
licensing agreement, in which the Company receives quarterly royalty payments.
ITEM 2. PROPERTIES
The Company currently leases its manufacturing facility and sales and executive
offices located at 18 Gloria Lane, Fairfield, New Jersey 07004, comprising a
total of 28,442 square feet of space. As of December 1, 2001 the Company entered
into a new lease agreement for the Fairfield location for a period of three
years, expiring on November 30, 2004. In December 2001, the Company consolidated
the Florida customer service, sales, warehousing and distribution operations for
its Lady Fairway(TM) lines with those operations conducted at its New Jersey
location. The Company now maintains a small office of approximately 800 square
feet in Lutz, Florida for administrative activities relating to the Lady
Fairway(TM) line.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders in the
fourth quarter period of 2002.
EXECUTIVE OFFICERS OF THE COMPANY
See Part III, Item 10 of this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the Over-The-Counter Bulletin Board
under under the trading symbol "GOLF.OB." The following table sets forth the
high and low bid prices for the Common Stock as provided by Nasdaq for the
periods indicated. These prices represent quotations between dealers, do not
include retail markups, markdowns or commissions and do not necessarily
represent prices at which actual transactions were effected.
8
Effective October 30, 2002 the common stock of Women's Golf Unlimited began
trading on the Over-The-Counter Bulletin Board. Prior to this date the company's
stock was trading on the Nasdaq Small Cap Market under the symbol GOLF. In July
2002, Nasdaq notified the company that the publicly held shares of its common
stock had not maintained a minimum market value of $1,000,000 over the previous
30 consecutive trading days, and, as a result, did not comply with Marketplace
Rule 4310(c)(7). The company was provided, under Rule 4310(c)(8)(B), 90 calendar
days, or until October 21, 2002 to regain compliance. The company was also
notified in July that the price of the common stock had closed below the minimum
$1.00 per share for 30 consecutive trading days, failing the requirement for
continued inclusion under Marketplace Rule 4310(c)(4). The company did not
regain compliance under Rule 4310(c)(8)(B) and accordingly its securities were
delisted from the Nasdaq Small Cap Market at the opening of business on October
30, 2002.
PERIODS: COMMON STOCK BID PRICES:
-------- ------------------------
HIGH LOW
---- ---
2001 1st Quarter $1 06 $0.88
2001 2nd Quarter $1.75 $1.29
2001 3rd Quarter $2.62 $1.00
2001 4th Quarter $2.00 $1.00
2002 1st Quarter $1.60 $1.10
2002 2nd Quarter $1.50 $.98
2002 3rd Quarter $1.10 $.76
2002 4th Quarter $1.00 $.51
On March 26, 2003, the number of holders of record of the Company's Common Stock
was approximately 176. No cash dividends have been paid to date and it is
anticipated that cash dividends will not be paid in the near future.
EQUITY COMPENSATION PLAN INFORMATION
The Company has 1,152,595 of Common Stock which may be issued on exercise of
options granted under the 1998 Employee Stock Plan as well as the 1992 Stock
Plan for Independent Directors. The following table sets forth certain
information pertaining to securities as of December 31, 2002:
----------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
----------------------------------------------------------------------------------------------------------------------------
Plan Category Number of securities to Weighted-average exercise Number of securities remaining
be issued upon exercise price of outstanding available for future issuance
of outstanding options, options, warrants and rights under equity compensation plans
warrants and rights (excluding securities reflected
in column (a)
----------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders
----------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by 694,302 $2.98 458,293
security holders
----------------------------------------------------------------------------------------------------------------------------
Total 694,302 $2.98 458,293
----------------------------------------------------------------------------------------------------------------------------
In 2002, the Company issued 1,021 shares of Common Stock to Frederick B.
Ziesenheim and 1,021 shares of common stock to Mary Ann Jorgenson as
compensation for their service as directors of the Company and participation in
board meetings. As no public offering was involved, the issuance of such shares
was exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended. See Item 11.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
OPERATING RESULTS:
Net Sales $12,115,124 $16,144,947 $12,510,314 $11,003,556 $11,505,000
Net Income (Loss) ($1,684,570) 164,291 220,654 306,126 440,848
Net Income (Loss)
per Share-Basic (0.52) 0.05 0.10 0.14 0.20
per Share-Diluted (0.52) 0.05 0.10 0.14 0.19
Weighted Average
Number of Shares
9
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Outstanding-Basic 3,225,945 3,223,850 2,226,312 2,219,700 2,219,078
Outstanding-Diluted 3,240,752 3,266,819 2,264,065 2,263,876 2,315,149
Cash Dividend 0 0 0 0
At Year End:
Working Capital 2,076,478 1,988,256 1,672,945 4,020,772 3,766,986
Total Assets 9,572,051 12,994,368 13,678,640 5,752,079 7,534,080
Total Liabilities 4,290,050 6,031,355 6,882,918 1,492,011 3,582,138
Long-Term Obligations 62,143 202,413 512,105 84,822 146,157
Shareholders' Equity 5,282,001 6,963,013 6,795,722 4,260,068 3,951,942
Market Price of
Common Stock
High-Low 1.60/.51 2.62/.88 2.88/.75 4.00/1.62 11.32/2.00
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Women's Golf Unlimited, Inc. operates in one business segment, the manufacture
and marketing of golf equipment, including golf clubs, golf balls, golf gloves,
golf bags, and, starting on December 29, 2000, golf shoes and socks. The Company
markets its products primarily in the United States. The Company has
distributors in Europe, Australia and Canada, which work under licensing
agreements.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." This accounting standard addresses financial accounting and reporting
for goodwill and other intangible assets and requires that goodwill amortization
be discontinued and replaced with periodic tests of impairment. A two-step
impairment test is used to first identify potential goodwill impairment and then
measure the amount of goodwill impairment loss, if any. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001, and is required to
be applied at the beginning of the fiscal year. Impairment losses that arise due
to the initial application of this standard will be reported as a cumulative
effect of a change in accounting principle. The first step of the goodwill
impairment test, which must be completed within six months of the effective date
of this standard, will identify potential goodwill impairment. The second step
of the goodwill impairment test, which must be completed prior to the issuance
of the annual financial statements, will measure the amount of goodwill
impairment loss, if any. As of the first quarter of 2002, the Company has
completed these steps.
In accordance with SFAS No. 142, goodwill amortization was discontinued as of
January 1, 2002. The Company recorded a goodwill impairment of $1,806,448, or
($.56) per basic and diluted share, related to the Lady Fairway acquisition as a
cumulative effect of change in accounting principle in the first quarter of
2002. In addition, the Company stopped amortizing approximately $1.2 million of
an intangible asset deemed to have an indefinite useful life, primarily related
to the Lady Fairway trademark. The Company estimated the fair value of the
associated sole unit by using a present value of future cash flows model. Based
on the current level of the intangible asset deemed to have an indefinite useful
life, the adoption of SFAS No. 142 will reduce annual amortization expense by
approximately $150,000. Amortization expense
10
related to intangible assets deemed to have a definite useful life is
approximately $214,000 as of December 31, 2002.
In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). This accounting standard, which is effective for exit or
disposal activities that are initiated after December 31, 2002, addresses
financial accounting and reporting for costs associated with exit or disposal
activities. The adoption of SFAS No. 146 is not expected to have a material
effect on the Company's financial position, results of operations and cash
flows.
In May 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4,44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. This
accounting standard, which is effective for fiscal years beginning after June
15, 2002, requires, among other things, that debt extinguishments used as a part
of an entity's risk management strategy no longer meet the criteria for
classification as extraordinary items. The adoption of SFAS No. 145 is not
expected to have a material effect on the Company's financial position, results
of operations and cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets." This statement will be effective for fiscal
years beginning after December 15, 2001. This statement established a single
accounting model, based upon the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," for long-lived assets to be disposed of by sale or to address
significant implementation issues. The adoption of FAS No. 144 does not have a
material effect on the Company's financial statements.
Results of Operations
Sales
2002 Compared to 2001
In 2002 net sales were $12,115,124 versus $16,144,947 in 2001, a decrease of
25%. The Square Two brand decreased 22%, the Nancy Lopez Golf brand decreased
24.2% and the Lady Fairway shoe brand decreased 31.2%. The primary decrease for
all three brands was a soft U.S economy, bad weather in the Northeast in the
spring and a very soft golf economy. Rounds played were down for a third
straight year. The number of players continued to be flat. Approximately 10% of
the decline in the Square Two brand was caused by price reductions on certain
club models.
2001 Compared to 2000
In 2001, net sales were $16,144,947, versus $12,510,314 in 2000. This is an
increase of 29%, resulting from an increase of $4,834,633 in sales attributable
to the Lady Fairway(TM) and
11
NancyLopezGolfTM brand acquisitions, offset by a decrease of $1,200,000 in sales
of Square Two(R) brand products due to bad weather in the spring 2001 selling
season and the U.S. economic recession, both of which contributed to a poor
industry environment in 2001. The Company does not have its own historical sales
data to evaluate the impact of these factors on 2001 sales of the Lady
Fairway(TM) and NancyLopezGolfTM brand products.
Gross Profit
2002 Compared to 2001
In 2002, gross profit on sales (net sales less the cost of goods sold) was
$4,534,825 or 37% of sales, a decrease from the 2001 gross profit of $6,775,415
or 42% of sales. This decrease in gross profit percentage was due primarily to
lower revenue and a higher mount of shoes sold at discounted prices.
2001 Compared to 2000
In 2001, gross profit on sales (net sales less the cost of goods sold) was
$6,775,415 or 42% of sales, an increase over the 2000 gross profit of $4,258,480
or 34% of sales. This increase in gross profit percentage was due primarily to
the mix of products sold in 2001, with higher sales of products with a higher
average gross profit margin. Another factor was lower material costs on golf
club components.
Selling Expenses
2002 Compared to 2001
Selling expenses decreased to $2,263,832 in 2002, versus $3,495,523 in 2001. The
primary reasons for the $1,231,691 decrease were elimination of television
advertising in 2002, as well as management decision not to exhibit at the
industries major trade show. In addition, commission expense decreased due to a
decline in the volume of sales.
2001 Compared to 2000
Selling expenses increased to $3,495,523 in 2001, versus $2,093,938 in 2000. The
primary reasons for the increase were the expenses associated with sales of the
Lady Fairway(TM) brand products, payment of the royalty on NancyLopezGolf(TM)
brand products for a full 12-months, heavy television advertising costs
associated with promoting the NancyLopezGolf(TM) brand and higher sales
commissions due to the increased volume of sales.
12
General Administrative
2002 Compared to 2001
General and Administrative expenses were $2,123,531 in 2002, versus $2,759,711
in 2001. The primary reasons for the decrease were mainly due to the
consolidation of Lady Fairway operations into the New Jersey facility, effective
December 1, 2001, as well as decreased Legal, Bad Debt Expense and FASB 142,
Amortization of Goodwill, which states Lady Fairway Goodwill can no longer be
expensed in 2002, but was in 2001. Goodwill for Lady Fairway for the year ended
December 31, 2001 was $151,412.
2001 Compared to 2000
General and Administrative expenses were $2,759,711 in 2001, versus $1,647,827
in 2000. The primary reasons for the increase were the non-recurring general and
administrative expenses associated with the Lady Fairway(TM) acquisition not
incurred in 2000, including increased legal fees, and the recording of 12-months
goodwill associated with the NancyLopezGolf(TM) brand (versus 5 months of
goodwill expense associated with that brand in 2000).
Interest
2002 Compared to 2001
Interest expense for 2002 was $241,063, a decrease of 42.0% versus the 2001
interest expense of $413,111. The average loan balance for 2002 was $3,397,576
compared to $4,233,045 for 2001. Interest rates for 2002 were lower than 2001,
therefore decreasing the interest paid on the term loan, line of credit &
promissory note. In addition, the balance on the promissory note had been
decreased throughout 2002, therefore reducing the interest on the principal. See
also the discussion of "Liquidity and Capital Resources" below.
2001 Compared to 2000
Interest expense for 2001 was $413,111, an increase of 77.0% over the 2000
interest expense of $233,385. This increase in interest expense resulted from
the higher average outstanding balance of the credit facility in 2001 plus the
increase of long-term debt in 2001, offset by favorable interest rates. See also
the discussion of "Liquidity and Capital Resources" below.
Other Income
2002 Compared to 2001
Other Income for 2002 was $301,380 compared to $269,313 in 2001. The increase is
mainly due to royalty income from international distributors associated with the
Square Two(R) and NancyLopezGolf(TM) products.
13
2001 Compared to 2000
Other Income/(Expense) for 2001 was $269,313, compared to ($5,307) in 2000. The
increase is mainly due to royalty income from international distributors related
to the NancyLopezGolf(TM) product line.
Income Taxes
2002 Compared to 2001
During 2002, the Company recorded a provision for income taxes of $85,901,
compared to $212,092 in 2002. The provision for income tax as a percentage of
income before taxes was 41% in 2002 as compared with 56% in 2001.
2001 Compared to 2000
During 2001, the Company recorded a provision for income taxes of $212,092,
compared to $57,369 in 2000. The provision for income tax as a percentage of
income before taxes was 56% in 2001 as compared with 21% in 2000. The effective
tax rate was higher in 2001 as compared to 2000 primarily as a result of the
elimination in 2000 of certain tax reserves (related to over-accruals of
corporate tax liabilities) and the amortization in 2001 of goodwill associated
with the acquisition of the Lady FairwayTM product line, which is not deductible
for tax purposes.
Net Income (Loss)
2002 Compared to 2001
The Company's net income before Cumulative Effect of Accounting Change for year
ended December 31, 2002 was $121,878 compared to $164,291 for 2001. The decrease
in net income was a result of decreased net revenue as well as decreased
margins, offset by reduced selling, general and administrative expense and
interest. Net Loss in 2002 was ($1,806,448) compared to Net Income of $164,291
for 2001. This decrease was due to a goodwill impairment of $1,806,448 related
to the Lady Fairway acquisition that was recorded in the first quarter of 2002.
(See Part II, Item 7, SFAS No. 142).
2001 Compared to 2000
During 2001, the Company had net income of $164,291, compared to $220,654 in
2000. The decrease was the result of decreased net revenue, increased selling,
general and administrative expense and interest, offset by increased margin
gross profit and other income.
Liquidity and Capital Resources
The Company's working capital at year-end was $2,076,478 in 2002, compared to
$1,988,256 for 2001, an increase of 4.4%. This increase was the result of a
decrease in current assets of $1,512,813 offset by a decrease in current
liabilities of $1,512,813. The decrease in current assets was due mainly to
decreases of $774,279 in accounts receivable, $74,277 in prepaid expenses and
inventory of $664,091. The 2002 decrease in current liabilities is due to
decreases of $1,104,830 in the current portion of long-term debt, $922,545 in
short-term borrowings,
14
$103,423 in accrued expenses, $19,735 other current liabilities, offset by an
increase of $515,961 in accounts payable and $33,537 for lease obligations.
Average balances for accounts receivable in 2002 of $3,426,066 were 12.0% less
than the 2001 average balances of $3,895,128, also as a result of decreased
sales.
Cash provided by operations in 2002 was $2,323,051 compared to $179,046 in 2001
and $1,483,778 in 2000. The increase in net cash provided by operations is due
primarily to the Company's reduction of inventory and accounts receivable offset
by increased accounts payable
The Company's credit facility with PNC Bank (the "PNC Credit Facility") allows a
revolving line of credit up to a maximum of $8,000,000 less 50% of the aggregate
face amount of all outstanding letters of credit, and subject to various
borrowing bases, as well as up to $1,750,000 in the form of standby or
documentary letters of credit and demand loans.
The availability of funds under the revolving line of credit varies because it
is based, in part, on a borrowing base of 80% of eligible accounts receivable
and 60% of qualified inventory. Substantially all of the Company's assets are
used as collateral for the credit line. Interest rates are at prime plus
one-quarter percent, paid monthly; the interest rate as of December 31, 2002 was
4.50%. At December 31, 2002, funds available to the Company under the line of
credit were approximately $1,118,000.
The average outstanding balance on the line of credit was $3,397,576 in 2002, a
decrease from $4,233,045 in 2002. This decrease resulted from a 9.0% decrease in
the average inventory balance ($4,328,270 in 2002 as compared to $4,757,047 in
2001), as well as a decrease in the average accounts receivable balance.
As of December 31, 2002, the Company had outstanding letters of credit or demand
loans under the PNC Credit Facility, which totaled $45,823.
The PNC Credit Facility contains certain covenants, which among other items
require the maintenance of certain financial ratios including tangible net worth
and working capital and an annual limit on capital expenditures. Any event of
default under the credit facility permits the lender to cease making additional
loans thereunder. The Company was not in compliance with one covenant, relating
to capital expenditures, of the facility as of December 31, 2002. The Company
received a waiver on March 28, 2002 from its lender.
Other debt obligations of the Company, associated with the acquisitions, are a
term loan from PNC Bank in the original principal amount of $900,000, of which
$200,000 remained outstanding on December 31, 2002.
The Company is obligated under various contractual commitments over the next
five years. The following is the five-year commitments of the Company as of
December 31, 2002:
15
Less Than Over
Contractual Obligation Total 1 Year 1-3 Years 4-5 Years 5 Years
Operating Leases $ 368,063 $192,489 $ 175,574
Capitalized Leases 95,680 33,537 62,143
License Agreements 1,508,000 236,000 472,000 400,000 400,000
Employment Agreements 765,000 255,000 510,000
--------------- -------------- ---------------- ------------- -------------
Total contractual obligations $ 2,736,743 $717,026 $1,219,717 $400,000 $400,000
=============== ============== ================ ============= =============
Critical Accounting Policies
The Company's accounting policies and practices are described in Note 1 to the
financial statements included herein, "Summary of Significant Accounting
Policies." Application of the Company's accounting policies requires judgments
by management and incorporates expectations about future events. The Company has
established reserves and accruals for possible losses on collection of accounts
receivable as well as on obsolete inventory. Management uses all available facts
and circumstances in establishing such accruals or reserves.
Calculation of Allowances for Doubtful Accounts
Management reviews on a revolving basis a schedule listing each customer account
containing balances that are 90 or more days past due, and determines whether
collection of each outstanding balance is anticipated. If collection is
anticipated, no reserve for such account is established. If collection is
questionable, management applies a reserve of between 20% and 100% of the total
amount due. In determining whether to apply a reserve and if so, the amount of
such reserve, management draws on its knowledge of the progress of internal
collection efforts, the customer's payment history, and other information about
the customer. Management also applies a reserve of 2% of accounts receivable
that are up to 90 days past due.
Calculation of Reserves for Obsolescence
Periodically management reviews all inventory for the purpose of evaluating
current reserves for obsolescence, which is determined on the basis of
historical and current sales of each product, inventory level, and other
factors. A reserve of between 10% and 90% of present book value is assigned for
all questionable inventory, to which is added an additional miscellaneous
amount.
Certain information in the preceding "Management's Discussion and Analysis of
Financial Condition and Results of Operations" constitutes forward-looking
information that involves certain risks and uncertainties.
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for
16
doubtful accounts based on a history of past write-offs, collections and current
credit conditions. Accounts are written off as un-collectible on a case-by-case
basis.
Inventories
Inventories are valued at the lower of cost, determined on the basis of the
first-in, first-out method, or market. Inventories consist of materials, labor
and manufacturing overhead.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risks is limited to interest rate risks
associated with the variable interest rates on its revolving line of credit,
term loan and promissory note. Changes in the interest rates affect the
Company's earnings and cash flows, but not the fair value of the Company's debt
instruments. If the indebtedness outstanding at December 31, 2002 were to remain
constant, a 1.0% increase in interest rates occurring on January 1, 2003 would
result in an increase in interest expense for the following 12 months of
approximately $37,351.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements and Financial Statement Schedule on page
F-1 for the location in this report of the financial statements and
supplementary data.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's current directors and executive officers are:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Robert L. Ross 58 Chairman of the Board and Chief Executive Officer
Douglas A. Buffington 47 Director, President, Chief Financial Officer, Chief Operating Officer
and Treasurer
Randy A. Hamill 47 Senior Vice President of Manufacturing and Resources and Assistant
Secretary
Richard M. Maurer 54 Director and Secretary
James E. Jones 40 Director and Vice President of Marketing
17
Mary Ann Jorgenson 62 Director
Nancy Lopez 45 Director
Frederick B. Ziesenheim 76 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, and became Chief Financial Officer and Chief Operating
Officer in June 1994, President in December 1994, a director in February 1995
and Treasurer in January 1996. From 1992 until joining the Company, Mr.
Buffington served as General Manager of Simon-Duplex, a $25 million capital
goods division of Simon Engineering, a company based in the United Kingdom. From
1990 to 1992, he served as Vice President of Finance of Simon-Ltd., a $35
million division of Simon Engineering.
RANDY A. HAMILL has been Senior Vice President of the Company since July 1991
and is in charge of all manufacturing and purchasing. Effective in January 1996,
Mr. Hamill became Assistant Secretary of the Company. He was Vice President of
Manufacturing of the Company from 1981 to July 1991.
RICHARD M. MAURER has been a director of the Company since 1988. Effective in
January 1996, Mr. Maurer became Secretary of the Company. He has been
Co-Managing Partner of Wesmar Partners, the majority shareholder of the Company,
since 1985. Prior to the formation of Wesmar Partners, Mr. Maurer was associated
with The Hillman Company, a private investment firm, from 1978 to 1985. Mr.
Maurer is a Certified Public Accountant and was associated with Price Waterhouse
prior to joining The Hillman Company.
JAMES E. JONES became the Vice President of Marketing and a director of the
Company on January 1, 2001. Mr. Jones, the founder of Ladies Golf, was President
of that company from 1993 through 2000, and served as President of S2
Acquisition between the merger of Ladies Golf into S2 Acquisition at the end of
December, 2000 and the merger of S2 Acquisition into the Company in May of 2001.
He was Chief Operating Officer of International Sporting Goods, a producer of a
wide range of sporting goods products from 1991 until 1993, and a sales
representative for the Converse Shoe Company from 1986 until 1991.
MARY ANN JORGENSON has been a director of the Company since 1992. She has been a
partner with the law firm of Squire, Sanders & Dempsey L.L.P. since 1984 and has
been associated since 1975 with that firm. She also serves as a director of
Cedar Fair Management
18
Company, the general partner of Cedar Fair, L.P., an owner and operator of
amusement parks, and is a director of Anthony & Sylvan Pools Corporation, an
installer of concrete in-ground swimming pools.
NANCY LOPEZ became a director of the Company on January 1, 2001. She has been a
member of the Tour Division of the Ladies Professional Golf Association since
1977, and was inducted into the LPGA(R) Hall of Fame in 1987. She has 48 career
victories including three major titles. Nancy Lopez was Rookie of the Year in
1978, a four-time LPGA(R) player of the year and a three-time Vare trophy winner
for the lowest scoring average.
FREDERICK B. ZIESENHEIM has been a director of the Company since 1992. He has
been with the law firm of Webb Ziesenheim Logsdon Orkin & Hanson, P.C. since
1988 and is currently Vice Chairman of its Board of Directors. Prior to
combining his practice with that firm, he was President of the law firm of
Buell, Ziesenheim, Beck and Alstadt, P.C., with whom he had been associated
since 1958.
All directors hold office until the next annual meeting of the Company's
shareholders and until their successors have been elected and qualified.
Officers serve at the discretion of the Board of Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Company's directors, executive officers and any person
holding ten percent or more of the Company's Common Stock are required to report
their initial ownership of the Company's Common Stock and any changes in that
ownership to the Securities and Exchange Commission (the "SEC"). Based solely on
a review of copies of the forms furnished to the Company in 2002 and written
representations from the Company's directors and executive officers, the Company
believes that its directors, executive officers and 10% shareholders complied
with all Section 16(a) filing requirements applicable to them in 2002.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to annual and
long-term compensation for services in all capacities paid by the Company for
the years ended December 31, 2002, 2001 and 2000 to or on behalf of Robert L.
Ross, Douglas A. Buffington, Randy A. Hamill and James E. Jones (collectively,
the "Named Executives").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------
OTHER SECURITIES
NAME AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
------------------ ---- ------ ----- ------------ ------- ------------
Robert L. Ross, 2002 $ 0 $ 0 $ 0 0 $ 0
19
Chief Executive Officer 2001 $ 0 $ 0 $ 0 0 $ 0
2000 $ 0 $ 0 $ 0 10,000 $ 0
Douglas A. Buffington, 2002 $175,000 $ 0 $ 19,267(4) 0 $975(8)
President, Chief Financial 2001 $173,073 $ 45,000(1) $ 19,829(4) 20,000(5) $ 975(8)
Officer, Chief Operating 2000 $150,000 $ 35,000(2) $ 19,392(4) 20,000(6) $ 975(8)
Officer, and Treasurer
Randy A. Hamill, 2002 $130,962 $ 0 $ 0 0 $ 0
Senior Vice President 2001 $116,539 $ 31,250(1) $ 0 0 $ 0
Manufacturing and 2000 $100,000 $ 20,000(3) $ 0 5,000(6) $ 0
Resources and Assistant
Secretary
James E. Jones, 2002(9) $ 96,923 $ 0 $ 0 0 $ 0
Vice President 2001(9) $100,000 $ 0 $ 0 0 $ 0
of Marketing
(1) Bonus earned in 2001, paid in 2002.
(2) Bonus earned in 2000, paid in 2001.
(3) Bonus earned in 2000, paid in 2000.
(4) Travel/commuting expenses reimbursed by the Company.
(5) Awarded for 2001 services, granted in 2002.
(6) Awarded for 2000 services, granted in 2000.
(8) The Company paid the $975 annual premium on a $750,000 insurance policy on
the life of Mr. Buffington, which names Mr. Buffington's wife as the sole
beneficiary.
(9) Mr. Jones became an employee on January 1, 2001.
The following table sets for information pertaining to stock options granted to
the Named Executives in 2002
2002 OPTION GRANTS
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE OR
UNDERLYING TO EMPLOYEES BASE PRICE EXPIRATION
NAME OPTIONS GRANTED IN 2002 $/SH DATE
---- --------------- ------- ---- ----
Douglas A. Buffington 20,000 (1) 100.0% $1.18 (2) 1/15/2012
(1) Immediately exercisable.
(2) Upon certain changes in control, exercise price becomes $0.01.
20
The following table sets forth certain information pertaining to stock
options held by the Named Executives as of December 31, 2002. The Named
Executives exercised no options in 2002.
2002 FISCAL YEAR-END OPTION HOLDINGS
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
------------------ ---------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Robert L. Ross 67,500 0 $0 $0
Douglas A. Buffington 105,375 0 $0 $0
Randy A. Hamill 59,842 0 $0 $0
James E. Jones 0 0 $0 $0
(1) Calculated on the basis of the fair market value of the Common Stock of $.58
per share on December 31, 2002, less exercise price.
Compensation of Directors
The Company compensates its non-employee, non-consultant directors (Mary Ann
Jorgenson and Frederick B. Ziesenheim) by granting such persons shares of the
Company's Common Stock having a fair market value of $1,000 for every meeting of
the Board of Directors or committee thereof attended by such person, and shares
of Common Stock having a fair market value of $500 if such person participated
in a meeting by telephone. The number of shares issued is based on the closing
price of the stock on the exchange where traded on the meeting date or the
preceding date on which such shares were traded.
Certain Agreements
The Company entered into a new employment agreement with Douglas A. Buffington
effective January 1, 2001 and terminating on December 31, 2005 unless terminated
sooner as provided in the agreement. Mr. Buffington's base annual salary under
the agreement is $175,000. An incentive cash bonus and stock option program are
incorporated into the agreement. Additional stock options, other than those
provided in the incentive program, may be granted at the discretion of the
Company's Board of Directors. The agreement also provides for certain benefits,
in addition to the standard Company employee fringe benefits, including but not
limited to reimbursement of certain expenses and payment of premiums on a
$750,000 life insurance policy with Mr. Buffington's spouse named as
beneficiary. The agreement also contains "noncompetition" and "invention and
secrecy" clauses.
21
In January 1997, the Company entered into an agreement with Randy A. Hamill
pursuant to which Mr. Hamill was granted an immediately exercisable option to
purchase 40,000 shares of Common Stock at an exercise price of $0.9375 per
share. Upon the occurrence of a change in control of the Company (as defined in
the agreement) the exercise price per share for any unexercised portion of the
option would be the lower of (a) (i) one cent or (ii) the lowest price greater
than one cent per share that would not cause the value to Mr. Hamill of shares
acquired upon exercise to be considered an "excess parachute payment" under
Section 280G of the Internal Revenue Code of 1986, as amended or (b) $0.9375. In
the event that Mr. Hamill should die while employed by the Company and the
Company has received $500,000 as beneficiary of a life insurance policy it
maintains on Mr. Hamill's life, Mr. Hamill's estate will have the right to
require the Company to purchase the option, if unexercised, for $500,000 or,
subject to certain limitations, to purchase up to 39,999 shares received on
exercise of the option for their fair market value at that time.
On December 29, 2000, the Company and S2 Acquisition entered into an employment
agreement with James E. Jones, effective as of January 1, 2001 and terminating
on December 31, 2005 unless terminated sooner as provided in the agreement,
pursuant to which Mr. Jones serves as the Vice President of Marketing of the
Company. Under this agreement, Mr. Jones' annual base salary is $100,000, he may
also receive grants of options to purchase shares of the Company's Common Stock,
and he receives the Company's standard employee fringe benefits. The agreement
also contains "noncompetition" and "invention and secrecy" clauses. Effective
November 1, 2002, Mr. Jones' annual base salary was adjusted to $80,000.
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 26, 2003 by (i) each person
who beneficially owned 5% or more of the outstanding Common Stock, (ii) each
director, (iii) each Named Executive and (iv) all directors and executive
officers as a group calculated in accordance with Rule 13d-3 under the Exchange
Act. Except as otherwise noted, the persons named in the table below have sole
voting and investment power with respect to the shares shown as beneficially
owned by them.
AMOUNT
BENEFICIALLY PERCENT
NAME AND ADDRESS OWNED(1) OF CLASS(1)
L. R. Jeffrey (2) 250,000 7.2%
2552 Harbour Lane
Sanibel, FL 33957
Richard M. Maurer (3) 1,501,096 45.6%
Director and Secretary
Three Gateway Center
Pittsburgh, PA 15222
Robert L. Ross (4) 1,473,596 44.7%
Chairman of the Board
22
and Chief Executive Officer
Three Gateway Center
Pittsburgh, PA 15222
Mary Ann Jorgenson 14,016 *
Director
4900 Key Tower
127 Public Square
Cleveland, OH 44114-1304
Frederick B. Ziesenheim 13,999 *
Director
700 Koppers Building
436 7th Avenue
Pittsburgh, PA 15219-1818
Douglas A. Buffington 107,375 3.2%
President, Chief Financial
Officer, Chief Operating
Officer and Treasurer
18 Gloria Lane
Fairfield, NJ 07004
Randy A. Hamill (5) 74,142 2.3%
Senior Vice President
of Manufacturing and Resources
and Assistant Secretary
18 Gloria Lane
Fairfield, NJ 07004
James E. Jones 775,000 24.0%
Director and Vice President
of Marketing
26238 State Road 54
Lutz, FL 33559
Brian Christopher 225,000 7.0%
26238 State Road 54
Lutz, FL 33559
Wesmar Partners (6) 1,399,096 43.4%
MR & Associates
Maurer, Ross & Co., Incorporated
Three Gateway Center
Pittsburgh, PA 15222
All directors and executive
officers as a group (7 persons)(7) 2,560,128 72.6%
* Less than 1%.
23
(1) The numbers shown include shares covered by options that are currently
exercisable as of March 26, 2003. The numbers and percentages of shares
owned assume that such outstanding options had been exercised as follows: L.
R. Jeffrey, Jr. - 250,000, Richard M. Maurer - 67,500, Robert L. Ross -
67,500, Douglas A. Buffington - 105,375, Randy A. Hamill - 59,892 and all
directors and executive officers as a group - 300,267.
(2) Does not include 730 shares owned by various members of Mr. Jeffrey's family
with respect to which shares he disclaims any beneficial ownership.
(3) Includes 25,300 shares which are held directly by three trusts of which Mr.
Maurer is co-trustee and with respect to which he shares voting and
investment power, 1,399,096 shares owned directly by Wesmar Partners with
respect to which he shares voting and investment power and 67,500 shares
underlying the options held directly by Mr. Maurer. Mr. Maurer is an
officer, director and principal shareholder of Maurer Ross & Co.,
Incorporated, the general partner of MR & Associates, and the managing
general partner of Wesmar Partners.
(4) Includes 1,399,096 shares owned directly by Wesmar Partners and 67,500
shares underlying the options held by Mr. Ross. Mr. Ross is an officer,
director and principal shareholder of Maurer Ross & Co., Incorporated, the
general partner of MR & Associates, the managing general partner of Wesmar
Partners.
(5) Does not include shares owned by various members of Mr. Hamill's family with
respect to which shares Mr. Hamill disclaims any beneficial ownership.
(6) Wesmar Partners is a Delaware limited partnership whose partners are
Landmark Equity Partners III, L.P., a Delaware limited partnership, and MR &
Associates, a Pennsylvania limited partnership. MR & Associates is the
managing partner of Wesmar Partners. Messrs. Maurer and Ross are officers,
directors and principal shareholders of Maurer Ross & Co., Incorporated, a
Pennsylvania corporation and the general partner of MR & Associates.
(7) Does not include shares owned by various members of a certain officer's
family with respect to which shares such officer disclaims any beneficial
ownership. Includes 1,399,096 shares owned directly by Wesmar Partners (see
Notes 3, 4 and 6 above).
24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions With Management and Others
During the fiscal year ended December 31, 2002, MR & Associates provided
consulting services to the Company for $5,000 per month. Messrs. Maurer and
Ross, directors of the Company, are officers, directors and principal
shareholders of Maurer Ross & Co., Incorporated, the general partner of MR &
Associates. MR & Associates is the managing general partner of Wesmar Partners,
a beneficial owner of more than five percent of the Common Stock.
Messrs. Maurer and Ross, as indirect owners of more than five percent of the
Common Stock, had an interest in the Company's acquisition in July of the assets
of NancyLopezGolf(TM), and acquisition in December of 2000, through S2
Acquisition, of Ladies Golf.
Nancy Lopez, a director of the Company as of January 1, 2001, is the President
of Lopez Enterprises, which receives royalty payments and, if certain targets
are met, options to purchase Common Stock as well as bonuses for certain
tournament winnings under the licensing agreement with the Company, into which
the Company entered pursuant to the July 2000 transaction to acquire the assets
of NancyLopezGolf(TM). In 2002, Lopez Enterprises received royalty payments of
$200,000 from the Company.
James E. Jones, a director of the Company as of January 1, 2001, became the
holder of more than five percent of the Company's Common Stock and entered into
an employment agreement with the Company pursuant to the Company's acquisition
of Ladies Golf in December of 2000.
During the fiscal year ended December 31, 2002, the Company retained the law
firm of Squire, Sanders & Dempsey L.L.P. ("Squire, Sanders"), of which Mary Ann
Jorgenson, a director of the Company, is a partner, to represent the Company in
various matters for which the Company paid to Squire, Sanders fees of $16,602
during the year.
During the fiscal year ended December 31, 2002, the Company retained the law
firm of Webb, Ziesenheim, Logsdon, Orkin & Hanson, P,C, ("Webb Ziesenheim"), of
which Frederick B. Ziesenhiem a director of the Company, is Vice Chairman of the
Board of Directors, to represent the Company in various matters for which the
Company paid to Webb Ziesenheim fees of $39,737 during the year.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, the Company's management
conducted an evaluation, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in alerting them in a timely manner to material
information required to be included in the Company's SEC reports. In addition,
the Company's management, including
25
the Chief Executive Officer and Chief Financial Officer, reviewed the Company's
internal controls, and concluded that there have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect those controls subsequent to the date of the Company's last evaluation
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.(1)
AUDIT FEES
Rothstein, Kass and Company, P.C. billed the Company approximately
$51,000 for the independent audit of the Company's annual financial statements
for the year ended December 31, 2002 and for the review of the financial
statements included in the Company's quarterly report and for the quarterly
reports filed for the three months ended September 29, 2002, June 30, 2002 and
March 31, 2002.
TAX FEES
Rothstein, Kass and Company, P.C. billed the Company $6,500 for the
preparation of Federal and State tax returns for the year ended December 31,
2001.
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a) (1) The financial statements listed in the accompanying Index
to Financial Statements and Financial Statement Schedule on
Page F-1 are filed as part of this report.
(2) The financial statement schedule listed in the accompanying
Index to Financial Statements and Financial Statement Schedule
on Page F-1 is filed as part of this report.
(3) The Exhibits listed in the accompanying Exhibit Index are
filed as part of this report.
(b) No reports on Form 8-K were filed for the fourth quarter ended
December 31, 2002.
----------
26
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.
WOMEN'S GOLF UNLIMITED, INC.
Dated: April 3, 2003 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 April 3, 2003
------------------------------- Financial Officer, Chief
Douglas A. Buffington Operating Officer and Treasurer
/s/ Robert L. Ross Chairman of the Board April 3, 2003
------------------------------- and Chief Executive Officer
Robert L. Ross
/s/ Richard M. Maurer Director and Secretary April 3, 2003
-------------------------------
Richard M. Maurer
/s/ James E. Jones Director and Vice President April 3, 2003
-------------------------------
James E. Jones
/s/ Mary Ann Jorgenson Director April 3, 2003
-------------------------------
Mary Ann Jorgenson
/s/ Nancy Lopez Director April 3, 2003
-------------------------------
Nancy Lopez
/s/ Frederick B. Ziesenheim Director April 3, 2003
-------------------------------
Frederick B. Ziesenheim
CERTIFICATION
I, Douglas A Buffington, certify that:
1. I have reviewed this annual report on Form 10-K of Women's Golf
Unlimited, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date");
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: April 3, 2003
/s/Douglas A. Buffington
------------------------
Director, President, Chief Financial Officer, Chief Operating
Officer and Treasurer
CERTIFICATION
I, Robert L. Ross, certify that:
1. I have reviewed this annual report on Form 10-K of Women's Golf
Unlimited, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date");
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: April 3, 2003
/s/Robert L. Ross
-----------------
Chairman of the Board and Chief Executive Officer
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Independent Auditors' Report F-2
Balance Sheets as of December 31, 2002 and 2001 F-3
Statements of Operations for the Years
Ended December 31, 2002, 2001 and 2000 F-4
Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 F-5 - F-6
Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2002, 2001 and 2000 F-7
Notes to Financial Statements F-8 - F-21
Financial Statement Schedule II - Valuation and
Qualifying Accounts and Reserves F-22
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Women's Golf Unlimited, Inc.
We have audited the accompanying balance sheets of Women's Golf Unlimited, Inc.
(the "Company") as of December 31, 2002 and 2001, and the related statements of
operations, cash flows, changes in shareholders' equity and financial statement
schedule for each of the years in the three-year period ended December 31, 2002.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Women's Golf Unlimited, Inc. as
of December 31, 2002 and 2001, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
February 7, 2003, except for Note 13 as to which the date is March 28, 2003
WOMEN'S GOLF UNLIMITED, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
2002 2001
----------- -----------
ASSETS
Current Assets
Cash $ 3,551 $ 7,717
Accounts Receivable - Net 2,318,286 3,092,565
Inventories 3,742,026 4,406,117
Prepaid Expenses 63,522 137,799
Deferred Income Taxes 177,000 173,000
----------- -----------
Total Current Assets 6,304,385 7,817,198
Plant and Equipment - Net 231,898 140,347
Deferred Income Taxes 61,000 30,000
Intangible Asset- Net 2,925,023 56,397
Goodwill - Net 4,896,568
Other Assets - Net 49,745 53,858
----------- -----------
Total Assets $ 9,572,051 $12,994,368
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Long-Term Debt, Current Portion $ 202,413 $ 1,307,243
Obligation under Capital Lease, Current Portion 33,537
Short-Term Borrowings 2,857,920 3,780,465
Accounts Payable 889,150 373,189
Accrued Expenses 244,887 348,310
Other Current Liabilities 19,735
----------- -----------
Total Current Liabilities 4,227,907 5,828,942
Long-Term Liabilities
Long-Term Debt, less Current Portion 202,413
Obligation Under Capital Lease, less Current Portion 62,143
----------- -----------
Total Liabilities 4,290,050 6,031,355
----------- -----------
Commitments
Shareholders' Equity
Common Stock, $.01 Par; 12,000,000 Authorized
Shares: 3,227,215 and 3,225,173 Issued and
Outstanding at December 31, 2002 and 2001,
Respectively 32,272 32,252
Additional Paid-in-Capital 6,354,274 6,350,736
Retained Earnings (Accumulated Deficit) (1,104,545) 580,025
----------- -----------
Total Shareholders' Equity 5,282,001 6,963,013
----------- -----------
Total Liabilities and Shareholders' Equity $ 9,572,051 $12,994,368
=========== ===========
The accompanying notes are an integral
part of these statements.
F-3
WOMEN'S GOLF UNLIMITED, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
Net Sales $ 12,115,124 $ 16,144,947 $ 12,510,314
Cost of Goods Sold 7,580,299 9,369,532 8,251,834
------------ ------------ ------------
Gross Profit 4,534,825 6,775,415 4,258,480
------------ ------------ ------------
Operating Expenses:
Selling 2,263,832 3,495,523 2,093,938
General & Administrative 2,123,531 2,759,711 1,647,827
------------ ------------ ------------
Total Operating Expenses 4,387,363 6,255,234 3,741,765
------------ ------------ ------------
Operating Income 147,462 520,181 516,715
------------ ------------ ------------
Other Income (Expense)
Interest Expense (241,063) (413,111) (233,385)
Other Income (Expense), Net 301,380 269,313 (5,307)
------------ ------------ ------------
60,317 (143,798) (238,692)
------------ ------------ ------------
Income Before Income Taxes 207,779 376,383 278,023
Provision for Income Taxes 85,901 212,092 57,369
------------ ------------ ------------
Income before Cumulative Effect of
Accounting Change 121,878 164,291 220,654
Cumulative Effect of Accounting Change (1,806,448)
------------ ------------ ------------
Net Income (Loss) $ (1,684,570) $ 164,291 $ 220,654
============ ============ ============
Earnings per Common Share from before
Accounting Change Basic $ 0.04 $ 0.05 $ 0.10
============ ============ ============
Diluted $ 0.04 $ 0.05 $ 0.10
============ ============ ============
Loss per Common Share from Cumulative
Effect of Accounting Change - Basic $ (0.56) $ 0.00 $ 0.00
============ ============ ============
Diluted $ (0.56) $ 0.00 $ 0.00
============ ============ ============
Earnings (Loss) per Share - Basic $ (0.52) $ 0.05 $ 0.10
============ ============ ============
Diluted $ (0.52) $ 0.05 $ 0.10
============ ============ ============
Weighted Average Number of Shares Outstanding -
Basic 3,225,945 3,223,850 2,226,312
Diluted 3,241,533 3,266,819 2,264,065
The accompanying notes are an integral
part of these statements.
F-4
WOMEN'S GOLF UNLIMITED, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------- ----------- -----------
OPERATING ACTIVITIES
Net Income (Loss) $(1,684,570) $ 164,291 $ 220,654
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided By
Operating Activities:
Depreciation 87,558 109,032 56,222
Amortization 221,495 380,396 108,003
Deferred Income Taxes (Benefit) (35,000) 63,000 25,600
Goodwill Impairment 1,806,448
Issuance of Stock for Compensation 3,558 3,000 5,000
Bad Debt Expense 214,000 331,121 321,000
Provision for Discounts 267,643 265,242 261,270
Provision for Returns 10,189 41,553 116,410
Provision for Inventory Obsolescence 24,930 28,724 45,558
Changes in Assets and Liabilities:
Accounts Receivable 292,636 (162,713) (110,434)
Inventories 639,160 (388,719) 16,529
Prepaid Expenses 74,277 68,183 (73,004)
Other Assets 4,113 (244) (301)
Accounts Payable 515,961 (563,423) 454,027
Accrued Expenses (99,612) (94,025) 127,485
Other Current Liabilities (19,735) (66,372) (90,241)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,323,051 179,046 1,483,778
----------- ----------- -----------
INVESTING ACTIVITIES
Acquisitions, Net of Cash Acquired (4,486,687)
Purchase of Equipment (98,432) (53,472) (68,273)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (98,432) (53,472) (4,554,960)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from (Repayments of) Short-Term Borrowings, Net (922,545) 319,637 2,285,586
Proceeds from Long-Term Debt 900,000
Repayments of Obligation under Capital Lease (11,284)
Repayments of Long-Term Debt (1,294,956) (447,380) (104,668)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,228,785) (127,743) 3,080,918
----------- ----------- -----------
INCREASE (DECREASE) IN CASH (4,166) (2,169) 9,736
CASH - BEGINNING OF YEAR 7,717 9,886 150
----------- ----------- -----------
CASH - END OF YEAR $ 3,551 $ 7,717 $ 9,886
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash Paid During the Year For:
Interest $ 310,329 $ 342,903 $ 222,719
=========== =========== ===========
Income Taxes $ 218,034 $ 174,368 $ 28,591
=========== =========== ===========
The accompanying notes are an integral
part of these statements.
F-5
WOMEN'S GOLF UNLIMITED, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
SUPPLEMENTAL SCHEDULES OF NON-CASH
INVESTING AND FINANCING ACTIVITES
2002 2001 2000
-------- -------- ----------
Long-Term Debt Incurred in
Connection with Acquisition $ -- $ -- $1,000,000
======== ======== ==========
Common Stock Issued in Connection with Acquisition $ -- $ -- $2,310,000
======== ======== ==========
Equipment Financed Through
Long-Term Debt $ -- $ -- $ 21,730
======== ======== ==========
Capital Lease Obligation Incurred in
Connection with the Acquisition of Equipment $ 92,964 $ -- $ --
======== ======== ==========
Transfer of Fixed Asset in Connection with
Debt Settlement $ 12,288 $ -- $ --
======== ======== ==========
The accompanying notes are an integral
part of these statements.
F-6
WOMEN'S GOLF UNLIMITED, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Common Stock Retained
------------ Additional Earnings Total
Paid-In (Accumulated Shareholders'
Shares Amount Capital Deficit) Equity
------ ------ ------- -------- ------
Balances-- January 1, 2000 2,220,113 $ 22,201 $ 4,042,787 $ 195,080 $ 4,260,068
Issuance of Common Stock 2,926 30 4,970 5,000
Issuance of Common Stock for
Acquisition 1,000,000 10,000 2,300,000 2,310,000
Net Income 2000 220,654 220,654
------------- ------------- ------------ ------------- -------------
Balances-- December 31, 2000 3,223,039 $ 32,231 $ 6,347,757 $ 415,734 $ 6,795,722
------------- ------------- ------------ ------------- -------------
Issuance of Common Stock 2,134 21 2,979 3,000
Net Income 2001 164,291 164,291
------------- ------------- ------------ ------------- -------------
Balances-- December 31, 2001 3,225,173 $ 32,252 $ 6,350,736 $ 580,025 $ 6,963,013
============= ============= ============ ============= =============
Issuance of Common Stock 2,042 20 3,538 3,558
Net Loss 2002 (1,684,570) (1,684,570)
------------- ------------- ------------ -------------- --------------
Balances-- December 31, 2002 3,227,215 $ 32,272 $ 6,354,274 $ (1,104,545) $ 5,282,001
============= ============= ============ ============== =============
The accompanying notes are an integral
part of these statements.
F-7
WOMEN'S GOLF UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Women's Golf Unlimited, 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 shoes, golf balls and accessories. The Company markets these products under
various trade names and uses several additional trademarks.
ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company sells to customers primarily throughout the United States, with a
small amount sold to customers overseas. The Company does not require collateral
on its trade receivables and it believes its trade receivables, net of
allowances, will be collected. The Company anticipates that in the event of
default it would follow normal collection procedures. Overall, management
believes the Company's credit risk related to its trade receivables is limited
due to the broad range of products and the large number of customers in
differing geographic areas.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash, accounts receivable and accounts payable approximate
their carrying values due to the short-term nature of the instruments. The fair
value of short-term borrowings approximates their carrying value due to their
variable interest rate features, which reprise quarterly. The fair value of
long-term borrowings approximate their carrying value due to the interest rate
which is variable based upon the prime rate.
ACCOUNTS RECEIVABLE
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts based on a history
of past write-offs, collections and current credit conditions. Accounts are
written off as un-collectible on a case-by-case basis.
INVENTORIES
Inventories are valued at the lower of cost, determined on the basis of the
first-in, first-out method, or market. Inventories consist of materials, labor
and manufacturing overhead.
F-8
PLANT AND EQUIPMENT
Equipment is stated at cost, less accumulated depreciation. Depreciation is
provided over the estimated useful service life.
The estimated lives used in determining depreciation are:
Software 3 Years
Machinery and Equipment 5 Years
Furniture and Fixtures 7 Years
Leasehold improvements are amortized over the lives of the respective leases or
the service lives of the improvements whichever is shorter.
Maintenance and repairs are charged to operations as incurred.
REVENUE RECOGNITION
The Company recognizes revenue upon the shipment of merchandise in fulfillment
of orders. As of December 31, 2002 and 2001, the Company had an allowance for
doubtful accounts of $256,143 and $237,692, respectively, allowance for
discounts of $40,000, in each year, and an allowance for returns of $78,393 and
$103,393, respectively.
ADVERTISING COSTS
The Company expenses costs of advertising as incurred. Advertising expenses
included in selling expenses for the years ended December 31, 2002, 2001, and
2000 were approximately $567,000, $1,238,000 and $589,000, respectively.
INCOME TAXES
The Company complies with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," which requires an asset and liability
approach to financial recording for income taxes. Deferred income tax assets and
liabilities are computed for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce the deferred tax
assets to the amount expected to be realized.
STOCK-BASED COMPENSATION
The Company follows SFAS No. 123 "Accounting for Stock-Based Compensation." The
provisions of SFAS No. 123 allow companies to either expense the estimated fair
value of stock options or to continue to follow the intrinsic value method set
forth in APB Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25")
but disclose the pro-forma effect on net income (loss) had the fair value of the
options been expensed. The Company has elected to continue to apply APB 25 in
accounting for its stock option incentive plans (See Note 10).
F-9
EARNINGS PER SHARE
The Company complies with SFAS No. 128, "Earnings per Share." SFAS No. 128
revises certain methodologies for computing earnings per share ("EPS") and
requires the dual presentation of basic and diluted earnings per share. Basic
EPS excludes dilution and is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if stock
options or other contracts to issue common stock were exercised and resulted in
the issuance of common stock that then shared in the earnings of the Company.
Diluted EPS is computed using the treasury stock method when the effect of
common stock equivalents would be dilutive. The only reconciling item between
the denominator used to calculate basic EPS and the denominator used to
calculate diluted EPS is the dilutive effect of stock options issued to
employees of the Company and other parties. The Company has issued no other
potentially dilutive common stock equivalents.
2002 2001 2000
--------- --------- ---------
Weighted average common shares
outstanding 3,225,945 3,223,850 2,226,312
Plus: Incremental shares from assumed
conversions of options 15,588 42,969 37,753
--------- --------- ---------
Dilutive weighted average common shares
outstanding 3,241,533 3,266,819 2,264,065
========= ========= =========
Antidilutive options 105,966
========= ========= =========
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically assesses the recoverability of the carrying amounts of
long-lived assets, including intangible assets. A loss is recognized when
expected undiscounted future cash flows are less than the carrying amount of the
asset. The impairment loss is the difference by which the carrying amount of the
asset exceeds its fair value.
RECLASSIFICATIONS
Certain reclassifications to prior years' financial statements were made in
order to conform to the 2002 presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. This accounting standard, which is
effective for fiscal years beginning after May 15, 2002, requires, among other
things, that debt extinguishments used as a part of an entity's risk management
strategy no longer meet the criteria for classification as extraordinary items.
The adoption of SFAS No. 145 is not expected to have a
F-10
material effect on the Company's financial position, results of operations or
cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities which nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). This accounting standard, which is effective for exit or
disposal activities that are initiated after December 31, 2002, addresses
financial accounting and reporting for costs associated with exit or disposal
activities. The adoption of SFAS No. 146 is not expected to have a material
effect on the Company's financial position, results of operations, or cash
flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" which amended SFAS No. 123,
"Accounting for Stock-Based Compensation". This Statement provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. It also amends the disclosure
provisions to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. The provisions of this Statement are to be applied to
financial statements for fiscal years ending after December 15, 2002. As
permitted by the Statement, the Company does not plan to adopt the fair value
recognition provisions of SFAS No. 123 at this time. The Company has adopted the
disclosure provisions of this Statement as of December 31, 2002 (See Note 10).
2. INVENTORIES
Inventories at December 31, 2002 and 2001 consist of the following components:
2002 2001
---- ----
Finished Goods $ 673,565 $ 793,101
Raw Materials 3,068,461 3,613,016
---------- ----------
$3,742,026 $4,406,117
========== ==========
3. PLANT AND EQUIPMENT
Plant and equipment at December 31, 2002 and 2001 were as follows:
2002 2001
---------- ----------
Software $ 92,964 $ --
Machinery and Equipment 1,167,682 1,106,981
Furniture and Fixtures 103,262 103,262
Leasehold Improvements 43,554 43,554
---------- ----------
Total 1,407,463 1,253,797
Less: Accumulated Depreciation and Amortization 1,175,565 1,113,450
---------- ----------
$ 231,898 $ 140,347
========== ==========
Depreciation for the years ended 2002, 2001 and 2000 was $87,558, $109,032 and
$56,222, respectively.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This accounting standard addresses financial accounting and reporting
for goodwill and other intangible assets and requires
F-11
that goodwill amortization be discontinued and replaced with periodic tests of
impairment. A two-step impairment test is used to first identify potential
goodwill impairment and then measure the amount of goodwill impairment loss, if
any. SFAS No. 142 is effective for fiscal years beginning after December 15,
2001, and is required to be applied at the beginning of the fiscal year.
Impairment losses that arise due to the initial application of this standard
will be reported as a cumulative effect of a change in accounting principle. The
first step of the goodwill impairment test, which must be completed within six
months of the effective date of this standard, will identify potential goodwill
impairment. The second step of the goodwill impairment test, which must be
completed prior to the issuance of the annual financial statements, will measure
the amount of goodwill impairment loss, if any. As of the first quarter of 2002,
the Company has completed these steps.
In accordance with SFAS No. 142, goodwill amortization was discontinued as of
January 1, 2002. The Company recorded a goodwill impairment of $1,806,448, or
($.56) per basic and diluted share, related to the Lady Fairway acquisition as a
cumulative effect of change in accounting principle in the first quarter of
2002. In addition, the Company stopped amortizing approximately $1.2 million of
an intangible asset deemed to have an indefinite useful life, primarily related
to the Lady Fairway trademark. The Company estimated the fair value of the
associated sole unit by using a present value of future cash flows model. Based
on the current level of the intangible asset deemed to have an indefinite useful
life, the adoption of SFAS No. 142 will reduce annual amortization expense by
approximately $150,000. Amortization expense related to intangible assets deemed
to have a definite useful life is approximately $214,000 as of December 31,
2002. If the adoption of this statement occurred on January 1, 2001, Net Income
(loss) from continuing operations and Earnings per Share, Basic and Diluted
would have been as follows:
(In thousands except earning per share) 2002 2001 2000
--------- ---- ---------
Income before cumulative effect of change in accounting principle $ 122 $164 $ 221
Add back: trademark amortization 150 1
--------- ---- ---------
Adjusted net income before cumulative effect of change in
accounting principle 122 304 222
Cumulative effect of change in accounting principle (1,806)
--------- ---- ---------
Adjusted net income (loss) $ (1,684) $304 $ 222
========= ==== =========
Basic and Diluted earnings (loss) per share:
Income before cumulative effect of change in accounting principle $ 0.04 $0.05 $ 0.10
Add back: amortization 0.05
--------- ---- ---------
Adjusted net income before cumulative effect of change in
accounting principle 0.04 0.10 0.10
Cumulative effect of change in accounting principle (0.56)
--------- ---- ---------
Adjusted earnings (loss) per share $ (0.52) $0.10 $ 0.10
========= ==== =========
F-12
Intangible assets that are subject to amortization are reviewed for potential
impairment whenever events or circumstances indicate that carrying amounts may
not be recoverable. Assets not subject to amortization are tested for impairment
at least annually.
The following is a summary of intangibles at December 31, 2002 and 2001:
2002 2001
-------- --------
Gross Accumulated Gross Accumulated
Amount Amortization Amount Amortization
Intangible subject to amortizaton:
Licenses $ 2,156,368 $ 519,782 $ 2,156,368 $ 305,543
Patents and Trademarks 223,809 182,282 223,809 167,412
----------------- ----------------- ------------------ -----------------
$ 2,380,177 $ 702,064 $ 2,380,177 $ 472,955
================= ================= ================== =================
Intangibles not subject to amortization:
Trademarks $ 1,246,910
=================
Pursuant to the adoption of SFAS No. 142, $1,850,825 and $1,246,910, was
reclassified from Goodwill to Licenses and Trademarks, respectively.
Amortization expense for 2002 was $229,109; estimated amortization expense for
each of the ensuing years through December 31, 2007 is $214,000.
5. SHORT-TERM BORROWINGS
The Company has a revolving line of credit with PNC Bank, National Association
(the "Bank") allowing a maximum credit limit of $8,000,000, less 50% of the
aggregate face amount of all outstanding letters of credit, subject to various
borrowing bases. The availability of funds under this line of credit varies as
it is based, in part, on a borrowing base of 80% of eligible accounts receivable
and 60% of qualified inventory. Substantially all of the Company's assets are
used as collateral for the credit line. Interest rates are at prime plus
one-quarter percent, paid monthly; the interest rate as of December 31, 2002 and
2001 was 4.50% and 5.00%, respectively. At December 31, 2002 and 2001, unused
funds available to the Company under the line of credit were approximately
$1,118,000 and $679,000, respectively. Outstanding letters of credit as of
December 31, 2002 and 2001 were $45,823 and $0 respectively.
The credit facility contains certain covenants, which, among other items,
require the maintenance of certain financial ratios including tangible net worth
and working capital. Any event of default under the credit facility permits the
lender to cease making additional loans there-under. At December 31, 2002 the
Company was in default of one covenant (See Note 13).
F-13
6. LONG-TERM DEBT AND CAPITAL LEASE
At December 31, 2002 and 2001 long-term debt consists of the following:
2002 2001
---------- ----------
Note payable in monthly installments of $25,000, through August 2003, plus
interest at prime plus one and one-half percent. The interest rate was
5.75% and 6.25% at December
31, 2002 and 2001, respectively $ 200,000 $ 500,000
Promissory note payable to a related party, originally due
on December 31, 2001, paid during 2002. The interest rate
was 5.00% at December 31, 2001 1,000,000
Other 2,413 9,656
---------- ----------
202,413 1,509,566
Less current portion 202,413 1,307,243
---------- ----------
$ $ 202,413
========== ==========
The Company has certain software under a capital lease agreement. Minimum future
lease payments under this capital lease are as follows:
For the Year ended December 31,
2003 $ 40,068
2004 40,068
2005 26,712
----------
Future minimum lease payments 106,848
Less amounts representing interest 11,168
-----------
Present value of minimum lease payments 95,680
Less current maturities 33,537
-----------
$ 62,143
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 2002, 2001 and
2000 consists of the following:
2002 2001 2000
---- ---- ----
Current
Federal $ 93,658 $ 115,496 $ 13,851
State 27,243 33,596 17,918
-------------- -------------- --------------
120,901 149,092 31,769
-------------- -------------- --------------
Deferred
Federal (29,750) 53,550 21,760
State (5,250) 9,450 3,840
--------------- -------------- --------------
(35,000) 63,000 25,600
--------------- -------------- --------------
Total Provision
for Income Taxes $ 85,901 $ 212,092 $ 57,369
============== ============== ==============
F-14
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:
2002 2001 2000
-------- -------- --------
Federal Tax at Statutory Rate $ 70,644 $127,970 $ 94,528
Increase in Taxes
Resulting From:
Permanent Differences 3,245 55,419
State Tax, Net of Federal
Tax Benefit 12,467 28,410 1,806
Reversal of Reserves (15,665)
Other (455) 293 (23,300)
-------- -------- --------
Total Income Tax Provision $ 85,901 $212,092 $ 57,369
======== ======== ========
The tax effects of temporary differences that give rise to significant portions
of the current and non-current deferred tax assets at December 31, 2002 and
December 31, 2001 are as follows:
December 31, December 31,
2002 2001
--------- ---------
Accounts Receivable Allowances $ 144,000 $ 152,000
Accrued Expenses 33,000 14,000
Non-Compete Agreement 7,000
--------- ---------
Current Deferred Income Tax Assets $ 177,000 $ 173,000
========= =========
Amortization $ 77,000 $ 36,000
Other (16,000) (6,000)
--------- ---------
Non Current Deferred Income Tax Assets $ 61,000 $ 30,000
========= =========
8. PURCHASE TRANSACTIONS
During 2000, the Company made the following acquisitions:
On July 31, 2000, the Company acquired from The Arnold Palmer Golf Company (the
"Seller") substantially all of the net assets of its NancyLopezGolf (TM)
division, for a cash purchase price of $4,633,333 (the "Purchase Price"). The
Purchase Price was a function of projected sales volume, with a post-closing
adjustment to be based on (i) changes in the net asset value between April 29,
2000 and the closing date and (ii) realization on accounts receivable in the
first six months after closing. On the closing date the Company paid $3,000,000
of the Purchase Price to the Seller, using the principal amount of a $900,000
term loan extended to the Company by the Bank together with funds available
under the Company's existing revolving line of credit with the Bank. On August
10, the Company, using funds available to it under an amendment to its existing
revolving line of credit with the Bank, deposited $150,000 of the Purchase Price
into escrow pending the final determination of the purchase price adjustment and
paid to the Seller $1,009,405, representing the remaining balance of the
Purchase Price adjusted pursuant to a mutual agreement of the parties in
anticipation of the post-closing purchase price adjustment. At the time of the
purchase, the Company allocated the excess
F-15
cost over the fair value of net assets acquired to goodwill, which amounted to
$2,156,369, and is being amortized on a straight line basis over a period of ten
years. Pursuant to SFAS No. 142 (See Note 4), the Company reclassified from
goodwill to licenses approximately $1,850,000 related to this transaction and is
continuing to amortize this amount.
The acquired assets were comprised of intellectual property, accounts
receivable, inventory of golf equipment and manufacturing and other physical
equipment used by the Seller in the manufacture and sale of golf clubs and other
golf equipment. The Company intends to use all equipment and physical property
acquired to continue manufacturing and distributing the NancyLopezGolf(TM)
equipment line.
On December 29, 2000, Acquisition Corp. acquired from James E. Jones and Brian
Christopher (the "Selling Shareholders") all of the issued and outstanding
shares of Ladies Golf, and on December 31, 2000, Ladies Golf was merged with and
into Acquisition Corp., with Acquisition Corp. as the surviving entity. The
purchase price was comprised of 1,000,000 shares of Common Stock of the Company,
par value $0.01 per share, and a promissory note of the Company in the principal
amount of $1,000,000 with a maturity date of December 31, 2001. Consideration
for the acquisition was a function of projected sales volume, with a potential
post-closing adjustment in the merger consideration shares to be based on (i)
realization on accounts receivable in the first six months after the effective
date of the merger, and (ii) losses on non-current inventory in the first nine
months after the effective date of the merger. On May 25, 2001 Acquisition Corp.
was merged with and into the Company, with the Company as the surviving entity.
At the time of the purchase the Company allocated the excess cost over the fair
value of net assets acquired to goodwill, which amounted to $3,242,854 and is
being amortized on a straight line basis over a period of 25 years. Pursuant to
SFAS No. 142 (See Note 4), the Company recorded a goodwill impairment of
$1,806,448. In addition, the Company stopped amortizing approximately 1.2
million of an intangible asset deemed to have an indefinite useful life.
The acquired assets were comprised of intellectual property, accounts
receivable, inventory of Lady Fairway(TM) golf shoes and golf accessories and
other physical equipment used by Ladies Golf in the design and distribution of
women's golf shoes and golf accessories. The Company intends to use all
equipment and physical property acquired to continue designing and distributing
the Lady Fairway(TM) shoe and accessory lines.
Both acquisitions were accounted for using the purchase method of accounting.
The operations of each company acquired have been included in the Company's
Statement of Operations from the respective dates of acquisitions. The purchase
price was allocated to the assets and liabilities based on their estimated fair
value as of the dates of acquisitions.
9. OPERATING LEASE
The Company currently leases its manufacturing facility and sales and executive
offices located at 18 Gloria Lane, Fairfield, New Jersey 07004, comprising a
total of 28,442 square feet of space. As of December 1, 2001 the Company entered
into a new lease agreement for the Fairfield location for a period of three
years, expiring on November 30, 2004. In December 2001, the Company consolidated
the Lady Fairway(TM) operations into its Fairfield location.
The annual total base rent for 2003 will be $192,489. 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, 2002, 2001 and 2000 was $199,919, $164,697 and $163,977,
respectively.
F-16
As of December 31, 2002, future minimum rental commitments under non-cancelable
operating leases with terms in excess of one year are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
2003 $192,489
2004 175,574
--------
$368,063
========
10. COMMITMENTS
LICENSING AGREEMENTS
Ladies Professional Golf Association
Under the terms of an agreement with the Ladies Professional Golf Association
("LPGA"), the Company is obligated to pay a license and royalty fee based upon
sales volume. Beginning in 1998, the minimum annual license and royalty fee is
$200,000 through December 31, 2003 payable in equal quarterly installments. In
the event that the sum of (A) 5% of the net sales of the licensed products
(other than golf shoes) up to $1,000,000 in any calendar year, (B) 2.5% of the
net sales of the licensed products (other than golf shoes) in excess of
$1,000,000 and less than $5,000,000 in any calendar year, (C) 1% of the net
sales of the licensed products (other than golf shoes) in excess of $5,000,000,
and (D) 1% of the net sales of golf shoes in any calendar year, exceeds the
minimum license fee, the excess shall be paid as a royalty fee. Royalty expense
for years ended December 31, 2002, 2001 and 2000 was $200,000, respectively.
In addition, the Company is obligated to spend a minimum of $100,000 per year on
various advertising programs and to be a "Title Sponsor" of the LPGA Teaching
and Club Professionals Division Team Classic at an annual cost of $35,000
beginning in 1999 and increasing by $2,500 per year through the term of the
agreement.
Kathy Whitworth
In October 1999, the Company entered into an Endorsement Agreement with former
LPGA Tour Golf Professional Kathy Whitworth, effective January 1, 2000 through
December 31, 2005. Under the terms of the agreement, Ms. Whitworth grants the
Company an exclusive license to use her name, likeness, image and personal
identification, singly or in any combination, in connection with the production,
marketing and sale of a "Kathy Whitworth" signature line of women's golf clubs.
In addition, the Company has the right to include Ms. Whitworth in two print and
one television advertisement per year. The Company will pay Ms. Whitworth a base
fee of $36,000 per year in equal quarterly payments. In addition, Ms. Whitworth
will receive a royalty fee of 2% of net sales of "Kathy Whitworth" line of
clubs.
Ms. Whitworth agrees to use only the golf clubs and golf bags of the Company in
any golf event, either professional or social, during the term of the agreement.
Ms. Whitworth will serve as a golf instructor at up to 10 golf clinics per
calendar year. In addition, Ms. Whitworth will represent the Company at 2
Professional Golf Association merchandise shows as their spokesperson each
calendar year. The Company will reimburse Ms. Whitworth for all reasonable and
necessary travel expenses in connection with her performance of the services.
Royalty expense under this agreement for the years ended December 31, 2002, 2001
and 2000 was $ 61,692, $66,695 and $61,484, respectively.
F-17
Nancy Lopez Enterprises, Inc.
In July 2000, the Company entered into a licensing agreement with Nancy Lopez
Enterprises, Inc., as part of the acquisition of NancyLopezGolf(TM), effective
July 31, 2000 through December 31, 2007. Under the terms of the agreement, the
Company must pay the licensor an annual fixed royalty in the amount of $200,000.
The Company is required to pay a royalty based on percentages of sublicense fees
paid to the Company and of gross revenues as specified within the agreement if
the sum of these amounts exceeds the fixed royalty amount of $200,000. In
addition, the Company issues stock options to the licensor if certain revenue
targets are met and, in recognition of the increased value of the golfer
identification resulting in achievements in certain tournaments, the Company
agrees to pay bonuses to the licensor as specified within the agreement.
Royalty expense under this agreement for the years ended December 31, 2002, 2001
and 2000 was $200,000, $200,000 and $83,332, respectively.
EMPLOYMENT AGREEMENTS
The Company entered into a new employment agreement with a key executive officer
effective January 1, 2001 and terminating on December 31, 2005 unless terminated
sooner as provided in the agreement. The base annual salary under the agreement
was $175,000. An incentive cash bonus and stock option program are incorporated
into the agreement. Additional stock options, other than those provided in the
incentive program, may be granted at the discretion of the Company. The
agreement also contains a "non-compete" clause and an "invention and secrecy"
clause.
On December 29, 2000, the Company entered into an employment agreement with a
key executive officer effective as of January 1, 2001 and terminating on
December 31, 2005 unless terminated sooner as provided in the agreement. Under
this agreement, the key executive officer's annual base salary is $100,000 and
he may also receive grants of options to purchase shares of the Company's Common
Stock. The agreement also contains "non-compete" and "invention and secrecy"
clauses.
OTHER LIABILITIES
In connection with a Separation Agreement, the Company granted its former
President stock options for 250,000 shares of the Company's common stock
("Common Stock") at an exercise price of $4.48 per share, which was the average
of the closing bid and asked prices of the Company's Common Stock on the last
trading date immediately preceding the effective date of the grant. Subject to
certain limitations, the options were exercisable immediately and will remain
exercisable until April 16, 2006. If, and to the extent that, any amount is
realized in excess of the exercise price upon the sale of any Common Stock
obtained upon exercise of all or any part of the options, then 65 percent of
such excess amount, subject to certain limitations, is to be paid to the Company
in immediately available funds concurrent with the realization event.
F-18
11. STOCK OPTIONS AND GRANTS OF STOCK
Options have been granted to current and former officers, employees and
directors of the Company at the discretion of the Company's Board of Directors.
Options have also been granted in connection with endorsement agreements. The
table below summarizes all outstanding stock options.
Weighted
Average
Number of Range of Exercise
Shares Exercise Price Price
------------- ----------------------------- -------------
Outstanding at January 1, 2000 596,545 $ 0.938 - $ 5.00 $ 3.295
Granted 76,307 0.750 - 2.563 1.479
Cancelled (10,000) (4.375) (4.375)
------------- ----------------------------- -------------
Outstanding at December 31, 2000 662,852 0.750 - 5.00 3.070
Granted 4,687 1.250 - 1.650 1.432
------------- ----------------------------- -------------
Outstanding at December 31, 2001 667,539 0.750 - 5.000 3.058
Granted 26,763 0.580 - 1.210 1.122
------------- ----------------------------- -------------
Outstanding at December 31, 2002 694,302 $ 0.580 - $ 5.000 $ 2.984
============= ============================= =============
The Company applies the intrinsic value method in accounting for its stock
plans. Accordingly, no compensation cost has been recognized for stock option
grants issued to employees under any of the Company's stock option plans. If
compensation cost for stock option grants issued during 2002, 2001 and 2000 had
been determined under the provisions of SFAS No. 123, the Company's net income
and income per share would have been reduced due to the pro-forma amounts
indicated below:
2002 2001 2000
Net Income (Loss), as Reported $(1,684,570) $ 164,291 $ 220,654
Deduct: Total stock based compensation expense
determined under the fair value method for all
awards, net of related tax effect (4,648) (2,687) (43,466)
----------- ----------- -----------
Net Income (Loss), Proforma $(1,689,218) $ 161,604 $ 177,188
=========== =========== ===========
Basic and Diluted Earnings (Loss) Per Share, As Reported $ (0.52) $ 0.05 $ 0.10
=========== =========== ===========
Basic and Diluted Earnings (Loss) Per Share, Proforma $ (0.52) $ 0.05 $ 0.10
=========== =========== ===========
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 2002, 2001 and 2000:
F-19
2002 2001 2000
---- ---- ----
Annualized Volatility 62% 66% 53%
Risk-Free Interest Rate 4.0% 4.5% 5%
Expected Term of Option (in years) 3.5 3.5 3.5
Dividend Yield N/A N/A N/A
The weighted average fair values per share of stock options granted during 2002,
2001 and 2000 were $.50 $.67, and $.60, respectively.
Number of Shares Weighted
Outstanding and Average
Exercise Contractual
Exercise Price Range December 31, 2002 Price
-------------------- ----------------- -----
$0.58 to $2.00 280,664 $1.43
$2.01 to $5.00 413,638 4.04
------- -----
Total 694,302 $2.98
======= =====
The Company has generally granted options that do not expire.
GRANTS OF STOCK TO DIRECTORS
The Company compensates its non-employee directors by granting such persons
shares of Common Stock having a value of $1,000 for every meeting of the Board
of Directors or committee thereof attended by such person, and shares of Common
Stock having a value of $500 if such person participated in a meeting by
telephone. The number of shares issued is based on the closing price of the
stock on the exchange where traded on the meeting date or the preceding date on
which such shares were traded. The value of the shares issued is charged to
operations as incurred.
12. RELATED PARTY TRANSACTIONS
During the fiscal years ended December 31, 2002, 2001 and 2000, MR & Associates
provided the Company with consulting services for $5,000 per month. Messrs.
Maurer and Ross, directors of the Company, are officers, directors, and
principal shareholders of Maurer Ross & Co., Incorporated, the general partner
of MR & Associates. MR & Associates is the managing general partner of Wesmar
Partners, a beneficial owner of more than five percent of the Common Stock.
During the fiscal years ended December 31, 2002, 2001 and 2000, the Company
retained the law firm of Webb Ziesenheim Logsdon Orkin & Hanson, P.C., of which
Frederick B. Ziesenheim, a director of the Company, is Vice Chairman of the
Board of Directors, to represent the Company on various intellectual property
matters. The Company had paid fees to Webb Ziesenheim Logsdon Orkin & Hanson,
P.C. of $39,737, $48,222 and $20,520, in 2002, 2001 and 2000, respectively.
During the fiscal years ended December 31, 2002, 2001 and 2000, the Company
retained the law firm of Squire, Sanders & Dempsey L.L.P., of which Mary Ann
Jorgenson, a director of the Company, is a partner, to represent the Company on
various matters. The Company had paid Squire, Sanders & Dempsey L.L.P. $15,602,
$49,615 and $125,200 in 2002, 2001 and 2000, respectively.
F-20
13. SUBSEQUENT EVENT
On March 28, 2003 the Company obtained a waiver from its lender in connection
with failing a certain loan covenant.
14. QUARTERLY SELECTED DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
2002
Net Sales $ 3,622,795 $ 3,914,338 $ 2,387,272 $ 2,190,719
Gross Profit 1,457,217 1,697,226 808,523 571,859
Net Income (Loss) (1,675,648) 332,365 (164,920) (176,367)
Income per common
and common equivalent share
Basic (0.52) .10 (0.05) (0.05)
Dilutive (0.52) .10 (0.05) (0.05)
2001
Net Sales $ 4,521,595 $ 5,402,339 $ 3,484,474 $ 2,736,539
Gross Profit 1,871,704 2,347,175 1,449,367 1,107,169
Net Income (Loss) 173,928 36,248 60,681 (106,566)
Income per common
and common equivalent share
Basic .05 .01 .02 (0.03)
Dilutive .05 .01 .02 (0.03)
2000
Net Sales $ 2,864,570 $ 3,927,376 $ 3,091,279 $ 2,627,089
Gross Profit 950,843 1,454,317 1,035,529 817,791
Net Income (Loss) 114,037 288,705 60,013 (242,101)
Income per common
and common equivalent share
Basic .05 .13 .03 (0.11)
Dilutive .05 .13 .03 (0.11)
F-21
WOMEN'S GOLF UNLIMITED, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
---------- ---------- -------- ---------- -------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
December 31, 2000 $215,000 $321,000 -- $215,064(1) $320,936
December 31, 2001 320,936 331,121 -- 414,365(1) 237,692
December 31, 2002 237,692 214,000 195,549 256,143
ALLOWANCE FOR RETURNS
December 31, 2000 83,000 116,410 -- 106,410 93,000
December 31, 2001 93,000 41,553 -- 31,160 103,393
December 31, 2002 103,393 10,189 35,189 78,393
ALLOWANCE FOR DISCOUNTS
December 31, 2000 40,000 261,270 -- 261,270 40,000
December 31, 2001 40,000 265,242 -- 265,242 40,000
December 31, 2002 40,000 267,643 267,643 40,000
(1) Uncollectible Accounts Written Off, Net of Recoveries.
F-22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT*
3.1 Amended and Second Restated Certificate of Incorporation of the
registrant dated June 28, 1991 (incorporated by reference to Exhibit
3.1 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1991).
3.2 Certificate of Amendment to the Amended and Second Restated
Certificate of Incorporation of the registrant (incorporated by
reference to Exhibit 99.0 to the registrant's current report on Form
8-K reporting the event dated June 12, 2001).
3.3 Amended and Restated By-laws of the registrant dated December 6,
1991 (incorporated by reference to Exhibit 3.2 of the registrant's
Annual Report on Form 10-K for the year ended December 31, 1991).
4.1 Common Stock Purchase Warrant in favor of Wesmar Partners dated
February 28, 1988 (incorporated by reference to Exhibit 4.4 of the
registrant's Registration Statement No. 33-37371 on Form S-3).
4.2 Common Stock Purchase Warrant in favor of Wesmar Partners dated
February 28, 1988 (incorporated by reference to Exhibit 4.5 of the
registrant's Registration Statement No. 33-37371 on Form S-3).
4.3 Stock Option Agreement between the registrant and Wesmar Partners
dated February 29, 1988 (incorporated by reference to Exhibit 4.6 of
the registrant's Registration Statement No. 33-37371 on Form S-3).
10.0 Loan and Security Agreement between the registrant and Midlantic
Bank, National Association dated December 29, 1994 (incorporated by
reference to Exhibit 99 of the registrant's Current Report on Form
8-K dated December 26, 1994).
10.1 First Amendment to Loan and Security Agreement between the
registrant and Midlantic Bank, National Association made as of April
9, 1996 (incorporated by reference to Exhibit 10.1 of the
registrant's Annual Report on Form 10-K for the year ended December
31, 2000).
10.2 Second Amendment to Loan and Security Agreement between registrant
and PNC Bank, National Association as successor in interest of
Midlantic Bank, National Association made as of December 1, 1997
(incorporated by reference to Exhibit 10.12 of the registrant's
Annual Report on Form 10-K for the year ended December 31, 1997).
10.3 Fourth Amendment to Loan and Security Agreement between the
registrant and PNC Bank, National Association dated as of July 3l,
2000 (incorporated by reference to Exhibit 10.14 to the registrant's
Registration Statement No. 333-47908 on Form S-4).
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT*
10.4 Fifth Amendment to Loan and Security Agreement between the
registrant and PNC Bank, National Association made of January 3,
2001 (incorporated by reference to Exhibit 10.4 of the registrant's
Annual Report on Form 10-K for the year ended December 31, 2000).
10.5 Sixth Amendment to Loan and Security Agreement between the
registrant and PNC Bank, National Association made as of August 13,
2001 (incorporated by reference to Exhibit 10.20 of the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 28,
2001).
10.6 Replacement Promissory Note of the registrant in favor of James E.
Jones dated December 29, 2000 and letter agreement in connection
with same (incorporated by reference to Exhibit 10.6 of the
registrant's Annual Report on Form 10-K for the year ended December
31, 2001).
10.7 Lease between the registrant and Kobrun Investments, III, L.L.C.
dated August 30, 2001 (incorporated by reference to Exhibit 10.7 of
the registrant's Annual Report on Form 10-K for the year ended
December 31, 2001).
10.8 Amended and Restated Licensing Agreement between Ladies Professional
Golf Association and the registrant dated January 1, 1999
(incorporated by reference to Exhibit 10.2 of the registrant's
Annual Report on Form 10-K for the year ended December 31, 1999).
10.9 Endorsement Agreement between the registrant and Kathy Whitworth
dated October 13, 1999 (incorporated by reference to Exhibit 10.13
to the registrant's Annual Report on Form 10-K for the year ended
December 31, 1999).
10.10 Licensing Agreement between Nancy Lopez Enterprises, Inc. and the
registrant made as of July 31, 2000 (incorporated by reference to
Exhibit 10.10 of the registrant's Annual Report on Form 10-K for the
year ended December 31, 2000).
10.11 License Agreement between the registrant and Raymond Lanctot
Ltee/Ltd. dated June 28, 1999 (incorporated by reference to Exhibit
10.12 to the registrant's Annual Report on Form 10-K for the year
ended December 31, 1999).
10.12 Asset Purchase Agreement among the registrant, APGC Holdings
Company, LLC and The Arnold Palmer Golf Company dated July 31, 2000
(incorporated by reference to Exhibit 2.0 to the registrant's
Current Report on Form 8-K reporting the event dated July 31, 2000).
10.13 Agreement and Plan of Reorganization, dated as of June 22, 2000,
among the registrant, S2 Golf Acquisition Corp., Ladies Golf
Equipment Company, Inc., James E. Jones and Brian Christopher
(incorporated by reference to Exhibit 2.0 of the registrant's
Registration Statement No. 333-47908 on Form S-4).
10.14 1992 Stock Plan for Independent Directors of S2 Golf Inc. dated
December 29, 1992 (incorporated by reference to Exhibit 10.11 to the
registrant's Annual Report on Form 10-K for the year ended December
31, 1992).
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT*
10.15** 1998 Employee Stock Plan of the registrant (incorporated by
reference to Exhibit 10.15 to the registrant's Annual Report on Form
10-K for the year ended December 31, 2000).
10.16** Agreement between the registrant and Randy A. Hamill dated January
2, 1997 (incorporated by reference to Exhibit 10.10 to the
registrant's Annual Report on Form 10-K for the year ended December
31, 1997).
10.17** Employment Agreement between the registrant and Douglas A.
Buffington, made April 3, 2001 and effective as of January 1, 2001
(incorporated by reference to Exhibit 10.17 of the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 30, 2001).
10.18** Consulting Services Agreement between the registrant and MR &
Associates made as of December 15, 2000, effective as of January 1,
2000 (incorporated by reference to Exhibit 10.18 of the registrant's
Annual Report on Form 10-K for the year ended December 31, 2000).
10.19** Employment Agreement among the registrant, S2 Golf Acquisition Corp.
and James E. Jones dated as of January 1, 2001 (incorporated by
reference to Exhibit 10.19 of the registrant's Annual Report on Form
10-K for the year December 31, 2000).
10.20 Agreement and Plan of Merger between the registrant and its
wholly-owned subsidiary S2 Golf Acquisition Corp. dated as of June
15, 2001 (incorporated by reference to Exhibit 10.20 of the
registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001).
10.21 Sixth Amendment to Loan and Security Agreement between the
registrant and PNC Bank, National Association made as of August 13,
2001 (incorporated by reference to Exhibit 10.21 of the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 28,
2001)
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350.
* 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.