<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____
Commission File Number: 0-14146
S2 GOLF INC.
------------
(Exact Name of Registrant as Specified in its Charter)
New Jersey 22-2388568
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 Gloria Lane, Fairfield, NJ 07004
------------------------------ -----
(Address of Principal Executive Office) (Zip Code)
(201) 227-7783
--------------
(Registrant's telephone number, including area code)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
On July 16, 1996, 2,208,311 shares of common stock, $.01 par value, were issued
and outstanding
<PAGE>
INDEX
- -----
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
--------------------
Balance Sheets - June 30, 1996 and December
31, 1995 2
Statements of Operations - Six Months Ended
June 30, 1996 and June 30, 1995 3
Statements of Operations - Three Months Ended
June 30, 1996 and June 30, 1995 4
Statements of Cash Flow - Six Months Ended
June 30, 1996 and June 30, 1995 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations 7
-----------------------------------
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 9
---------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K 9
---------------------------------
Signatures 12
<PAGE>
PART I
Item 1. Financial Statements
S2 Golf Inc.
Balance Sheets
<TABLE>
<CAPTION>
30-Jun December 31,
1996 1995
---- ----
(Unaudited)
-----------
<S> <C> <C>
ASSETS
Current Assets
Cash $62,166 $18,995
Accounts Receivable (Net of Allowance
for Doubtful Accounts of $214,000 in 1996
and $284,375 in 1995) 3,045,490 2,089,631
Inventory 2,223,904 1,695,246
Prepaid Expenses 80,420 139,968
Prepaid Income Taxes 10,000 10,000
Deferred Income Taxes 315,669 257,003
---------- ----------
Total Current Assets 5,737,649 4,210,843
Plant and Equipment - Net 129,113 148,365
Non-Current Deferred Income Taxes 66,023 54,079
Investment - Squaretwo Golf New Zealand, Ltd. 11,129 11,129
Other Assets - Net 248,053 301,937
---------- ----------
Total Assets $6,191,967 $4,726,353
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short Term Borrowings $2,185,047 $1,445,021
Accounts Payable to Related Parties 1,839 14,209
Accounts Payable Other 682,231 158,024
Accrued Expenses 365,936 217,107
Other Current Liabilities 57,534 55,570
---------- ----------
Total Current Liabilities 3,292,587 1,889,931
Non-Current Liabilities 285,937 315,206
---------- ----------
Total Liabilities 3,578,524 2,205,137
Shareholders' Equity
Common Stock, $.01 Par; 12,000,000 Shares
Authorized; 2,208,311 Shares Issued and
Outstanding at June 30, 1996, 2,208,311
Shares Issued and Outstanding December
31, 1995 22,083 22,083
Additional Paid in Capital 4,025,475 4,025,475
Accumulated Deficit (1,434,115) (1,526,342)
---------- ----------
Total Shareholders' Equity 2,613,443 2,521,216
---------- ----------
Total Liabilities and Shareholders'
Equity $6,191,967 $4,726,353
========== ==========
</TABLE>
See notes to financial statements
-2-
<PAGE>
S2 GOLF INC.
Statement of Operations
For the Six Months Ended
Unaudited
<TABLE>
<CAPTION>
30-Jun-96 30-Jun-95
--------- ---------
<S> <C> <C>
Net Sales $4,995,640 $4,495,617
Cost of Goods Sold 3,352,394 3,031,803
---------- ----------
Gross Profit on Sales 1,643,246 1,463,814
---------- ----------
Operating Expenses:
Selling 757,375 470,223
General & Administrative: 623,957 730,344
---------- ----------
Total Operating Expenses 1,381,332 1,200,567
---------- ----------
Operating Income 261,914 263,247
---------- ----------
Other (Expense)
Interest (124,702) (133,039)
Other (34,547) (16,656)
---------- ----------
Other Expense (159,249) (149,695)
---------- ----------
Income Before Income Taxes 102,665 113,552
Income Taxes 10,438 10,928
---------- ----------
Net Income $92,227 $102,624
========== ==========
Earnings Per Common Share $0.04 $0.05
========== ==========
Weighted Average Number of Shares Outstanding 2,208,311 2,203,927
</TABLE>
See notes to financial statements
-3-
<PAGE>
S2 GOLF INC.
Statement of Operations
For the Three Months Ended
Unaudited
<TABLE>
<CAPTION>
30-Jun-96 30-Jun-95
---------- ----------
<S> <C> <C>
Net Sales $2,931,594 $2,672,562
Cost of Goods Sold 1,931,582 1,737,827
---------- ----------
Gross Profit on Sales 1,000,012 934,735
---------- ----------
Operating Expenses:
Selling 370,176 209,282
General & Administrative 312,646 369,918
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Total Operating Expenses 682,822 579,200
---------- ----------
Operating Income 317,190 355,535
---------- ----------
Other Expense
Interest (72,753) (75,069)
Other (18,547) (13,397)
---------- ----------
Other Expense (91,300) (88,466)
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Income Before Income Taxes 225,890 267,069
Income Taxes 58,480 71,747
---------- ----------
Net Income $167,410 $195,322
========== ==========
Earnings Per Common Share $0.08 $0.09
========== ==========
Weighted Average Number of Shares Outstanding 2,208,311 2,203,927
</TABLE>
See notes to financial statements
-4-
<PAGE>
S2 GOLF INC.
Statements of Cash Flows
For The Six Months Ended
Unaudited
<TABLE>
<CAPTION>
30-Jun-96 30-Jun-95
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
- --------------------
Net Income $92,227 $102,624
Adjustments to Reconcile Net Income to Net Cash Provided
By Operating Activities:
Depreciation and Amortization 26,868 58,897
Deferred Income Taxes (70,610) (59,325)
Issuance of Stock for Compensation - 21,969
Cash Flow Provided (Used) by Operating Activities as a
Result of Changes in:
Accounts Receivable (955,859) (632,202)
Inventory (528,658) (57,026)
Prepaid Expenses 59,548 (54,149)
Other Assets 53,884 21,250
Accounts Payable, Payable Accrued Expenses and
Related Parties 660,666 (83,063)
Other Current Liabilities 1,964 50,252
Other - Net (29,269) (20,943)
---------- ----------
NET CASH (USED) BY OPERATIONS (689,239) (651,716)
---------- ----------
INVESTING ACTIVITIES
- --------------------
Purchase of Equipment (7,616) (55,899)
Investment in Square Two Golf New Zealand, Ltd. - (726)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (7,616) (56,625)
FINANCING ACTIVITIES
- --------------------
Proceeds from Line of Credit 4,886,734 2,861,461
Payments on Line of Credit (4,146,708) (2,240,082)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 740,026 621,379
INCREASE (DECREASE) IN CASH 43,171 (86,962)
CASH - BEGINNING OF PERIOD 18,995 241,812
---------- ----------
CASH - END OF PERIOD $62,166 $154,850
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Year For:
Income Taxes - -
Interest 102,607 112,151
Income Taxes (Net of Refund) - 20,000
</TABLE>
See notes to financial statements
-5-
<PAGE>
S2 GOLF, INC.
Notes to Financial Statements
Summary of Significant Accounting Policies
In the opinion of management, the financial information in this report reflects
all adjustments necessary for a fair presentation of the results for the interim
periods consisting of normal recurring entries. No dividends have been declared
or paid on common stock during 1996. Per share data was determined by using the
weighted average number of shares of common stock outstanding during the period.
Accounting for Income Taxes
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes", effective January 1, 1993. This Statement
supersedes APB No. 11, "Accounting for Income Taxes".
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
and tax credit carryforwards. The tax effects of significant items comprising
the Company's net deferred tax assets are as follows:
June 30, 1996 December 31, 1995
------------- -----------------
Allowance for Doubtful Accounts $117,526 $129,671
Legal Settlement 191 191
Accrued Expenses 133,043 80,193
Other, Net 64,909 46,948
-------- --------
Current Deferred Income Tax $315,669 $257,003
-------- --------
Net Operating Loss $296,511 $296,511
Non-Compete Agreement (9,073) (720)
Valuation Allowance (296,511) (296,511)
Other, Net 75,096 54,799
-------- --------
Non Current Deferred Income Tax $66,023 $54,079
-------- --------
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<PAGE>
Tax Provision for the three and six months ended June 30, 1996:
Three Month Six Month
----------- ---------
Federal Provision $73,099 $35,883
State Provision 21,264 10,438
Utilization of NOL (35,883) (35,883)
Income Tax Provision $58,480 $10,438
The tax expense for the six months ended June 30, 1996 was $46,321, of which
$116,930 and $70,610 is current expense and deferred tax benefit, respectively.
Reclassifications
Certain reclassifications have been made to the prior year financial statements
in order to conform to current year presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- -------------
Results of Operations
- ---------------------
Net sales for the three- and six-month periods ended June 30, 1996 increased
$500,023 and $259,032, respectively, to $4,995,640 and $2,931,596 as compared to
$4,495,617 and $2,672,562 for the same period in 1995. This increase in sales is
primarily due to more competitive pricing, broader selection of the Company's
women's line of golf clubs and increased sales coverage.
Gross profit as a percent of net sales was 33% for each of the six-month periods
ended June 30, 1996 and June 30, 1995.
Selling expenses for the three- and six-month periods ended June 30, 1996
increased $160,894 and $287,152, respectively, as compared to the same periods
in 1995. These increases were due in part to higher sales force salaries,
commissions and advertising expenses. The Company has increased its field sales
force significantly while also adding a Vice President of Sales. The Company
increased its advertising by $73,642 for the first six months of 1996 as
compared to the same period in 1995.
General and Administrative expenses decreased $57,272 and $106,387, for the
three- and six-month periods ended June 30, 1996, respectively, as compared to
the same periods in 1995. This decrease is due in part to lower office salaries,
rent expense and travel expense.
-7-
<PAGE>
Interest expense for the three- and six-month periods ended June 30, 1996
decreased $8,337 and $2,316, respectively, as compared to the same periods in
1995. The Company's borrowings over the first half of 1996 were lower than its
borrowings during the same period in 1995.
The Company's income before taxes for the three- and six-month periods ended
June 30, 1996 were $102,665 and $225,890, respectivley, as compared to income
before taxes of $113,552 and $267,069, respectively, for the same periods in
1995. This decrease was primarily due to increased sales and marketing expenses
incurred as a result of an increase in the sales force and the addition of a
Vice President of Sales.
Income taxes for the three- and six-month periods ended June 30, 1996 were
$10,438 and $54,480, respectively, as compared to $10,928 and $71,747,
respectively, for the same periods of 1995. At June 30, 1996, the Company
utilized net loss carryforwards in the amount of its federal income tax
provision of $35,883.
Financial Condition and Liquidity
- ---------------------------------
The Company's working capital at June 30, 1996 increased $124,150 or 5% from
December 31, 1995. The Company's current assets increased $1,526,806 from
December 31, 1995, consisting primarily of an increase in accounts receivable of
$955,859. This increase in accounts receivable is the result of higher sales
during the six months ended June 30, 1996 as compared to the six month period
ended December 31, 1995.
Inventory at June 30, 1996 increased $528,658 from December 31, 1995 due to the
cyclical demand of the market place. However, inventory levels at June 30, 1996
were $234,737 lower than at June 30, 1995 due to improved inventory management.
The increase in current liabilities of $1,402,656 reflects an increase in short
term borrowings of $740,026 caused by higher accounts receivable levels at June
30, 1996 than at December 31, 1995, as well as increases in other outstanding
current liabilities.
On December 29, 1994, the Company secured a new credit line with Midlantic Bank
NA. The Company used proceeds of this line to retire the Integra Bank
obligation. The credit line has a credit limit of $4,000,000, subject to a
borrowing base of 75% of eligible accounts receivable, and depending on the time
of year, 40 to 50% of qualified inventory. The credit facility expires December
31, 1997.
At June 30, 1996, the Company had $405,189 available under its line of credit
and $137,783 in letters of credit written but not drawn.
-8-
<PAGE>
PART II
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Company's Annual Meeting of Shareholders held on June 4, 1996 the
shareholder's voted upon and elected directors.
Elections of Directors:
Votes For Votes Withheld
--------- --------------
Douglas A. Buffington 1,197,208 23,071
Richard M. Maurer 1,975,859 24,420
Robert L. Ross 1,976,065 24,214
Mary Ann Jorgenson 1,977,608 22,671
Frederick B. Ziesenheim 1,977,608 22,671
Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
(a) Exhibits
--------
Exhibit
Number Description of Exhibit
- ------- ----------------------
3.1 Amended and restated Certificate of Incorporation of the Company
dated June 28, 1991 (incorporated by reference to Exhibit 3.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1991).
3.2 Amended and restated By-laws of the Registrant dated December 6,
1991 (incorporated by reference to Exhibit 3.2 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1991).
4.1 Common Stock Purchase Warrant in favor of Wesmar Partners dated
February 28, 1988 (incorporated by reference to Exhibit 4.4 of
the Registrant's Registration Statement No. 33-37371 on Form S-3).
4.2 Common Stock Purchase Warrant in favor of Wesmar Partners dated
February 28, 1988 (incorporated by reference to Exhibit 4.5 of the
Registrant's Registration Statement No. 33-37371 on Form S-3).
4.3 Stock Option Agreement between the Registrant and Wesmar Partners
dated February 29, 1988 (incorporated by reference to Exhibit
4.6 of the Registrant's Registration Statement No. 33-37371 on
Form S-3).
-9-
<PAGE>
4.4 Credit Agreement and Security Agreement between the Registrant and
Midlantic Bank, National Association dated December 29, 1994
(incorporated by reference to Exhibit 99 of the Registrant's
Current Report on Form 8-K dated December 26, 1994).
4.5 United States Patent No. 4,203,598 issued the Registrant
(incorporated by reference to Exhibit 10.3 of the Registrant's
Registration Statement No. 33-16931 on Form S-1).
10.0 Agreement between the LPGA Tournament Players Corporation and the
Registrant dated July 31, 1991 (incorporated by reference to
Exhibit 4.11 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1991).
10.1 Lease Agreement between the Registrant and 12 Gloria Lane Limited
Partnership dated June 22, 1989 (incorporated by reference to
Exhibit 10.6 of the Registrant's Registration Statement No. 33-
37371 on Form S3).
10.2 Modification of Lease Agreement between the Registrant and 12
Gloria Lane Industrial Partnership dated October 3, 1995
(incorporated by reference to Exhibit 10.2 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995).
10.3 1984 Incentive Stock Option Plan of the Registrant dated February
10, 1984 (incorporated by reference to Exhibit 10.7 to the
Registrant's Registration Statement No. 33-16931 on Form S-1).
10.4 Employment Agreement between the Registrant and Randy A. Hamill
dated July 1, 1991 (incorporated by reference to Exhibit 10.9 of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991).
10.5 Consulting Agreement between the Registrant and MR & Associates
dated January 1992 (incorporated by reference to Exhibit 10.10 of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992).
10.6 Amendment of Consulting Services Agreement between the Registrant
and MR and Associates effective as of February 1, 1996.
-10-
<PAGE>
10.7 1992 Stock Plan for Independent Directors of S2 Golf, Inc. dated
December 28 1992 (incorporated by reference to Exhibit 10.11 of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1992).
10.8 Agreement between the Vardon Golf Company and the Registrant dated
October 4, 1993 (incorporated by reference to Exhibit 10.9 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 24, 1993).
10.9 Employment Agreement between the Registrant and Douglas A.
Buffington dated January 1, 1995 (incorporated by reference to
Exhibit 10.10 of the Registrant's Annual Report on form 10-K for
the year ended December 31, 1994).
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
None
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
S2 GOLF INC.
August 8, 1995 /s/ Douglas A. Buffington
- -------------- -------------------------
Dated: By:
Douglas A. Buffington
President and Chief
Financial Officer
-12-
<PAGE>
Exhibit 10.6
AMENDMENT OF
CONSULTING SERVICES AGREEMENT
This AMENDMENT (this "Amendment") is made effective as of the 1st day of
February 1996 by and between MR & Associates, a Pennsylvania limited partnership
("M&R"), and S2 Golf Inc., a New Jersey corporation ("S2").
WHEREAS, S2 is engaged in the business of manufacturing and selling men's
and women's golf clubs through a nationwide dealer network; and
WHEREAS, in connection with such business, S2 retained M&R to provide
administrative and financial consulting assistance as provided in that certain
Consulting Services Agreement dated January 1, 1992 (the "Agreement"); and
WHEREAS, M&R, as provided in subparagraph 1(a) of the Agreement, accepted
the engagement to provide Consulting Assistance "...subject to the prevailing
conditions affecting S2's business"; and
WHEREAS, S2 and M&R each recognize the difficult cash flow conditions
affecting S2's business and accordingly desire to amend the Agreement upon the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein and other good and valuable consideration, and intending to be
legally bound hereby, M&R and jS2 agree as follows:
1. Amendment. For the period of time extending from February 1, 1996
---------
until December 31, 1996, M&R hereby waives its right to receive the compensation
specified in subparagraph 1(b) of the Agreement.
1
<PAGE>
2. Original Agreement.
------------------
(a) All other provisions of the Agreement shall remain in full force
and effect.
(b) The defined terms used herein shall have the same meaning as in the
Agreement unless otherwise specifically defined herein.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the
Parties have executed this Agreement as of the date first above written.
MR & ASSOCIATES
By: Maurer Ross & Co., Incorporated,
a Pennsylvania corporation,
its sole general partner
By: /s/ Richard M. Maurer
---------------------------------
Richard M. Maurer, President
S2 GOLF INC.
By: /s/ Douglas A. Buffington
---------------------------------
Douglas A. Buffington, President
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 62,160
<SECURITIES> 0
<RECEIVABLES> 3,259,490
<ALLOWANCES> (214,000)
<INVENTORY> 2,223,904
<CURRENT-ASSETS> 5,737,649
<PP&E> 709,278
<DEPRECIATION> 580,165
<TOTAL-ASSETS> 6,191,967
<CURRENT-LIABILITIES> 3,292,587
<BONDS> 0
0
0
<COMMON> 22,083
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,191,967
<SALES> 4,995,640
<TOTAL-REVENUES> 4,995,640
<CGS> 3,352,394
<TOTAL-COSTS> 1,381,332
<OTHER-EXPENSES> 34,547
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124,702
<INCOME-PRETAX> 102,665
<INCOME-TAX> 10,438
<INCOME-CONTINUING> 92,227
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,227
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
