<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 29, 1998.
[ ] 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)
(973) 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 30, 1998, 2,218,961 shares of common stock, $.01 par value, were issued
and outstanding.
- --------------------------------------------------------------------------------
<PAGE>
INDEX
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<TABLE>
<CAPTION>
Page No.
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Balance Sheets - June 29, 1998 and December 31, 1997 2
Statements of Operations - Three Months Ended
June 29, 1998 and June 30, 1997 3
Statements of Operations - Six Months Ended
June 29, 1998 and June 30, 1997 4
Statements of Cash Flows - Six Months Ended
June 29, 1998 and June 30, 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations 8
-----------------------------------
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
--------------------------------
Signatures 13
</TABLE>
<PAGE>
S2 GOLF INC.
BALANCE SHEETS
Item 1. Financial Statements
<TABLE>
<CAPTION>
June 29, December 31,
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash $11,448 $121,431
Accounts Receivable (Net of Allowance
for Doubtful Accounts of$311,903 in 1998
and $320,930 in 1997 4,193,529 3,722,924
Inventory(Note 3) 5,197,895 3,094,302
Prepaid Expenses 27,726 44,660
Deferred Income Taxes 372,879 372,879
----------- -----------
Total Current Assets 9,803,477 7,356,196
Plant and Equipment - Net 63,430 79,474
Non-Current Deferred Income Taxes 30,034 30,034
Other Assets - Net 161,120 164,472
----------- -----------
Total Assets $10,058,061 $7,630,176
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-Term Borrowings $4,292,867 $2,921,832
Accounts Payable 1,129,603 608,724
Accrued Expenses 511,644 336,909
Other Current Liabilities 53,616 53,386
----------- -----------
Total Current Liabilities 5,987,730 3,920,851
Non-Current Liabilities 174,823 202,231
----------- -----------
Total Liabilities 6,162,553 4,123,082
Commitments and Contingencies
Shareholders' Equity
Common Stock, $.01 Par; 12,000,000
Authorized Shares: 2,218,966 and 2,218,605 Issued and
Outstanding at June 29, 1998 and December 31, 1997 22,190 22,186
Additional Paid in Capital 4,038,798 4,036,802
Accumulated Deficit (165,480) (551,894)
----------- -----------
Total Shareholders' Equity 3,895,508 3,507,094
----------- -----------
Total Liabilities and Shareholders' Equity $10,058,061 $7,630,176
=========== ===========
</TABLE>
See notes to financial statements
-2-
<PAGE>
S2 GOLF INC.
Statements of Operations
For the Three Months Ended
Unaudited
<TABLE>
<CAPTION>
June 29, June 30,
1998 1997
---------- ----------
<S> <C> <C>
Net Sales $3,611,429 $3,435,134
Cost of Goods Sold 2,387,303 2,342,422
---------- ----------
Gross Profit 1,224,126 1,092,712
---------- ----------
Operating Expenses:
Selling 423,424 374,441
General & Administrative 297,357 287,717
---------- ----------
Total Operating Expenses 720,781 662,158
---------- ----------
Operating Income 503,345 430,554
---------- ----------
Other Income/(Expense)
Interest Expense (115,424) (103,489)
Other Income/(Expense) 34,113 (5,001)
---------- ----------
Other - Net (81,311) (108,490)
---------- ----------
Income Before Income Taxes 422,034 322,064
Provision (Benefit) for Taxes 172,355 (12,716)
---------- ----------
Net Income
$249,679 $334,780
========== ==========
Earnings Per Common Share-Basic $0.11 $0.15
Earnings Per Common Share-Diluted $0.10 $0.15
Weighted Average Number of Shares Outstanding-Basic 2,218,925 2,211,742
Weighted Average Number of Shares Outstanding-Diluted 2,453,806 2,267,150
</TABLE>
See notes to financial statements
-3-
<PAGE>
S2 GOLF INC.
Statements of Operations
For the Six Months Ended
Unaudited
<TABLE>
<CAPTION>
June 29, June 30,
1998 1997
---------- ----------
<S> <C> <C>
Net Sales $6,997,058 $6,272,567
Cost of Goods Sold 4,674,870 4,320,637
---------- ----------
Gross Profit 2,322,188 1,951,930
---------- ----------
Operating Expenses:
Selling 902,170 759,373
General & Administrative 590,612 553,639
---------- ----------
Total Operating Expenses 1,492,782 1,313,012
---------- ----------
Operating Income 829,406 638,918
---------- ----------
Other Income/(Expense)
Interest Expense (214,903) (162,077)
Other Income/(Expense) 35,192 (5,504)
---------- ----------
Other - Net (179,711) (167,581)
---------- ----------
Income Before Income Taxes 649,695 471,337
Provision (Benefit) for Taxes 263,281 (2,570)
---------- ----------
Net Income
$386,414 $473,907
========== ==========
Earnings Per Common Share-Basic $0.17 $0.21
Earnings Per Common Share-Diluted $0.16 $0.21
Weighted Average Number of Shares Outstanding-Basic 2,218,848 2,211,742
Weighted Average Number of Shares Outstanding-Diluted 2,475,005 2,246,567
</TABLE>
See notes to financial statements
-4-
<PAGE>
S2 GOLF INC.
Statements of Cash Flows
For the Six Months Ended
Unaudited
<TABLE>
<CAPTION>
June 29, June 30,
1998 1997
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $386,414 $473,907
Adjustments to Reconcile Net Income to Net Cash Used In
Operating Activities:
Depreciation and Amortization 25,102 76,532
Deferred Income Taxes 0 (60,506)
Issuance of Stock for Compensation 2,000 6,999
Cash Flow Provided (Used) by Operating Activities as a
Result of Changes in:
Accounts Receivable (470,605) (1,040,467)
Inventory (2,103,593) (577,720)
Prepaid Expenses 16,934 16,607
Other Assets (200) (30,689)
Accounts Payable and Accrued Expenses 695,614 459,503
Other - Net (27,178) (29,977)
---------- ---------
NET CASH USED IN OPERATIONS (1,475,512) (705,811)
---------- ---------
INVESTING ACTIVITIES
Purchase of Equipment (5,506) (11,930)
FINANCING ACTIVITIES
Proceeds from Line of Credit 1,371,035 662,339
(DECREASE) IN CASH (109,983) (55,402)
CASH - BEGINNING OF PERIOD 121,431 166,592
---------- ---------
CASH - END OF PERIOD $11,448 $111,190
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the period:
Interest $180,949 $136,889
Income Taxes $50,000 $0
</TABLE>
See notes to financial statements
-5-
<PAGE>
S2 GOLF, INC.
Notes to Financial Statements
Summary of Significant Accounting Policies
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principals for interim financial reporting.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principals for complete financial statements. In
the opinion of management, all material adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the six months ended June 29, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 1998. The unaudited financial statements and related notes
are presented as permitted by Form 10Q and do not contain certain information
included in the Company's annual financial statements and notes. For further
information, refer to the Company's annual financial statements and notes
thereto included in the Company's annual report on Form 10-K for the fiscal year
ended December 31, 1997.
1) Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share", which
requires presentation of basic and diluted earnings per share. Basic earnings
per share is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the reporting period.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. As required, the Company adopted the provisions of SFAS 128
for the year ended December 31, 1997. All prior year weighted average and per
share information has been restated in accordance with SFAS 128 for the three
and six-month period ended June 29,1998. The dilutive effect of outstanding
stock options issued by the Company represents the only difference between the
denominator used for the basic earnings per share calculation and denominator
used for the dilutive earnings per share calculation.
2) Recent Accounting Pronouncements
--------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an enterprise and Related Information", which is
effective for the Company for the year ending December 31, 1998. This statement
establishes standards for the way in which public enterprises report information
about operating segments in annual financial statements and requires that these
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. The Company is currently evaluating
the impact that the adoptions of SFAS No. 131 will have on its financial
statements for the year ending December 31, 1998.
-6-
<PAGE>
3) Inventory
Inventory at June 29, 1998 and December 31, 1997 consists of the following:
<TABLE>
<CAPTION>
June 29, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Finished Goods $ 784,143 $ 819,423
Raw Materials 4,413,752 2,274,879
---------- ----------
$5,197,895 $3,094,302
</TABLE>
4) Revolving Line of Credit
Effective March 18, 1998, the Company entered into an agreement to temporarily
increase of its revolving line of credit from $5,000,000 to $5,500,000. This
increase was effective through May 31, 1998 and subsequently adjusted to extend
to June 30, 1998 and is pursuant to the Loan Agreement and Revolving Note with
PNC Bank as amended on June 30, 1997. Under said agreement, on June 29, 1998
the Company had $783,745 available under the line and $43,843 in letters of
credit written but not drawn.
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 period ended June 29, 1998 increased
$176,295 and $724,491 respectively, to $3,611,429 and $6,997,058 as compared to
$3,435,134 and $6,272,567 for the same period in 1997. These increases are due
to approximately $546,000 of new account sales.
Gross profit as a percentage of net sales increased to 33.2% for the six-month
period ended June 29, 1998 as compared to 31.1% for the same period in 1997.
The increase of 2.1% continues to be due to increased sales and sales of higher
margin products.
Selling expenses for the three- and six-month period ended June 29, 1998
increased $48,983 and $142,797 respectively over the same period in 1997. This
increase is primarily due to increases of approximately 28% in advertising as
well as a 17% increase in sales commissions due to increased sales.
General and Administrative expenses for the three- and six-month period ended
June 29, 1998 increased $9,640 and $36,973 as compared to the same period in
1997. These increases continue to be due to increased payroll and related tax
as well as an increase in the provision for bad debts.
-7-
<PAGE>
Interest expense for the three- and six-month period ended June 29, 1998
increased $11,935 and $52,826 respectively, as compared to the same periods in
1997 due to an overall increase in the average loan balance offset by lower
interest rates.
The Company's net income before tax for the three- and six-month period ended
June 29, 1998 was $422,034 and $649,695, respectively, an increase of 31% and
38% over the same period in 1997. This improvement is the result of increased
sales volume and improved margins.
The Company's effective tax rate was 41% for the three- and six-month period
ended June 29, 1998 as compared to a benefit recorded for the same periods in
1997. The increased tax is due to the utilization of substantially all of the
Company's available Net Operating Loss carryforwards in the year ended December
31, 1997.
Financial Condition and Liquidity
- ---------------------------------
The Company's working capital at June 29, 1998 increased $380,402 from December
31, 1997 to $3,815,747 due to increased current assets of $2,447,281 offset by
increased current liabilities of $2,066,879. The increase in current assets is
primarily due to an increase of $470,605 in accounts receivable as is typical to
the Company due to the cyclical nature of the golf industry. In addition ,
inventory increased $2,103,593 due to increased purchases in the first two
quarters of 1998 over 1997 in connection with management's decision to increase
raw material purchases to meet anticipated demand in 1998. The increase in
inventory purchases continue to result in increased current liabilities,
specifically as they relate to the credit facility and accounts payable which
had increases of $1,371,035 and $520,879 respectively.
The increase in working capital of $862,934 at June 29, 1998 from June 30, 1997
is due to increased current assets of $3,473,486 offset by increased current
liabilities of $2,610,552. The increase in current assets is primarily due to
increased accounts receivable of $732,382 resulting from increased sales volume
and increased inventory of $2,746,974 due to increased purchases in the first
half of 1998 over the same in 1997. The increase in inventory purchases also
resulted in the increase in bank borrowings and accounts payable of $1,858,081
and $630,992, respectively.
Cash used in operations was $1,475,512 and $705,811 for the six months ended
June 29, 1998 and June 30, 1997, respectively. The increase resulted from
increased accounts receivable and inventory purchases.
Cash provided by financing activity amounted to $1,371,035 for the six month
period ended June 29, 1998 as compared to $622,339 for the same period in 1997.
The increase is the result of increased borrowings to finance increased
inventory purchases.
Effective March 18, 1998, the Company entered into an agreement to temporarily
increase its revolving line of credit from $5,000,000 to $5,500,000.
-8-
<PAGE>
This increases was effective through May 31, 1998 and subsequently adjusted to
extend to June 30, 1998 and is pursuant to the Loan Agreement and Revolving Note
with PNC Bank as amended on June 30, 1997. Under said agreement on June 29,
1998 the Company has $783,745 available under the line and $43,848 in letters of
credit written but not drawn.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information", which is
effective for the Company for the year ending December 31, 1998. This statement
establishes standards for the way in which public enterprises report information
about operating segments in annual financial statements and requires that these
enterprises report selected information about operating segments in interim
financial reports issued to shareholders.
The Company is currently evaluating the impact that the adoptions of SFAS No.
131 will have on its financial statements for the year ending December 31, 1998.
On or about July 13, 1998 the Company filed a Form S-8 Registration Statement
under the Securities Act of 1933 to effectively register the issuance by the
Company of 1,152,595 shares of Common Stock which may be issued upon exercise of
options granted to date and that may be granted in the future under the 1998
Employee Stock Plan, 1984 Incentive Stock Option Plan, 1992 Stock Plan for
Independent Directors, Written Compensation Contracts with Various Executives
and Employees and Written Compensation Contracts with Various Consultants. The
Registration Statement and reoffer prospectus included in the filing were
intended to register for reoffer and/or resale 50,000 shares of Common Stock
that have been issued and that my be issued in the future as "restricted
securities" under the 1992 Stock Plan for Independent Directors and shares of
Common Stock that may be issued upon exercise of options granted or that may be
granted in the future under the other plans listed above by persons who may be
considered affiliates of the Company as defined by Rule 405 under the Act.
Year 2000 Compliance
- --------------------
The Company has completed a review of its information systems and applications
in preparation for the year 2000. The Company expects to incur internal staff
costs as well as outside consulting and other capital expenditures related to
this initiative. Total incremental expenses, including depreciation and
amortization of new systems and remediation to bring current systems into
compliance are not expected to have a material impact on the Company's financial
condition. The Company expects its system to be Year 2000 compliant by 1999.
The Company is attempting to contact vendors and others on whom it relies to
assure that their systems will be timely converted. However, there can be no
assurance that the systems of other companies on which the Company relies will
be timely converted or that any such failure to convert by another company would
not have an adverse effect on the Company.
-9-
<PAGE>
Item 6. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
Exhibit
Number Description of Exhibit*
- ------ -----------------------
3.1 Amended and Restated Certificate of Incorporation of the Company dated
June 28, 1991 (incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1991).
3.2 Amended and restated By-laws of the Registrant dated December 6, 1991
(incorporated by reference to Exhibit 3.2 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1991).
4.1 Common Stock Purchase Warrant in favor of Wesmar Partners dated
February 28, 1988, (incorporated by reference to Exhibit 4.4 of the
Registrant's Registration Statement No. 33-37371 on Form S-3).
4.2 Common Stock Purchase Warrant in favor of Wesmar Partners dated
February 28, 1988, (incorporated by reference to Exhibit 4.5 of the
Registrant's Registration Statement No. 33-37371 on Form S-3).
4.3 Stock Option Agreement between the Registrant and Wesmar Partners dated
February 29, 1988, (incorporated by reference to Exhibit 4.6 of the
Registrant's Registration Statement No. 33-37371 on Form S-3).
10.0 Credit Agreement and Security Agreement between the Registrant and
Midlantic Bank, National Association dated December 29, 1994
(incorporated by reference to Exhibit 99 of the Registrant's Current
Report on Form 8-K dated December 26, 1994).
10.1 United States Patent No. 4,203,598 issued to the Registrant
(incorporated by reference to Exhibit 10.3 of the Registrant's
Registration Statement No. 33-16931 on Form S-1).
10.2 Agreement between the LPGA Tournament Players Corporation and the
Registrant dated July 31, 1991 (incorporated by reference to exhibit
4.11 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30,1991).
10.3 Lease Agreement between the registrant and 12 Gloria Lane Limited
Partnership dated June 22, 1989 (incorporated by reference to exhibit
10.6 of the Registrant's Registration Statement No. 33-37371 on Form
S-3).
10.4 Modification of Lease Agreement between the Registrant and 12 Gloria
Lane Industrial Partnership dated October 3, 1995 (incorporated by
reference to Exhibit 10.2 of the Registrants Annual Report on Form 10-K
for the year ended December 31, 1995).
-10-
<PAGE>
10.5 1984 Incentive Stock Option Plan of the Registrant dated February 10,
1984 (incorporated by reference to Exhibit 10.7 to the Registrant's
Registration Statement No. 33-16931 on Form S-1).
10.6 Consulting Agreement between the Registrant and MR & Associates dated
January 1992 (incorporated by reference to exhibit 10.10 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1992).
10.7 Amendment of Consulting Services Agreement between the Registrant and
MR and Associates effective as of February 1, 1996 (incorporated by
reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996).
10.8** 1992 Stock Plan for Independent Directors of S2 Golf, Inc. dated
December 28, 1992 (incorporated by reference to Exhibit 10.11 of the
Registrant's Annual Report on form 10-K for the year ended December 31,
1992).
10.9** Employment Agreement between the Registrant and Douglas A. Buffington
dated January 1, 1995 (incorporated by reference to Exhibit 10.10 to
the Registrant's Annual Report on Form 10-K for the year ended December
31, 1994).
10.10** Agreement between the Registrant and Randy A. Hamill dated January 2,
1997.
10.11 Amended and Restated Licensing Agreement between Ladies Professional
Golf Association and the Registrant dated July 1, 1996 (incorporated by
reference to exhibit 12 of the Registrants Annual Report on Form 10K
for the year ended December 31, 1996).
10.12 Second amendment to loan and security agreement between Registrant and
PNC Bank dated December 1, 1997 (incorporated by reference to Exhibit
99 of the Registrant's Current Report on Form 8-K dated December 26,
1994.
10.13 Employment agreement between Registrant and Douglas A. Buffington dated
January 1, 1998 (incorporated by reference to Exhibit 10.13 to the
Registrants Quarterly Report on Form 10-Q for the quarter ended March
29, 1998)
27 Financial Data Schedule.
No Current reports on Form 8-K were filed for the second quarter ended
June 29, 1998
- --------------------------------------------------------------------------------
* 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.
-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.
Aug 10, 1998
Dated: By: /s/ Douglas A. Buffington
-------------------------
Douglas A. Buffington
President and Chief
Operating Officer
-12-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-29-1998
<CASH> 11,448
<SECURITIES> 0
<RECEIVABLES> 4,505,432
<ALLOWANCES> 331,903
<INVENTORY> 5,197,895
<CURRENT-ASSETS> 9,803,477
<PP&E> 749,340
<DEPRECIATION> 685,910
<TOTAL-ASSETS> 10,058,061
<CURRENT-LIABILITIES> 5,987,730
<BONDS> 0
0
0
<COMMON> 22,190
<OTHER-SE> 3,873,318
<TOTAL-LIABILITY-AND-EQUITY> 10,058,061
<SALES> 6,997,058
<TOTAL-REVENUES> 6,997,058
<CGS> 4,674,870
<TOTAL-COSTS> 1,492,782
<OTHER-EXPENSES> (35,192)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 214,903
<INCOME-PRETAX> 649,695
<INCOME-TAX> 263,281
<INCOME-CONTINUING> 386,414
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 386,414
<EPS-PRIMARY> .17
<EPS-DILUTED> .16
</TABLE>
