<PAGE>
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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 SEPTEMBER 25, 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
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(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 October 14, 1998, 2,219,316 shares of common stock, $.01 par value, were
issued and outstanding.
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<PAGE>
INDEX
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PART I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
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Balance Sheets -September 25, 1998 and
December 31, 1997 2
Statements of Operations - Three Months Ended
September 25, 1998 and September 29, 1997 3
Statements of Operations - Nine Months Ended
September 25, 1998 and September 29, 1997 4
Statements of Cash Flows-Nine Months Ended
September 25, 1998 and September 29, 1997 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 6. Exhibits and Reports on Form 8-K 10
--------------------------------
Signatures 12
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S2 GOLF, INC.
BALANCE SHEETS
Item 1. Financial Statements
<TABLE>
<CAPTION>
September 25, December 31,
1998 1997
ASSETS ------------- -----------
<S> <C> <C>
Current Assets
Cash $0 $121,431
Accounts Receivable (Net of Allowance
for Doubtful Accounts of $332,458 in 1998
and $320,930 in 1997) 2,996,117 3,722,924
Inventory(Note 3) 4,364,875 3,094,302
Prepaid Expenses 82,752 44,660
Deferred Income Taxes 451,640 372,879
------------ -----------
Total Current Assets 7,895,384 7,356,196
Plant and Equipment - Net 69,003 79,474
Non-Current Deferred Income Taxes 39,095 30,034
Other Assets - Net 157,490 164,472
------------ -----------
Total Assets $8,160,972 $7,630,176
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-Term Borrowings $2,892,265 $2,921,832
Accounts Payable 663,792 608,724
Accrued Expenses 443,887 336,909
Other Current Liabilities 60,544 53,386
------------ -----------
Total Current Liabilities 4,060,488 3,920,851
Non-Current Liabilities 164,596 202,231
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Total Liabilities 4,225,084 4,123,082
Commitments and Contingencies
Shareholders' Equity
Common Stock, $.01 Par; 12,000,000
Authorized Shares: 2,219,316 and 2,218,605 Issued and
Outstanding at September 25, 1998 and December 31, 1997 22,193 22,186
Additional Paid in Capital 4,040,795 4,036,802
Accumulated Deficit (127,100) (551,894)
------------ -----------
Total Shareholders' Equity 3,935,888 3,507,094
------------ -----------
Total Liabilities and Shareholders' Equity $8,160,972 $7,630,176
============ ===========
</TABLE>
See notes to financial statements
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<PAGE>
S2 GOLF, INC.
Statements of Operations
For the Three Months Ended
Unaudited
<TABLE>
<CAPTION>
September 25, September 29,
1998 1997
------------ -------------
<S> <C> <C>
Net Sales $2,411,982 $2,859,749
Cost of Goods Sold 1,653,719 1,939,425
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Gross Profit 758,263 920,324
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Operating Expenses:
Selling 336,104 374,923
General & Administrative 267,342 254,814
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Total Operating Expenses 603,446 629,737
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Operating Income 154,817 290,587
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Other Income/(Expense)
Interest Expense (85,486) (72,442)
Other Income/(Expense) (4,828) 100
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Other - Net (90,314) (72,342)
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Income Before Income Taxes 64,503 218,245
Provision for Taxes 26,124 51,956
------------ ------------
Net Income
$38,379 $166,289
============ ============
Earnings Per Common Share-Basic $0.02 $0.08
Earnings Per Common Share-Diluted $0.02 $0.07
Weighted Average Number of Shares Outstanding-Basic 2,219,300 2,213,788
Weighted Average Number of Shares Outstanding-Diluted 2,306,652 2,307,114
</TABLE>
See notes to financial statements
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<PAGE>
S2 GOLF, INC.
Statements of Operations
For the Nine Months Ended
Unaudited
<TABLE>
<CAPTION>
September 25, September 29,
1998 1997
------------ ------------
<S> <C> <C>
Net Sales $9,409,041 $9,132,316
Cost of Goods Sold 6,328,589 6,260,062
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Gross Profit 3,080,452 2,872,254
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Operating Expenses:
Selling 1,238,274 1,134,296
General & Administrative 857,954 808,453
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Total Operating Expenses 2,096,228 1,942,749
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Operating Income 984,224 929,505
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Other Income/(Expense)
Interest Expense (300,389) (234,519)
Other Income/(Expense) 30,364 (5,404)
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Other - Net (270,025) (239,923)
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Income Before Income Taxes 714,199 689,582
Provision for Taxes 289,405 49,386
Net Income
$424,794 $640,196
============ ============
Earnings Per Common Share-Basic $0.19 $0.29
Earnings Per Common Share-Diluted $0.18 $0.28
Weighted Average Number of Shares Outstanding-Basic 2,218,997 2,213,788
Weighted Average Number of Shares Outstanding-Diluted 2,408,706 2,284,019
</TABLE>
See notes to financial statements
-4-
<PAGE>
S2 GOLF, INC.
Statements of Cash Flows
For the Nine Months Ended
Unaudited
<TABLE>
<CAPTION>
September 25, September 29,
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $424,794 $640,196
Adjustments to Reconcile Net Income to Net Cash Used In
Operating Activities:
Depreciation and Amortization 42,376 90,959
Deferred Income Taxes (87,822) (105,795)
Issuance of Stock for Compensation 4,000 11,430
Cash Flow Provided (Used) by Operating Activities as a
Result of Changes in:
Accounts Receivable 726,807 (595,517)
Inventory (1,270,573) (797,063)
Prepaid Expenses (38,092) 3,883
Other Assets (3,906) (30,989)
Accounts Payable and Accrued Expenses 55,068 497,521
Other - Net 76,501 (45,002)
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NET CASH USED IN OPERATIONS (70,847) (330,377)
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INVESTING ACTIVITIES
Purchase of Equipment (21,017) (12,737)
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FINANCING ACTIVITIES
Proceeds (Payments) on Line of Credit (29,567) 281,660
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(DECREASE) IN CASH (121,431) (61,454)
CASH - BEGINNING OF PERIOD 121,431 166,592
------------ ------------
CASH - END OF PERIOD $0 $105,138
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the period:
Interest $277,852 $212,418
Income Taxes $124,571 $0
</TABLE>
See notes to financial statements
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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 nine months ended September 25, 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 10-Q 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 nine-month periods ended September 25,1998. 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. As this pronouncement impacts
disclosure only, it will have no effect on the financial position, results of
operations, or cash flows of the Company.
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<PAGE>
3) Inventory
Inventory at September 25, 1998 and December 31, 1997 consists of the following:
<TABLE>
<CAPTION>
September 25, December 31,
1998 1997
---------------- -------------
<S> <C> <C>
Finished Goods $ 872,975 $ 819,423
Raw Materials 3,491,900 2,274,879
---------- ----------
$4,364,875 $3,094,302
========== ==========
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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Results of Operations
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Net sales for the three and nine-month period ended September 25, 1998 decreased
$447,767 and increased $276,725 respectively, to $2,411,982 and $9,409,041 as
compared to $2,859,749 and $9,132,316 for the same periods in 1997. The
decrease in sales for the quarter was due to the overall sluggish golf industry
resulting in a significant overhang of manufacturers club inventory at the
retail level. The increase in revenue for the nine-months is attributable to
the growing acceptance of the company's female equipment in spite of this
overall sluggishness in the industry.
Gross profit as a percentage of net sales increased to 32.7% for the nine-month
period ended September 25, 1998 as compared to 31.4% for the same period in
1997. The increase of 1.3% is due to increased sales of higher margin products
such as the ladies Light & Easy and men's Power Circle. Gross profit for the
three-month period ended September 25, 1998 was 31.4% versus 32.2% for the
comparable period in 1997. This lower margin was attributable to golf bags
being sold at reduced margins.
Selling expenses for the three and nine-month period ended September 25, 1998
decreased $38,819 and increased $103,978 respectively over the comparable
periods in 1997. The change in each respective period is primarily attributable
to the change in net sales as compared to the same period in 1997.
General and Administrative expenses for the three and nine-month period ended
September 25, 1998 increased $12,528 and $49,501 as compared to the same period
in 1997. Both of these increases are mainly attributable to an increase in the
company's bad debt provision.
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<PAGE>
Interest expense for the three and nine-month period ended September 25, 1998
increased $13,044 and $65,870 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 nine-month period ended
September 25, 1998 was $64,503 and $714,199 respectively, as compared to
$218,245 and $689,582 for the same period in 1997. These differences are
attributable to the sales volume differences previously explained.
The Company's effective tax rate was 40.5% for the nine-month period ended
September 25, 1998 as compared to 7% recorded for the same periods in 1997.
The increased tax expense 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 September 25, 1998 increased $399,551 from
December 31, 1997 to $3,834,896 due to increased current assets of $539,188
offset by increased current liabilities of $139,637. The increase in current
assets is primarily due to an increase of $1,270,573 in inventory offset by a
decrease in accounts receivable of $726,807.
Cash used in operations was $70,847 and $330,377 for the nine months ended
September 25, 1998 and September 29, 1997, respectively. The increase resulted
from increased inventory purchases.
Cash payments for financing activity amounted to $29,567 for the nine-month
period ended September 25, 1998 as compared to cash proceeds of $281,660 for the
same period in 1997. The decrease is the result of a shift in borrowing
activity for inventory purchases wherein significant purchases were made in the
first half of 1998 versus 1997 where borrowings increased in the third quarter
to meet demand in the fourth quarter of 1997. Based on inventory levels at the
end of nine months in 1998, the Company believes it is in the position to meet
demand for the fourth quarter of 1998.
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<PAGE>
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. As this pronouncement impacts
disclosure only, it will have no effect on the financial position, results of
operations, or cash flows of the Company.
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 to remediate and bring current
systems into compliance are not expected to exceed $100,000. The Company
believes that it will be year 2000 compliant in the fourth quarter of 1999. The
Company believes its vendors and other third parties on whom it relies will be
timely converted and/or have no Year 2000 issues. 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. None of the Company's products or
manufacturing systems will be effected by the Year 2000 issue. As the Company
believes it will be timely converted and not affected by Year 2000 compliance
issues, it has not established a contingency plan.
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<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).
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<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 10-K for
the year ended December 31, 1996).
10.12 Second amendment to loan and security agreement between Registrant and
PNC Bank dated December 1, 1997 (incorporated by reference to Exhibit 99
of the Registrant's Current Report on Form 8-K dated December 26, 1994.
10.13 Employment agreement between Registrant and Douglas A. Buffington dated
January 1, 1998.
27 Financial Data Schedule.
No Current reports on Form 8-K were filed for the first quarter ended March 29,
1998
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* 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.
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<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.
October 26, 1998 s/s Douglas A. Buffington
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Dated: By:
Douglas A. Buffington
President and Chief
Operating Officer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-25-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,328,575
<ALLOWANCES> 332,458
<INVENTORY> 4,364,875
<CURRENT-ASSETS> 7,895,384
<PP&E> 764,851
<DEPRECIATION> 695,848
<TOTAL-ASSETS> 8,160,972
<CURRENT-LIABILITIES> 4,060,488
<BONDS> 0
0
0
<COMMON> 22,193
<OTHER-SE> 3,913,695
<TOTAL-LIABILITY-AND-EQUITY> 8,160,972
<SALES> 9,409,041
<TOTAL-REVENUES> 9,409,041
<CGS> 6,328,589
<TOTAL-COSTS> 2,096,228
<OTHER-EXPENSES> (30,364)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 300,389
<INCOME-PRETAX> 714,199
<INCOME-TAX> 289,405
<INCOME-CONTINUING> 424,794
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 424,794
<EPS-PRIMARY> .19
<EPS-DILUTED> .18
</TABLE>
