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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 29, 2000.
[ ] 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
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(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 September 29, 2000, 2,221,053 shares of common stock, $.01 par value, were
issued and outstanding.
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S2 GOLF INC.
FORM 10-Q
FOR QUARTERLY PERIOD ENDED SEPTEMBER 29, 2000
INDEX
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PART I. FINANCIAL INFORMATION Page Number
Item 1. FINANCIAL STATEMENTS 2
Balance Sheets -
September 29, 2000 and December 31, 1999 2
Statements of Operations -
Three Months Ended September 29, 2000
and October 1, 1999 3
Statements of Operations -
Nine Months Ended September 29, 2000
and October 1, 1999 4
Statements of Cash Flows -
Nine Months Ended September 29, 2000
and October 1, 1999 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 1. LEGAL PROCEEDINGS 9
Item 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK 9
Item 6. EXHIBITS AND REPORTS
ON FORM 8-K 9
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
S2 GOLF INC.
BALANCE SHEETS
AS OF SEPTEMBER 29, 2000 (UNAUDITED)
AND DECEMBER 31, 1999 (AUDITED)
<TABLE>
<CAPTION>
September 29, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 150 $ 150
Accounts Receivable - Net 3,450,484 2,650,197
Inventories 3,658,592 2,554,736
Prepaid Expenses 168,059 59,278
Deferred Income Taxes 212,500 163,600
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Total Current Assets 7,489,785 5,427,961
Plant and Equipment - Net 152,758 104,476
Non-Current Deferred Income Taxes 49,000 82,000
Goodwill - Net 2,118,733 0
Other Assets 125,030 49,500
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Total Assets $9,935,306 $5,663,937
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short Term Borrowings $ 2,641,193 $ 774,468
Current Portion, Long-Term Debt 300,000 0
Accounts Payable 1,133,639 399,864
Accrued Expenses 459,974 171,522
Other Current Liabilities 72,000 61,335
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Total Current Liabilities 4,606,806 1,407,189
Long-Term Liabilities
Long-Term Debt 575,000 84,822
Other Long Term-Liabilities 28,676 0
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Total Liabilities 5,210,482 1,492,011
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Shareholders' Equity
Common Stock, $.01 Par; 12,000,000 Shares
Authorized: 2,221,053 & 2,220,113 Issued
& Outstanding at September 29, 2000 and
December 31, 1999, respectively 22,211 22,201
Additional Paid in Capital 4,044,777 4,042,787
Retained Earnings 657,836 195,080
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Total Shareholders' Equity 4,724,824 4,260,068
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Total Liabilities and Shareholders' Equity $ 9,935,306 $ 5,752,079
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
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S2 GOLF INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
SEPTEMBER 29, 2000 AND OCTOBER 1, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
September 29, 2000 October 1, 1999
------------------ ---------------
<S> <C> <C>
Net Sales $ 3,091,279 $ 2,536,905
Cost of Goods Sold 2,055,750 1,682,880
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Gross Profit 1,035,529 854,025
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Operating Expenses
Selling 530,304 375,399
General & Administrative 348,066 320,887
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Total Operating Expenses 914,370 696,286
Operating Income 121,159 157,739
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Other Expense
Interest Expense (80,839) (22,584)
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Total Expense (80,839) (22,584)
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Income Before Income Taxes 40,320 135,155
Provision (Benefit) for Income Taxes (19,693) 43,567
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Net Income $ 60,013 $ 91,588
============ ===========
Earnings per Common Share - Basic $ 0.03 $ 0.04
============ ===========
Diluted $ 0.03 $ 0.04
============ ===========
Weighted Average Number of Common Shares
Outstanding -
Basic 2,220,587 2,220,072
Diluted 2,279,424 2,277,451
</TABLE>
The accompanying notes are an integral part of these statements.
3
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S2 GOLF INC.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED
SEPTEMBER 29, 2000 AND OCTOBER 1, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
September 29, 2000 October 1, 1999
------------------ ---------------
<S> <C> <C>
Net Sales $ 9,883,325 $8,730,735
Cost of Goods Sold 6,442,636 5,881,080
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Gross Profit 3,440,689 2,849,655
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Operating Expenses
Selling 1,524,493 1,305,291
General & Administrative 1,066,082 912,803
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Total Operating Expenses 2,590,575 2,218,094
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Operating Income 850,114 631,561
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Other Expense
Interest Expense (138,136) (147,033)
Other (47) 562
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Total Expense (138,183) (146,471)
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Income Before Income Taxes 711,931 485,090
Provision for Income Taxes 249,175 152,461
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Net Income $ 462,756 $ 332,629
============ ===========
Earnings per Common Share - Basic $ 0.21 $ 0.15
============ ===========
Diluted $ 0.20 $ 0.14
============ ===========
Weighted Average Number of Common Shares
Outstanding -
Basic 2,220,270 2,219,567
Diluted 2,279,107 2,296,888
</TABLE>
The accompanying notes are an integral part of these statements.
4
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S2 GOLF INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 29, 2000 AND OCTOBER 1, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
September 29, 2000 October 1, 1999
------------------ ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 462,755 $ 332,628
Adjustments to Reconcile Net Income to Net Cash
Provided By Operating Activities:
Depreciation and Amortization 84,126 44,398
Deferred Income Taxes (48,900) (7,867)
Changes in Assets and Liabilities:
Accounts Receivable 419,536 1,154,655
Inventories (117,430) 990,640
Prepaid Expenses (58,781) (69,167)
Other Assets 0 (890)
Accounts Payable 677,420 191,427
Accrued Expenses 288,453 7,966
Other Current and Non-Current Liabilities (74,157) (33,002)
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NET CASH PROVIDED BY OPERATIONS 1,633,022 2,610,788
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INVESTING ACTIVITIES
Purchase of Product Line (4,318,282)
Purchase of Equipment (56,265) (63,625)
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NET CASH USED IN INVESTING ACTIVITIES (4,374,547) (63,625)
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FINANCING ACTIVITIES
Proceeds from Revolving Line of Credit, Net 1,866,525 (2,547,290)
Proceeds from Long-Term Debt 900,000 0
Repayment of Long-Term Debt (25,000) 0
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NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 2,741,525 (2,547,290)
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INCREASE IN CASH 0 (127)
CASH - BEGINNING OF PERIOD 150 1,576
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CASH - END OF PERIOD $ 150 $ 1,449
============ ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash Paid During the Year For:
Interest $ 138,136 $ 147,033
============ ===========
Income Taxes $ 8,515 $ 152,842
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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NOTES TO FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements of S2 Golf Inc. (the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial reporting. In the opinion of management, all material
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the nine months
ended September 29, 2000 are not necessarily indicative of the results that may
be expected for the fiscal year ending December 31, 2000. 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 thereto. 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,
1999.
1) EARNINGS PER SHARE
Basic earnings per share ("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.
2) INVENTORIES
Inventories are valued at the lower of cost, determined on the basis of the
first-in, first-out method, or market.
Inventories at September 29, 2000 and December 31, 1999 consisted of the
following components:
September 29, 2000 December 31, 1999
------------------ -----------------
Raw Materials $2,743,944 $1,916,052
Finished Goods 914,648 638,684
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$3,658,592 $2,554,736
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3) SHORT-TERM BORROWINGS
The Company has a secured revolving line of credit allowing a maximum credit
limit of $8,000,000, less 50% of the aggregate face amount of all outstanding
letters of credit and subject to various borrowing bases, through September 30,
2003. 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 was 9.75% as of September 29, 2000 and
8.75% as of December 31, 1999. Funds available to the Company under the line of
credit as of September 29, 2000 were approximately $424,033.
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 thereunder. The Company was in
compliance with all covenants and conditions of the facility as of September 29,
2000.
4) TERM LOAN
The Company has a secured term loan in the amount of $900,000 for 3 years ending
August 1, 2003. Monthly payments of $25,000 plus interest are payable on the
first of each month. Interest rates are at prime plus one and one-half percent;
the interest rate was 11.0% at September 29, 2000.
5) LEGAL
The Company, in the ordinary course of business, is party to a legal action, the
outcome of which, in the opinion of management, will not have a material adverse
effect on the results of operations, cash flows or financial position of the
Company.
6) QUARTERLY ENDS
The Company reports its interim financial statements as of the Friday closest to
month-end of the quarter. Therefore, the interim quarters for fiscal 2000 will
end on March 31, 2000, June 30, 2000, and September 29, 2000. The Company
reports its year-end financial statements as of December 31.
7) ACQUISITIONS
On July 31, 2000, the Company acquired substantially all of the net assets of
NancyLopezGolf,[TM] a golf equipment product line of The Arnold Palmer Golf
Company, for approximately $4.1 million, subject to purchase price adjustments.
The Company has signed an agreement to acquire Ladies Golf Equipment Company,
Inc. ("Ladies Golf"), a supplier of women's golf footwear and other golf
accessories, through the
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Company's wholly-owned subsidiary, S2 Golf Acquisition Corp. Consideration for
the acquisition will be in the form of cash and stock. The acquisition is
subject to the approval of the shareholders of the Company and of Ladies Golf in
December 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Net Sales for the three-month and nine-month periods ended September 29, 2000
were $3,091,279 and $9,883,325, respectively, compared to $2,536,905 and
$8,730,735 for the same periods in 1999. Management attributes these 21.9% and
13.2% increases, respectively, in sales over the same periods in the prior year
primarily to the Company's acquisition of the NancyLopezGolf[TM] product line,
effective July 31, 2000, which generated net sales of approximately $405,000, as
well as to the continued strength of the Company's Square Two women's business,
supported by the Company's national television advertising campaign.
Gross profits as a percentage of sales for the three-month and nine-month
periods ended September 29, 2000 were 33.5% and 34.8%, respectively, as compared
to 33.7% and 32.6% for the same periods in 1999. Management attributes these
increases primarily to differences in the mix of products shipped during the
comparison periods and to lower costs for some components in the period ended
September 29, 2000.
Selling expenses for the three-month and nine-month periods ended September 29,
2000 were $530,304 and $1,524,493, respectively, compared to $375,399 and
$1,305,291 for the same periods in 1999. These increases for the three-month and
nine-month periods are the result of increased salaries, commissions,
advertising and public relations. In addition, the company incurred costs of
approximately $80,000 for player endorsements during the nine-month period ended
September 29, 2000; there were no such player endorsement costs in the
nine-month period ended October 1, 1999.
General and administrative expenses for the three-month and nine-month periods
ended September 29, 2000 were $348,066 and $1,066,082, respectively, compared to
$320,887 and $912,803 for the same periods in 1999. These increases for the
three-month and nine-month periods are due primarily to increased expenses in
connection with the Company's acquisition in July 2000 of the assets of
NancyLopezGolf[TM] and the pending acquisition of Ladies Golf through the
Company's subsidiary, S2 Golf Acquisition Corp.
Interest expense for the nine-month period ended September 29, 2000 was
$138,136, which reflected a 6.1% decrease compared to the same period in 1999.
The average loan balance for the nine-month period ended September 29, 2000 was
$1,506,650, compared to an average loan balance of $2,245,089 for the nine-month
period ended October 1, 1999.
The Company's net income for the three-month and nine-month periods ended
September 29, 2000 was $60,013 and $462,755, respectively, compared to $91,588
and $332,629 for the same periods in 1999. These changes reflect the combined
effects of the 21.9% and 13.2% increases
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in net sales in the three and nine month periods measured in 2000 over the same
periods last year and increases in general and administrative expenses due to
the NancyLopezGolf[TM] acquisition.
FINANCIAL CONDITION AND LIQUIDITY
---------------------------------
In the nine-month period ended September 29, 2000, the Company's working capital
decreased by $1,137,793 and current assets increased by $2,061,824, offset by an
increase in current liabilities of $3,199,617. In the same period, accounts
receivable increased by approximately $800,000 and inventory increased by
approximately $1,104,000, which was mainly due to the acquisition of
NancyLopezGolf[TM]. In addition, prepaid expenses and deferred income taxes
increased approximately $109,000 and $15,900, respectively. The Company's
short-term borrowing increased by approximately $1,867,000, which was a result
of the NancyLopezGolf[TM] acquisition. In addition, accounts payable increased
by approximately $734,000, accrued expenses increased by $288,000, other current
liabilities increased by $11,000, and there was an increase of $300,000 for the
current portion of a long-term debt due to the acquisition of
NancyLopezGolf[TM].
Cash provided by operations was $1,633,022 and $2,610,788 for the nine-month
periods ending September 29, 2000 and October 1, 1999, respectively. Cash
provided by financing activities totaled $2,741,525 for the nine-month period
ended September 29, 2000 and cash used to reduce financing activities totaled
$2,547,290 for the same nine-month period in 1999. During the nine-month period
ended September 29, 2000, cash used for the purchase of the NancyLopezGolf[TM]
product line was $4,318,282 and payment of equipment purchased was $56,265.
Interest charges on short and long-term borrowings were $138,136.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
-----------------
On July 21, 1999, a former Vice President of the Company filed a complaint
against the Company in the Essex County Superior Court of New Jersey in
connection with the termination of his employment. He claims damages of
approximately $50,000. The Company intends to defend this lawsuit vigorously.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
(a) The exhibits listed on the attached Exhibit Index are filed as part of this
report.
(b) The Company filed a Current Report on Form 8-K on August 14, 2000 to report
its July 31, 2000 acquisition of substantially all of the assets of
NancyLopezGolf,[TM] and a Current Report on Form 8-K/A on September 29, 2000 to
provide financial statements and pro forma financial information related to the
same acquisition.
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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.
/s/ Douglas A. Buffington
-------------------------
Dated: 11/13/00 By: Douglas A. Buffington
President, Chief Operating
Officer, Chief Financial
Officer and Treasurer
10
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT*
3.1 Amended and 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 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 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 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).
10.3 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 of 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 registrant's
Annual Report on Form 10-K for the year ended December 31,
1995).
11
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT*
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, 1998 (incorporated by reference to
Exhibit 10.9 to the registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000).
10.10** Agreement between the registrant and Randy A. Hamill dated
January 2, 1997 (incorporated by reference to Exhibit 10.10 of
the registrant's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.11 Second Amendment to Loan and Security Agreement between
registrant and PNC Bank dated 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).
10.12 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).
10.13 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).
10.14 Asset Purchase Agreement dated July 31, 2000 among the
registrant, APGC Holdings Company, LLC and The Arnold Palmer
Golf Company (incorporated by reference to Exhibit 2.0 to the
registrant's Current Report on Form 8-K reporting the event
dated July 31, 2000).
12
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT*
10.15 Fourth Amendment to Loan and Security Agreement between the
registrant and PNC Bank, National Association, dated as of July
31, 2000 (incorporated by reference to Exhibit 10.14 to the
registrant's Registration Statement No. 333-47908 on Form S-4).
10.16 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).
21.0 Subsidiaries of the registrant.
27 Financial Data Schedule.
* In the case of incorporation by reference to documents filed by
the registrant under the Exchange Act, the registrant's file
number under the Act is 0-14146.
** Management contract or management compensatory plan or
arrangement.
13
