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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 March 30, 2001.
[ ] 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.
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(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
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(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
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On March 30, 2001, 3,223,039 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 March 30, 2001
INDEX
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PART I. FINANCIAL INFORMATION Page Number
Item 1. FINANCIAL STATEMENTS
Balance Sheets -
March 30, 2001 and December 31, 2001 1
Statements of Operations -
Three Months Ended March 30, 2001
and March 31, 2000 2
Statements of Cash Flows -
Three Months Ended March 30, 2001
and March 31, 2000 3
Notes to Financial Statements 4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 5
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 6
PART II. OTHER INFORMATION 6
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 6
SIGNATURES 7
EXHIBIT INDEX 8
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
S2 GOLF INC.
BALANCE SHEETS
AS OF MARCH 30, 2001 (UNAUDITED)
AND DECEMBER 31, 2000 (AUDITED)
March 30, December 31,
2001 2000
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ASSETS
Current Assets
Cash $ 18,203 $ 9,886
Accounts Receivable - Net 4,621,028 3,567,768
Inventories 5,060,697 4,046,122
Prepaid Expenses 347,690 205,982
Deferred Income Taxes 226,000 214,000
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Total Current Assets 10,273,618 8,043,758
Plant and Equipment - Net 196,758 195,907
Non-Current Deferred Income Taxes 0 6,000
Goodwill 5,224,424 5,307,919
Other Assets Net 121,294 125,056
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Total Assets 15,816,094 13,678,640
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Portion Long Term Debt $1,307,242 $1,447,189
Short term Borrowings 5,023,560 3,460,828
Accounts Payable 1,514,825 936,614
Accrued Expenses 499,578 442,335
Other Current Liabilities 67,338 83,847
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Total Current Liabilities 8,412,543 6,370,813
Long-Term Liabilities
Long-Term Debt, less current portion 425,000 509,847
Other Long-Term Liabilities 7,901 2,258
Non-current Deferred Income Taxes 1,000 0
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Total Liabilities 8,846,444 6,882,918
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Shareholders' Equity
Common Stock, $.01 Par; 12,000,000
Shares Authorized: 3,223,039 &
3,223,039 Issued & Outstanding
at March 30, 2001 and
December 31, 2000, respectively 32,231 32,231
Additional Paid in Capital 6,347,757 6,347,757
Retained Earnings 589,662 415,734
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Total Shareholders' Equity 6,969,650 6,795,722
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Total Liabilities and
Shareholders'
Equity $15,816,094 $ 13,678,640
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
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S2 GOLF INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 30, 2001 AND MARCH 31, 2000
(UNAUDITED)
March 30, March 31,
2001 2000
Net Sales $ 4,521,595 $ 2,864,670
Cost of Goods Sold 2,649,891 1,913,827
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Gross Profit 1,871,704 950,843
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Operating Expenses:
Selling 823,633 433,134
General & Administrative 661,459 306,153
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Total Operating Expenses 1,485,092 739,287
Operating Income 386,612 211,556
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Other (Income) Expense
Interest Expense 109,770 20,691
Other Income (40,459)
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69,311 20,691
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Income Before Income Taxes 317,301 190,865
Provision for Income Taxes 143,373 76,828
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Net Income $ 173,928 $ 114,037
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Earnings per Common Share - Basic $ 0.05 $ 0.05
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- Diluted $ 0.05 $ 0.05
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Weighted Average Number of Common Shares Outstanding -
Basic 3,223,039 2,220,113
Diluted 3,269,285 2,268,279
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
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S2 GOLF INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 30, 2001 AND MARCH 31, 2000
(UNAUDITED)
March 30, March 31,
2001 2000
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OPERATING ACTIVITIES
Net Income $173,928 $114,037
Adjustments to Reconcile Net
Income to Net Cash Provided
By Operating Activities:
Depreciation 26,588 14,462
Amortization 91,413
Deferred Income Taxes (5,000) (15,900)
Allowance for Doubtful Accounts 60,389
Changes in Assets and Liabilities:
Accounts Receivable (1,113,649) (1,144,283)
Inventories (1,014,575) (142,727)
Prepaid Expenses (141,708) 44,841
Other Assets 3,762 0
Accounts Payable 578,211 629,819
Accrued Expenses 57,243 111,940
Other Current and
Non-Current
Liabilities (16,509) (14,822)
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NET CASH USED IN OPERATIONS (1,299,907) (402,633)
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INVESTING ACTIVITIES
Purchase of Equipment (35,357) (25,364)
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FINANCING ACTIVITIES
Repayments of long-term debt (219,151)
Proceeds from Revolving Line
of Credit, Net 1,562,732 427,997
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NET CASH PROVIDED BY FINANCING ACTIVITIES 1,343,581 427,997
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INCREASE IN CASH 8,317 0
CASH - BEGINNING OF PERIOD 9,886 150
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CASH - END OF PERIOD $18,203 $150
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SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash Paid During the Year For:
Interest $138,136 $20,691
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Income Taxes $60,000 $0
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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 accounting principles generally accepted
in the United States of America 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 three months ended March 30, 2001 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 2001. 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, 2000.
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 March 30, 2001 and December 31, 2000 consisted of the following
components:
3/30/01 12/31/00
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Raw Materials $4,261,107 $3,404,600
Finished Goods 799,590 641,522
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$5,060,697 $4,046,122
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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
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at prime plus one-quarter percent, paid monthly; the interest rate was 8.25% as
of March 30, 2001 and 9.75% as of December 31, 2000. The Company's availability
on the line of credit, as of March 30, 2001, was approximately $325,130.
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 March 30,
2001.
4) 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 2001 will
end on March 30, 2001, June 29, 2001, and September 28, 2001. The Company
reports its year-end financial statements as of December 31.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales for the three-months ended March 30, 2001 were $4,521,595, compared to
$2,864,670 for the same period in 2000. Management attributes this 57.8%
increase in sales over the same period in the prior year primarily due to the
acquisitions of the Nancy Lopez and Lady Fairway product lines. These
acquisitions accounted for approximately $1,775,000 of the $1,656,925 increase,
offset by a decline of approximately $118,000 in the Square Two brand. The
primary reason for the decline in the Square Two brand was a softening of demand
for the men's clubs. The Square Two women's clubs increased 15%.
Gross profit as a percentage of sales for the three-month period ended March 30,
2001 was 41.4%, as compared to 33.2% for the same period in 2000. Management
attributes this increase to the higher margin sales of the NancyLopezGolf brand
and the Lady Fairway brand along with lower component pricing for the Square Two
brand.
Selling expenses for the three-month period ended March 30, 2001 were $823,633,
compared to $433,134 for the same period in 2000. This three-month difference is
the result of increased expenses of approximately $142,000 due to the Lady
Fairway acquisition, as well as increased PGA show expense, advertising, public
relations and commissions. In addition, the Company incurred player endorsements
during the three-month period ended March 30, 2001 that did not exist in the
three-month period ended March 31, 2000, which was approximately $50,000.
General and Administrative expenses for the three-month period ended March 30,
2001 were $661,459, compared to $306,153 for the same period in 2000. This is
due primarily to increased expenses of approximately $142,000 due to Lady
Fairway acquisition as well as increased salaries and wages, printing,
professional and legal fees and amortization of goodwill for both NancyLopezGolf
and Lady Fairway.
Interest expense for the three-month period ended March 30, 2001 was $109,770,
compared to $20,691 for the same period in 2000. The average loan balance for
the three-month period ended March 30,
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2001 was $4,379,130 compared to an average loan balance of $1,179,442 for the
three-month period ended March 31, 2000. This increase in the average
outstanding balance resulted mainly from the NancyLopezGolf acquisition, as well
as from increased inventory. The NancyLopezGolf acquisition, which occurred on
July 31, 2000, was a cash purchase of approximately $3,645,000 after
post-closing adjustments, which the Company funded with a term loan of $900,000
and the existing line of credit. Interest expense for the three-month period
ended March 30, 2001 also includes $25,000 projected interest expense on the
Promissory Note with a maturity date of December 31, 2001 that the Company
issued in connection with the Lady Fairway acquisition.
Other Income for the three-month period ended March 30, 2001 was $40,459
compared to $0 for the same period in 2000. This increase is due to royalty
income from international distributors.
The Company's net income for the three-month period ended March 30, 2001 was
$173,928, compared to $114,037 for the same period in 2000. This increase is the
result of a 57.8% increase in net revenue, gross margins improving to 41.4%,
offset by increased sales, general and administrative, interest and other
expense due to the Nancy Lopez and Lady Fairway acquisitions.
FINANCIAL CONDITION AND LIQUIDITY
The Company's working capital increased by $188,130 for the three-month period
ended March 30, 2001. Current assets increased by $2,229,860, offset by an
increase in current liabilities of $2,041,730. Accounts receivable increased by
approximately $1,053,000, inventory increased by approximately $1,015,000 for
the three-month period ended March 30, 2001, which was typical for the Company
due to the cyclical nature of the golf industry. In addition, pepaid expenses
increased approximately $142,000. The Company's short-term borrowing increased
by approximately $1,563,000, which was a result of the acquisitions, as well as
increased inventory. In addition, accounts payable increased by approximately
$578,000 for the three-month period ended March 30, 2001.
Cash used by operations was $1,299,907 and $402,633 for the three-month period
ending March 30, 2001 and March 31, 2000, respectively. Cash provided by
financing activities totaled $1,343,581 for the three-month period ended March
30, 2001 and $427,997 for the same three-month period in 2000. During the
three-month period ended March 30, 2001 cash used for the payment of equipment
purchased was $35,357 and $25,364 respectively. Cash paid for interest charges
on short and long-term borrowings was $138,136 and $20,691 for the three-month
periods ended March 30, 2001 and March 31, 2000, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II. OTHER INFORMATION
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.
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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.
05/11/2001 /s/ Douglas A. Buffington
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Dated By: Douglas A. Buffington
President, Chief Financial Officer,
Chief Operating Officer and Treasurer
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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 Bylaws of the registrant dated December
6, 1991 (incorporated by reference to Exhibit 3.2 of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1991).
4.1 Common Stock Purchase Warrant in favor of Wesmar Partners
dated February 28, 1988 (incorporated by reference to Exhibit
4.4 of the registrant's Registration Statement No. 33-37371 on
Form S-3).
4.2 Common Stock Purchase Warrant in favor of Wesmar Partners
dated February 28, 1988 (incorporated by reference to Exhibit
4.5 of the registrant's Registration Statement No. 33-37371 on
Form S-3).
4.3 Stock Option Agreement between the registrant and Wesmar
Partners dated February 29, 1988 (incorporated by reference to
Exhibit 4.6 of the registrant's Registration Statement No.
33-37371 on Form S-3).
10.0 Loan and Security Agreement between the registrant and
Midlantic Bank, National Association dated December 29, 1994
(incorporated by reference to Exhibit 99 of the registrant's
Current Report on Form 8-K dated December 26, 1994).
10.1 First Amendment to Loan and Security Agreement between the
registrant and Midlantic Bank, National Association made as of
April 9, 1996 (incorporated by reference to Exhibit 10.1 of
the registrant's Annual Report on Form 10-K for the year ended
December 31, 2000).
10.2 Second Amendment to Loan and Security Agreement between
registrant and PNC Bank, National Association as successor in
interest of Midlantic Bank, National Association made as of
December 1, 1997 (incorporated by reference to Exhibit 10.12
of the registrant's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.3 Fourth Amendment to Loan and Security Agreement between the
registrant and PNC Bank, National Association dated as of July
31, 2000 (incorporated by reference to Exhibit 10.14 to the
registrant's Registration Statement No. 333-47908 on Form
S-4).
10.4 Fifth Amendment to Loan and Security Agreement between the
registrant and PNC Bank, National Association made as of
January 3, 2001 (incorporated by reference to Exhibit 10.4 of
the registrant's Annual Report on Form 10-K for the year ended
December 31, 2000).
10.5 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).
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10.6 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).
10.7 Lease Modification, Extension, Assignment, Assumption and
Consent among Joel Levy as Successor Land Trustee of Trust
Number One under Unrecorded Land Trust Agreement dated as of
November 29, 1999, Ladies Golf Equipment Company, Inc. and S2
Golf Acquisition Corp., dated as of December 29, 2000
(incorporated by reference to Exhibit 10.7 of the registrant's
Annual Report on Form 10-K for the year ended December 31,
2000).
10.8 Amended and Restated Licensing Agreement between Ladies
Professional Golf Association and the registrant dated January
1, 1999 (incorporated by reference to Exhibit 10.2 of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1999).
10.9 Endorsement Agreement between the registrant and Kathy
Whitworth dated October 13, 1999 (incorporated by reference to
Exhibit 10.13 to the registrant's Annual Report on Form 10-K
for the year ended December 31, 1999).
10.10 Licensing Agreement between Nancy Lopez Enterprises, Inc. and
the registrant made as of July 31, 2000 (incorporated by
reference to Exhibit 10.10 of the registrant's Annual Report
on Form 10-K for the year ended December 31, 2000).
10.11 License Agreement between the registrant and Raymond Lanctot
Ltee/Ltd. dated June 28, 1999 (incorporated by reference to
Exhibit 10.12 of the registrant's Annual Report on Form 10-K
for the year ended December 31, 1999).
10.12 Asset Purchase Agreement among the registrant, APGC Holdings
Company, LLC and The Arnold Palmer Golf Company dated July 31,
2000 (incorporated by reference to Exhibit 2.0 to the
registrant's Current Report on Form 8-K reporting the event
dated July 31, 2000).
10.13 Agreement and Plan of Reorganization, dated as of June 22,
2000, among the registrant, S2 Golf Acquisition Corp., Ladies
Golf Equipment Company, Inc., James E. Jones and Brian
Christopher (incorporated by reference to Exhibit 2.0 of the
registrant's Registration Statement No. 333-47908 on Form
S-4).
10.14 1992 Stock Plan for Independent Directors of S2 Golf Inc.
dated December 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).
10.15** 1998 Employee Stock Plan of the registrant (incorporated by
reference to Exhibit 10.15 of the registrant's Annual Report
on Form 10-K for the year ended December 31, 2000).
10.16** Agreement between the registrant and Randy A. Hamill dated
January 2, 1997 (incorporated by reference to Exhibit 10.10 of
the registrant's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.17** Employment Agreement between the registrant and Douglas A.
Buffington made April 3,
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2001 and effective as of 1, 2001.
10.18** Consulting Services Agreement between the registrant and MR &
Associates made as of December 15, 2000, effective as of
January 1, 2000 (incorporated by reference to Exhibit 10.18 of
the registrant's Annual Report on Form 10-K for the year ended
December 31, 2000).
10.19** Employment Agreement among the registrant, S2 Golf Acquisition
Corp. and James E. Jones dated as of January 1, 2001
(incorporated by reference to Exhibit 10.19 of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 2000).
21.0 Subsidiaries of the registrant (incorporated by reference to
Exhibit 21.0 of the registrant's Quarterly Report on Form 10-Q
for the quarter ended September 29, 2000).
* In the case of incorporation by reference to documents filed by the registrant
under the Securities Exchange Act, the registrant's file number under the
Securities Exchange Act is 0-14146.
** Management contract or management compensatory plan or arrangement.
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