Commission File Number 0-29014
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
TEARDROP GOLF COMPANY
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 51-105660
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
32 Bow Circle, Building #1
Hilton Head, South Carolina 29928
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (803) 686-4995
Check whether issues (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 |_|
Number of shares of Common Stock outstanding as of August 1, 1997: 2,187,500
Transitional Small Business Disclosure Format (Check One): Yes |_| No |X|
<PAGE>
TEARDROP GOLF COMPANY
FORM 10-QSB INDEX
FOR QUARTERLY PERIOD ENDED JUNE 30, 1997
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Balance Sheet 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Conditions 8-12
Part II. Other Information 12
Signature Page 13
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
TEARDROP GOLF COMPANY
BALANCE SHEET
(Unaudited)
June 30, 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,145,013
Accounts receivable, less allowance for doubtful
accounts of $121,000 548,880
Inventories 495,814
Prepaid advertising 694,851
Other current assets 179,443
-----------
Total current assets $3,064,001
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization 254,341
OTHER ASSETS, intangible assets, less
accumulated amortization 27,654
----------
$3,345,996
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of obligation under capital lease $ 16,272
Accounts payable and other current liabilities 816,816
-----------
Total current liabilities $ 833,088
NOTES PAYABLE, stockholders, less current portion 406,589
OBLIGATION UNDER CAPITAL LEASE, less
current portion 50,750
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
authorized 1,000,000 shares, issued and
outstanding none
Common stock, $.01 par value, authorized
10,000,000 shares, issued and outstanding
2,187,500 shares 21,875
Capital in excess of par value 6,466,231
Accumulated deficit (4,432,537)
-----------
Total stockholders' equity 2,055,569
----------
$3,345,996
==========
See accompanying notes to financial statements.
3
<PAGE>
TEARDROP GOLF COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- -----------------------
<S> <C> <C> <C> <C>
SALES $1,222,140 $ 385,521 $1,404,481 $ 475,412
COST OF SALES 277,442 153,584 319,386 208,396
---------- ---------- ---------- ----------
GROSS PROFIT 944,698 231,937 1,085,095 267,016
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,405,143 196,369 3,276,216 435,175
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (1,460,445) 35,568 (2,191,121) (168,159)
INTEREST INCOME (EXPENSE) 8,847 (52,081) 40,538 (83,427)
---------- ---------- ---------- ----------
NET LOSS $(1,451,598) $ (16,513) $(2,150,583) $ (251,586)
=========== ========== =========== ==========
NET LOSS PER COMMON SHARE $ (0.66) $ (0.02) $ (0.99) $ (0.34)
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,187,500 750,000 2,162,638 750,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
TEARDROP GOLF COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,150,583) $(251,586)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 33,092 16,061
Provision for doubtful accounts 70,512 3,702
Stock and stock options issued for services 32,383 500
Accrued interest on stockholders' notes 18,219 66,271
Changes in assets and liabilities:
Increase in accounts receivable (389,190) (83,358)
Increase in inventories (389,033) (19,858)
Increase in prepaid advertising (479,810)
(Increase) decrease in other current assets (113,236) 375
Increase in accounts payable and other current liabilities 139,098 7,240
---------- ---------
NET CASH USED IN OPERATING ACTIVITIES (3,228,548) (260,653)
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES, purchases
of property and equipment (117,937) (1,501)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (300,000)
Payments on obligations under capital lease (8,269) (7,423)
(Payments on) proceeds from stockholders' notes (443,389) 256,125
Proceeds from issuance of common stock 734,163
----------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (17,495) 248,702
----------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,363,980) (13,452)
CASH AND CASH EQUIVALENTS:
Beginning of period $ 4,508,993 15,868
----------- ---------
End of period $ 1,145,013 $ 2,416
=========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION, cash paid during the period for interest $ 17,701 $ 18,656
=========== =========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
TEARDROP GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ACCOUNTING POLICIES:
The accounting policies followed by the Company are set forth in Note
1 of the Company's financial statements on Form 10-KSB for the year
ended December 31, 1996. The financial statements should be read in
conjuction with the financial statements and the notes thereto,
together with management's discussion and analysis of financial
condition and results of operations contained in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996. The
results of operations for the six months ended June 30, 1997 are not
necessarily indicative of the results for the entire fiscal year
ending December 31, 1997.
In the opinion of management, the accompanying financial statements
contain the necessary adjustments, all of which are of a normal and
recurring nature, to present fairly Teardrop Golf Company's financial
position at June 30, 1997 and the results of its operations for the
three and six months ended June 30, 1997 and 1996 and its cash flows
for the six months ended June 30, 1997 and 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE 2 - INVENTORIES:
Inventories consist of the following at June 30, 1997:
Raw materials $ 441,274
Finished goods 54,540
----------
$ 495,814
==========
NOTE 3 - STOCKHOLDERS' EQUITY
In January 1997, the Company's underwriters exercised their
over-allotment option to sell an additional 187,500 shares of common
stock at $4.50 per share (net proceeds of approximately $734,000).
Proceeds of approximately $422,000 were used to repay stockholder
notes, plus accrued interest, of which $351,000 was paid to the
Company's Chief Executive Officer (CEO) in repayment of amounts due to
him under the notes.
NOTE 4 - COMMITMENTS AND CONTINGENCIES:
In January 1996, the Company entered into an endorsement agreement
with a PGA touring professional for three years. The agreement
provides for payments of $70,000 and $98,000 during the years ending
December 31, 1997, and 1998, respectively. In addition, the agreement
provides for certain bonuses based on tournament performances and
sales in Australia and New Zealand, as defined. This agreement was
modified on January 17, 1997. The modified agreement provides for
guaranteed compensation of $50,000. In addition, the Company granted
options to acquire 1,000 shares of the Company's common stock for
$4.75 per share. These options vest immediately and expire five years
from the grant date.
The Company entered into a two year advertising agreement commencing
January 1, 1997, with a one year renewal option. The Company will be
obligated to pay an aggregate of approximately $770,000 for
advertising services, as defined in the agreement.
6
<PAGE>
TEARDROP GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
On November 18, 1996, the Company entered into a three year employment
agreement with its CEO commencing December 19, 1996. The agreement
provides for annual compensation of $175,000, with a one year renewal,
and performance bonuses, as defined. The agreement further provides
that the CEO may not engage in certain competitive activities, as
defined, for two years after termination of the employment agreement.
On November 18, 1996, the Company entered into an agreement for the
production of an infomercial. The agreement provides for a fee of
$132,500, to be paid in installments during the production of the
infomercial, and for royalties to be paid of 1% of net worldwide
television sales, as defined.
In December 1996, the Company entered into one year endorsement
agreements with nine touring golf professionals, which commenced
January 1, 1997. The agreements provide for base compensation, which
ranges between $8,000 and $75,000 per annum, and bonuses based upon
tournament performance. In conjunction with these agreements, the
Company granted options to acquire an aggregate of 11,200 shares of
the Company's common stock at $4.75 per share. These options vest
immediately and expire five years from the grant date.
In 1997, the Company entered into one and two year endorsement
agreements with ten touring golf professionals, which commenced
January 1, 1997. The agreements provide for base compensation, which
ranges between $12,000 and $60,000 per annum, and bonuses based upon
tournament performance. Certain of these bonuses are in the form of
additional stock option grants, as defined in the agreements, at an
exercise price based upon the market value of the common stock on the
date of the grant. In conjunction with these agreements, the Company
granted options to acquire an aggregate of 12,100 shares of the
Company's common stock at $4.75 per share. These options vest
immediately and expire five years from the grant date.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following should be read in conjunction with the Company's financial
statements and the related notes thereto included elsewhere herein.
Overview
The Company introduced its first product, the TearDrop putter, in 1993 and
commenced significant marketing and sales activities in 1994. Since the
introduction of the TearDrop putter, the Company has expanded its product line
to include 12 putters and three wedges, and in 1997 restyled its line of
putters. In order to achieve profitability, the Company will be required to
address numerous issues, including, among others: (i) increasing market
awareness of, and demand for, its existing products, (ii) effectively
introducing, over time, additional innovative golf clubs to the market, (iii)
accurately gauging demand for its products, (iv) determining viable price points
for such products, (v) maintaining and strengthening its supply channels, (vi)
designing efficient manufacturing and assembling systems to meet demand for its
products, and (vii) continuing to build efficient channels of distribution.
There can be no assurance that the Company will ever achieve profitability, or
that if such profitability is attained, that it can be maintained.
In early 1997, the Company commenced a substantial television and print
advertising campaign, including the production and airing of a television
infomercial and a series of television commercials. The costs to produce the
infomercial and commercials and to show these on the air have been substantial
and the Company must continue to incur these costs during the third and fourth
quarters of 1997 in order to continue to increase consumer awareness of its
products. Although the Company's sales have not increased at the same rate as
its expenditures, the Company believes that its advertising efforts have been
important for increasing exposure of the Company's products and have been
instrumental in the Company's increased sales. Accordingly, the Company expects
to continue to incur losses during these periods as it continues its advertising
program.
The Company believes that an important element for introducing and
increasing awareness of its golf clubs is the building of a corp of touring
professional golfers that will endorse, use and win with the Company's clubs.
Accordingly, as an integral part of its marketing strategy, the Company
continually seeks to obtain professional endorsements of its clubs. The Company
has entered into an agreement with, among others, George Archer, a touring
professional on the Senior PGA Tour, to use and endorse the Company's products.
The Company's agreements with its endorsing professionals provide for base
payments of between $8,000 and $75,000 in consideration of the use of the
professionals' names in connection with the marketing of the Company's clubs and
the use of the clubs by such professionals in tournament play. In addition,
bonus payments which could be substantial may be made by the Company based upon
tournament performance. The Company has granted stock options to its endorsing
professionals and intends to continue to do so in the future. The effect of a
particular
8
<PAGE>
professional's endorsement on the successful marketing of the Company's clubs,
and the heightening of awareness of the Company's name, may be directly related
to the success of such professional in tournament play. The Company, however,
will be required to compensate a professional whether or not he is successful.
In order to succeed with its marketing strategy, the Company believes it will be
required to enter into endorsement agreements with additional touring
professional golfers who will be successful in tournament play.
The Company has recently begun to conduct research, development and design
with its own employees. The Company also works closely with component
manufacturers, independent design consultants and the Company's endorsing golf
professionals in the design and development of new products and product
improvements. Accordingly, the Company incurs regular, ongoing expenses relating
to salaries of in-house design personnel, as well as design consulting fees when
a new club or product improvement is in the development phase. The Company does
not have any agreements with independent design consultants, but has
historically been able to retain the services of qualified designers when
needed. The inability on the part of the Company to retain qualified design
consultants possessing suitable technical expertise when needed in the future
could result in delays in the introduction of a new product or product
improvement, which could adversely affect sales.
The market for high quality, premium priced golf clubs is highly
competitive and includes a number of well-established companies that have more
readily recognizable brand names and financial resources. The Company faces
competition on the basis of price, reputation and qualitative distinctions among
available products. Recently, there has been consolidation of golf club
manufacturers that compete with the Company. In particular, in recent weeks two
companies specializing in the manufacture of putters have announced that they
were to be acquired by large golf club manufacturers. The Company cannot predict
what effect the consolidation of competitors will have on the Company's sales,
the market acceptance of the Company's golf clubs or the market price of its
securities.
Results of Operations
The Company had sales of $1,222,140 during the quarter ended June 30, 1997
and $1,404,481 during the first six months of 1997 as compared to sales of
$385,521 during the quarter ended June 30, 1996 and $475,412 during the first
six months of 1996, an increase of approximately 217% and 195%, respectively.
This increase is attributable to increased marketing and advertising, and
increased capabilities during 1997 of producing and delivering clubs.
The cost of sales primarily consists of amounts paid for the purchase of
the components used in the assembly of the Company's golf clubs and costs
relating to the machining and milling of such components and assembly thereof
into finished golf clubs. Cost of sales was $277,442 (22.7% of sales) during the
quarter ended June 30, 1997 and $319,386 (22.7% of sales) during the first six
months of 1997 as compared to $153,584 (39.8% of sales) during the quarter ended
June 30, 1996 and $208,396 (43.8% of sales) during the first six months of 1996.
This decline in costs as a percentage of sales is attributable to increased
efficiency in producing and delivering clubs during the first six months of
1997.
9
<PAGE>
During the quarter ended June 30, 1997, selling, general and administrative
expenses were $2,405,143 as compared to $196,369 during the quarter ended June
30, 1996. During the first six months of 1997, selling, general and
administrative expenses were $3,276,216 as compared to $435,175 during the first
six months of 1996. This increase is attributable to substantial increases in
marketing and advertising activities, including television and print
advertising, production and airing of a television infomercial and a series of
television commercials and the Company's hiring of additional marketing and
sales personnel. The Company intends to continue its aggressive advertising and
marketing campaign through the end of the third quarter of 1997, with a
reduction in such expenditures during the fourth quarter of 1997.
As a result of increasing expenses and costs relating to the growth of the
Company, the Company experienced a net loss of $1,451,598 during the quarter
ended June 30, 1997 and a net loss of $2,150,583 during the first six months of
1997 as compared to a net loss of $16,513 during the quarter ended June 30, 1996
and a net loss of $251,586 during the first six months of 1996. The Company's
inability to offset such increased costs and expenses by sufficient increases in
sales resulted in the increased net loss during the quarter and six months ended
June 30, 1997 as compared to the same periods of the prior year.
Liquidity and Capital Resources
The Company had working capital of $2,230,913 at June 30, 1997. Since
inception, the Company's internally generated cash flow has not been sufficient
to finance operations. Further, the Company has experienced severe working
capital shortfalls in the past, which have restricted the Company's ability to
conduct its business as anticipated. As a result, the Company has in the past
been substantially dependent upon loans from its current stockholders in order
to maintain its operations. The $400,000 of remaining debt owed to a current
stockholder will be payable upon the earlier of the date of exercise of its
outstanding Common Stock Purchase Warrants (to the extent proceeds derived
therefrom are sufficient to make repayment) and December 19, 1999.
The Company had accounts receivable, less allowance for doubtful accounts,
of $548,880 at June 30, 1997. The Company has provided extended payment terms to
several international distributors in order to encourage initial purchases of
its clubs. Accordingly, approximately $107,000, or 16% of such accounts
receivable are over 90 days old at June 30, 1997. The Company does not
anticipate that it will continue to extend such liberal payment terms. However,
as it expands its activities, it may do so again in order to increase its
exposure to the market for its products. The Company has not experienced
significant collection problems or credit risks in the past.
The Company has entered into an advertising agreement with the Golf Channel
which commenced January 1, 1997 and ends on December 31, 1998. The agreement
provides that the Company will pay $770,000 to the Golf Channel over the term of
the agreement for the broadcast of commercial advertising during, and
sponsorship of certain television programming produced by the Golf Channel. The
Company has also incurred substantial expenses and undertaken substantial
financial commitments to commence its media campaign including
10
<PAGE>
the production of its television infomercial, its television commercial and its
print advertisements and has purchased substantial advertising time during the
next several months on a variety of broadcast and cable television channels. The
Company will depend upon increased sales to satisfy these obligations and to
recover these costs. In addition, the Company has entered into endorsement
agreements with 20 touring golf professionals that provide for minimum annual
payments that range from $8,000 to $75,000. These agreements also provide for
bonuses, which could be substantial if the professionals are successful in
tournament play.
The Company is conducting an aggressive advertising and marketing campaign
in order to increase the exposure of the Company's products and increase sales.
The Company's expenditures and commitments for advertising and marketing have
been substantial and the Company must continue to incur such costs in order to
continue to increase consumer awareness of its products. If the Company's sales
do not increase substantially to cover its expenditures, it will be required to
limit its advertising expenditures and expansion plans or seek additional
financing in order to continue operations. There can be no assurance that any
additional financing will be available to the Company on acceptable terms, if at
all, when required by the Company. The inability to obtain additional financing
when needed would have a material adverse effect on the Company's liquidity,
and, as a result, the Company could be required to significantly reduce or
suspend its operations, seek a merger partner or sell some or all of its assets.
Seasonality
The purchasing decisions of most customers are typically made in the
autumn and the vast majority of sales are expected to occur during the first six
months of the year. In addition, quarterly results may vary from year to year
due to the timing of new product introductions, orders and sales, advertising
expenditures, promotional periods and shipments. Accordingly, comparisons of
quarterly information of the Company's results of operations may not be
indicative of the Company's overall annual performance.
Forward Looking Statements
When used in this and in future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases and in oral statements
made with the approval of an authorized executive officer of the Company, the
words or phrases "will likely result," "expects," "plans," "will continue," "is
anticipated," "estimated," "project" or "outlook" or similar expressions
(including confirmations by an authorized executive officer of the Company of
any such expressions made by a third party with respect to the Company) are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements, each
of which speak only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. They
include the risks of market acceptance of or preference for the Company's golf
clubs, competitive forces, the impact of, and changes in, general economic
factors in the golf club industry and other factors discussed in the Company's
filings with the Securities and Exchange Commission. The Company has no
11
<PAGE>
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed by the Registrant
during the quarter ended June 30, 1997.
12
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TEARDROP GOLF COMPANY
/s/ Rudy A. Slucker
Dated: August 13, 1997 ---------------------------------
Rudy A. Slucker, President, Chief
Executive Officer and Principal
Accounting Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,145,013
<SECURITIES> 0
<RECEIVABLES> 548,880
<ALLOWANCES> 121,000
<INVENTORY> 495,814
<CURRENT-ASSETS> 3,064,001
<PP&E> 254,341
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,345,996
<CURRENT-LIABILITIES> 833,088
<BONDS> 0
0
0
<COMMON> 21,875
<OTHER-SE> 6,466,231
<TOTAL-LIABILITY-AND-EQUITY> 3,345,996
<SALES> 1,404,481
<TOTAL-REVENUES> 1,404,481
<CGS> 319,386
<TOTAL-COSTS> 319,386
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,150,583)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,150,583)
<EPS-PRIMARY> (.99)
<EPS-DILUTED> 0
</TABLE>
