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 March 31, 1997
TEARDROP GOLF COMPANY
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 51-105660
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
32 Bow Circle, Building #1
Hilton Head, South Carolina 29928
(Address of principal executive office) (Zip Code)
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 May 10, 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 MARCH 31, 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 6-8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Conditions 9-12
Part II. Other Information 13
Signature Page 14
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
TEARDROP GOLF COMPANY
BALANCE SHEET
(Unaudited)
March 31, 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,011,184
Accounts receivable, less allowance for doubtful
accounts of $53,000 273,284
Inventories 388,975
Prepaid advertising 698,267
Other current assets 109,364
-----------
Total current assets $4,481,074
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization 194,114
OTHER ASSETS, intangible assets, less
accumulated amortization 28,651
-----------
$ 4,703,839
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable, bank $ 280,000
Current portion of notes payable, stockholders 30,227
Current portion of obligation under capital lease 15,872
Accounts payable and other current liabilities 449,065
-----------
Total current liabilities $ 775,164
NOTES PAYABLE, stockholders, less current portion 398,555
OBLIGATION UNDER CAPITAL LEASE, less
current portion 55,336
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 6,433,848
Accumulated deficit (2,980,939)
-----------
Total stockholders' equity 3,474,784
-----------
$ 4,703,839
===========
See accompanying notes to financial statements.
3
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TEARDROP GOLF COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months
Ended March 31,
-------------------------------
1997 1996
----------- -----------
SALES $ 182,341 $ 89,891
COST OF SALES 41,944 54,812
----------- -----------
GROSS PROFIT 140,397 35,079
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 871,073 238,806
----------- -----------
LOSS FROM OPERATIONS (730,676) (203,727)
INTEREST (EXPENSE) INCOME 31,691 (31,346)
----------- -----------
NET LOSS $ (698,985) $ (235,073)
=========== ===========
NET LOSS PER COMMON SHARE $ (0.33) $ (0.31)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,137,500 750,000
=========== ===========
See accompanying notes to financial statements.
4
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TEARDROP GOLF COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (698,985) $ (235,073)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 14,982 8,031
Provision for doubtful accounts 1,547 612
Accrued interest on stockholders' notes 8,163 21,914
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (44,629) 33,024
(Increase) in inventories (282,194) (34,961)
(Increase) in prepaid advertising (483,226)
(Increase) decrease in other current assets (43,157) 3,719
(Decrease) increase in accounts payable
and other current liabilities (228,653) 48,400
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,756,152) (154,334)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES, purchases
of property and equipment (40,597)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (300,000)
Proceeds from note payable, bank 280,000
Payments on obligations under capital lease (4,083) (3,665)
(Payments on) proceeds from stockholders' notes (411,140) 162,625
Proceeds from issuance of common stock 734,163
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 298,940 158,960
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,497,809) 4,626
CASH AND CASH EQUIVALENTS:
Beginning of period 4,508,993 15,868
----------- -----------
End of period $ 3,011,184 $ 20,494
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION, cash paid during the period for interest $ 16,065 $ 9,432
=========== ===========
See accompanying notes to financial statements.
5
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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 fiscal
year ended December 31, 1996.
In the opinion of management of the accompanying financial statements
contains the necessary adjustments, all of which are of a normal and
recurring nature, to present fairly Teardrop Golf Company's financial
position at March 31, 1997 and the results of operations for the three
months ended March 31, 1997 and 1996 and statement of cash flows for
the three months ended March 31, 1997 and 1996.
NOTE 2 - INVENTORIES:
Inventories consist of the following at March 31, 1997:
Raw materials $ 107,698
Finished goods 281,277
---------
$ 388,975
=========
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's
notes, plus accrued interest, of which $351,000 was paid to the
Company's Chief Executive Officer (CEO) in repayment of his note.
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.
In September 1996, the Company entered into an advertising agreement
for which the Company will receive media advertising valued at
approximately $101,000, in exchange for golf clubs of the same value.
6
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TEARDROP GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
The Company entered into a two year advertising agreement commencing
January 1, 1997, with a one year renewal. The Company will be
obligated to pay an aggregate of approximately $770,000 for
advertising services, as defined in the agreement.
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.
On December 6, 1996, the Company entered into an agreement with an
advertising agency to provide a nationally recognized athlete to
appear in the aforementioned infomercial. The agreement provides for a
guaranteed payment of $60,000 to be paid in two equal installments and
for the grant of options to acquire 2,000 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 agreement terminated on
February 28, 1997, at which time the Company extended the term until
December 31, 1997 by making an additional payment of $25,000 and
granted the options provided for in the agreement.
In December 1996, the Company entered into one year endorsement
agreements with nine touring golf professionals, which commence
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.
On December 24, 1996, the Company entered into a two year financial
consulting agreement with GKN Securities Corp. to pay the aggregate of
$60,000 for services to be rendered.
On January 9, 1997, the Company entered into a one year agency service
agreement, with a one year renewal. The agreement provides for the
agency to negotiate, purchase and arrange for the Company's
advertising in the United States and Canada. The agreement further
provides for a 15% commission based on the gross media cost, as
defined.
On January 13, 1997, the Company entered into a six month distribution
agreement in connection with the infomercial. The agreement grants the
distributor the exclusive right to advertise, promote, market and sell
the Company's products in Japan, Australia, Korea, Indonesia,
Malaysia, New Zealand, the Philippines, Singapore and Thailand.
7
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TEARDROP GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
On January 16, 1997, the Company entered into an agreement in which
the CEO is to be featured in a documentary program which will air in
1997. The agreement provides for a fee of $34,000 to be paid in two
equal installments during production.
In 1997, the Company entered into one and two year endorsement
agreements with six touring golf professionals, which commence 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 on the date of the grant.
In conjunction with these agreements, the Company granted options to
acquire an aggregate of 11,000 shares of the Company's common stock at
$4.75 per share. These options vest immediately and expire five years
from the grant date.
On March 21, 1997, the Company granted incentive stock options to
certain employees to acquire 50,700 shares of the Company's common
stock for $4.75 per share. These options vest over a three year period
and expire five years from the grant date. In addition, the Company
granted non-qualified stock options (NQSOs) to its advertising agency
and public relations firm to acquire 4,000 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 also granted NQSO's
to three outside Board members to acquire 45,000 shares of the
Company's common stock for $4.75 per share. These options vest over a
three year period if the members are serving on the Board of Directors
at such time, and expire in five years.
8
<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. 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 obtained, 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 will be substantial and
will be incurred primarily during the first and second quarter of 1997. Although
the Company believes that its advertising efforts will increase sales, the
Company's advertising program is intended to increase awareness and exposure of
the Company's products, and the Company does not believe that sales will
increase at the same rate as expenditures. Accordingly, the Company will
continue to incur losses during these periods as it rolls out its advertising
program.
The Company believes that an important element for introducing and
increasing awareness of its golf clubs is the building of a corps 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. Typically,
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 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 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
9
<PAGE>
Company will be required to enter into endorsement agreements with additional
touring professional golfers who will be successful in tournament play.
The Company does not maintain an in-house research and development or
design department. Rather, the Company 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 does not incur regular, ongoing expenses
relating to salaries of in-house design personnel, but does incur 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 Company does not manufacture the components required to assemble its
golf clubs, relying instead on a small number of component suppliers. The
Company does not have supply agreements with any of its current suppliers.
Therefore, the Company's success will be dependent, in part, on maintaining its
relationships with its existing suppliers and developing relationships with new
suppliers. The Company believes that there are readily available alternative
sources for each of the components comprising its clubs, although there can be
no assurance of this. Any significant delay or disruption in the supply of
components from the Company's suppliers or any quality problems with the
suppliers' components would delay the Company's delivery of finished products
and adversely affect current sales and could adversely affect future sales
potential if distributors lose faith in the Company's ability to deliver a
high-quality product on a timely basis.
Results of Operations
Quarter Ended March 31, 1997 Compared to Quarter Ended March 31, 1996
The Company had sales of $182,341 during the quarter ended March 31, 1997
as compared to sales of $89,891 during the quarter ended March 31, 1996, an
increase of approximately 102%. This increase is attributable to increased
marketing and advertising, and increased efficiency in producing and delivering
clubs during the important Spring buying season.
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 $41,944 (23% of sales) during the
quarter ended March 31, 1997 as compared to $54,812 (61% of sales) during the
quarter ended March 31, 1996. This decline in costs is attributable to increased
efficiency in producing and delivering clubs during the first three months of
1997.
10
<PAGE>
During the quarter ended March 31, 1997, selling, general and
administrative expenses were $871,073 (478% of sales) as compared to $238,806
(266% of sales) during the quarter ended March 31, 1996. This increase is
attributable to the Company's substantial increase in its marketing including
the hiring of additional marketing and sales personnel and 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.
As a result of increasing expenses and costs relating to the growth of the
Company, the Company experienced a net loss of $698,985 during the quarter ended
March 31, 1997 and $235,073 during the quarter ended March 31, 1996. The
Company's inability to offset such increased costs and expenses by sufficient
increases in sales, resulted in the increase in net loss during the quarter
ended March 31, 1997 as compared to the same period of the prior year.
Liquidity and Capital Resources
The Company had working capital of $3,705,910 at March 31, 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. At the closing of the Company's initial public
offering, certain stockholders forgave approximately $1,114,000 of debt owed by
the Company to such stockholders. Of the remaining debt, approximately (i)
$422,000 was paid by the Company with interest at the rate of 8% per annum, upon
the exercise by the underwriters of the Company's initial public offering of the
over-allotment option and (ii) $400,000 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 $273,284 at March 31, 1997. The Company has provided extended payment terms
to several international distributors in order to encourage initial purchases of
its clubs. Accordingly, approximately 42% of such accounts receivable are over
90 days old at March 31, 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 market exposure. 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 in connection
with the production of its television infomercial, its television commercial,
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
11
<PAGE>
sales to satisfy these obligations and to recover these costs. In addition, the
Company has entered into endorsement agreements with 16 touring golf
professionals that provide for minimum 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 has commenced an aggressive advertising and marketing campaign
in anticipation of increased sales. Although the Company has been able to
generate exposure and increasing sales, the Company's expenditures and
commitments for advertising have increased substantially. If the Company's sales
do not increase substantially to cover its expenditures, it will eventually need
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 operating results, 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 a 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
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.
12
<PAGE>
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 March 31, 1997.
13
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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
Dated: May 14, 1997 /s/ Rudy A. Slucker
-----------------------------------
Rudy A. Slucker, President, Chief
Executive Officer and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,011,184
<SECURITIES> 0
<RECEIVABLES> 326,284
<ALLOWANCES> 53,000
<INVENTORY> 388,975
<CURRENT-ASSETS> 4,481,074
<PP&E> 194,114
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,703,839
<CURRENT-LIABILITIES> 775,164
<BONDS> 0
0
0
<COMMON> 21,875
<OTHER-SE> 6,433,848
<TOTAL-LIABILITY-AND-EQUITY> 4,703,839
<SALES> 182,341
<TOTAL-REVENUES> 182,341
<CGS> 41,944
<TOTAL-COSTS> 41,944
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,691
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (698,985)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (698,985)
<EPS-PRIMARY> (.033)
<EPS-DILUTED> 0
</TABLE>
