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 September 30, 1998
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.)
1080 Lousons Road
Union, New Jersey 07083
(Address of PrincipalExecutive Office) (Zip Code)
Registrant's telephone number, including area code: (908) 688-4445
Check whether issuer (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 November 11, 1998: 5,224,890
Transitional Small Business Disclosure Format (Check One): Yes |_| No |X|
<PAGE>
TEARDROP GOLF COMPANY
FORM 10-QSB INDEX
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis or Plan
of Operation 11-19
Part II. Other Information 20
Signature Page 21
2
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
TearDrop Golf Company
Consolidated Balance Sheet
September 30, 1998
(in $000's)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 522
Accounts receivable less allowance for returns and
doubtful accounts of $1,143 15,676
Inventories 20,310
Other current assets 3,027
--------
Total current assets $ 39,535
PROPERTY AND EQUIPMENT, less accumulated
depreciation 5,002
GOODWILL AND INTANGIBLE ASSETS, less accumulated amortization 5,409
--------
$ 49,946
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,707
Accrued liabilities 5,265
--------
Total current liabilities $ 11,972
LONG TERM DEBT 21,265
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized
10,000,000 shares, issued and outstanding
5,196,045 shares 52
Capital in excess of par value 25,275
Currency translation adjustment (24)
Accumulated deficit (8,594)
--------
Total stockholders' equity 16,709
--------
$ 49,946
========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
TearDrop Golf Company
Consolidated Statements of Operations
For the Three Months and Nine Months Ended September 30, 1998 and 1997
(all dollar amounts, except per share amounts in $000's)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 13,028 $ 1,011 $ 57,602 $ 2,415
Cost of sales 7,093 243 32,402 565
----------- ----------- ----------- -----------
Gross profit 5,935 768 25,200 1,850
Selling, general and
administrative expenses 5,154 1,702 21,151 4,975
----------- ----------- ----------- -----------
Income (loss) from operations 781 (934) 4,049 (3,125)
Interest (expense) income, net (379) (2) (1,180) 38
----------- ----------- ----------- -----------
Income (loss) before income taxes 402 (936) 2,869 (3,087)
Income tax (expense) (140) -- (1,003) --
Utilization of net loss carryforward 110 -- 973 --
----------- ----------- ----------- -----------
Net income (loss) $ 372 $ (936) $ 2,839 $ (3,087)
=========== =========== =========== ===========
Preferred dividends -- -- 137 --
----------- ----------- ----------- -----------
Income (loss) available to common shareholders $ 372 $ (936) $ 2,702 $ (3,087)
=========== =========== =========== ===========
Net income (loss) per common share - basic $ 0.07 $ (0.42) $ 0.74 $ (1.42)
=========== =========== =========== ===========
Net income (loss) per common share - diluted $ 0.07 $ (0.42) $ 0.62 $ (1.42)
=========== =========== =========== ===========
Weighted Average Number of
Common shares Outstanding - Basic 5,196,045 2,216,957 3,645,946 2,181,767
=========== =========== =========== ===========
Weighted Average Number of
Common shares Outstanding - Diluted 5,483,523 2,216,957 4,353,133 2,181,767
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
TearDrop Golf Company
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997
(in $000's)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
1998 1997
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 2,839 $(3,087)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 521 48
Provision for doubtful accounts 421 75
Common stock and options issued for services -- 131
Changes in operating assets and liabilities:
Increase (decrease) in accounts receivable (8,341) (216)
(Increase) decrease in inventories 959 (248)
(Increase) decrease in other current assets (2,718) (177)
Increase (decrease) in accounts payable and
other current liabilities (2,184) 7
------- -------
NET CASH USED IN OPERATING ACTIVITIES (8,503) (3,467)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and equipment (191) (147)
Other (22) (11)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (213) (158)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under financing agreements 4,004 --
Repayment of note payable -- (308)
Repayment of stockholders' notes (400) (443)
Proceeds from issuance of common stock -- 734
Proceeds from redemption of common stock purchase warrants 8,514 --
Redemption of preferred stock (3,000) --
Preferred dividends (137) --
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 8,981 (17)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS 265 (3,642)
CASH AND CASH EQUIVALENTS:
Beginning of period 257 4,509
------- -------
End of period $ 522 $ 867
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TEARDROP GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts, except share and per share amounts, in $000
(Unaudited)
NOTE 1 - ACCOUNTING POLICIES
The accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements in the Company's 1997 Annual Report
to Shareholders. In the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation have been included.
The results for the quarter or the nine months ended September 30, 1998 do not
necessarily indicate the results that may be expected for the full year.
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board's Statement 130, Reporting Comprehensive Income. Statement 130 establishes
new rules for the reporting and display of comprehensive income and its
components. However, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. Statement 130 requires foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement 130.
During the three and nine month periods ended September 30, 1998 and 1997, total
comprehensive income (loss) amounted to $372 and $(936), and $2,839 and
$(3,087), respectively.
NOTE 2 - INVENTORIES
Inventories at September 30, 1998 consist of the following:
Raw materials and work in process $ 10,594
Finished goods 9,716
--------
Total inventories $ 20,310
--------
6
<PAGE>
TEARDROP GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts, except share and per share amounts, in $000
(Unaudited)
NOTE 3 - ACQUISITIONS
During the fourth quarter of 1997, the Company made the following acquisitions:
a. In October 1997, the Company acquired the assets of Pro Golf
Promotions, LLC for 50,000 shares of the Company's common stock
(valued at $225) and an option to purchase 25,000 additional shares
of the Company's common stock at $4.50 per share exercisable for a
period of three years from date of grant (valued at $80).
b. In November 1997, the Company completed the acquisition of the
assets and liabilities of the Tommy Armour Golf Company in exchange
for $11,600 cash, 175,000 shares of the Company's common stock
(valued at $788), and 100,000 shares of the Company's Series A
Convertible Preferred Stock (valued at $10,000).
c. In December 1997, the Company acquired certain assets and
liabilities of the Ram Golf Corporation in exchange for $2,668 cash,
187,357 shares of the Company's common stock (valued at $1,241), and
a warrant to purchase 50,000 shares of the Company's common stock at
a price of $6.625 (valued at $88), expiring December 29, 2002.
All three acquisitions were accounted for using the purchase method of
accounting. The Company's evaluation of the assets acquired and the liabilities
assumed in these purchases is substantially complete and the Company does not
anticipate any future adjustments. However, a final determination has not been
made at this time. The operations of each company acquired have been included in
the Company's Consolidated Statement of Operations from the respective dates of
acquisition.
The following table reflects unaudited condensed pro-forma information for the
three and nine month periods ended September 30, 1997, as if each of the above
companies had been acquired on January 1, 1997 and compares that information
with condensed information from the accompanying Consolidated Statements of
Operations for the three and nine month periods ended September 30, 1998:
7
<PAGE>
TEARDROP GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts, except share and per share amounts, in $000
(Unaudited)
Three Month Periods Nine Month Periods
Ended Sept. 30, Ended Sept. 30,
1998 1997 1998 1997
Net Sales $ 13,028 $ 13,734 $ 57,602 $ 44,407
Income (loss) from operations 781 (12,068) 4,049 (21,730)
Net income (loss) 372 (12,862) 2,839 (24,276)
Income (loss) per common share
Basic $ 0.07 $ (4.89) $ 0.74 $ (9.36)
Diluted $ 0.07 $ (4.89) $ 0.62 $ (9.36)
NOTE 4 - LONG TERM DEBT
During 1997, the Company obtained a line of credit with First Union National
Bank, successor by merger to CoreStates Bank, N.A., (the "Bank") for $25,000,
collateralized by a security interest in all the assets of the Company. The loan
agreement, as amended, provides, among other things, that the Company satisfy
certain financial covenants. At September 30, 1998, the Company was in
compliance with all financial covenants.
NOTE 5 - STOCKHOLDERS' EQUITY
In May, 1998, the Company redeemed 30,000 shares of its Series A Preferred Stock
for $3,000 and in June, 1998, the holder of the remaining 70,000 shares
converted such shares into 933,333 shares of Common Stock of the Company.
In May, 1998, the Company notified all registered holders of its Warrants of the
Company's intention to redeem such warrants in June, 1998 for $.01. Each Warrant
entitled the holder thereof to purchase one share of the Company's Common Stock
at a price of $5.50 per share.
Pursuant to that notification, substantially 100% of the Warrants were exercised
by the holders and the Company issued 1,525,855 shares of its Common Stock in
exchange for $8,300.
8
<PAGE>
TEARDROP GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts, except share and per share amounts, in $000
(Unaudited)
From March through June 1998, 138,785 shares of Common Stock of the Company were
purchased by the administrator of the Company's 401(k) plan (the "Plan") on
behalf of certain employees of the Company at prices generally ranging from
$6.81 to $12. It appears that the provisions of the Securities Act of 1933, as
amended, relating to the registration of securities may not have been fully
complied with in connection with the offer or sale of these securities.
Accordingly, the Company offered to repurchase these securities from the
relevant employee 401(k) accounts for their purchase price for cash, plus
interest from the date of purchase. The Company commenced the offer on July 16,
1998 and the offer terminated on August 15, 1998. Employees holding 138,785
shares of Common Stock accepted the offer and the Company will be required to
pay approximately $1,100 to satisfy acceptances of offers by its employees.
NOTE 6 - SALES
Sales for the three month and nine month periods ended September 30, 1998,
include approximately $2,000 of product delivered in a barter transaction, with
a gross margin of approximately $400. The transaction was valued at the fair
value of the product delivered based on the most recent sales of that product.
Such value was also the contractually agreed upon value of the advertising
credits received in the transaction. The advertising credits received have been
recorded in other current assets since all of the credits are expected to be
used within one year.
NOTE 7 - 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.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company has entered into endorsement agreements with touring golf
professionals for periods up to three years. The agreements typically provide
for a base compensation and bonuses based upon, among other things, tournament
performances, standings on the official money list and earning spots on Ryder or
President Cup teams.
9
<PAGE>
TEARDROP GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts, except share and per share amounts, in $000
(Unaudited)
Minimum compensation requirements for the years ending December 31, 1998, 1999
and 2000, are approximately $2,000, $3,000 and $3,000, respectively.
The Company entered into a two-year advertising agreement aggregating
approximately $770. For 1998, the Company is committed for approximately $450 in
connection with such agreement. In August 1998, the Company entered into an
advertising agreement which requires the Company to spend approximately $2,000
for the remainder of 1998 and $5,000 in 1999. The $2,000 commitment for 1998 has
been satisfied by virtue of the barter advertising credits described in Note 6.
In November 1996, the Company entered into a three-year employment agreement
with its President and Chief Executive Officer commencing December 19, 1996. The
agreement, as amended, provides for annual compensation of $250 for the years
ending December 31, 1998 and 1999, and performance bonuses, as defined.
The Company has been named, among others, as a defendant in a lawsuit seeking
damages of $12,000. The Company believes that the lawsuit is without merit and
will defend it vigorously. Accordingly, no reserve has been established in this
connection.
A legal action has also been commenced against the Company by Laser Golf
Corporation and James R. Hansberger ("JRH"), the seller of the assets of Ram
Golf Corporation to the Company, in connection with disputes between JRH and the
Company relating to post closing adjustments and certain of the shares of the
Company's Common Stock that were placed in escrow at the time of the
acquisition. JRH is seeking, among other things, the release of such shares to
JRH and damages and costs resulting from the Company's continuing refusal to do
so, including the potential loss to JRH as a result of any decrease in the
market value of the shares of Common Stock of the Company. The Company believes
that JRH is not entitled to the release of all of the shares and intends to
vigorously defend the claim. See "Part II, Item 1 - Legal Proceedings."
10
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following should be read in conjunction with the Company's financial
statements and the related notes thereto included elsewhere herein.
Overview
The Company designs, develops, manufactures and markets throughout the
world high-quality, premium priced golf clubs, including its (a) TearDrop line
of putters; (b) its Armour line of irons and woods; (c) its Ram line of irons,
woods and wedges, and (d) its Zebra putters. The Company's lines of products are
used by golfers throughout the world, including professional golfers on the
Professional Golf Association ("PGA") Tour, the Senior PGA Tour, the Ladies PGA
Tour and the Nike Tour. In addition, the Company operates a professional
developmental golf tour for aspiring PGA Tour players.
The Company introduced its first product, the TearDrop putter, in 1993 and
commenced significant marketing and sales activities in 1994. The Company
completed an initial public offering of its common stock and Redeemable Common
Stock Purchase Warrants in December 1996. In January 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 cost to produce and air the infomercial and television
commercials was substantial and resulted in losses as the Company continued to
roll out its advertising campaign in the first three quarters of 1997. The
advertising campaign was intended to increase awareness and exposure of the
Company's products. The Company currently spends substantial amounts on
advertising and endorsements.
In the fourth quarter of 1997, the Company made three acquisitions:
(a) In October, the Company acquired the assets of Pro Golf Promotions,
LLC, a professional developmental tour for aspiring PGA Tour players for 50,000
shares of the Company's common stock. The tour was immediately renamed "The
TearDrop Professional Golf Tour".
(b) In November, the Company acquired the Tommy Armour Golf Company
("Armour") from U.S. Industries, Inc. for common stock, preferred stock and cash
valued at approximately $22.5 million. With this acquisition, the Company
expanded beyond its initial base of putters into a well-known, well-respected
line of irons and woods.
(c) In December, the Company acquired certain assets and assumed certain
liabilities of the Ram Golf Corporation ("Ram") for common stock and cash with a
value of approximately $3.7 million. With the Ram acquisition came another
well-known and respected name in the golf business and the Company's product
line was expanded to included Ram woods, irons and wedges and Zebra putters.
11
<PAGE>
Neither Armour nor Ram were profitable in 1997 or 1996. Armour reported
losses of approximately $19.1 million and $400,000 on sales of approximately
$32.0 million and $56.2 million for the fiscal years ended September 30, 1997
and 1996, respectively; and Ram reported losses of approximately $4.1 million
and $307,000 on sales of approximately $14.0 million and $19.4 million for the
years ended December 31, 1997 and 1996, respectively.
The Company believes with the combination of the three companies and the
use and endorsement of its products by touring professionals, the synergies
available with the combination of three similar companies, the elimination of
unprofitable product lines, focused marketing of the high quality products and
the elimination of unnecessary expenses, the Company can realize operating
results for the three companies that are better than if they were not combined.
However, there can be no assurance that the Company will maintain profitability.
The Company believes that an important element for increasing awareness
and demand for 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. The Company has entered into
endorsement agreements, of up to three years, with professional players on the
PGA Tour, the Senior PGA Tour, the Ladies PGA Tour, the Nike Tour and players on
foreign tours which provide for base payments 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 and other golf accessories, such as golf bags and hats and
shirts containing the Company's logo, by such professionals in tournament play.
The Company has entered into endorsement agreements recently which involve
substantial payments to golfers who may be well known among golf consumers. In
addition, bonus payments that could be substantial may be made based upon
tournament performance, standings on the official money list, and selection to
the Ryder Cup or President Cup teams. The Company has granted stock options to
certain of 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 or she is successful. For 1998, the Company has
entered into endorsement agreements which will require the payment of a minimum
of approximately $2 million should each of the professionals use and endorse the
Company's products as provided in the agreements. The Company's obligations for
1999 already exceed $3 million and the Company's obligations may increase as the
Company signs additional endorsement agreements.
The Company maintains an in-house research and development and design
department. In addition, 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. The ability
of the Company to introduce new products or product improvements is directly
related to the efforts and success of this research and development effort.
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<PAGE>
The Company does not manufacture the components required to assemble its
golf clubs, relying instead on a number of component suppliers, both domestic
and foreign. The Company's success in assembling its products 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 of this there can be
no assurance. Any significant delay or disruption in the supply of components
from the Company's suppliers or any quality problems with the supplier's
components would delay the Company's delivery of finished products and adversely
affect current sales and could adversely affect future sales potential if
customers lose faith in the Company's ability to deliver a high-quality product
on a timely basis. Further, given the highly seasonal nature of the golf
equipment industry, such adverse effect would be exacerbated should any such
supply delay or quality problem occur immediately prior to or during the
six-month period ending June 30.
The Company has increased its inventory substantially over the last six
months in anticipation of increased sales. Although the Company's sales have
increased substantially during the last year, sales have increased at a slower
pace during the last quarter. Accordingly, the Company's inventory has increased
significantly.
Results of Operations
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
The Company had sales of $57.6 million for the nine months ended September
30, 1998 compared to sales of $2.4 million for the nine months ended September
30, 1997, an increase of $55.2 million. The increase in sales resulted
principally from the increased product lines and sales networks available to the
Company as a result of the acquisitions described above. Sales of the TearDrop
putter line were approximately $2.4 million for the nine months ended September
30, 1998. Sales of Armour products were approximately $45.4 million, including
$13.1 million in sales of a discontinued product line, and sales of Ram products
were approximately $9.8 million in the nine month period ended September 30,
1998. Sales for the nine month period ended September 30, 1998 include
approximately $2 million of discontinued product delivered in a barter
transaction, with a gross margin of approximately $400,000. The transaction was
valued at the fair value of the product delivered based on the most recent sales
of that product. Such value was also the contractually agreed upon value of the
advertising credits received in the transaction.
Gross profit on sales for the nine months ended September 30, 1998 was
$25.2 million or 43.7% of sales compared to $1.8 million or 76.6% of sales for
the nine months ended September 30, 1997. The increase in gross profit is
directly attributable to the increase in sales described in the previous
paragraph. The decrease in gross profit as a percentage of sales is due to two
significant reasons. First, all sales in the nine months ended September 30,
1997 were of
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<PAGE>
TearDrop putters, which carry a much higher gross profit percentage than other
products in the Company's product line, compared to the nine month period ended
September 30, 1998, during which TearDrop putters accounted for approximately
4.2% of total sales. Second, in the nine month period ended September 30, 1998,
there were approximately $13.1 million in sales (approximately 22.7% of total
sales) of a discontinued product line, which was disposed of at less than normal
gross profit percentage.
Selling, general and administrative expenses ("SG&A") for the nine months
ended September 30, 1998 were $21.2 million (36.7% of sales) compared to $5.0
million (206.0% of sales) for the nine months ended September 30, 1997. The
increase is attributable to the substantial increase in the size of the Company
in 1998 compared to 1997, including increases in personnel and facilities, and
significant increases in advertising, marketing and the expenses relating to
professional golfer endorsement contracts.
Interest expense for the nine months ended September 30, 1998 was $1.2
million compared to interest income of $38,000 for the nine months ended
September 30, 1997. In connection with the acquisitions of Armour and Ram, the
Company obtained a $25.0 million line of credit and had borrowed under that line
during 1998. In 1997, the Company had invested the unused proceeds from its
Initial Public Offering completed in December 1996, generating interest income.
Due to operating losses incurred prior to 1998, the Company has a net
operating tax loss carry forward, and therefore, income tax expense, which would
be accrued against any income in 1998 will be substantially offset by
application of appropriate net operating tax loss carry forwards.
As a result of the significant increase in sales, as well as certain cost
savings achieved through the consolidation of the Company's three companies, the
Company had net income of $2.8 million ($.74 per common share basic after
provision for preferred dividends of $137,000; $.62 per common share diluted)
for the nine months ended September 30, 1998 compared to a net loss of $3.1
million ($1.42 net loss per share, both basic and diluted) for the nine months
ended September 30, 1997.
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
The Company had sales of $13.0 million for the three months ended
September 30, 1998 compared to sales of $1.0 million for the three months ended
September 30, 1997, an increase of $12.0 million. The increase in sales resulted
from the increased product lines and sales networks available to the Company as
a result of the acquisitions described above as well as an increase in sales of
the TearDrop putter line, which accounted for the only sales for the three
months ended September 30, 1997. Sales of Armour products were approximately
$6.4 million for the three months ended September 30, 1998, including
approximately $2.0 million in barter sales of products that have been
discontinued and will not be marketed on a substantial basis in the
14
<PAGE>
future. Sales of TearDrop putters were approximately $300,000 for the three
months ended September 30, 1998 compared to the $1.0 million in sales for the
three months ended September 30, 1997. The Company introduced a new line of
TearDrop product late in that three month period and shipments of the product
began to occur late in the month of September. Accordingly, sales during the
quarter of the old line of products was curtailed earlier in the period in
anticipation of the new product roll-out. Sales of products from the Ram line
accounted for the remainder of the increase in sales. Sales for the three month
period ended September 30, 1998 include approximately $2 million of discontinued
product delivered in a barter transaction, with a gross margin of approximately
$400,000. The transaction was valued at the fair value of the product delivered
based on the most recent sales of that product. Such value was also the
contractually agreed upon value of the advertising credits received in the
transaction.
Cost of sales were $7.1 million (54.4% of sales) for the three months
ended September 30, 1998 compared to $200,000 (24.0% of sales) for the three
months ended September 30, 1997, an increase of $6.9 million. The cost of
manufacturing the Armour and Ram products, as a percentage of sales, is
traditionally higher than the TearDrop line of products, which accounted for
100% of the 1997 sales but only 2.3% of the 1998 sales. The increase in cost of
sales as a percentage of sales also reflects the high cost of the discontinued
Armour products that were sold during the three months ended September 30, 1998,
generally at reduced prices. The impact of these costs, as a percentage of
sales, had the effect of decreasing gross margins on sales to 45.6% for the
three months ended September 30, 1998 from 76.0% for the three months ended
September 30, 1997.
Selling, general and administrative expenses were $5.2 million (40.0% of
sales) for the three months ended September 30, 1998 as compared to $1.7 million
(168.2% of sales) for the three months ended September 30, 1997, an increase of
$3.5 million. This increase is attributable to the substantial increase in the
size of the Company in 1998 compared to the 1997 period, including increased
personnel and facilities, significantly higher advertising, marketing and the
expenses of professional golfers' endorsement contracts.
Interest expense, net for the three months ended September 30, 1998 was
$379,000 compared to $2,000 for the three months ended September 30, 1997. In
connection with the acquisitions described earlier, the Company obtained a line
of credit for $25 million. The interest expense for the period ended September
30, 1998 reflects the interest expense on drawdowns against that line. In
connection with the initial public offering of the Company's common stock in
December, 1996, the Company had invested its unutilized cash during the greater
portion of the three months ended September 30, 1997 and only toward the end of
that period, started borrowing under a bank credit line.
As a result of the increased sales related to the growth of the Company
and through acquisitions, and a decrease of costs and expenses, as a percentage
of sales, through consolidation of operations, the Company experienced net
income of $372,000 or $.07 per common share - basic and diluted for the three
months ended September 30, 1998 compared to a
15
<PAGE>
net loss of $936,000, or $.42 per common share - basic and diluted, for the
three months ended September 30, 1997.
Liquidity and Capital Resources
At September 30, 1998, the Company had net working capital of $27.6
million and $21.3 million was payable to First Union Bank under the Credit
Facility described below.
Pursuant to a Loan and Security Agreement (the "Loan Agreement") between
the Company and First Union National Bank, successor by merger to CoreStates
Bank, N.A. ("First Union"), First Union provided a $25.0 million revolving
credit facility (the "Credit Facility") to the Company to finance the
acquisition of the assets of Armour and Ram and the Company's working capital
and general corporate expenditures. The Company drew down $10.0 million under
the Credit Facility to fund the cash payment for Armour and $2.7 million under
the Credit Facility to fund the cash payment for Ram. Funds extended pursuant to
the Credit Facility accrue interest at the prime rate minus 1/2% or LIBOR plus
2% per annum. The Credit Facility is secured by substantially all of the assets
of the Company, including the assets acquired in connection with the
acquisitions of Armour and Ram. The Loan Agreement contains restrictions on
certain of the Company's activities, including, but not limited to, the payment
of dividends, redemption of securities and the sale of assets outside the
ordinary course of the Company's business. The Loan Agreement also provides that
the Company meet certain financial covenants. At September 30, 1998, the Company
was in compliance with such covenants.
The Company's credit terms range from 30 days to 90 days, depending on the
type of account. The Company's cash needs are generally highest during the
fourth quarter and the first quarter of the year, as inventories will be
purchased in anticipation of unlicensed sales during the first six months of the
year. Since the cash receipts from sales during the first quarter may not be
received for up to 90 days, receivable balances may increase through the first
six months of the year and decrease in the second six months of the year. In
addition, a significant financial commitment will be made for advertising during
the first quarter of the year.
The Company does not have any significant capital expansion plans at the
present time and any capital expenditures will be financed from internally
generated funds. There can be no assurance, however, that the current Credit
Facility is sufficient to allow the Company to meet its needs, particularly if
sales do not increase or if the Company encounters operational difficulties.
The Company has increased its inventory substantially over the last six
months in anticipation of increased sales as a result of its growth. Although
the Company's sales have increased substantially during the past nine months,
sales have increased at a slower rate during the latest quarter. Accordingly,
the Company's inventory has increased significantly.
During 1998, the Company anticipates that it will spend in excess of $15.0
million on advertising and anticipates even greater spending in 1999. In
addition, the Company has entered into endorsement agreements with touring golf
professionals that provide for minimum payments of $2.0 million in 1998 and the
payment of additional bonuses of cash or stock based upon certain
16
<PAGE>
performance criteria. For 1999, the Company's obligations already exceed $3.0
million and the Company's obligations may increase as the Company signs
additional endorsement agreements.
The statements of cash flows for the Company for the nine months ended
September 30, 1998 and 1997 is summarized below:
1998 1997
---- ----
Net cash used by operating activities $ 8,503,000 $ 3,467,000
Net cash used in investing activities 213,000 158,000
Net cash provided by (used in) financing 8,981,000 (17,000)
activities
In connection with the acquisition of the assets of Armour, the Company
issued 100,000 shares of Series A Preferred Stock, which were convertible into
shares of Common Stock at any time at the rate of $7.50 per share, subject to
adjustment under certain conditions and was entitled to cumulative dividends at
6% per annum for the first year after issuance.
In May, 1998, the Company redeemed 30,000 shares of the Series A Preferred
Stock for $3.0 million, and in June 1998, the holder of the remaining 70,000
shares converted such shares into 933,333 shares of common stock of the Company.
From March through June 1998, 138,785 shares of Common Stock of the
Company were purchased by the administrator of the Company's 401(k) plan (the
"Plan") on behalf of certain employees of the Company at prices generally
ranging from $6.81 to $12. It appears that the provisions of the Securities Act
of 1933, as amended, relating to the registration of securities may not have
been fully complied with in connection with the offer or sale of these
securities. Accordingly, the Company offered to repurchase these securities from
the relevant employee 401(k) accounts for their purchase price for cash, plus
interest from the date of purchase. The Company commenced the offer on July 16,
1998 and the offer terminated on August 15, 1998. Employees holding 138,785
shares of Common Stock accepted the offer and the Company will be required to
pay approximately $1.1 million to satisfy acceptances of offers by its
employees.
Warrant Redemption
On May 14, 1998, the Company delivered a notice to all registered holders
of its Warrants stating that it had elected to exercise its option to redeem the
Warrants on or after June 19, 1998 at a price of $ .01 per Warrant. Each Warrant
entitled the holder thereof to purchase, at a price of $5.50, one share of the
Company's Common Stock.
17
<PAGE>
Prior to June 19, 1998, substantially 100% of the Warrants were exercised
by the holders thereof and the Company issued 1,532,855 shares of its Common
Stock in exchange for $8.3 million, of which $3.0 million was used to redeem
30,000 shares of the Company's Series A Preferred Stock, repay $400,000 of a
shareholder note and the remainder has been used for general corporate purposes.
Year 2000 Modifications
The Company relies on both information technology ("IT") and non-IT
computer systems in its operations. The mission-critical IT systems include the
Company's operating and accounting systems, such as IT software applications
that allow the company to maintain inventory and customer information and to
communicate with its suppliers and customers. The non-IT systems are primarily
telecommunications systems and other building systems, such as security systems,
lighting, fire and safety systems.
In 1997, the Company began to address the Year 2000 problem. The issue is
one where computer systems may recognize the designation "00" as 1900 when it
means 2000, resulting in system failure or miscalculations. The Company has
assigned its Chief Information Officer to coordinate and implement measures
designed to prevent disruption in its business operations related to the Year
2000 problem. The Company is scheduled to complete the remediation of its
mission-critical IT applications softward in December 1998 and to complete and
end-to-end test of its IT systems by July 1999. The Company is assessing the
effect of the Year 2000 problem on its non-IT systems and intends to replace
non-IT systems as necessary to become Year 2000 ready by July 1999.
The Company is also working with its customers and its suppliers to
determine whether the Year 2000 problem will have an adverse effect on the
Company's relationships with them. The Company is developing contingency plans
to address the risks created by the Year 2000 problem. These plans include
procuring alternative suppliers, when available, when the Company is able to
conclude that an existing supplier will not be Year 2000 ready. The Company is
scheduled to complete these contingency plans by July 1999.
During 1998, the Company estimates it will spend approximately $165,000
above normal operating costs in order to comply with Year 2000 issues.
There can be no assurance that Year 2000 remediation by the Company or
third parties will be properly and timely completed and a failure to do so could
have a material adverse effect on the Company's financial condition. The Company
cannot predict the actual effects to it of the Year 2000 issue, which depends on
numerous uncertainties such as: (1) whether major third parties address this
issue properly and timely and (2) whether broad-based or systemic economic
failures may occur. The Company is currently unaware of any events, trends, or
conditions regarding this issue that may have a material effect on the Company's
results of operations, liquidity, and financial position. If the Year 2000 issue
is not resolved by December 31, 1999, the Company's results of operations and
financial condition could be materially adversely affected.
18
<PAGE>
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. As a result, the Company
anticipates that sales during the quarter ending September 30 will be lower than
during the prior quarter. 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 and are
subject to a variety of risks including the acceptance and pricing of new and
existing products, general economic conditions as they affect the Company's
customers, the success of the Company's new sales programs, substantial
indebtedness, dependence upon endorsements, increased marketing costs, the
seasonal nature of the Company's business, as well as other risks detailed, from
time to time, in the Company's SEC filings, including the report on Form 10-KSB
for the year ended December 31, 1997 and the Company's Registration Statement on
Form S-3 dated July 1, 1998. 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. The results of operations for the three month and
nine month periods ended September 30, 1998 are not necessarily indicative of
the results that may be expected for the entire year ending December 31, 1998 or
any future period.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
An action was served upon the Company in the Eastern District of
Pennsylvania on February 28, 1998 entitled "Izett Manufacturing, Inc.,
Plaintiff, vs. RAM Golf Corporation, JRH Corporation, Laser Golf Corporation,
TearDrop Golf Company and TearDrop RAM Golf Company, Defendants." seeking
damages of $12 million. The claim relates to an agreement assumed by the Company
in December 1997 in connection with the acquisition of the assets of RAM Golf
Corporation. The Company believes that it has valid defenses to such claim and
intends to defend the claim vigorously.
On June 29, 1998, an action for declaratory judgment, specific performance
and damages was filed in the Circuit Court of Cook County, Illinois, County
Department, Chancery Division, by Laser Golf Corporation and James R. Hansberger
against the Company and TearDrop Ram Golf Company, its wholly-owned subsidiary.
The plaintiffs are seeking the following (i) declaratory relief under the
agreements relating to the acquisition by the Company of the assets of Ram Golf
Corporation, (ii) damages, among other things, relating to the Company's failure
to release up to 183,007 shares of Common Stock that are currently outstanding
but are held in escrow, (iii) repayment of up to $283,000 in accounts payable
that are alleged to have been assumed by the Company at the time of the purchase
of the assets, (iv) an additional 55,994 shares of Common Stock as a result of a
claimed post-closing adjustment due to its calculations of inventory transferred
to the Company, and (v) a declaration that certain non-competition agreements
entered into between them and the Company are unenforceable. The Company
believes that for a variety of reasons, the plaintiffs should not be entitled to
delivery of the shares of Common Stock currently held in escrow. The Company
intends to defend the action vigorously and to in fact pursue remedies that it
believes it has against the plaintiffs. Nevertheless, to the extent that the
litigation may involve costs to the Company or that it may be responsible for
damages to the plaintiffs, the Company may incur costs and expenses in excess of
amounts previously anticipated at the time of the acquisition.
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K:
During the quarter ended September 30, 1998, the following report on Form
8-K was filed by the Company.
A Form 8-K was filed by the Company with the Securities and Exchange
Commission on September 4, 1998 to report the execution of a non-binding letter
of intent between the Company and Lynx Golf, Inc. of Carlsbad, California
("Lynx") for the acquisition by the Company of certain of the assets of Lynx.
The acquisition was subject to numerous conditions, including the signing of a
definitive agreement and approval of the Bankruptcy Court for the Southern
District of California having jurisdiction over the bankruptcy proceedings
involving Lynx. Subsequent to the filing of the Form 8-K, at an auction held on
October 14, 1998 for the acquisition of certain of the assets of Lynx, another
bidder agreed to acquire such assets.
No financial statements were filed by the Company in connection with the
Form 8-K.
20
<PAGE>
SIGNATURES
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: November 16, 1998 /s/ Rudy A. Slucker
--------------------------------------
Rudy A. Slucker, President and Chief
Executive Officer (Principal Executive
Officer)
Dated: November 16, 1998 /s/ Joseph Cioni
--------------------------------------
Joseph Cioni, Vice President of Finance
and Chief Financial Officer (Principal
Financial and Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited financial statements of TearDrop Golf Company for the quarter ended
September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 522,000
<SECURITIES> 0
<RECEIVABLES> 15,676,000
<ALLOWANCES> 1,143,000
<INVENTORY> 20,310,000
<CURRENT-ASSETS> 39,535,000
<PP&E> 9,642,000
<DEPRECIATION> 4,640,000
<TOTAL-ASSETS> 49,946,000
<CURRENT-LIABILITIES> 11,972,000
<BONDS> 21,265,000
0
0
<COMMON> 52,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 49,946,000
<SALES> 13,028,000
<TOTAL-REVENUES> 13,028,000
<CGS> 7,093,000
<TOTAL-COSTS> 7,093,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 172,000
<INTEREST-EXPENSE> (379,000)
<INCOME-PRETAX> 402,000
<INCOME-TAX> (140,000)
<INCOME-CONTINUING> 110,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 372,000
<NET-INCOME> 372,000
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
