Commission File Number 0-29014
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
TEARDROP GOLF COMPANY
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE
(State or other
jurisdiction of 51-105660
incorporation or (I.R.S. Employer
organization) Identification No.)
1080 Lousons Road
Union, New Jersey 07083
(Address of Principal Executive 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 August 7, 1998: 5,199,890
Transitional Small Business Disclosure Format (Check One): Yes |_| No |x|
<PAGE>
TEARDROP GOLF COMPANY
FORM 10-QSB INDEX
FOR QUARTERLY PERIOD ENDED JUNE 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 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-17
Part II. Other Information 18
Signature Page 19
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<PAGE>
PART I. Financial Information
Item 1. Financial Statments
TearDrop Golf Company
Consolidated Balance Sheet
June 30, 1998
(in $000's)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 102
Accounts receivable less allowance for returns and
doubtful accounts of $1,502 19,181
Inventories 16,691
Other current assets 424
--------
Total current assets $ 36,398
PROPERTY AND EQUIPMENT, less accumulated
depreciation 5,050
GOODWILL AND INTANGIBLE ASSETS, less accumulated amortization 5,468
--------
$ 46,916
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,183
Accrued liabilities 6,552
--------
Total current liabilities $ 12,735
LONG TERM DEBT 17,794
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 25,323
Currency translation adjustment (24)
Accumulated deficit (8,964)
--------
Total stockholders' equity 16,387
--------
$ 46,916
========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
TearDrop Golf Company
Consolidated Statements of Operations
For the Three Months and Six Months Ended June 30, 1998 and 1997
(all dollar amounts, except per share amounts in $000's)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 19,574 $ 1,222 $ 44,574 $ 1,404
Cost of sales 9,810 278 25,309 319
----------- ----------- ----------- -----------
Gross profit 9,764 944 19,265 1,085
Selling, general and
administrative expenses 7,928 2,405 15,997 3,276
----------- ----------- ----------- -----------
Income (loss) from operations 1,836 (1,461) 3,268 (2,191)
Interest (expense) income, net (409) 9 (801) 41
----------- ----------- ----------- -----------
Income (loss) before income taxes 1,427 (1,452) 2,467 (2,150)
Income tax (expense) (500) -- (863) --
Utilization of net loss carryforward 500 -- 863 --
----------- ----------- ----------- -----------
Net income (loss) $ 1,427 $ (1,452) $ 2,467 $ (2,150)
=========== =========== =========== ===========
Preferred dividends 102 -- 137 --
----------- ----------- ----------- -----------
Income (loss) available to common shareholders $ 1,325 $ (1,452) $ 2,330 $ (2,150)
=========== =========== =========== ===========
Net income (loss) per common share - basic $ 0.43 $ (0.66) $ 0.82 $ (0.99)
=========== =========== =========== ===========
Net income (loss) per common share - diluted $ 0.30 $ (0.66) $ 0.60 $ (0.99)
=========== =========== =========== ===========
Weighted Average Number of
Common shares Outstanding - Basic 3,059,012 2,187,500 2,858,051 2,162,638
=========== =========== =========== ===========
Weighted Average Number of
Common shares Outstanding - Diluted 4,474,257 2,187,500 3,865,511 2,162,638
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
TearDrop Golf Company
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1997
(in $000's)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 2,467 $ (2,150)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 355 33
Provision for doubtful accounts 308 71
Common stock and options issued for services -- 32
Changes in operating assets and liabilities:
Increase in accounts receivable (11,733) (389)
(Increase) decrease in inventories 4,578 (389)
(Increase) in other current assets (115) (593)
Increase (decrease) in accounts payable and other current liabilities (1,420) 156
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (5,560) (3,229)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and equipment (132) (118)
Other (22) --
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (154) (118)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under financing agreements 533 --
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 8,562 --
Redemption of preferred stock (3,000) --
Preferred dividends (137) --
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,558 (17)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1 --
NET DECREASE IN CASH AND CASH EQUIVALENTS (155) (3,364)
CASH AND CASH EQUIVALENTS:
Beginning of period 257 4,509
-------- --------
End of period $ 102 $ 1,145
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<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 six months ended June 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' deficiency. 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 first six months of 1998 and 1997, total comprehensive income (loss)
amounted to $2,468 and $(2,150), respectively.
NOTE 2 - INVENTORIES
Inventories at June 30, 1998 consist of the following:
Raw Materials and work in process $ 6,568
Finished Goods 10,123
Total Inventories $ 16,691
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
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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
Cumulative Convertible Preferred Stock ("Series A 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 (See Note 7). 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 six month periods ended June 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 six month periods ended June 30, 1998:
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
1998 1997 1998 1997
Net Sales $ 19,574 $ 18,998 $ 44,574 $ 30,673
Income (loss)
from operations 1,836 (4,668) 3,268 (9,662)
Net income (loss) 1,427 (5,526) 2,467 (11,414)
Income (loss) per
common share
Basic $ 0.43 $ (2.15) $ 0.82 $ (4.43)
Diluted $ 0.30 $ (2.15) $ 0.60 $ (4.43)
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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 provides, among other things, that the Company satisfy certain
financial covenants. At June 30, 1998, the Company was in violation of certain
of such covenants and has obtained waivers from the Bank, as appropriate. There
can be no assurance that the Bank will continue to waive the Company's violation
of such 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.
From March through June 1998, up to 135,563 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 $6.88 to $10.00. It appears that the provisions of the Federal
Securities Act of 1933 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 terminates on August 15, 1998.
NOTE 6 - 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 7 - COMMITMENTS AND CONTINGENCIES
The Company has entered into endorsement agreements with touring golf
professionals for periods of 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.
Minimum compensation requirements for the years ending December 31, 1998, 1999
and 2000, are approximately $2,000, $1,400 and $1,400, respectively.
-8-
<PAGE>
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 November 1996, the Company entered into a three year employment agreement
with its President and Chief Executive Officer commencing December 19, 1996. The
agreement 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."
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<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 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 costs 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.
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 include Ram woods, irons and wedges and Zebra putters.
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<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 achieve significant
profitability, or that if such profitability is obtained, that it can be
maintained.
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.
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 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.
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
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<PAGE>
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.
Results of Operations
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
The Company had sales of $44.6 million for the six months ended June 30,
1998 compared to sales of $1.4 million for the six months ended June 30, 1997,
an increase of $43.2 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 increases in sales of the TearDrop
putter line, which accounted for the entire sales for the 1997 period. Sales of
the TearDrop putter line were approximately $2.1 million for the six months
ended June 30, 1998, a 50% increase over the previous year. Sales of Armour
products were approximately $39.0 million, including $11.1 million in sales of a
discontinued product line, and sales of Ram products were approximately $3.4
million in the six month period ended June 30, 1998.
Gross profit on sales for the six months ended June 30, 1998 was $19.3
million or 43.2% of sales compared to $1.1 million or 77.3% of sales for the six
months ended June 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 six months ended June 30, 1997 were of TearDrop
putters, which carry a higher gross profit percentage than other products in the
Company's product line, compared to the six month period ended June 30, 1998,
during which TearDrop putters accounted for approximately 4.7% of total sales.
Secondly, in the six month period ended June 30, 1998, there were approximately
$11.1 million in sales (approximately 24.9% 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 six months
ended June 30, 1998 were $16.0 million (35.9% of sales) compared to $3.3 million
(233.3% of sales) for the six months ended June 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.
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Interest expense for the six months ended June 30, 1998 was $801,000
compared to interest income of $41,000 for the six months ended June 30, 1997.
In connection with the acquisitions of Armour and Ram, the Company obtained a
$25 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 offset by application of
appropriate net operating tax loss carry forwards.
As a result in the significant increase in sales, as well as certain cost
savings achieved through the consolidation of the three companies, the Company
had a net income of $2.5 million ($.82 per common share basic after provision
for preferred dividends of $137 thousand; $.60 per common share diluted) for the
six months ended June 30, 1998 compared to a net loss of $2.2 million ($.99 net
loss per share, both basic and diluted) for the six months ended June 30, 1997.
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30,
1997
The Company had sales of $19.6 million for the three months ended June 30,
1998 compared to sales of $1.2 million for the three months ended June 30, 1997,
an increase of $18.4 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 June
30, 1997. Sales of Armour products were approximately $15.4 million for the
three months ended June 30, 1998, including approximately $1.5 million in sales
of products that have been discontinued and will not be marketed on a
substantial basis in the future. Sales of TearDrop putters were approximately
$1.4 million for the three months ended June 30, 1998 compared to $1.2 million
in sales for the three months ended June 30, 1997, an increase of $200,000 or
16.6%. Sales of products from the Ram line accounted for the remainder of the
increase in sales.
Cost of sales were $9.8 million (50.1% of sales) for the three months
ended June 30, 1998 compared to $0.3 million (22.7% of sales) for the three
months ended June 30, 1997, an increase of $9.5 million. The cost of
manufacturing the Armour and Ram products, as a percentage of sales, is
generally higher than the TearDrop line of products, which accounted for 100% of
the 1997 sales but only 7.1% of the 1998 sales. The increase in cost of sales as
a percentage of sales also reflects the relative high cost of the discontinued
Armour products that were sold during the three months ended June 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 49.9% for the
three months ended June 30, 1998 from 77.3% for the three months ended June 30,
1997.
Selling, general and administrative expenses were $7.9 million (40.5% of
sales) for the three
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months ended June 30, 1998 as compared to $2.4 million (196.8% of sales) for the
three months ended June 30, 1997, an increase of $5.5 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 and marketing expenses and the expenses of
professional golfers' endorsement contracts.
Interest expense, net for the three months ended June 30, 1998 was
$409,000 compared to interest income, net for the three months ended June 30,
1997 of $9,000. In connection with the acquisitions described earlier, the
Company obtained a line of credit for $25 million. The interest expense for the
period ended June 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 three months ended June 30, 1997 resulting in net interest income of
$9,000.
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 $1.4 million or $.43 per common share - basic ($.30 per common share -
diluted), after a provision of $102,000 for dividends on preferred stock for the
three months ended June 30, 1998 compared to a net loss of $1.5 million, or $.66
per share - basic and diluted, for the three months ended June 30, 1997.
Liquidity and Capital Resources
At June 30, 1998, the Company had net working capital of $23.7 million and
$17.5 million was payable to First Union Bank under the line of credit 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 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 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 June 30, 1998, the Company was in violation of
such covenants and has obtained waivers from First Union with respect thereto.
The Company is still not in compliance with such covenants and no assurance can
be given that the Bank will continue to waive such covenant defaults in the
future.
In 1996, the Company issued a note to the Company's Chief Executive
Officer for $400,000 which bears interest at 8% and is due on the earlier of
December 19, 1999 or upon the
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exercise of all of the warrants issued by the Company in connection with its
initial public offering. The note was repaid in full in June 1998.
The Company's credit terms range from 30 days to 90 days, depending on the
type of account. Cash needs are highest in the first quarter of the year, as
inventories are being purchased. The majority of sales is typically shipped to
customers in the first six months of the year. Accordingly, receivable balances
typically 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
is 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 line of
credit is sufficient to allow the Company to meet its needs, particularly if
sales do not increase or if the Company encounters operational difficulties.
During 1998, the Company anticipates that it will spend in excess of $15
million on advertising. In addition, the Company has entered into endorsement
agreements with touring golf professionals that provide for minimum payments of
$2 million through 1998 and the payment of additional bonuses of cash or stock
based upon certain performance criteria.
The statements of cash flows for the Company for the six months ended June
30, 1998 and 1997 is summarized below:
1998 1997
---- ----
Net cash used in operating
activities $ 5,560,000 $ 3,229,000
Net cash used in investing
activities 154,000 118,000
Net cash provided by (used in)
financing activities 5,558,000 (17,000)
In connection with the acquisition of the assets of the Tommy Armour Golf
Company, 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 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, up to 135,563 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 $6.88 to $10.00. It appears that the provisions of the Federal
Securities Act of 1933 and 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 terminates on August 15, 1998. Employees holding a
significant number of the above shares of Common Stock have accepted the offer
to date and the Company cannot yet determine with certainty the final number of
shares that will be repurchased. Nevertheless the Company will be required to
expend its capital to satisfy acceptances of offers by its employees, which
could have a material adverse effect upon the Company's liquidity and cash
position.
-15-
<PAGE>
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. 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.
Year 2000 Modifications
The Company recognizes the potential business impacts related to the Year
2000 computer system issue. 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 began to address the Year 2000 issue in
1997, and continues to implement measures to ensure that its business operations
are not disrupted. The Company estimates that it will spend approximately
$165,000 above normal operating costs in order to comply with Year 2000 issues.
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
-16-
<PAGE>
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
filings with the Securities and Exchange Commission, including the report on
Form 10-KSB for the year ended December 31, 1997. 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 six month periods ended June 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.
-17-
<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 25, 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 that 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 June 30, 1998, no reports on Form 8-K were
filed by the Company.
-18-
<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: August 11, 1998 /s/ Rudy A. Slucker
------------------------------------
Rudy A. Slucker, President and Chief
Executive Officer (Principal Executive
Officer)
Dated: August 11, 1998 /s/ Joseph Cioni
------------------------------------
Joseph Cioni, Vice President of
Finance and Chief Financial Officer
(Principal Financial and Accounting
Officer)
-19-
<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
June 30, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 102,000
<SECURITIES> 0
<RECEIVABLES> 19,181,000
<ALLOWANCES> 1,502,000
<INVENTORY> 16,691,000
<CURRENT-ASSETS> 36,398,000
<PP&E> 9,774,000
<DEPRECIATION> 4,724,000
<TOTAL-ASSETS> 46,916,000
<CURRENT-LIABILITIES> 12,735,000
<BONDS> 17,794,000
1,000,000
0
<COMMON> 52,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 46,916,000
<SALES> 19,574,000
<TOTAL-REVENUES> 19,574,000
<CGS> 9,810,000
<TOTAL-COSTS> 9,810,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 308,000
<INTEREST-EXPENSE> (409,000)
<INCOME-PRETAX> 1,427,000
<INCOME-TAX> (500,000)
<INCOME-CONTINUING> 1,836,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,427,000
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.30
</TABLE>
