Commission File Number 0-29014
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
TEARDROP GOLF COMPANY
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 57-1056600
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1080 Lousons Road
Union, New Jersey 07083
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (908) 688-4445
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
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 September 30, 2000: 5,262,565
<PAGE>
TEARDROP GOLF COMPANY
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
Page No.
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Part I. Financial Information
Item 1. Financial Statements 3
Consolidated Balance Sheet 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature Page 23
2
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Part 1. Financial Information
Item 1. Financial Statements
TearDrop Golf Company
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
(All dollar amounts, except share and per share amounts, in $000's)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 600 $ 481
Accounts receivable less allowance for returns and
doubtful accounts of $1,796 and $1,793 9,325 11,932
Inventories 10,783 10,778
Other current assets 336 148
-------- --------
Total current assets 21,044 23,339
PROPERTY AND EQUIPMENT, less accumulated
depreciation 3,809 4,334
PATENTS & TRADEMARKS, less accumulated amortization 6,072 6,302
GOODWILL, less accumulated amortization -- 525
-------- --------
$ 30,925 $ 34,500
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,822 $ 11,064
Accrued liabilities 2,398 2,594
Note payable - shareholder 1,000 500
Current portion of long term debt 2,085 1,363
-------- --------
Total current liabilities 14,305 15,521
LONG TERM DEBT 16,453 15,705
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par value, authorized 1,000,000 shares -- --
issued and outstanding none
Common stock, $.01 par value, authorized
10,000,000 shares, issued and 5,262,565 outstanding
shares 53 53
Capital in excess of par value 26,504 25,346
Accumulated other comprehensive income (98) (79)
Accumulated deficit (26,292) (22,046)
-------- --------
Total stockholders' equity 623 3,274
-------- --------
$ 30,925 $ 34,500
======== ========
</TABLE>
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TearDrop Golf Company
Consolidated Statements of Operations
For the Three Months and Nine Months Ended September 30, 2000 and 1999
(All dollar amounts, except share and per share amounts, in $000's)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 4,485 $ 14,327 $ 30,283 $ 51,917
Cost of sales 2,421 7,432 15,286 28,306
----------- ----------- ----------- -----------
Gross profit 2,064 6,895 14,997 23,611
Selling, general and
administrative expenses 4,829 6,110 16,644 24,443
Non-cash compensation -- -- 469 --
----------- ----------- ----------- -----------
Income (loss) from operations (2,765) 785 (2,116) (832)
Royalty income 269 13 777 182
Write-off of goodwill (456) (456)
Interest (expense), net (576) (382) (1,698) (1,269)
Non-cash interest (expense)
on subordinated debt -- -- (688) --
----------- ----------- ----------- -----------
Income (loss) before income taxes (3,528) 416 (4,181) (1,919)
Income tax (expense) (65) (150) (65) --
Utilization of net tax loss carryforward -- 150 -- --
Net income (loss) $ (3,593) $ 416 $ (4,246) $ (1,919)
=========== =========== =========== ===========
Net income (loss) per common share
basic and diluted $ (0.68) $ 0.08 $ (0.80) $ (0.37)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding - basic and diluted 5,262,565 5,197,928 5,262,565 5,186,481
=========== =========== =========== ===========
</TABLE>
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TearDrop Golf Company
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999
(All dollar amounts, except share and per share amounts, in $000's)
(Unaudited)
Nine Months
Ended September 30
------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,246) $(1,919)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 960 869
Provision for doubtful accounts 3 359
Write-off of Goodwill 456
Non-cash compensation 469 --
Non-cash interest expense 688 --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 2,604 (7,001)
Decrease (increase) in inventories (5) 9,742
Decrease (increase) in other current assets (188) 101
Increase (decrease) in accounts payable and other
current liabilities (2,438) 839
------- -------
NET CASH PROVIDED BY(USED IN) OPERATING ACTIVITIES (1,697) 2,990
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in patents and trademarks (97) (234)
Purchases of property and equipment (39) (182)
------- -------
NET CASH (USED IN) INVESTING ACTIVITIES (136) (416)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under financing agreements 1,470 (2,631)
Proceeds from shareholder note payable 500 500
Proceeds from issuance of common stock -- 127
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,970 (2,004)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (18) 11
NET INCREASE IN CASH AND CASH EQUIVALENTS 119 581
CASH AND CASH EQUIVALENTS:
Beginning of year 481 373
------- -------
End of period $ 600 $ 954
======= =======
5
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TEARDROP GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts, except share and per share amounts, in $000's
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. 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 ended September 30, 2000 do not
necessarily indicate the results that may be expected for the full year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1999.
During the three and nine month periods ended September 30, 2000 and 1999,
total comprehensive income (loss) amounted to $(3,611), $427, $(4,264) and
$(1,908), respectively.
NOTE 2 - INVENTORIES
Inventories at September 30, 2000 and December 31, 1999 consist of the
following:
Sept. 30, 2000 December 31, 1999
-------------- -----------------
Raw materials and work in process $5,931 $5,401
Finished goods 4,852 5,377
-------------- -----------------
Total inventories $10,783 $10,778
NOTE 3 - BANK LOAN
On January 20, 2000, we completed a new revolving loan and credit
agreement with Congress Financial Corporation ("Congress"), which was amended on
August 11, 2000, for $25,500, including a term loan of $6,675 (of which $2,175
has been prepaid), which replaced and repaid the outstanding loan due First
Union National Bank. The loan is due in two years and bears interest at
Congress' prime lending rate plus a) 1% for the revolving portion, and b) 1.5%
for the term loan, and is secured by substantially all of our assets. The term
loan is payable at the rate of $500 quarterly, commencing November 1, 2000, with
the balance due at maturity of the line. We failed to make the first payment on
this loan. Congress has notified us that we are in
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TEARDROP GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts, except share and per share amounts, in $000's
(Unaudited)
default on the term loan and the revolving line as a result of the failure to
make such a payment as well as the currently outstanding loan is in excess of
the lending formula.
In March 1999, our Chairman of the Board and Chief Executive Officer
loaned us $500 bearing interest at 8% due upon demand, once we have reached
certain reduced levels of indebtedness under the credit facility with the Bank.
In January 2000, the loan was increased to $1,000, and the repayment terms were
changed to be due on demand, payable upon the achievement of certain specified
debt levels under the revolving credit agreement and was made convertible upon
shareholder approval in April 2000 into our common stock at the rate of $1 per
share. An amount equal to the difference between the fair market value of our
Common Stock on the date of shareholder approval ($1.688) and the conversion
price of $1 resulted in a charge to earnings of $688 in the second quarter of
the year 2000, classified as a non-cash interest expense on subordinated debt.
On August 10, 2000, we completed a new mortgage and security agreement
with Sun Life Assurance Company of Canada under which we borrowed $2,500,
secured by our land and building. The loan bears interest at 8.68% and is
payable in equal monthly installments of $25 with a maturity of September 1,
2015. The proceeds of the loan were used to prepay the $1,958 balance of a term
loan due to Congress, with the remainder of the proceeds added to our general
funds.
The carrying value of the outstanding debt approximates its fair value.
NOTE 4 - 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 our results of operations may not be indicative of our
overall annual performance.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
We have entered into endorsement agreements with touring 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 the
Ryder or President Cup teams.
7
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TEARDROP GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts, except share and per share amounts, in $000's
(Unaudited)
Minimum compensation requirements for the years ending December 31, 2000
and 2001 are approximately $3,200 and $1,000 respectively. Additionally, we have
agreed to issue options to purchase 25,000 and 16,000 shares of our Common Stock
in connection with these agreements for the years ending December 31, 2000 and
2001, respectively. Of the options to be issued under these agreements, 4,000 to
be granted in 2000 could be exchanged for $50.
In April 1999, we extended the employment agreement with our Chairman of
the Board and Chief Executive Officer, to expire on June 24, 2002. The agreement
provides for annual compensation of $500 and performance bonuses, as defined in
the agreement. No performance bonuses have been earned to date.
NOTE 6 - SEGMENT INFORMATION
It is our opinion that we, at this time, have only one reportable segment,
and that segment is the manufacture, marketing and distribution of golf
equipment. We distribute from our manufacturing and distribution facility in
Morton Grove, Illinois to all areas of the world where golf is played. The
following discussion sets forth the required disclosure regarding single segment
information:
We operated as a single reportable segment with sales the three and nine
months ended September 30, 2000 of $4,485 and $30,283, respectively, of which
$3,998 and $26,697, respectively, were sales in the United States and $487 and
$3,586, respectively, were sales outside of the United States. We sell our
products in the United States through our own sales force to approximately 1,500
national accounts (such as national cataloguers, sporting goods retail chain
stores, etc.) and to over 6,000 green grass accounts (golf course pro shops),
which in turn sell directly to the end user. We sell our products outside of the
United States through a sales office in Canada and through distributors in other
countries.
NOTE 7 - EARNINGS PER SHARE
The basic and diluted weighted number of Common Shares outstanding is the
same since any dilutive shares would be anti-dilutive.
NOTE 8 - STOCK OPTIONS
In April 2000, our shareholders approved the grant to our Chairman of the
Board and Chief Executive Officer of an option to purchase 1,500,000 shares of
our Common Stock at a price of $1.375. As a result, there has been a non-cash
compensation charge to earnings of $469 in the second quarter of 2000.
8
<PAGE>
TEARDROP GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts, except share and per share amounts, in $000's
(Unaudited)
NOTE 9 - SUBSEQUENT EVENT
On October 18, 2000, we announced that we have executed a Term Sheet with
Gen-X Sports, Inc. providing for a merger of Gen-X and TearDrop. The proposed
transaction provides for the shareholders of Gen-X to be issued 160 million of
our shares and for Gen-X to provide for the investment of no less than $10,000
of additional funding to the new combined company. The transaction will be
subject to, among other things, due diligence, the negotiation of definitive
agreements, transaction financing and approval of our bank and approval of our
shareholders. Upon closing the transaction, we intend to effect a 1 for 15
reverse stock split.
On November 16, 2000 we received a communication from Gen-X that it was
terminating its Letter of Intent with respect to the proposed merger. However,
in that same communication, Gen-X indicated that it was still interested in
purchasing all of our assets, free and clear of all liens and encumbrances and
that they would be submitting an offer in that matter with a few days time.
We continue to limit expenditures and are evaluating strategic alternative
options in order to continue operations and protect our assets. Among the
options is a purchase of our stock, which was being considered with Gen-X as
well as seeking relief pursuant to title 11 of the U. S. Code.
NOTE 10 - RECENTLY ISSUED ACCOUNTING GUIDANCE
In December 1999 the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides guidance regarding revenue recognition. The Company
is in the process of determining the impact, if any, this new guidance will have
on the Company's financial statements. The effect of any change will be
reflected by the cumulative effect of an accounting change as of January 1,
2000. In May 2000, the SEC deferred the required effective date for
implementation of SAB No. 101 until the fourth quarter of 2000.
NOTE 11 - WRITE OFF OF GOODWILL
Due to our continuing losses, we believe the value of our goodwill has
been diminished and have therefore expensed the remaining portion in the quarter
ended September 30, 2000.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Overview
We design, develop, manufacture and market throughout the world
high-quality, premium priced golf clubs based on our proprietary technologies,
including (a) our TearDrop line of putters; (b) our Tommy Armour line of irons
and woods; (c) our Ram line of irons, woods and wedges; and (d) our Zebra
putters. Our product lines are used by golfers throughout the world, including
professional golfers on the PGA Tour, the Senior PGA Tour, the Ladies PGA Tour
and the BUY.COM Tour.
We introduced our first product, the TearDrop putter, in 1993 and
commenced significant marketing and sales activity in 1994. We completed an
initial public offering of our Common Stock in December 1996.
In the fourth quarter of 1997, we completed three acquisitions. In October
1997, we acquired the assets of Pro Golf Promotions, LLC, a professional
developmental tour for aspiring PGA Tour players, which we immediately renamed
"The TearDrop Professional Golf Tour." In November 1997, we acquired
substantially all of the assets of the Tommy Armour Golf Company ("Armour"). In
December 1997, we acquired certain assets and assumed certain liabilities of the
Ram Golf Corporation ("Ram").
Neither Armour nor Ram was profitable in 1997 and both businesses had
substantial declines in sales from 1996 to 1997. Armour incurred operating
losses of $31.4 million on sales of $32.0 million for the fiscal year ended
September 30, 1997 and Ram incurred losses of $4.1 million on sales of $14.0
million for year ended December 31, 1997. We have incurred losses in each year
of our existence which losses have increased substantially during the current
quarter. In addition, our indebtedness, including our accounts payable and
accrued liabilities, continue to be substantial. As a result of our continuing
losses, substantial indebtedness and our long list of past due trade payables,
we have sought alternative strategies for financing our continued operations. In
June 2000, we retained Chase Securities, Inc. to assist us in identifying a
strategic partner. On October 18, 2000, we announced that we have executed a
Term Sheet with Gen-X Sports, Inc. providing for a merger of Gen-X and TearDrop.
The proposed transaction provides for the shareholders of Gen-X to be issued 160
million of our shares and for Gen-X to provide for the investment of no less
than $10.0 million of additional funding to the new combined company. The
transaction will be subject to, among other things, due diligence, the
negotiation of definitive agreements, transaction financing and approval of our
bank and approval of our shareholders. Upon closing the transaction, we intend
to effect a 1 for 15 reverse stock split.
We cannot assure any investors that the merger with Gen-X will be
completed, or even if completed, that the approximately 3% of the new enterprise
that will be owned by our investors will have any significant value. We have not
yet provided any substantive information regarding Gen-X to investors and we and
Gen-X are still completing due diligence. Because of our precarious financial
condition and our continuing losses, we would likely have to cease operations if
we are unable to complete the contemplated or a similar type of transaction.
10
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As an integral part of our marketing strategy, we have sought to obtain
professional endorsements of our clubs. We have entered into endorsement
agreements, of up to three years, with professional players principally on the
PGA Tour, which provide for base payments in consideration of the use of the
professionals' names in connection with the marketing of our clubs and the use
of the clubs by such professional 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 being named to the Ryder
Cup or President Cup teams. We have granted stock options to certain endorsement
professionals and we intend to continue to do so in the future. The effect of a
particular professional's endorsement on the successful marketing of our clubs,
and the heightening of awareness of our name, may be directly related to the
success of such professionals in tournament play. We will be required to
compensate a professional whether or not he or she is successful. For 2000, we
have entered into endorsement agreements which will require the payment of a
minimum of approximately $3.2 million and up to an additional $2.1 million
should each of the professionals use and endorse our products as provided in the
agreements. In addition, we anticipate that we will devote substantial capital
to advertising and marketing during the next year.
We have made substantial expenditures and commitments for advertising and
marketing and must continue to incur such costs in order to continue to increase
consumer awareness of our products. During 2000, we have incurred substantial
expenses for print advertising and for our program with The Golf Channel, among
other things. No assurance can be given that the expansive advertising and
marketing will result in increased sales.
We have incurred substantial indebtedness in financing the acquisition of
Armour and Ram and in financing our losses. As of September 30, 2000, we had
$30.8 million in liabilities, approximately $16.1 million of which was payable
to Congress Financial Corporation ("Congress"). We signed a credit agreement
with Congress on January 20, 2000. Under the new credit agreement, as amended,
we have been extended credit of $25.5 million, of which $4.5 million is
represented by term loans. The indebtedness to Congress is secured by
substantially all of our assets. We are currently in default under our credit
agreement with Congress due to our inability to repay an installment of the term
loan on November 1, 2000 of $500,000 and due to the total amount of the loan
exceeding the lending formula.
On August 10, 2000, we were extended a 15-year mortgage loan of $2,500,000
from Sun Life Assurance Company of Canada, the proceeds of which were used to
prepay $1,958,000 of a Congress term loan and the remainder of the proceeds
added to our general funds.
We maintain an in-house research and development and design department. In
addition, we work closely with component manufacturers, independent design
consultants and our endorsing golf professionals in the design and development
of new products and product improvements. Our ability to introduce new products
or product improvements is directly related to the efforts and success of this
research and development effort.
We do not manufacture the components required to assemble our golf clubs,
as we rely instead on a number of component suppliers, both domestic and
foreign. Our success in
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assembling our products will be dependent, in part, on maintaining our
relationships with these existing suppliers and developing relationships with
new suppliers.
Any significant delay or disruption in the supply of components from our
suppliers or any quality problems with the suppliers' components would delay the
delivery of finished products and adversely affect current sales. These
circumstances could also adversely affect future sales potential if customers
lose faith in our 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 immediately prior to or during the six-month period ending June 30 (the
period during which sales of golf equipment have historically been the highest).
We also face the risk that our customers, many of which may be subject to
downturns in the golf equipment industry, could, for a variety of reasons, be
unable to pay us for delivered goods. As a result, from time to time, we could
be required to take write-offs of our accounts receivable. During the three
months ended September 30, 2000, one customer, who owed us more than $300,000,
filed for protection under the Federal Bankruptcy Law.
Results of Operations
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Sales for the three month period ended September 30, 2000 were $4,485,000
compared to sales of $14,327,000 for the same period of 1999, a decrease of
$9,842,000. This decrease in sales is attributable to a variety of factors,
including a general decline in the golf equipment market and reduced demand for
our product. In addition, we were forced to reduce substantially our advertising
budget during the first half of this year because we were unable to complete a
refinancing package until January 20, 2000, which was well past the date
necessary to make commitments for advertising in the early part of the year.
Gross profit for the three-month period ended September 30, 2000 was
$2,064,000, or 46.0% of sales, compared to a gross profit of $6,895,000, or
48.1% of sales, for the corresponding period of 1999. We believe that unabsorbed
overhead resulting from lower sales volume, caused the decrease in the gross
profit percentage.
Selling, general and administrative expenses in the three months ended
September 30, 2000 were $4,829,000, or 107.7% of sales, compared to $6,110,000,
or 42.6% of sales, for the same period of 1999. We reduced advertising expenses
substantially during the period, as well as general and administrative expenses.
However, because of the substantial reduction in sales, selling, general and
administrative expenses increased as a percentage of sales in 2000 compared to
1999.
Royalty income in the three-month period ended September 30, 2000 was
$269,000 compared to $13,000 for the corresponding period of 1999. In 1999 we
entered into several royalty agreements in the United States, as well as in
certain foreign countries, under which certain of our trade names are used on
products, for which we receive royalty payments.
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<PAGE>
As a result of our continuing losses, we believe that the value of our
goodwill has been diminished and have expensed the unamortized portion in the
three-month period ended September 30, 2000.
Interest expense in the three-month period ended September 30, 2000 was
$576,000 compared to interest expense of $382,000 for the three-month period
ended September 30, 1999. Higher levels of borrowings, combined with increases
in the prime rate of interest contribute to this increase in interest expense.
As a result of all of the above, our net loss for the three month period
ended September 30, 2000 was $3,593,000, or $.68 per common share, compared to
net income of $416,000, or $.08 per common share, for the three month period
ended September 30, 1999.
Nine Month Period Ended September 30, 2000 Compared to Nine Month Period Ended
September 30, 1999
Sales for the nine month period ended September 30, 2000 were $30,283,000
compared to sales of $51,917,000 for the same period of 1999, a decrease of
$21,634,000. This decrease in sales is attributable to a variety of factors,
including general decline in the golf equipment market and reduced demand for
our products. In addition, we were required to reduce substantially our
advertising budget during the first half of the year because we were unable to
complete a refinancing package until January 20, 2000, which was well past the
date necessary to make commitments for advertising in the early part of the
year.
Gross profit for the nine-month period ended September 30, 2000 was
$14,997,000, or 49.5% of sales, compared to a gross profit of $23,611,000, or
45.5% of sales, for the corresponding period of 1999. Sales of newly introduced
products, with higher gross profit margins, in 2000, offset in part by
unabsorbed overhead resulting from lower volume, caused the significant increase
in the gross profit percentage.
Selling, general and administrative expenses in the nine months ended
September 30, 2000 were $16,644,000, or 55.0% of sales, compared to $24,443,000,
or 47.1% of sales, for the same period of 1999. We reduced advertising expenses
substantially during the period, resulting in a decrease in selling general and
administrative expenses. In the first quarter of 1999, we had a significant
advertising program, which, we did not repeat in the same period of 2000.
During the nine month period ended September 30, 2000, our shareholders
approved the grant of an option to purchase 1,500,000 shares of our common stock
granted to our Chief Executive Officer. The price of our stock on the date of
the approval ($1.688) exceeded the option price of $1.375. The difference ($
.313 per share) multiplied by the number of shares is recorded as non-cash
compensation expense. This resulted in a non-cash charge of $469,000 during the
nine month period ended September 30, 2000.
Due to the continuing reduced sales levels in 2000 compared to 1999, the
non-cash item in 2000 described above, and the fixed costs included in selling,
general and administrative expenses, the percentage of selling, general and
administrative expenses to sales increased from 1999 to 2000.
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Royalty income in the nine-month period ended September 30, 2000 was
$777,000 compared to $182,000 for the corresponding period of 1999. In 1999 we
entered into several royalty agreements in the United States, as well as in
certain foreign countries, under which certain of our trade names are used on
products, for which we receive royalty payments.
Due to our continuing losses, we believe the value of our goodwill has
been diminished and have expensed the unamortized portion in the three and
nine-month periods ended September 30, 2000.
Interest expense in the nine-month period ended September 30, 2000 was
$1,698,000 compared to interest expense of $1,269,000 for the nine-month period
ended September 30, 1999. Higher levels of borrowings, combined with increases
in the prime rate of interest contributed to this increase in interest expense.
During the nine month period ended September 30, 2000, our shareholders
approved the convertible feature of $1,000,000 subordinated debt issued to our
Chief Executive Officer. The price of our stock on the date of approval ($1.688)
exceeded the conversion price of $1 by $ .688. That difference, multiplied by
$1,000,000, was recorded as interest expense in the period of shareholder
approval. As a result, we recorded $688,000 of non-cash interest expense in the
period.
As a result of all of the above, our net loss for the nine month period
ended September 30, 2000 was $4,246,000, or $.80 per common share, compared to a
net loss of $1,919,000, or $.37 per common share, for the nine month period
ended September 30, 1999.
Liquidity and Capital Resources
At September 30, 2000, we had working capital of approximately $6.7
million. In January 2000, we completed a new revolving loan and credit agreement
with Congress that currently provides for a maximum facility of $25.5 million,
which currently includes term loans of $4.5 million. This new revolving loan
replaced and repaid the outstanding amounts due to First Union National Bank
("First Union"). The Congress facility bears interest at First Union's prime
lending rate plus 1% as to the revolving portion and First Union's prime lending
rate plus 1.5% as to the term loan. The revolving portion has a two-year term
and the $4.5 million term is due in equal quarterly installments of $500,000
commencing November 1, 2000 with the balance payable at the termination of the
revolving loan. We failed to make the first payment on this loan. Congress has
notified us that we are in default on the term loan and the revolving line as a
result of the failure to make such a payment as well as the currently
outstanding loan is in excess of the lending formula. The loans are secured by
substantially all of our assets. In addition, Rudy Slucker, our Chairman and
Chief Executive Officer has agreed to personally guaranty a portion of the term
loan.
We have incurred losses in each year of our existence which losses have
increased substantially during the current quarter. In addition, our
indebtedness, including our accounts payable and accrued liabilities, continue
to be substantial. As a result of our continuing losses, substantial
indebtedness and our long list of past due trade payables, we have sought
alternative strategies for financing our continued operations. In June 2000, we
retained Chase Securities,
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<PAGE>
Inc. to assist us in identifying a strategic partner. On October 18, 2000, we
announced that we have executed a Term Sheet with Gen-X Sports, Inc. providing
for a merger of Gen-X and TearDrop. The proposed transaction provides for the
shareholders of Gen-X to be issued 160 million of our shares and for Gen-X to
provide for the investment of no less than $10,000 of additional funding to the
new combined company. The transaction will be subject to, among other things,
due diligence, the negotiation of definitive agreements, transaction financing
and approval of our bank and approval of our shareholders. Upon closing the
transaction, we intend to effect a 1 for 15 reverse stock split.
On November 16, 23 received a communication from Gen-X that it was
terminating its Letter of Intent with respect to a proposed merger. However, in
that same communication, Gen-X indicated that it was still interested in
purchasing all of our assets, free and clear of all liens and encumbrances, and
that they would be submitting an offer in this matter within a few days time.
Because of our precarious financial condition and our continuing losses, we
would likely have to cease operations if we are unable to complete the
contemplated or a similar type of transaction. Additionally, there is
uncertainty as to the realizibility of the carry value of the patents and
trademarks due to our declining financial condition.
We continue to limit expenditures and we continue to evaluate strategic
alternative options in order to continue operations and protect our assets.
Among the options is a purchase of our stock, which was being considered with
Gen-X , as well as seeking relief pursuant to title 11 of the U. S. Code.
On August 10, 2000, we entered into a new mortgage and security agreement
with Sun Life Assurance Company of Canada under which we borrowed $2,500,000
secured by our land and building. The loan bears interest at 8.68% and is
payable in equal monthly installments of $25,000 with a maturity of September 1,
2015. The proceeds of the loan were used to prepay the $1,958,000 balance of a
term loan due to Congress, with the remainder of the proceeds added to our
general funds.
Our expenditures for operations and commitments for advertising and
marketing have been and continue to be substantial and we believe that we must
continue to incur such costs in order to continue to increase consumer awareness
of our products. Our accounts payable and indebtedness continue to be
substantial and we are currently facing cash flow shortfalls and expect that we
will continue to do so for the foreseeable future. In addition, we have been
seeking to provide scheduled payments of amounts due to many of our vendors. As
our sales have declined, and we have had difficulty meeting our financial
obligations, we have continued to limit our advertising expenditures and seek
additional financing in order to continue operations. The inability to obtain
additional financing when needed would have a material adverse effect on our
liquidity, and, as a result, we could be required to significantly reduce or
suspend our operations, seek a merger partner or sell some or all of our assets.
There can be no assurance that any additional financing will be available to us
on acceptable terms, if at all, when we require it.
On March 10, 1999, Rudy Slucker, our Chairman and Chief Executive Officer
loaned us $500,000. On January 20, 2000, he increased the loan to $1 million,
repayable on demand once we achieve certain debt levels under the Congress
facility. The loan bears interest at Congress' prime lending rate plus 1%, and
it is convertible into our common stock at the rate of $1 per
15
<PAGE>
share. Additionally, we granted Mr. Slucker options to purchase 1,500,000 shares
of our common stock. The options are exercisable at $1.38 per share. Under the
rules of the Nasdaq SmallCap Market, the convertible feature of the loan and the
grant of the stock options were subject to the approval of our shareholders,
which approval was obtained on April 27, 2000. The market price of our common
stock on the date of shareholder approval was $1.688, which exceeded the
conversion price of the loan and the exercise price of the stock options. As a
result, we recognized a non-cash compensation charge against earnings in the
second quarter of 2000 in the amount of $469,000 and a non-cash interest charge
of $688,000.
Our 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, and, while product is being shipped to customers, the cash
receipts from those sales may not be received for a period of 90 days. In
addition, a significant financial commitment is made for advertising during the
first quarter of the year.
We have entered into endorsement agreements with golf professionals, which
will require the payment of a minimum of approximately $3.2 million and up to an
additional $2.1 million in 2000.
We do 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 us to meet our needs, particularly if sales do not increase
or if we encounter additional operational difficulties.
16
<PAGE>
Our statements of cash flows for the nine months September 30, 2000 and
1999 are summarized below:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net cash provided (used) in operating activities $(1,697,000) $ 2,990,000
Net cash (used) in investing activities (136,000) (416,000)
Net cash provided (used) by financing activities 1,970,000 (2,004,000)
</TABLE>
At September 30, 2000, we had patents and trademarks, primarily related to
the acquisition of the assets of Armour and Ram, of approximately $6,072,000.
During the three and nine months ended September 30, 2000 and 1999, we
recognized amortization expense of approximately $132,000, $396,000, $98,000 and
$294,000 respectively. We will continue to amortize patents and trademarks. Due
to our continuing losses, we believe the value of our goodwill has been
diminished and have therefore expensed the remaining portion in the quarter
ended September 30, 2000.
Delisting of Common Stock from the Nasdaq SmallCap Market
In order for our Common Stock to continue to be quoted on the Nasdaq
SmallCap Market, it must maintain a price of $1.00 per share. Our stock has
continued to trade at a price less than $1.00. We have received a notice from
the Nasdaq SmallCap Market notifying us that our Common Stock will be subject to
delisting on January 3, 2001 if it does not close above $1.00 for a period of no
less than 10 days prior to such date. Accordingly, we expect that our Common
Stock will be delisted from the Nasdaq SmallCap Market.
When our Common Stock is no longer eligible for quotation on Nasdaq,
trading, if any, of our Common Stock would thereafter be conducted in the
non-Nasdaq bulletin board over-the-counter market. As a result of such
delisting, an investor may find it more difficult to dispose of or to obtain
accurate quotations as to the market value of our Common Stock. In addition if
our Common stock were to become delisted from Nasdaq and the trading price of
the Common Stock was less than $5.00 per share, trading in the Common Stock
would be subject to the requirements of certain rules promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which require
additional disclosure by broker-dealers in conjunction with any trades involving
a stock defined as a penny stock (generally, any non-Nasdaq equity security that
has a market price of less than $5.00 per share, subject to certain exceptions).
Such rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith, and impose various sales practice requirements on dealer-brokers who
sell penny stocks to persons other than established customers and accredited
investors (generally institutions). For these types of transactions, the
dealer-broker must make a special suitability determination for the purchaser
and must receive the purchaser's written consent to the transaction prior to
sale. The additional burdens imposed on broker-dealers by such requirements may
discourage them from effecting transactions in the Common Stock, which could
severely limit the liquidity of the Common Stock and the ability to sell the
Common Stock in the secondary market.
17
<PAGE>
In the absence of an active trading market, purchasers of the Common Stock
may experience difficulty in selling their shares. The trading price of the
Common Stock is expected to be subject to significant fluctuations in response
to variations in quarterly operating results, changes in analysts' earnings
estimates and other factors. In addition, the stock market is subject to price
and volume fluctuations that affect the market prices for companies and that are
often unrelated to operating performance.
Seasonality
The purchasing decisions of most of our 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, our 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 our results of operations may not be
indicative of our overall annual performance.
Forward Looking Statements
When used in this and in future filings by us with the Securities and
Exchange Commission ("the Commission"), in our 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 us) are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. We have made such
forward-looking statements in, among other places, the section of this Report
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations". We wish to caution the reader not to place undue
reliance on any such forward-looking statement, 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. Such risks and other aspects of
our business and operations are described in "Risk Factors" included in the
Company's Form 10-KSB for the year ended December 31, 1999. We have 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.
18
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We do not hedge our foreign currency exchange rate exposure. Therefore, we
are exposed to foreign currency exchange rate risks on our foreign sales which
constitute 12% of our total sales. We do not invest in speculative or derivative
financial instruments. We have significant amounts of debt, which are subject to
interest rate fluctuation risk. The amounts outstanding under all of our notes
payable and long-term debt have variable interest rates and, therefore, adjust
to market conditions. The impact of a 1% increase or decrease in the interest
rate would increase or decrease our annual interest expense by approximately
$171,000 based on the debt levels at September 30, 2000.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In March 1999, we received a formal notice demanding arbitration from Pro
Golf Promotions, LLC, Cal Rogers and Dara O'Neill in connection with certain
disputes between such parties and us relating to our purchase of the TearDrop
Professional Golf Tour from such parties. Such parties were seeking money
damages and the issuance of shares of Common Stock related to alleged incentive
obligations for 1998 and 1999. In addition, we instituted a counterclaim against
the plaintiffs. In an arbitration proceeding commenced in January 2000, the
arbitrator ruled generally in our favor except in connection with one claim,
with respect to which the arbitrator awarded approximately $90,000 as
compensation for work done in 1998. This amount has been accrued on our balance
sheet.
On April 27, 2000, we were named as a defendant by a former employee
alleging violations of the Americans With Disabilities Act and seeking damages
in excess of $287,000. We believe the claim is without merit and plan to defend
the case vigorously.
We have been named defendants in a lawsuit entitled Hamada Enterprises v.
TearDrop Golf Company, which was filed July 5, 2000, in the Circuit Court of
Cook County. Hamada is alleging breach of contract in connection with matters
that extend back to the time prior to our acquisition of the Tommy Armour Golf
Company, seeking damages of $350,231. It is our position that there has been no
breach of contract and that we have been ready and willing to send Hamada
equipment to offset Hamada's credit, as the parties originally agreed. We intend
to vigorously defend this matter.
We were also served with a complaint from Nieman Porter & Company,
alleging damages of $535,337, in connection with products sold and delivered to
us pending in the Northern District of Illinois. The amount that we owe is
reflected on our balance sheet as a liability. We have begun settlement
discussions. The parties have agreed to an extension of time for us to answer
the complaint.
We are being sued by Dow Jones Inc. for breach of contract relating to
advertising services. Plaintiff is claiming damages of $118,070. The amount is
reflected on our balance sheet under accounts payable. We are investigating
plaintiff's claim and anticipate that we will be able to resolve this matter
through settlement.
We have been sued by Industrial Staffing Inc. for damages of $8,455 for
breach of contract. We are investigating the validity of plaintiff's allegations
and anticipate that we will be able to resolve this matter through settlement.
Item 2. Changes in Securities and Use of Proceeds
At the Annual Meeting of Stockholders held on April 27, 2000, the
Stockholders approved an amendment to the Company's Certificate of Incorporation
increasing the Company's authorized shares of Common Stock from 10,000,000 to
20,000,000 shares.
20
<PAGE>
The issuance by the Company, however, of additional shares of Common Stock
may, depending on the context in which they are issued, dilute the stock
ownership of the existing stockholders of the Company. The Company's
stockholders do not have any preemptive or similar rights to subscribe for or
purchase any additional shares of Common Stock that may be issued in the future.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
---------- ---------
3.1++ Certificate of Incorporation
3.2++ Certificate of Merger
3.3++ Agreement and Plan of Merger dated October 21, 1996 between the
Company and TearDrop Putter Corporation, a South Carolina
Corporation
3.4++ By-Laws
3.6** Certificate of Ownership and Merger of TearDrop Promotions, Inc.,
Tommy Armour Golf Company and Ram Golf Corporation into the
Company dated October 8, 1999.
4.2++ Specimen Stock Certificate
10.1++ Employment Agreement with Rudy A. Slucker
10.2++ Employment Agreement with John Zeravica
10.3+ 1996 Employee Stock Option Plan, as amended
10.4++ Form of Stock Option Agreement
10.23++ Form of Lock-up Agreement
10.24* Property Lease dated August 10, 1997 between the Company and Dolo
Realty Co.
10.40** Loan and Security Agreement, dated January 20, 2000, by and
between Congress Financial Corporation (Central) and the Company
10.41** Subordination Agreement, dated as of January 20, 2000, by and
between Rudy A. Slucker and Congress Financial Corporation
(Central)
10.42+ Amended and Restated Subordinated Convertible Demand Note, dated
as of January 20, 2000 to Rudy A. Slucker.
10.43+ Stock Option Agreement, dated as of December 31, 1999, between
the Company and Rudy A. Slucker.
10.44** Employment Agreement, effective January 27, 2000, by and between
the Company and Andrew M. Kairey.
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<PAGE>
10.45 Amendment No. 1 to Loan and Security Agreement, dated as of
August 11, 2000 by and between Congress Financial Corporation
(Central) and the Company.
10.46 Reaffirmation of Guarantee of Tommy Armour Golf Company, dated
August 11, 2000.
10.47 Reaffirmation of Guarantee of Rudy A. Slucker, dated August 11,
2000.
27 Financial Data Schedule
------------
++ Previously filed with the Securities and Exchange Commission as an
Exhibit to our Registration Statement on Form SB-2 (File No.333-14647) and
incorporated herein by reference.
* Previously filed with the Securities and Exchange Commission as an
Exhibit to Post-Effective Amendment No. 1 to our Registration Statement on Form
SB-2 (File No. 333-14647) and incorporated herein by reference.
+ Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Preliminary Proxy Statement for the Annual Meeting of
Stockholders filed on March 17, 2000 and incorporated herein by reference.
** Previously filed with the Securities and Exchange Commission as an
Exhibit to our Annual Report to Stockholders on Form 10-KSB filed on March 30,
2000 and incorporated herein by reference.
(b) Reports on Form 8-K:
During the quarter ended September 30, 2000, the Company did not
file any Current Reports on Form 8-K.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TEARDROP GOLF COMPANY
Dated: November 15, 2000 /s/ Rudy A. Slucker
----------------------------------
Rudy A. Slucker, President and Chief
Executive Officer (Principal Executive Officer)
Dated: November 15, 2000 /s/ Joseph Cioni
------------------------------------
Joseph Cioni, Vice President of Finance and Chief
Financial Officer (Principal Financial and
Accounting Officer)
23
<PAGE>
INDEX TO EXHIBITS
No. Description
-- -----------
27 Financial Data Schedule
24
