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 June 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 Executive (Zip Code)
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 June 30, 2000:
5,262,565
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TEARDROP GOLF COMPANY
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED JUNE 30, 2000
Page No.
--------
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 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature Page 20
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Part 1. Financial Information
Item 1. Financial Statements
TearDrop Golf Company
Consolidated Balance Sheet
June 30, 2000 and December 31, 1999
(All dollar amounts, except share and per share amounts, in $000's)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,280 $ 481
Accounts receivable less allowance for returns and
doubtful accounts of $2,117 and $1,793 14,661 11,932
Inventories 10,632 10,778
Other current assets 341 148
-------- --------
Total current assets 26,914 23,339
PROPERTY AND EQUIPMENT, less accumulated
depreciation 4,007 4,334
PATENTS & TRADEMARKS, less accumulated amortization 6,155 6,302
GOODWILL, less accumulated amortization 505 525
-------- --------
$ 37,581 $ 34,500
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,556 $ 11,064
Accrued liabilities 2,516 2,594
Note payable - shareholder 1,000 500
Current portion of long term debt 2,435 1,363
-------- --------
Total current liabilities 14,507 15,521
LONG TERM DEBT 19,297 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 (81) (79)
-------- --------
Accumulated deficit (22,699) (22,046)
-------- --------
Total stockholders' equity $ 3,777 $ 3,274
======== ========
$37,581 $ 34,500
</TABLE>
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TearDrop Golf Company
Consolidated Statements of Operations
For the Three Months and Six Months Ended June 30, 2000 and 1999
(All dollar amounts, except share and per share amounts, in $000's)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 12,199 $ 22,372 $ 25,798 $ 37,590
Cost of sales 6,350 11,803 12,865 20,874
----------- ----------- ----------- -----------
Gross profit 5,849 10,569 12,933 16,716
Selling, general and
administrative expenses 5,530 9,600 11,815 18,333
Non-cash compensation 469 -- 469 --
----------- ----------- ----------- -----------
Income (loss) from operations (150) 969 649 (1,617)
Royalty income 405 55 508 169
Interest (expense), net (626) (468) (1,122) (887)
Non-cash interest (expense)
on subordinated debt (688) -- (688) --
----------- ----------- ----------- -----------
Income (loss) before income taxes (1,059) 556 (653) (2,335)
Income tax (expense) -- (161) -- --
Utilization of net tax loss carryforward -- 161 -- --
Net income (loss) $ (1,059) $ 556 $ (653) $ (2,335)
=========== =========== =========== ===========
Net income (loss) per common share
Basic and diluted $ (0.20) $ 0.11 $ (0.12) $ (0.45)
=========== =========== =========== ===========
Weighted average number of common shares
Outstanding - basic and diluted 5,262,565 5,181,674 5,262,565 5,180,787
=========== =========== =========== ===========
</TABLE>
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TearDrop Golf Company
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2000 and 1999
(All dollar amounts, except share and per share amounts, in $000's)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30
----------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (653) $ (2,335)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 615 570
Provision for doubtful accounts 239 239
Non-cash compensation 469 --
Non-cash interest expense 688 --
Changes in operating assets and liabilities:
(Increase) in accounts receivable (2,967) (10,781)
Decrease in inventories 146 8,071
(Increase) in other current assets (193) (168)
Increase (decrease) in accounts payable and other
current liabilities (2,586) 1,185
-------- --------
NET CASH (USED) IN OPERATING ACTIVITIES (4,242) (3,219)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in patents and trademarks (97) --
Purchases of property and equipment (24) (138)
-------- --------
NET CASH (USED) IN INVESTING ACTIVITIES (121) (138)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under financing agreements 4,664 3,499
Proceeds from shareholder note payable 500 500
Proceeds from exercise of common stock options -- 9
Proceeds from redemption of common stock warrants -- 1
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,164 4,009
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2) (26)
NET INCREASE IN CASH AND CASH EQUIVALENTS 799 626
CASH AND CASH EQUIVALENTS:
Beginning of year 481 373
-------- --------
End of period $ 1,280 $ 992
======== ========
</TABLE>
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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 and six months ended June 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 six month periods ended June 30, 2000 and 1999, total
comprehensive income (loss) amounted to $(1,061), $(655), $530 and $(2,361),
respectively.
NOTE 2 - INVENTORIES
Inventories at June 30, 2000 and December 31, 1999 consist of the following:
June 30, 2000 December 31, 1999
------------- -----------------
Raw materials and work in process $ 4,532 $ 5,401
Finished goods 6,100 5,377
------- -------
Total inventories $10,632 $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 term loans of $4,500, which replaced and
repaid the outstanding loan due First Union National Bank. The loan is due in
two years and bears interest at First Union's 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. The remaining
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TEARDROP GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts, except share and per share amounts, in $000's
(UNAUDITED)
balance of a $2,175 term loan ($1,958) from Congress was prepaid on August 10,
2000 from the proceeds of a mortgage loan (see below).
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
receipt of shareholder approval in April 2000 into our Common Stock at the rate
of $1 per share. 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 was charged to earnings in the second quarter of the year 2000 of $688,
classified as a non-cash interest expense on subordinated debt.
On August 10, 2000, we executed 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 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 the
Ryder or President Cup teams.
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.
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)
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.
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 first three and
six months of 2000 of $12,199 and $25,798, respectively, of which $9,955 and
$20,713, respectively, were sales in the United States and $2,244 and $5,085,
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 are 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.
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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. In addition, we operate a professional developmental golf
tour for aspiring PGA Tour players and we are the sole United States distributor
for Walter Genuin golf shoes.
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. In addition, our indebtedness, including our accounts payable
and accrued liabilities continue to be substantial.
Since the acquisitions were completed, we have devoted substantial efforts
to reduce costs, eliminate unprofitable product lines and focus on developing
and marketing high quality products. However, no assurance can be given that we
will be able to operate the combined enterprises successfully or reverse the
history of losses that each of TearDrop, Ram and Armour has incurred in the
past.
We believe that an important element for increasing awareness and demand
for our golf clubs is the building of a corps of touring professional golfers
that will endorse, use and win with our clubs. Accordingly, as an integral part
of our marketing strategy, we are continually seeking 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
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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 will incur 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 expansion and operations. As of June 30,
2000, we had $33.8 million in liabilities, approximately $21.7 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 a line of 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.
On August 10, 2000, we were extended a 15-year mortgage loan of $2,500,000
with 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 assembling our products will be dependent, in part, on
maintaining our relationships with these existing suppliers and developing
relationships with new suppliers.
We believe that there are readily available alternative sources for each
of components comprising our clubs, although there can be no assurance of this.
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
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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.
Results of Operations
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Sales for the three month period ended June 30, 2000 were $12,199,000
compared to sales of $22,372,000 for the same period of 1999, a decrease of
$10,173,000. This decrease in sales is attributable to a variety of factors,
including a general decline in the golf equipment market. In addition, we were
forced to substantially reduce 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 June 30, 2000 was
$5,849,000, or 47.9% of sales, compared to a gross profit of $10,569,000, or
47.2% 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 due to lower volume, was the reason for the increase in the
gross profit percentage.
Selling, general and administrative expenses in the three months ended
June 30, 2000 were $5,530,000, or 45.3% of sales, compared to $9,600,000, or
42.9% of sales, for the same period of 1999. Advertising expenses were reduced
substantially during the period, resulting in the decrease in selling, general
and administrative expense.
During the three month period ended June 30, 2000, our shareholders
approved the grant of an option to purchase 1,500,000 shares of our common stock
granted to Rudy Slucker, 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 required by
accounting rules to be recorded as non-cash compensation expense. This resulted
in a non-cash charge of $469,000 during the three month period ended June 30,
2000.
Royalty income in the three month period ended June 30, 2000 was $405,000
compared to $55,000 for the corresponding period of 1999. We have entered into
several royalty agreements in the United States, as well as in certain foreign
countries, under which certain of our tradenames are used on products, for which
we receive royalty payments.
Interest expense in the three month period ended June 30, 2000 was
$626,000 compared to interest expense of $468,000 for the three month period
ended June 30, 1999. Higher levels of borrowings, combined with increases in the
prime rate of interest contribute to this increase in interest expense.
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During the three month period ended June 30, 2000, our shareholders
approved the convertible feature of $1,000,000 subordinated debt issued by 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, is required by the accounting rules to be 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 income for the three month period
ended June 30, 2000, before non-cash charges was $98,000, or $.02 per common
share, compared to $556,000, or $.11 per common share, for the three month
period ended June 30, 1999. Our net loss for the three month period ended June
30, 2000, after application of the non-cash accounting charges, was $1,059,000
or $.20 per share.
Six Month Period Ended June 30, 2000 Compared to Six Month Period Ended June 30,
1999
Sales for the six month period ended June 30, 2000 were $25,798,000
compared to sales of $37,590,000 for the same period of 1999, a decrease of
$11,792,000. This decrease in sales is attributable to a variety of factors,
including general decline in the golf equipment market. 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 six month period ended June 30, 2000 was $12,933,000,
or 50.1% of sales, compared to a gross profit of $16,716,000, or 44.4% 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 due
to lower volume, was the reason for the significant increase in the gross profit
percentage.
Selling, general and administrative expenses in the six months ended June
30, 2000 were $11,815,000, or 45.8% of sales, compared to $18,333,000, or 48.8%
of sales, for the same period of 1999. Advertising expenses were reduced
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 six month period ended June 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 required by accounting rules to
be recorded as non-cash compensation expense. This resulted in a non-cash charge
of $469,000 during the six month period ended June 30, 2000.
Royalty income in the six month period ended June 30, 2000 was $508,000
compared to $169,000 for the corresponding period of 1999. We have entered into
several royalty agreements
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in the United States, as well as in certain foreign countries, under which
certain of our tradenames are used on products, for which we receive royalty
payments.
Interest expense in the six month period ended June 30, 2000 was
$1,122,000 compared to interest expense of $887,000 for the six month period
ended June 30, 1999. Higher levels of borrowings, combined with increases in the
prime rate of interest contributed to this increase in interest expense.
During the six month period ended June 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 income for the six month period
ended June 30, 2000, before non-cash charges was $504,000, or $.10 per common
share, compared to a net loss of $2,335,000, or $.45 per common share, for the
six month period ended June 30, 1999. Our net loss for the six month period
ended June 30, 2000, after application of the non-cash accounting charges, was
$653,000 or $.12 per share.
Liquidity and Capital Resources
At June 30, 2000, we had working capital of approximately $12.4 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 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 2000 with the balance payable at the termination of the revolving loan.
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.
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
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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 certain of our vendors. If our sales do not increase
substantially to cover our expenditures, we will be required to continue to
limit our advertising expenditures and seek additional financing in order to
continue operations. This may result in continued reduced sales. 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.
We are currently exploring alternatives for additional financing. We have
recently announced that we have retained Chase Securities Inc. as our financial
advisor to explore strategic alternatives in response to several unsolicited
inquiries. No assurance can be given that any transaction will be completed or
that any financing transaction will be identified.
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 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.
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Our statements of cash flows for the three months ended June 30, 2000 and
1999 are summarized below:
2000 1999
Net cash (used) in operating activities $(4,242,000) $(3,219,000)
Net cash (used) in investing activities (121,000) (138,000)
Net cash provided by financing activities 5,164,000 4,009,000
At June 30, 2000, we had patents and trademarks and goodwill, primarily related
to the acquisition of the assets of Armour and Ram, of approximately $6,155,000
and $505,000, respectively. During the three and six months ended June 30, 2000
and 1999, we recognized amortization expense of approximately $132,000,
$264,000, $98,000 and $196,000, respectively. We will continue to amortize
patents and trademarks and goodwill.
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.
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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
$227,000 based on the debt levels at June 30, 2000.
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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. However, we have submitted motions to
reconsider, which are still pending and we are awaiting final ruling.
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 been in contact with
plaintiff's counsel and have begun settlement discussions. The parties have
agreed to an extension of time to answer the complaint in order to reach a
compromise to this dispute.
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.
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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)
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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.
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 June 30, 2000, the Company did not file any
Current Reports on Form 8-K.
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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: August 17, 2000 /s/ Rudy A. Slucker
-----------------------------------------------
Rudy A. Slucker, President and Chief
Executive Officer (Principal Executive Officer)
Dated: August 17, 2000 /s/ Joseph Cioni
-----------------------------------------------
Joseph Cioni, Vice President of Finance and Chief
Financial Officer (Principal Financial and
Accounting Officer)
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