UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly report pursuant to Section 13 or 15 (d) of the Securities and
Exchange Act of 1934 for the quarterly period ended September 30, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Exchange Act for
the transition period from __________ to ___________
COMMISSION FILE NO. 0-24812
DIVOT GOLF CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 56-1781650
- -------------------------------- ------------------------------
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
201 N. Franklin Street, Suite 200 Tampa, FL 33602
- ------------------------------------------------------------------------------
(Address of principal executive offices)
(813) 222-0611
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(Registrant's telephone number, including area code)
Check whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 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 No
On October 30, 1998 there were 4,410,041 shares of the issuer's Common Stock,
$.001 par value, and 6,960 shares of the issuer's Preferred Stock, $.001 par
value outstanding.
Transitional Small Business Disclosure Format Yes No
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DIVOT GOLF CORPORATION
QUARTERLY REPORT FOR THE THREE AND NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1998
FORM 10-QSB
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997............................................ 3
Condensed Consolidated Statements of Operations for the three-month and
nine-month periods ended September 30, 1998 and 1997............. 5
Condensed Consolidated Statements of Cash Flows for the three-month and
nine-month periods ended September 30, 1998 and 1997............. 6
Condensed Consolidated Statements of Changes in Shareholders' Equity for
the nine-month period ended September 30, 1998................... 7
Notes to Condensed Consolidated Financial Statements...... 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................24
Item 2. Changes in Securities...........................................25
Item 3. Defaults Upon Senior Securities.................................25
Item 4. Submission of Matters to a Vote of Securities Holders...........26
Item 5. Other Information...............................................26
Item 6. Exhibits and Reports on Form 8-K................................26
Signatures..............................................................27
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
DIVOT GOLF CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September
30, 1998 December 31,
(Unaudited) 1997
-------------- --------------
<S> <C> <C>
Current assets:
Cash $ 314,477 $ 53,266
Cash - restricted - 135,019
Trade accounts receivable, net 1,144,395 352,018
Accounts receivable from related
parties 216,594 160,543
Inventories 1,081,381 31,611
Prepaid expenses and other current
assets 461,886 1,038,588
------------ -------------
Total current assets 3,218,733 1,771,045
------------ -------------
Property and equipment, net 3,925,143 5,287,805
Other assets, net 1,228,629 583,400
Goodwill, net 2,643,991 331,250
-------------- --------------
Total assets $ 11,016,496 $7,973,500
============== ==============
</TABLE>
See accompanying notes
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DIVOT GOLF CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September
30, 1998 December 31,
(Unaudited) 1997
-------------- --------------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued expenses $ 1,301,594 $ 772,460
Accrued interest payable 4,125 32,751
Short-term debt 2,828,118 -
Foreign income tax payable 181,793 181,793
Current portion of long-term debt 59,150 757,023
Current maturities of capital lease
obligations 13,760 21,510
Accrued discount on convertible debentures - 104,037
-------------- --------------
Total current liabilities 4,388,540 1,869,574
-------------- --------------
Noncurrent Liabilities:
Long-term debt, less current portion 352,476 3,477,256
Long-term capital lease obligations, less
cur. portion 21,057 35,785
Other long term liabilities 23,300 -
-------------- --------------
Total noncurrent liabilities 396,833 3,513,041
-------------- --------------
Redeemable convertible preferred stock,
$.001 par value; 1,528 shares authorized;
1,178 and 0 shares issued and outstanding
at September 30,1998 and December 31,
1997, respectively (aggregate liquidation
preference $1,500,000 and $0) 1,177,500 -
-------------- --------------
Shareholders' Equity:
Preferred Stock, $.001 par value;
998,472 shares authorized; 286,980 and
283,170 shares issued and outstanding
at September 30,1998 and December 31,
1997, respectively (aggregate
liquidation preference $7,558,750
and $1,920,000) 287 283
Common Stock, $.001 par value;
200,000,000 shares authorized;
4,055,578 and 2,842,167 shares issued
and outstanding at September 30, 1998
and December 31, 1997, respectively 4,056 2,842
Additional paid-in capital 39,446,440 32,083,757
Accumulated deficit (34,077,439) (29,176,276)
Less cost of Convertible Preferred Stock
held in treasury, 281,250 shares (210,937) (210,937)
Foreign currency translation adjustment ( 108,784) (108,784)
-------------- --------------
Total shareholders' equity 5,053,623 2,590,885
-------------- --------------
Total liabilities and shareholders' equity $ 11,016,496 $7,973,500
============== ==============
</TABLE>
See accompanying notes
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DIVOT GOLF CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ -----------------------
September September September September
30, 1998 30, 1997 30, 1998 30, 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues:
Sales $ 2,006,479 $ - $ 4,609,373 $ -
Golf revenues - 576,468 102,478 1,571,287
Food and beverage revenues - 145,496 13,992 402,347
Proshop revenues - 79,572 9,558 217,247
Membership fees and dues - 42,288 5,784 380,382
Resident membership fees - 140,000 - 270,000
Management and design fees 12,688 90,951 31,063 802,722
Other - 110 5,856 6,067
------------- ------------- ------------ ------------
Total operating revenues 2,019,167 1,074,885 4,778,104 3,650,052
------------- ------------- ------------ ------------
Operating expenses:
Cost of sales 1,180,999 - 2,759,041 -
Golf course operations - 383,103 71,290 1,070,143
Cost of food and beverage
sales - 61,164 23,255 162,365
Cost of proshop sales - 56,351 56,296 148,320
Marketing expenses - 60,225 3,956 209,529
Management and design
expenses - 65,535 - 686,101
General and administrative
expenses 1,872,474 403,633 4,503,600 1,036,092
Professional fees, including
legal and accounting 260,346 91,715 670,941 401,819
Depreciation and
amortization expense 72,051 173,392 208,557 543,398
------------- ------------- ------------ ------------
Total operating expenses 3,385,870 1,295,118 8,296,936 4,257,767
------------- ------------- ------------ ------------
Operating loss (1,366,703) (220,233) (3,518,832) (607,715)
Other income (expense):
Interest expense (83,243) (205,833) (670,985) (560,494)
Amortization of debt
discount on convertible debt (102,383) - (516,319) -
Gain on sale of golf course - - 523,799 -
Write-off of deposit (25,000) - (125,000) -
Interest and other income - 105,952 134,867 132,882
------------- ------------- ------------ ------------
Net loss $(1,504,617) $ (320,114) $(4,172,470) $(1,035,327)
============= ============= ============ ============
Net loss per share $ (.39) $ (.16) $ (1.22) $ (.54)
============= ============= ============ ============
Weighted average number of
shares outstanding 3,856,000 1,968,000 3,422,000 1,906,000
============= ============= ============ ============
</TABLE>
See accompanying notes
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DIVOT GOLF CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
-------------------------- --------------------------
September September September September
30, 1998 30, 1997 30, 1998 30, 1997
------------ ------------- ------------- ------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net loss $(1,504,617) $(320,114) $(4,172,470) $(1,035,327)
Adjustment to reconcile net
loss to net cash used in operating
activities:
Gain on sale of assets - (105,711) (523,799) (105,711)
Depreciation and 72,051 173,392 208,557 543,398
amortization
Amortization of debt 161,387 - 516,319 -
discount
Amortization of loan costs 36,278 - 331,250 -
Net change in other 355,831 (190,627) (72,995) 94,046
working capital items
Accounts receivable from 36,700 (19,534) (56,051) (19,534)
related parties
------------ ------------- ------------- ------------
Net cash used in operating
activities (842,370) (462,594) (3,769,189) (523,128)
------------ ------------- ------------- ------------
Investing activities:
Payments for intangibles, net - - (1,525,018) -
Change in restricted cash - - 135,019 -
Sales (purchases) of property
and equipment, net (625,567) (168,741) 794,930 (383,479)
Payments for loan and
amortization costs - (10,145) - 17,682
Proceeds from sale of business - 600,000 - 600,000
Additional investment in
subsidiaries - 33,285 - 33,682
------------ ------------- ------------- ------------
Net cash (used in) provided by
investing activities (625,567) 454,399 (595,069) 267,885
------------ ------------- ------------- ------------
Financing activities:
Additions to short term
borrowings 381,395 - 3,946,957 -
Payments for short term
borrowings and cap leases (1,025,000) - (2,525,000) -
Additions to long-term
borrowings - - 1,025,976 50,300
Payments for long-term
borrowings and cap leases (147,502) (203,601) (4,113,627) (1,702,029)
Issuance of common stock 1,000,000 - 1,015,750 1,573,308
Change in accrued discount on
convertible debentures - - - (311,694)
Issuance of preferred stock 1,527,500 - 5,275,413 -
------------ ------------- ------------- ------------
Net cash (used in) provided by a
financing activities 1,736,393 (203,601) 4,625,469 (390,115)
------------ ------------- ------------- ------------
Effect of foreign currency
exchange rate changes on cash - (6,858) - (17,852)
------------ ------------- ------------- ------------
Increase (decrease) in cash 268,456 (218,654) 261,211 (663,210)
Cash at beginning of period 46,021 361,523 53,266 806,079
------------ ------------- ------------- ------------
Cash at end of period $314,477 $142,869 $314,477 $142,869
============ ============= ============= ============
Supplemental disclosure of cash flow information:
Cash paid during the period
for interest $136,621 $150,047 $463,643 $434,798
============ ============= ============= ============
</TABLE>
See accompanying notes
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<PAGE>
DIVOT GOLF CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common Preferred Paid-in Accumulated
------------------------------------------------------------------
Shares Amount Shares Amount Capital Deficit
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 2,842,167 $2,842 283,170 $ 283 $32,083,757 $(29,176,276)
Net loss (4,172,470)
Issuance of Warrannts in connection
with Payment of debt 525,000
Issuance of Common Stock in connection
with a private placement 551,933 552 1,015,148
Issuance of Preferred Stock in
connection with a private placement 3,975 4 3,747,909
Preferred Stock dividend 728,693 (728,693)
- conversion discount
Issuance of Common Stock in connection
with Warrant Excercise 94,304 94 (94)
Issuance of Common Stock in connection
with convertible debentures 457,412 458 999,262
Issuance of Common Stock in connection
with conversion of Preferred Stock 46,429 46 (165) 0 (46)
Issuance of Common Stock in connection
with the acquisition of Talisman
Incorporated 10,000 10 46,865
Issuance of Common Stock in connection
with the acquisition of Miller
Golf,Inc. 53,333 54 299,946
------------------------------------------------------------------
Balance at September 30, 1998 4,055,578 $4,056 286,980 $ 287 $39,446,440 $(34,077,439)
==================================================================
</TABLE>
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<PAGE>
DIVOT GOLF CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Convertible Foreign
Preferred Currency
Treasury Stock Translation
Shares Amount Adjustment Total
--------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 (281,250) $ (210,937) $(108,784) $2,590,885
Net loss (4,172,470)
Issuance of Warrannts in connection
with Payment of debt 525,000
Issuance of Common Stock in connection
with a private placement 1,015,700
Issuance of Preferred Stock in
connection with a private placement 3,747,913
Preferred Stock dividend
- conversion discount 0
Issuance of Common Stock in connection
with Warrant Excercise 0
Issuance of Common Stock in connection
with convertible debentures 999,720
Issuance of Common Stock in connection
with conversion of Preferred Stock 0
Issuance of Common Stock in connection
with the acquisition of Talisman
Incorporated 46,875
Issuance of Common Stock in connection
with the acquisition of Miller
Golf,Inc. 300,000
--------------------------------------------
Balance at September 30, 1998 (281,250) $(210,937) $(108,784) $5,053,623
============================================
</TABLE>
See accompanying notes
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DIVOT GOLF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
NOTE A. Business of the Company and Significant Accounting Policies
Description of Business
Divot Golf Corporation (the "Company"), currently is engaged in the development
and marketing of golf-related businesses, and holds certain licensing rights in
the United States and internationally.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form 10-QSB
and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission
("SEC"). Accordingly, the financial statements do not include all of the
information and footnotes required by generally accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. The accompanying condensed consolidated financial statements
and notes thereto should be read in conjunction with the Company's audited
financial statements as of December 31, 1997 contained in its current Annual
Report on Form 10-KSB.
Investment in Subsidiaries - The Company includes The Gauntlet at Curtis Park,
Miller Golf, Inc., Divot Golf Subsidiary Corporation, Talisman Tools
Incorporated, and Divot Properties WGV, Inc., wholly owned subsidiaries, in its
condensed consolidated financial statements. The golf course assets of The
Gauntlet at Curtis Park were disposed of in April 1998, see Note E - Disposition
of Assets . The Company also held minority interests in two South Carolina golf
courses which the Company disposed of in April 1998.
Acquisitions - Acquisitions are accounted for under the purchase method of
accounting, in accordance with generally accepted accounting principles, see
Note D - Acquisitions.
Revenue Recognition -Through April 1998, revenues of the Company include daily
golf fees, proshop merchandise sales, and food and beverage sales. Golf fees
include revenue generated from green fees, cart fees and range fees. Revenues
also include sales of memberships and annual dues charged to members. Golf fees,
proshop merchandise sales and food and beverage sales are recognized when
received. Membership dues collected in advance are deferred as "unearned income"
and recognized over the period of prepayment. Membership fees that are
nonrefundable are recognized by the Company when received. In April 1998, the
Company disposed of its remaining golf course operations.
Since April 1998, revenues of the Company include the sale of golf accessories
and are recognized at the time merchandise is shipped to the customer.
Goodwill - The Company has classified, as goodwill, the cost in excess of the
fair value of the net assets acquired, which were acquired through various
purchase transactions.
Goodwill is being amortized on a straight-line basis over 15-20 years.
Amortization charged to continuing operations amounted to $35,800 and $74,756
for the three and nine month periods ended September 30, 1998.
Page 9 of 27
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DIVOT GOLF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
NOTE A. Business of the Company and Significant Accounting Policies (continued)
The Company carries its goodwill asset at its purchase price, less amortized
amounts, but subject to annual review for impairment. The Company's policy for
the valuation of goodwill is to calculate the undiscounted projected future cash
flows of the investment expected to be generated over the life of the goodwill.
This amount is then compared to the carrying value of the goodwill to determine
if the asset is impaired.
Income Taxes - The Company records income taxes pursuant to the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred taxes are provided for the
difference between the tax and financial statement basis of assets and
liabilities, and a valuation allowance is established for deferred tax assets
that, based upon available evidence, are not expected to be realized.
Net Loss Per Share - Net loss per share has been computed in accordance with the
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," based
on the weighted average number of shares outstanding during the period
presented. Stock options, warrants and convertible securities are considered
anti-dilutive and have not been considered in the computations.
NOTE B. Debt
<TABLE>
<S> <C>
Line of credit, secured by inventory, accounts receivable, fixtures,
machinery and equipment. Interest paid monthly at 1% over the
bank's prime. $ 1,353,717
Line of credit, secured by Parcel 11-A land at the World Golf Village.
Interest paid monthly at 10.6%. 1,093,240
Subordinated notes payable, 7% interest and principal due January 24, 1999,
net of unamortized discounts of $23,839. 326,161
Short term loans related to certain acquisitions (see Note D - Acquisitions) 55,000
Other notes payable 411,626
3,239,744
Less short-term debt 2,828,118
Less current portion of long-term debt 59,150
===========
Long-term debt, less current portion $ 352,476
===========
</TABLE>
NOTE C. Shareholders' Equity
Effective June 16, 1998, the Board of Directors declared a reverse stock split
of 1 for 15 shares of the Company's common stock to holders of record on June
16, 1998. Common stock issued and additional paid-in capital as of December 31,
1997 have been restated to reflect this split. All share and per share data,
including stock option plan and warrant information, is also restated to reflect
the split.
Page 10 of 27
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DIVOT GOLF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
NOTE C. Shareholders' Equity (Continued)
Effective June 2, 1998, the Company increased the number of common shares
authorized from 50 million to 200 million.
As of September 30, 1998, warrants to purchase 1,835,707 shares of the Company's
Common Stock were outstanding as follows:
# WARRANTS ISSUED EXPIRATION DATE EXERCISE PRICE
----------------- ----------------- --------------
6,667 September 28, 1998 $36.00
15,867 November 17, 1998 $36.00
3,333 December 5, 1998 $15.00
10,000 June 30, 1999 $30.00
66,667 January 20, 2000 $11.25-22.50
60,000 June 30, 2000 $36.00
16,667 September 28, 2000 $36.00
666,667 November 18, 2000 $ 2.00
230,000 December 3, 2000 $15.00
40,556 December 3, 2000 $1.00
280,000 December 3, 2000 $1.25
56,666 January 28, 2001 $ 3.00
181,818 April 2, 2002 $ 6.00
133,333 January 28, 2003 $ 2.81
90,000 January 28, 2003 $ 3.00
---------------
1,835,707
===============
During the nine months ended September 30, 1998, 280,000 warrants were issued as
consideration for various debts during the period. An additional 176,755 and
320,556 warrants were issued in connection with a private placement of the 1997
Preferred Stock and Redeemable Convertible Preferred Stock, respectively. During
the same period, 134,751 warrants were exercised in a cash-less transaction for
94,304 shares of common stock. During the nine months ended September 30, 1997,
no warrants were exercised.
During the nine months ended September 30, 1998, the Company sold an additional
3,975 shares of 1997 Preferred Stock for $4.0 million, less fees of
approximately $300,000. In conjunction with the discount allowed on the
conversion of the 1997 Preferred Stock into common stock, the Company has
recorded dividends of $728,693. Through September 30, 1998, holders of 165
shares of the 1997 Preferred converted their 1997 Preferred into 46,429 shares
of the Company's Common Stock. Additionally, at September 30, 1998, there were
approximately $190,000 of unpaid dividends on the Company's preferred stock.
This amount has been recorded as an adjustment to liquidation value of the
shares.
During the quarter ended September 30,1998, the Company sold 1,528 shares of
Redeemable
Page 11 of 27
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DIVOT GOLF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
NOTE C. Shareholders' Equity (Continued)
Convertible Preferred Stock for $1,527,500. These shares were a part of the 1997
Prefered Stock offering sold with an addendum allowing the subscriber, for a
period of 90 days, to convert the shares for an equal amount of subordinated
notes. As a result of this redemption feature, these shares have been classified
as Redeemable Convertible Preferred Stock in the accompanying financial
statements. The subordinated notes have a term of six months and bear interest
at 7% per annum payable at maturity, January 24, 1999. As of September 30, 1998,
350 shares were converted to $350,000 of subordinated notes.
During the quarter ended September 30, 1998, the company sold 500,000 shares of
the Company's common stock at $2.00 per share in a private placement.
During the nine months ended September 30, 1998, certain holders of convertible
debt converted approximately $999,720 of notes and unpaid interest into 457,412
shares of common stock. The Company also issued 53,333 shares of common stock
with a fair market value of approximately $300,000 as a part of the acquisition
of Miller Golf, Inc. The Company also issued 10,000 shares of common stock with
a fair market value of approximately $46,875 as a part of the acquisition of
Talisman Tools Incorporated.
Stock Option Plan
During April 1998, the Board of Directors and shareholders approved the
formation of the Divot Golf Corporation 1998 Stock Option Plan (the "1998 Plan")
for the purpose of attracting and retaining certain key employees of the
Company. The 1998 Plan provides that an aggregate of 1,500,000 of the Company's
authorized shares be reserved for future issuance. In the case of initial
grants, the exercise price will be fixed by the Board of Directors on the date
of grant.
On June 15, 1998, the Company issued a total of 733,333 options with immediate
vesting to certain officers and key employees of the Company under the 1998
Plan. These options have a exercise price of $2.8125 per share, which equals the
fair value of the stock price on the date of grant. On September 2, 1998, the
Company issued a total of 200,000 options with immediate vesting to certain
officers and key employees of the Company under the 1998 Plan. These options
have an exercise price of $2.8125 per share.
NOTE D. Acquisitions
During the nine months ended September 30, 1998, the Company completed the
following acquisitions:
MILLER GOLF, INC.
On April 8, 1998, the Company completed its $4.3 million acquisition of all the
issued and outstanding stock of Miller Golf, Inc. ("Miller"), a Massachusetts
corporation. The Miller stock was acquired from its shareholders, Robert
Marchetti, Louis Katon, and John Carroll, for a combination of $3.0 million in
cash, $1.0 million in notes payable to the sellers and 53,333 shares of the
Company's common stock which, in the aggregate, had a fair market value of
$300,000 at the date of closing. The sellers' notes were paid in full on
September 16, 1998. A Form 8-K was filed on February 12, 1998 describing the
terms of this transaction.
Page 12 of 27
<PAGE>
DIVOT GOLF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
NOTE D. Acquisitions (continued)
To obtain the funds necessary to complete this transaction, the Company issued
$3.0 million of convertible notes. These convertible notes were secured by a
subordinated pledge of the common stock of Miller, which matured on December 31,
1999, and accrued interest at 7% per annum, payable quarterly beginning on July
1, 1998. The notes were convertible into shares of the Company's common stock at
the lessor of $7.50 per share or 75% of the average closing bid price of the
common stock during the last five trading days prior to conversion. The
convertible note holders also received warrants to purchase 98,182 shares of
common stock at $7.50 per share. On May 31 and June 9, 1998, the holders of
these convertible debentures and warrants exchanged the debt and warrants for
3,000 shares of the 1997 Preferred and warrants to purchase approximately
133,000 shares of the Company's Common Stock at $15.00 per share, exercisable
for three years from the date of issuance.
DIVOT GOLF CORPORATION
On April 15, 1998, the Company completed its $500,000 stock acquisition of Divot
Golf Corporation ("Divot"), a Florida corporation. The Divot stock was acquired
from its sole shareholder, Joseph R. Cellura, who serves as Director, Chairman
of the Board, and Chief Executive Officer of the Company. The purchase price
consisted of a combination of (i)$300,000 in cash and (ii) a short term
promissory note in the principal amount of $200,000 (the "Note"). The Note
provides for interest accruing at 6% per annum, payable quarterly beginning June
30, 1998. The Note was paid in full as of September 30, 1998. The assets of
Divot include its name, certain patent and licensing rights, and molds for
producing a divot repair tool.
Based on information available to the Company in April, 1998, the Board believes
that the terms of this transaction are commercially reasonable.
TALISMAN TOOLS INCORPORATED
On April 20, 1998, the Company completed its $101,875 acquisition of all of the
issued and outstanding stock of Talisman Tools Incorporated ("Talisman"), a
Rhode Island corporation. The Talisman stock was acquired from its sole
shareholders, Daniel S. Shedd and Dixon Newbold for a combination of (i) two
short-term, non-interest bearing promissory notes in the aggregate amount of
$55,000 payable on May 20, 1998 and (ii) $46,875 of the Company's common stock
(10,000 shares valued at the date of closing). Talisman is a manufacturer of
high-quality greens repair tools. The assets of Talisman include a pending
patent on the specialized divot repair tool and the proprietary process of
producing the divot repair tool.
The promissory notes in the aggregate amount of $55,000 have not been paid and
the Company has received an extension of time until November 1999.
NOTE E. Disposition of Assets
GAUNTLET AT CURTIS PARK
On April 2, 1998, the Company sold its leasehold interest in the golf course
assets at The Gauntlet at Curtis Park for $5,400,000 of which approximately
$4,800,000 was used to reduce the Company's debt. The net realized gain on the
sale of the golf course was approximately $524,000.
Page 13 of 27
<PAGE>
DIVOT GOLF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
NOTE F. Subsequent Events
On October 26, 1998, the Company formed a joint venture with Raymond Floyd
("Joint Venture"). The Joint Venture is operated as a limited liability company,
80% of which will be owned by the Company and the remaining 20% by Eagle Golf
Enterprises, Inc. (a Raymond Floyd family-owned company).
The Joint Venture entered into a license agreement with Raymond Floyd
Enterprises, Inc., pursuant to which the Joint Venture received the exclusive
right to manufacture and distribute a signature line of Raymond Floyd golf
related accessory products ("Licensed Products"). Manufacturing and distribution
of the Licensed Products will be the sole business of the Joint Venture. The
initial term of the license is ten years, subject to two consectutive 10 year
renewal terms. The license will be subject to termination or non-renewal if the
Joint Venture, among other things, fails to reach certain specified revenue
goals within two years. The Licensed Products will be manufactured and
distributed by Miller Golf, Inc., a wholly owned subsidiary of the Company.
In consideration for the license, the Company has issued 354,463 shares of
common stock to Mr. and Mrs. Raymond Floyd, as tenants by the entireties,
through assignment from Raymond Floyd Enterprises, Inc. This represents 8.0% of
the issued and outstanding shares of the Company's common stock as of October
30, 1998.
In addition, during October 1998, substantially all the holders of the
remaining Convertible Redeemable Stock redeemed their shares for subordinated
notes with a term of six months, bearing interest at 7% per annum payable at
maturity, January 24, 1999.
Page 14 of 27
<PAGE>
DIVOT GOLF CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements included herein for the three and
nine-month periods ended September 30, 1998 and 1997 and for the years ended
December 31, 1997 and 1996, included in the Company's 1997 Annual Report on Form
10-KSB.
Prior to July 1, 1997, the Company was primarily engaged in the design,
ownership and management of golf courses. In order to capitalize on the growth
in the golf products and accessories industry and the experience of its new
management, on July 1, 1997, the Company commenced a corporate restructuring
plan that included selling its golf courses and golf course management and
design businesses and acquiring businesses engaged in the development,
licensing, and marketing of golf-related products and services. Since December
1997, the Company has acquired Divot Golf Corporation, a designer and supplier
of golf products and other licenses and rights; Miller Golf, Inc., a supplier of
high-quality golf accessory products; and Talisman Tools Incorporated, a
manufacturer of high-quality greens repair tools. The Company also owns two
parcels of land located within the World Golf Village, a destination golf resort
owned by third parties, south of Jacksonville, Florida.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1998 Compared to Quarter Ended September 30, 1997
In the aggregate, the Company generated $2,019,167 in revenues during the three
months ended September 30, 1998 compared to $1,074,885 during the three months
ended September 30, 1997. This increase of $944,282, or 88% is attributed to
$2,006,479 of revenue from the operations of the Company's newly acquired
subsidiary Miller Golf, Inc. ("Miller"), offset by a decrease in golf course
revenues of $983,824 related primarily to the disposition of the Gauntlet at St.
James and Gauntlet at Curtis Park golf courses in November 1997 and April 1998
and a decrease of $91,061 from the sale of the golf course management business
in July 1997. Until the Company can more fully implement its business
strategies, no assurance can be given that the Company's revenues will continue
to increase.
Despite the 88% increase in revenues, the Company's total operating expenses
increased by $2,090,752, or 161%, to $3,385,870 during the three month period
ended September 30, 1998. The increase is due to a combination of a $65,535
decrease attributed to design expense, a $177,740 decrease in marketing and golf
course activities, a decrease of $383,103 in golf course operating expenses
attributed to the sale of the golf courses, and a $101,341 decrease in
depreciation and amortization, which resulted primarily from the sale of the
design division and the golf course operations. These decreases were offset by a
$1,180,999 increase in manufacturing costs related to the Miller revenues; a
$1,468,841 increase in general and administrative expenses, of which $787,141
relates to Miller and $681,700 relates directly to the hiring of key employees
necessary to facilitate the execution of ongoing business activities; and an
increase of $168,631 of professional fees, which were primarily legal and
accounting fees incurred in connection with the Company's efforts towards
complying with the Securities and Exchange Commission and NASDAQ and other costs
incurred to pursue acquisitions and financing alternatives, some of which were
unsuccessful.
Page 15 of 27
<PAGE>
DIVOT GOLF CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
General and administrative expenses include management and administrative
compensation, related payroll taxes and benefits, telephone, utilities,
insurance, other taxes, travel, meals and entertainment and office expenses,
including rents.
Interest expense decreased by 60% from $205,833 during the three-month period
ended September 30, 1997 to $83,243 during the three-month period ended
September 30, 1998. The decrease of $122,590 is primarily due to a decrease in
borrowings. The borrowings declined as a result of the conversion of
approximately $999,700 of convertible debentures into common stock of the
Company, and use of proceeds from the issuance of the Company's common and
preferred stock, and from the Curtis Park sale.
During the quarter ended September 30, 1998, the Company charged to amortization
expense $102,383 of debt discount because the holders converted certain debt
instruments.
Interest and other income decreased from $105,952 during the three-month period
ended September 30, 1997 to $72,712 during the three-month period ended
September 30, 1998.
For the quarter ended September 30, 1998, the Company had a net loss of
$1,504,617, an increase of $1,184,503 from the net loss of $320,114 for the
three-month period ended September 30, 1997. The increase is attributable to the
reasons stated above, namely, a substantial increase in total operating expenses
that offset the increase in operating revenues related to the acquired
subsidiaries.
Inflation did not have a material effect on the Company's operations during the
three-month periods ended September 30, 1998 or September 30, 1997.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
In the aggregate, the Company generated $4,778,104 in revenues during the nine
months ended September 30, 1998 compared to $3,650,052 during the nine months
ended September 30, 1997. This increase of $1,128,052, or 31% is attributed to
$4,609,373 of revenue from the operations of the Company's newly acquired
subsidiary Miller Golf, Inc. ("Miller"), offset by a decrease in golf course
revenues of $2,709,253 related primarily to the disposition of the Gauntlet at
St. James and the Gauntlet at Curtis Park golf courses in November 1997 and
April 1998 and a decrease of $771,870 from the sale of the golf course
management business in July 1997. Until the Company can more fully implement its
business strategies, no assurance can be given that the Company's revenues will
continue to increase.
Despite the 31% increase in revenues, the Company's total operating expenses
increased by $4,039,169, or 95%, to $8,296,936 during the nine month period
ended September 30, 1998. The increase is due to a combination of a $686,101
decrease attributed to design expense, a $436,707 decrease in marketing and golf
course activities, a decrease of $998,853 in golf course operating expense
attributed to the sale of the golf courses, and a $334,841 decrease in
depreciation and amortization, which resulted primarily from the sale of the
design division and the golf course operations. These decreases were offset by a
$2,759,041 increase in manufacturing costs related to
Page 16 of 27
<PAGE>
DIVOT GOLF CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
the Miller revenues; a $3,467,508 increase in general and administrative
expenses, of which $1,617,852 relates to Miller and $1,849,656 relates directly
to the hiring of key employees necessary to facilitate the execution of ongoing
business activities; and an increase of $269,122 of professional fees, which
were primarily legal and accounting fees incurred in connection with the
Company's efforts towards complying with the Securities and Exchange Commission
and NASDAQ and other costs incurred to pursue acquisitions and financing
alternatives, some of which were unsuccessful.
As noted under "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments -- Sale of Curtis Park," the
Company disposed of its remaining golf courses operations on April 2, 1998. At
that time, the Company recorded a gain of approximately $524,000. Golf course
operations reported in the historical financial statements included the
compensation and benefits costs of course personnel and related payroll taxes,
golf cart leases, equipment rental and maintenance, clubhouse repairs and
upkeep, insurance, utilities, chemicals, seed and fertilizers, water, supplies
and other miscellaneous costs incurred in the operation of the golf course. The
Company evaluated the cost of operations at its facility and established
budgeted amounts for each significant category of expense in the areas of pro
shop, food and beverage, golf course maintenance, and general, selling and
administrative expenses. Monthly, the Company analyzed its actual versus
budgeted results.
General and administrative expenses include management and administrative
compensation, related payroll taxes and benefits, telephone, utilities,
insurance, other taxes, travel, meals and entertainment and office expenses,
including rents.
Interest expense increased by 20% from $560,494 during the nine month period
ended September 30, 1997 to $670,985 during the nine month period ended
September 30, 1998. The increase of $110,491 is primarily due to the
amortization of $150,000 of financing costs offset by a decrease in borrowings,
as more fully described under "Liquidity and Capital Resources."
During the nine months ended September 30, 1998, the Company charged to
amortization expense $516,319 of debt discount due to conversions of debt
instruments into common stock at a discount, in a private placement.
During the nine months ended September 30, 1998, the Company forfeited a
$100,000 deposit on an unsuccessful acquisition and a $25,000 deposit on a land
option and incurred another $60,000 in related costs that the Company has
written off.
Interest and other income increased from $132,882 during the nine-month period
ended September 30, 1997 to $134,867 during the nine month period ended
September 30, 1998.
For the nine months ended September 30, 1998, the Company had a net loss of
$4,172,470, an increase of $3,137,143 from the net loss of $1,035,327 for the
nine month period ended September 30, 1997. The increase is attributable to the
reasons stated above, namely, a substantial increase in total operating expenses
that offset the increase in operating revenues related to the acquired
subsidiaries.
Page 17 of 27
<PAGE>
DIVOT GOLF CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Inflation did not have a material effect on the Company's operations during the
nine month periods ended September 30, 1998 or September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, golf revenues, resident membership fees, membership sales and
annual dues, pro shop revenue, food and beverage revenue and management and
design fees have been the principal source of funds to pay the operating
expenses of the Company. As of April, 1998, the Company had disposed of all of
its interests in golf courses. This effectively eliminated the primary source of
the Company's revenues. The Company has reorganized and refocused its operations
to the sale of golf accessories through its acquired subsidiaries. Currently,
however, the Company does not have sufficient operations to fund its activities
or its strategic plan. In the short-term, therefore, the Company will be
dependent on additional infusions of capital or debt to fund its operations. In
the foreseeable future, the Company will continue to rely on long-term
borrowings and equity financing to fund acquisitions and capital improvements.
The Company cannot predict at what point in time it will be able to fund its
working capital needs out of funds generated from current operations.
Working Capital
As noted above, the Company is not generating sufficient revenues from
its operations to fund its activities and therefore is dependent on additional
financing from external sources. This fact raises substantial doubt about the
Company's ability to continue as a going concern. The Company expects to raise
additional amounts from private placements or registered public offerings of its
securities in the future. If the Company is successful in raising additional
capital in 1998 and 1999, management believes that the Company will have
adequate resources to continue to meet its working capital requirements to pay
its current debt obligations, fund capital improvements and expand and develop
businesses. There is no assurance that such additional funding will be
completed. The inability to obtain such financing would have a material adverse
effect on the Company.
The Company had a working capital deficiency of $1,169,807 as of
September 30, 1998, as compared to a working capital deficiency of $98,529 as of
December 31, 1997. The reduction in working capital of $1,071,278 from December
31, 1997 to September 30, 1998 relates primarily to the net loss for the nine
month period ended September 30, 1998 offset by an increase in working capital
of approximately $1.0 million proceeds from the sale of its leasehold interest
in the golf course assets at the Gauntlet at Curtis Park.
On April 2, 1998, the Company used approximately $4,800,000 of the
proceeds from the sale of its leasehold interest in the golf course assets at
the Gauntlet at Curtis Park to reduce its debt, which resulted in a decrease in
its working capital deficit of approximately $1,000,000. See "- Recent
Developments - Sale of Curtis Park."
On May 8, 1998, the Company secured a working capital revolving line of
credit of up to $1,100,000, due May 10, 1999 with interest at 10.6% per annum,
secured by Parcel 11-A land at the World Golf Village, which reduced bank lines
of credit by approximately $675,000.
Page 18 of 27
<PAGE>
DIVOT GOLF CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The total borrowings for the Company were $3,039,744 as of September
30, 1998 compared to $4,234,279 as of December 31, 1997. The net decrease in
borrowings of $1,194,535 from December 31, 1997 to September 30, 1998 is due to
the conversion of $999,720 of convertible debentures of convertible debentures
into common stock of the Company, and use of proceeds from the issuance of the
Company's common and preferred stock, and from the Curtis Park sale.
The Company commenced a private placement offering in December 1997 of
the 1997 Preferred for $1.92 million, less associated costs of $165,000 to
secure such funding. The 1997 Preferred was offered for a price of $15,000 per
unit. Each unit consisted of 15 Preferred Shares and 667 warrants to purchase
common shares. One hundred twenty-eight units (128) were sold, which equates to
1,920 shares of 1997 Preferred. Each preferred share has a liquidation value of
$1,000 and each warrant is exercisable immediately for a period of 3 years to
purchase one share of common stock for $15.00 each.
Through the first nine months of 1998, 265 units, or 3,975 shares of
1997 Preferred and 176,755 warrants to purchase Common Stock at $15.00 per
share, were issued for approximately $4.0 million, less fees of approximately
$300,000. Of the 265 units, 200 units were issued in exchange for $3.0 million
of convertible debentures. See "-- Recent Developments -- Miller Golf
Acquisition". In conjunction with the discount allowed on the conversion of the
Preferred Stock into common stock, the Company has recorded dividends of
$728,693. Through September 30, 1998, holders of 165 shares of the 1997
Preferred converted their 1997 Preferred into 46,429 shares of the Company's
Common Stock.
During the quarter ended September 30,1998, the Company sold an
additional 1,528 shares of the 1997 Preferred stock for $1,527,500. These shares
were sold with an addendum allowing the subscriber, for a period of 90 days, to
convert the shares for an equal amount of subordinated notes. As a result of
this redemption feature, these shares have been classified as redeemable
convertible preferred stock in the accompanying financial statements. The
subordinated notes have a term of six months and bear interest at 7% per annum
payable at maturity, January 24, 1999. As of September 30, 1998, 350 shares were
converted to $350,000 of subordinated notes. In addition, during October 1998,
substantially all the holders of the remaining Convertible Redeemable Stock
redeemed their shares for subordinated notes with a term of six months, bearing
interest at 7% per annum payable at maturity.
During the quarter ended September 30, 1998, the company sold 500,000
shares of the Company's common stock at $2.00 per share in a private placement.
Through September 30, 1998, holders of warrants associated with the
convertible debentures exercised 134,751 warrants in a cashless exercise and
received 94,304 shares of Common Stock. The Company is currently preliminary
negotiations with the holders of the remainder of these warrants to substitute a
reduced number of warrants with a revised exercise price per share.
Use of Funds
From the proceeds obtained through the private placement of preferred stock, the
sale of businesses, and the
Page 19 of 27
<PAGE>
DIVOT GOLF CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
sale of interests in its golf course assets, the Company is attempting to
position itself to execute its new business plan.
The Company has used these proceeds in a variety of acquisitions designed
to capitalize on the growth in the golf products and accessories industry and
the experience of its new management. See " -- Recent Developments."
RECENT DEVELOPMENTS
World Golf Village Developments
The World Golf Village, a golf resort owned by third parties south of
Jacksonville, Florida, is expected to open in phases, with the first phase
having opened in May, 1998. In December 1996, the Company acquired Parcel 2 for
approximately $475,000 and on January 16, 1998 acquired Parcel 11-A at the World
Golf Village. The 11-A parcel was acquired for total consideration of
approximately $1,850,000. The Company plans to develop the World Golf Village
Spa (the "Spa") and the Bungalows at World Golf Village (the "Bungalows") on
parcel 11-A.
Sale of Curtis Park
In a closing on April 2, 1998, the Company sold its leasehold interest
in the Gauntlet at Curtis Park golf course to KSL Fairways, Inc. This was the
only remaining golf course interest held by the Company, and this sale concluded
the Company's previous strategy of golf course ownership. The interest was sold
for $5,400,000.
Miller Golf Acquisition
On April 8, 1998, the Company completed its $4.3 million stock
acquisition of Miller Golf, Inc. ("Miller"), a Massachusetts corporation (the
"Miller Golf Transaction"). Miller is a supplier of high-quality golf
accessories such as bag tags, divot repair tools and towels. The Miller stock
was acquired from its stockholders, Robert Marchetti, Louis Katon, and John
Carroll, for a combination of $3.0 million in cash, $1.0 million in notes
payable to the sellers and $300,000 of the Company's common stock (53,333 shares
valued at the fair market value of the common stock at the date of closing). The
notes payable to the sellers were paid in full on September 17, 1998.
To obtain the funds necessary to complete this transaction, the Company
issued $3.0 million of convertible notes. These convertible notes were secured
by a subordinated pledge of the common stock of Miller, which matured on
December 31, 1999, and accrued interest at 7% per annum, payable quarterly
beginning on July 1, 1998. The notes were convertible into shares of the
Company's common stock at the lessor of $7.50 per share or 75% of the average
closing bid price of the common stock during the last five trading days prior to
conversion. The convertible note holders also received warrants to purchase
98,182 shares of common stock at $7.50 per share. On May 31 and June 9, 1998,
the holders of these convertible debentures and warrants exchanged the debt and
warrants for 3,000 shares of the 1997 Preferred and warrants to purchase
approximately 133,000 shares of the Company's Common Stock at $15.00 per share,
exercisable for three years from the date of issuance.
Page 20 of 27
<PAGE>
DIVOT GOLF CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Divot Acquisition
On April 15, 1998, the Company completed its $500,000 stock acquisition
of Divot Golf Corporation ("Divot"), a Florida corporation from its sole
stockholder, Joseph R. Cellura, the Chairman and Chief Executive Officer of the
Company.
Talisman Tools Acquisition
On April 20, 1998, the Company completed its $101,875 stock acquisition
of Talisman Tools Incorporated ("Talisman"), a Rhode Island corporation. The
Talisman stock was acquired from its stockholders, Daniel S. Shedd and Dixon
Newbold, for a combination of (i) two short-term, non-interest bearing
promissory notes in the aggregate amount of $55,000 payable on May 20, 1998 and
(ii) $46,875 of the Company's common stock (10,000 shares valued at the fair
market value of the common stock on the date of closing). Additionally, the
Company issued a $35,000 short-term promissory note to Taylor Box Company in
payment of certain company payables of Talisman Tools. To date each of these
notes remains unpaid. The promissory notes, totalling $55,000, have been
extended until November 1999. Talisman is a manufacturer of high-quality greens
repair tools. The assets of Talisman include a pending patent on the specialized
divot repair tool and the proprietary process of producing the divot repair
tool.
Ray Floyd Joint Venture
On October 2, 1998, the Company formed a joint venture with Raymond Floyd
("Joint Venture"). The Joint Venture is operated as a limited liability company,
80% of which will be owned by the Company and the remaining 20% by Eagle Golf
Enterprises, Inc. (a Raymond Floyd family-owned company).
The Joint Venture entered into a license agreement with Raymond Floyd
Enterprises, Inc., pursuant to which the Joint Venture received the exclusive
right to manufacture and distribute a signature line of Raymond Floyd golf
related accessory products ("Licensed Products"). Manufacturing and distribution
of the Licensed Products will be the sole business of the Joint Venture. The
initial term of the license is ten years, subject to two consectutive 10 year
renewal terms. The license will be subject to termination or non-renewal if the
Joint Venture, among other things, fails to reach certain specified revenue
goals within two years. The Licensed
Products will be manufactured and distributed by Miller Golf, Inc., a wholly
owned subsidiary of the Company.
In consideration for the license, the Company has issued 354,463 shares of
common stock to Mr. and Mrs. Raymond Floyd, as tenants by the entireties,
through assignment from Raymond Floyd Enterprises, Inc. This represents 8.0% of
the issued and outstanding shares of the Company's common stock as of October
30, 1998.
Acquisition Plan
The Company intends to grow principally through acquisitions of other
companies that provide golf products or services. The Company intends to
complete the majority of these acquisitions for a combination of stock and cash.
Page 21 of 27
<PAGE>
DIVOT GOLF CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Year 2000 Issue
Many software applications and operational programs written in the past
were not designed to recognize calendar dates beginning in the Year 2000. The
failure of such applications or systems to properly recognize the dates
beginning in the Year 2000 could result in miscalculations or system failures
which could result in an adverse effect on the Company's operations.
The Company has been evaluating known date-sensitive systems and equipment
for Year 2000 compliance. The assessment phase of the Year 2000 project is
approximately 50% complete and includes information technology, accounting
software and networked computer systems, as well as non-information technology
equipment, such as machine shop equipment. During this phase the Company has
determined that the accounting software utilized at Miller is not currently Year
2000 compliant and the vendor will not have a Year 2000 compliant upgrade
available until the spring of 1999. Therefore the Company is in the process of
reviewing alternative vendor products and anticipates selecting a solution in
early 1999.
The next phase of the Company's Year 2000 project, conversion and complete
system testing is scheduled to begin during the second quarter of 1999. Testing
will continue for all existing systems and ongoing new releases and enhancements
to ensure readiness.
The only costs the Company has incurred to date related to Year 2000
compliance are internal MIS costs which the Company does not separately track
for Year 2000 issues. In addition, the Company has not yet determined the total
estimated cost of the conversion. The Company believes that the costs to
transition its systems to Year 2000 compliance are not anticipated to have a
material effect on the Company's financial position or results of operations.
The Company's has not deferred any information technology projects to address
the Year 2000 issue.
In addition to internal Year 2000 implementation activities, the Company
is communicating with others with which our systems interface or on which they
rely to determine the extent to which those companies are addressing their Year
2000 compliance. The Company has received partial responses, which indicate that
its major suppliers are not yet compliant and are addressing the issues. There
can be no assurance that there will not be an adverse effect on the Company if
third parties, such as utility companies or merchandise suppliers, do not
convert their systems in a timely manner and in a way that is compatible with
the Company's systems. However, management believes that ongoing communication
with and assessment of these third parties will minimize these risks.
Although the Company anticipates minimal business disruption will occur as
a result of Year 2000 issues, possible consequences include, but are not limited
to, loss of electric power, inability to process transactions, send purchase
orders, or engage in similar normal business activities.
To date, the Company has not established a contingency plan for possible
Year 2000 issues. Where needed, the Company will establish contingency plans
based on our actual testing experience with our supplier base and assessment of
outside risks. We anticipate contingency plans to be in place by July 31, 1999.
Page 22 of 27
<PAGE>
DIVOT GOLF CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The cost of the conversions and the completion dates are based on
management's best estimates and may be updated, as additional information
becomes available. Readers are referred to the cautionary statement, which
addresses forward-looking statements made by the Company.
Cautionary Statement
This Form 10-QSB, press releases and certain information provided periodically
in writing or orally by the Company's officers or its agents contain statements
which constitute forward-looking statements within the meaning of Section 27A of
the Securities Act, as amended and Section 21E of the Securities Exchange Act of
1934. The words expect, believe, goal, plan, intend, estimate and similar
expressions and variations thereof if used are intended to specifically identify
forward-looking statements. Those statements appear in a number of places in
this Form 10-QSB and in other places, particularly, Management's Discussion and
Analysis of Financial Condition and Results of Operations, and include
statements regarding the intent, belief or current expectations of the Company,
its directors or its officers with respect to, among other things: (i) the
Company's liquidity and capital resources; (ii) the Company's financing
opportunities and plans and (iii) the Company's future performance and operating
results. Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. The factors that might cause such differences include, among others,
the following: (i) any material inability of the Company to successfully
identify, consummate and integrate acquisitions at reasonable and anticipated
costs to the Company; (ii) any material inability of the Company to successfully
internally develop its products; (iii) any adverse effect or limitations caused
by Governmental regulations; (iv) any adverse effect on the Company's continued
positive cash flow and abilities to obtain acceptable financing in connection
with its growth plans; (v) any increased competition in business and in
acquisitions; (vi) any inability of the Company to successfully conduct its
business in new markets; and (vii) other risks including those identified in the
Company's filings with the Securities and Exchange Commission. The Company
undertakes no obligation to publicly update or revise the forward looking
statements made in this Form 10-QSB to reflect events or circumstances after the
date of this Form 10-QSB or to reflect the occurrence of unanticipated events.
Page 23 of 27
<PAGE>
DIVOT GOLF CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Item 3 of the Consolidated Financial Statements of the Company for the year
ended December 31, 1997 for a description of legal proceedings to which the
company is a party.
On April 3, 1998, the Company delivered the remaining 30% minority ownership in
two golf courses in South Carolina, The Gauntlet at Myrtle West and The Gauntlet
at Laurel Valley, to the EPI Pension Fund under the March 26, 1998 court ordered
hearing. The Company also recorded, in operations, the amount of the anticipated
settlement of the litigation with EPI Pension Fund.
The Company has submitted a proposed settlement to the EPI Pension Fund, with a
$3,000 good faith deposit. The terms of the proposed settlement include a down
payment to be made within 30 days of executing the settlement documents with a
balloon payment to be delivered at the end of one year. The deferred payment
will be non-interest bearing. The Company has requested that it be permitted to
prepay the settled amount at a discount. The Company does not know if the
settlement will be secured. A penalty will be imposed upon default on the
proposed settlement in addition to EPI Pension Fund's rights to enforce the
original judgement. No assurance can be given by the Company that the proposed
settlement will be accepted by the EPI Pension Fund or that the terms will be
substantially similar to those disclosed above.
On October 22, 1998, Divot Golf Subsidiary Corporation (f/k/a Divot Golf
Corporation and acquired on April 15, 1998, see Part I, Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Recent Developments" ) ("DGS"), a wholly owned subsidiary of the Company, was
named as a defendant in a complaint filed in the U.S. District Court, Middle
District of Florida. The plaintiff is Robert Hochstein ("Hochstein"). The
lawsuit also names as defendants Joseph R. Cellura, Chairman and CEO of the
Company, individually, as well as three entities which Mr. Cellura either owns
or controls -- Divot Corporation, Divot Development Corporation, and Divot
Partners, Ltd. ("Partners"). Although Mr. Cellura has material involvement in
the other three entities, the Company is not otherwise affiliated with any of
these three other entities. The lawsuit principally relates to the investment of
monies by Hochstein in Partners Hochstein's complaint makes the following
allegations: (1) Hochstein was offered and sold unregistered, nonexempt
securities in Partners in violation of Section 12(1) of the Securities Act of
1933, as amended ("Act"); (2) the Private Placement Memorandum received by
Hochstein in connection with the offer and sale of interests in Partners
misrepresented and omitted material facts thereby making the offering documents
misleading in violation of Section 10(b) and 12(2) of the Act; (3) similar state
securities laws were violated; and (4) the matters described in the above
allegations constitute "common law fraud" on the part of the defendants against
Hochstein. In naming DGS as a defendant, Hochstein contends that each of the
corporate and partnership defendants failed to maintain separate identities and
operated as a single entity. Hochstein seeks damages in the amount of his
investment, $400,000, plus punitive damages, costs, and fees.
Page 24 of 27
<PAGE>
DIVOT GOLF CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Item 2. Changes in Securities
From January 1, 1998 to June 30 , 1998, the Company sold 3,975 shares of its
1997 convertible preferred stock ("1997 Preferred"). The 1997 Preferred was sold
solely to sophisticated and accredited investors pursuant to a private placement
offering in reliance upon Section 4 (2) of the Securities Act of 1933, as
amended. Proceeds from the private placement were approximately $3.7 million.
The 1997 Preferred was offered in units of 15 preferred shares, with each share
having a liquidation value of $1,000, plus 667 warrants (exercisable at $15.00
per share for a period of 3 years) for a price of $15,000 per unit. The holders
of the 1997 Preferred are entitled to 7% cumulative dividends payable quarterly
with percentage increases in the foreseeable future. The 1997 Preferred is
convertible immediately into shares of the Company's common stock at $1,000 per
share so converted divided by the "conversion price" which is a formula based on
the lesser of $10.50 or 75% of the average closing price during the 10-day
period prior to conversion. Through September 30, 1998, holders of 165 shares of
the 1997 Preferred converted their 1997 Preferred into 46,429 shares of the
Company's Common Stock.
During the quarter ended September 30,1998, the Company sold an
additional 1,528 shares of the 1997 Preferred stock for $1,527,500. These shares
were sold with an addendum allowing the subscriber, for a period of 90 days, to
convert the shares for an equal amount of subordinated notes. As a result of
this redemption feature, these shares have been classified as Redeemable
Convertible Preferred Stock in the accompanying financial statements. The
subordinated notes have a term of six months and bear interest at 7% per annum
payable at maturity, January 24, 1999. As of September 30, 1998, 350 shares were
converted to $350,000 of subordinated notes.
During the three month period ended September 30, 1998, the company
sold 500,000 shares of the Company's common stock at $2.00 per share in a
private placement.
Item 3. Defaults Upon Senior Securities
The Company has defaulted on certain obligations of its senior securities by
failing to meet its obligation to file a registration statement, having such
registration statement become effective by a certain date, and having a special
shareholder meeting. The holders of the securities under default have waived
their rights and granted the Company an extension of time to cure the defaults.
Accordingly, the Company filed Form SB-2 on July 1, 1998 within the extension
period provided. The company is in negotiations with holders of the 1997
Preferred to satisfy the provisions of the securities and to provide for a
conversion of the 1997 Preferred to common stock. The SB-2 as filed July 1, 1998
will require amendment and a revised SB-2 filed with the SEC.
Miller Golf, Inc. ("Miller"), a wholly owned subsidiary of the Company, has been
notified that it is in technical default of the Loan and Security Agreement
dated April 2, 1998, between Miller and Citizens Bank of Massachusetts
("Citizens"). The Loan Agreement includes a $2,000,000 Working Capital Line of
Credit and a
Page 25 of 27
<PAGE>
DIVOT GOLF CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
$250,000 Equipment Line of Credit. The default relates to a breach by Miller
under the Loan Agreement restricting advances to affiliates to $100,000 or less.
The total amount necessary to cure the default is $347,043. Miller has requested
a waiver of the covenant default from Citizens, which Citizens has indicated
that it will consider granting, contingent upon receiving from Miller a detailed
plan for repayment of the amount in default within 30 days. There is no
assurance that Miller will be able to submit an acceptable plan for repayment or
whether, when such a plan is submitted, Citizens will grant the waiver under any
circumstances. The lines of credit are secured with a first security lien in
favor of Citizens on all of Miller's assets. In the event the default is not
cured, Citizens may forclose upon its security interest which would have a
material adverse affect on the business and operations of Miller.
Item 4. Submission of Matters to a Vote of Security-Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8K Dated October 20, 1998 Dated October 22, 1998
Page 26 of 27
<PAGE>
DIVOT GOLF CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIVOT GOLF CORPORATION
/s/Clifford F. Bagnall
----------------------------------------
Clifford F. Bagnall, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 23, 1998
Page 27 of 27
<PAGE>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 314,477
<SECURITIES> 0
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0
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