Commission File Number 0-29014 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 TEARDROP GOLF COMPANY (Exact Name of Registrant as Specified in Its Charter) DELAWARE 57-1056600 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1080 Lousons Road Union, New Jersey 07083 (Address of Principal (Zip Code) Executive Offices) Registrant's telephone number, including area code: (908) 688-4445 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Number of shares of Common Stock outstanding as of September 30, 2000: 5,262,565 TEARDROP GOLF COMPANY FORM 10-Q INDEX FOR QUARTERLY PERIOD ENDED SEPTEMBER 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 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Part II. Other Information Item 1. Legal Proceedings 20 Item 2. Changes in Securities and Use of Proceeds 20 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 6. Exhibits and Reports on Form 8-K 21 Signature Page 23 2 Part 1. Financial Information Item 1. Financial Statements TearDrop Golf Company Consolidated Balance Sheets September 30, 2000 and December 31, 1999 (All dollar amounts, except share and per share amounts, in $000's) (Unaudited)

~~June~~September 30, December 31, 2000 1999 ------------- ------------ ASSETS CURRENT ASSETS: Cash $ ~~1,280~~600 $ 481 Accounts receivable less allowance for returns and doubtful accounts of $21,~~117~~796 and $1,793 149,~~661~~325 11,932 Inventories 10,~~632~~783 10,778 Other current assets ~~341~~336 148 -------- -------- Total current assets 2621,~~914~~044 23,339 PROPERTY AND EQUIPMENT, less accumulated depreciation 43,~~007~~809 4,334 PATENTS & TRADEMARKS, less accumulated amortization 6,~~155~~072 6,302 GOODWILL, less accumulated amortization ~~505~~-- 525 -------- -------- $ 3730,~~581~~925 $ 34,500 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 8,~~556~~822 $ 11,064 Accrued liabilities 2,~~516~~398 2,594 Note payable - shareholder 1,000 500 Current portion of long term debt 2,~~435~~085 1,363 -------- -------- Total current liabilities 14,~~507~~305 15,521 LONG TERM DEBT 1916,~~297~~453 15,705 ~~-------- --------~~ STOCKHOLDERS' EQUITY: Preferred stock $.01 par value, authorized 1,000,000 shares, -- -- issued and outstanding none ~~-- --~~ Common stock, $.01 par value, authorized 10,000,000 shares, issued and 5,262,565 outstanding shares 53 53 Capital in excess of par value 26,504 25,346 Accumulated other comprehensive income (8198) (79) Accumulated deficit (26,292) (22,046) -------- -------- ~~Accumulated~~Total ~~deficit~~stockholders' ~~(22,699)~~equity ~~(22~~623 3,~~046)~~274 -------- -------- ~~Total stockholders' equity~~ $ 330,~~777~~925 $ 334,~~274~~500 ======== ======== ~~$37,581 $ 34,500~~

3 TearDrop Golf Company Consolidated Statements of Operations For the Three Months and Nine Months Ended September 30, 2000 and 1999 (All dollar amounts, except share and per share amounts, in $000's) (Unaudited)

Three Months ~~Six~~Nine Months Ended ~~June~~September 30, Ended ~~June~~September 30, --------------------------~~---~~ --------------------------~~---~~ 2000 1999 2000 1999 ----~~-------~~ ----~~-------~~ ----~~-------~~ ----~~-------~~ Net Sales $ 124,~~199~~485 $ 2214,~~372~~327 $ 2530,~~798~~283 $ 3751,~~590~~917 Cost of sales 62,~~350~~421 117,~~803~~432 1215,~~865~~286 2028,~~874~~306 ----------- ----------- ----------- ----------- Gross profit 52,~~849~~064 106,~~569~~895 1214,~~933~~997 1623,~~716~~611 Selling, general and administrative expenses 54,~~530~~829 96,~~600~~110 1116,~~815~~644 1824,~~333~~443 Non-cash compensation ~~469~~-- -- 469 -- ----------- ----------- ----------- ----------- Income (loss) from operations (~~150~~2,765) ~~969~~785 ~~649~~ (12,~~617~~116) (832) Royalty income ~~405~~269 5513 ~~508~~777 ~~169~~182 Write-off of goodwill (456) (456) Interest (expense), net (~~626~~576) (~~468~~382) (1,~~122~~698) (~~887~~1,269) Non-cash interest (expense) on subordinated debt ~~(688)~~-- -- (688) -- ----------- ----------- ----------- ----------- Income (loss) before income taxes (13,~~059~~528) ~~556~~416 (~~653~~4,181) (21,~~335~~919) Income tax (expense) --(65) (~~161~~150) --(65) -- Utilization of net tax loss carryforward -- ~~161~~150 -- -- Net income (loss) $ (13,~~059~~593) $ ~~556~~416 $ (~~653~~4,246) $ (21,~~335~~919) =========== =========== =========== =========== Net income (loss) per common share ~~Basic~~basic and diluted $ (0.2068) $ 0.1108 $ (0.1280) $ (0.4537) =========== =========== =========== =========== Weighted average number of common shares ~~Outstanding~~outstanding - basic and diluted 5,262,565 5,~~181~~197,~~674~~928 5,262,565 5,~~180~~186,~~787~~481 =========== =========== =========== ===========

4 TearDrop Golf Company Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2000 and 1999 (All dollar amounts, except share and per share amounts, in $000's) (Unaudited) Nine Months Ended September 30 ------------------ 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(4,246) $(1,919) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 960 869 Provision for doubtful accounts 3 359 Write-off of Goodwill 456 Non-cash compensation 469 -- Non-cash interest expense 688 -- Changes in operating assets and liabilities: Decrease (increase) in accounts receivable 2,604 (7,001) Decrease (increase) in inventories (5) 9,742 Decrease (increase) in other current assets (188) 101 Increase (decrease) in accounts payable and other current liabilities (2,438) 839 ------- ------- NET CASH PROVIDED BY(USED IN) OPERATING ACTIVITIES (1,697) 2,990 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in patents and trademarks (97) (234) Purchases of property and equipment (39) (182) ------- ------- NET CASH (USED IN) INVESTING ACTIVITIES (136) (416) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under financing agreements 1,470 (2,631) Proceeds from shareholder note payable 500 500 Proceeds from issuance of common stock -- 127 ------- ------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,970 (2,004) ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (18) 11 NET INCREASE IN CASH AND CASH EQUIVALENTS 119 581 CASH AND CASH EQUIVALENTS: Beginning of year 481 373 ------- ------- End of period $ 600 $ 954 ======= ======= 5 TEARDROP GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS All amounts, except share and per share amounts, in $000's (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. The results for the quarter ended September 30, 2000 do not necessarily indicate the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999. During the three and nine month periods ended September 30, 2000 and 1999, total comprehensive income (loss) amounted to $(3,611), $427, $(4,264) and $(1,908), respectively. NOTE 2 - INVENTORIES Inventories at September 30, 2000 and December 31, 1999 consist of the following: Sept. 30, 2000 December 31, 1999 -------------- ----------------- Raw materials and work in process $5,931 $5,401 Finished goods 4,852 5,377 -------------- ----------------- Total inventories $10,783 $10,778 NOTE 3 - BANK LOAN On January 20, 2000, we completed a new revolving loan and credit agreement with Congress Financial Corporation ("Congress"), which was amended on August 11, 2000, for $25,500, including a term loan of $6,675 (of which $2,175 has been prepaid), which replaced and repaid the outstanding loan due First Union National Bank. The loan is due in two years and bears interest at Congress' prime lending rate plus a) 1% for the revolving portion, and b) 1.5% for the term loan, and is secured by substantially all of our assets. The term loan is payable at the rate of $500 quarterly, commencing November 1, 2000, with the balance due at maturity of the line. We failed to make the first payment on this loan. Congress has notified us that we are in 6 TEARDROP GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS All amounts, except share and per share amounts, in $000's (Unaudited) default on the term loan and the revolving line as a result of the failure to make such a payment as well as the currently outstanding loan is in excess of the lending formula. In March 1999, our Chairman of the Board and Chief Executive Officer loaned us $500 bearing interest at 8% due upon demand, once we have reached certain reduced levels of indebtedness under the credit facility with the Bank. In January 2000, the loan was increased to $1,000, and the repayment terms were changed to be due on demand, payable upon the achievement of certain specified debt levels under the revolving credit agreement and was made convertible upon shareholder approval in April 2000 into our common stock at the rate of $1 per share. An amount equal to the difference between the fair market value of our Common Stock on the date of shareholder approval ($1.688) and the conversion price of $1 resulted in a charge to earnings of $688 in the second quarter of the year 2000, classified as a non-cash interest expense on subordinated debt. On August 10, 2000, we completed a new mortgage and security agreement with Sun Life Assurance Company of Canada under which we borrowed $2,500, secured by our land and building. The loan bears interest at 8.68% and is payable in equal monthly installments of $25 with a maturity of September 1, 2015. The proceeds of the loan were used to prepay the $1,958 balance of a term loan due to Congress, with the remainder of the proceeds added to our general funds. The carrying value of the outstanding debt approximates its fair value. NOTE 4 - SEASONALITY The purchasing decisions of most customers are typically made in the autumn and a vast majority of sales are expected to occur during the first six months of the year. In addition, quarterly results may vary from year to year due to the timing of new product introductions, orders and sales, advertising expenditures, promotional periods and shipments. Accordingly, comparisons of quarterly information of our results of operations may not be indicative of our overall annual performance. NOTE 5 - COMMITMENTS AND CONTINGENCIES We have entered into endorsement agreements with touring professionals for periods up to three years. The agreements typically provide for a base compensation and bonuses based upon, among other things, tournament performances, standings on the official money list and earning spots on the Ryder or President Cup teams. 7 TEARDROP GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS All amounts, except share and per share amounts, in $000's (Unaudited) Minimum compensation requirements for the years ending December 31, 2000 and 2001 are approximately $3,200 and $1,000 respectively. Additionally, we have agreed to issue options to purchase 25,000 and 16,000 shares of our Common Stock in connection with these agreements for the years ending December 31, 2000 and 2001, respectively. Of the options to be issued under these agreements, 4,000 to be granted in 2000 could be exchanged for $50. In April 1999, we extended the employment agreement with our Chairman of the Board and Chief Executive Officer, to expire on June 24, 2002. The agreement provides for annual compensation of $500 and performance bonuses, as defined in the agreement. No performance bonuses have been earned to date. NOTE 6 - SEGMENT INFORMATION It is our opinion that we, at this time, have only one reportable segment, and that segment is the manufacture, marketing and distribution of golf equipment. We distribute from our manufacturing and distribution facility in Morton Grove, Illinois to all areas of the world where golf is played. The following discussion sets forth the required disclosure regarding single segment information: We operated as a single reportable segment with sales the three and nine months ended September 30, 2000 of $4,485 and $30,283, respectively, of which $3,998 and $26,697, respectively, were sales in the United States and $487 and $3,586, respectively, were sales outside of the United States. We sell our products in the United States through our own sales force to approximately 1,500 national accounts (such as national cataloguers, sporting goods retail chain stores, etc.) and to over 6,000 green grass accounts (golf course pro shops), which in turn sell directly to the end user. We sell our products outside of the United States through a sales office in Canada and through distributors in other countries. NOTE 7 - EARNINGS PER SHARE The basic and diluted weighted number of Common Shares outstanding is the same since any dilutive shares would be anti-dilutive. NOTE 8 - STOCK OPTIONS In April 2000, our shareholders approved the grant to our Chairman of the Board and Chief Executive Officer of an option to purchase 1,500,000 shares of our Common Stock at a price of $1.375. As a result, there has been a non-cash compensation charge to earnings of $469 in the second quarter of 2000. 8 TEARDROP GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS All amounts, except share and per share amounts, in $000's (Unaudited) NOTE 9 - SUBSEQUENT EVENT On October 18, 2000, we announced that we have executed a Term Sheet with Gen-X Sports, Inc. providing for a merger of Gen-X and TearDrop. The proposed transaction provides for the shareholders of Gen-X to be issued 160 million of our shares and for Gen-X to provide for the investment of no less than $10,000 of additional funding to the new combined company. The transaction will be subject to, among other things, due diligence, the negotiation of definitive agreements, transaction financing and approval of our bank and approval of our shareholders. Upon closing the transaction, we intend to effect a 1 for 15 reverse stock split. On November 16, 2000 we received a communication from Gen-X that it was terminating its Letter of Intent with respect to the proposed merger. However, in that same communication, Gen-X indicated that it was still interested in purchasing all of our assets, free and clear of all liens and encumbrances and that they would be submitting an offer in that matter with a few days time. We continue to limit expenditures and are evaluating strategic alternative options in order to continue operations and protect our assets. Among the options is a purchase of our stock, which was being considered with Gen-X as well as seeking relief pursuant to title 11 of the U. S. Code. NOTE 10 - RECENTLY ISSUED ACCOUNTING GUIDANCE In December 1999 the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which provides guidance regarding revenue recognition. The Company is in the process of determining the impact, if any, this new guidance will have on the Company's financial statements. The effect of any change will be reflected by the cumulative effect of an accounting change as of January 1, 2000. In May 2000, the SEC deferred the required effective date for implementation of SAB No. 101 until the fourth quarter of 2000. NOTE 11 - WRITE OFF OF GOODWILL Due to our continuing losses, we believe the value of our goodwill has been diminished and have therefore expensed the remaining portion in the quarter ended September 30, 2000. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation. Overview We design, develop, manufacture and market throughout the world high-quality, premium priced golf clubs based on our proprietary technologies, including (a) our TearDrop line of putters; (b) our Tommy Armour line of irons and woods; (c) our Ram line of irons, woods and wedges; and (d) our Zebra putters. Our product lines are used by golfers throughout the world, including professional golfers on the PGA Tour, the Senior PGA Tour, the Ladies PGA Tour and the BUY.COM Tour. We introduced our first product, the TearDrop putter, in 1993 and commenced significant marketing and sales activity in 1994. We completed an initial public offering of our Common Stock in December 1996. In the fourth quarter of 1997, we completed three acquisitions. In October 1997, we acquired the assets of Pro Golf Promotions, LLC, a professional developmental tour for aspiring PGA Tour players, which we immediately renamed "The TearDrop Professional Golf Tour." In November 1997, we acquired substantially all of the assets of the Tommy Armour Golf Company ("Armour"). In December 1997, we acquired certain assets and assumed certain liabilities of the Ram Golf Corporation ("Ram"). Neither Armour nor Ram was profitable in 1997 and both businesses had substantial declines in sales from 1996 to 1997. Armour incurred operating losses of $31.4 million on sales of $32.0 million for the fiscal year ended September 30, 1997 and Ram incurred losses of $4.1 million on sales of $14.0 million for year ended December 31, 1997. We have incurred losses in each year of our existence which losses have increased substantially during the current quarter. In addition, our indebtedness, including our accounts payable and accrued liabilities, continue to be substantial. As a result of our continuing losses, substantial indebtedness and our long list of past due trade payables, we have sought alternative strategies for financing our continued operations. In June 2000, we retained Chase Securities, Inc. to assist us in identifying a strategic partner. On October 18, 2000, we announced that we have executed a Term Sheet with Gen-X Sports, Inc. providing for a merger of Gen-X and TearDrop. The proposed transaction provides for the shareholders of Gen-X to be issued 160 million of our shares and for Gen-X to provide for the investment of no less than $10.0 million of additional funding to the new combined company. The transaction will be subject to, among other things, due diligence, the negotiation of definitive agreements, transaction financing and approval of our bank and approval of our shareholders. Upon closing the transaction, we intend to effect a 1 for 15 reverse stock split. We cannot assure any investors that the merger with Gen-X will be completed, or even if completed, that the approximately 3% of the new enterprise that will be owned by our investors will have any significant value. We have not yet provided any substantive information regarding Gen-X to investors and we and Gen-X are still completing due diligence. Because of our precarious financial condition and our continuing losses, we would likely have to cease operations if we are unable to complete the contemplated or a similar type of transaction. 10 As an integral part of our marketing strategy, we have sought to obtain professional endorsements of our clubs. We have entered into endorsement agreements, of up to three years, with professional players principally on the PGA Tour, which provide for base payments in consideration of the use of the professionals' names in connection with the marketing of our clubs and the use of the clubs by such professional in tournament play. In addition, bonus payments that could be substantial may be made based upon tournament performance, standings on the official money list, and being named to the Ryder Cup or President Cup teams. We have granted stock options to certain endorsement professionals and we intend to continue to do so in the future. The effect of a particular professional's endorsement on the successful marketing of our clubs, and the heightening of awareness of our name, may be directly related to the success of such professionals in tournament play. We will be required to compensate a professional whether or not he or she is successful. For 2000, we have entered into endorsement agreements which will require the payment of a minimum of approximately $3.2 million and up to an additional $2.1 million should each of the professionals use and endorse our products as provided in the agreements. In addition, we anticipate that we will devote substantial capital to advertising and marketing during the next year. We have made substantial expenditures and commitments for advertising and marketing and must continue to incur such costs in order to continue to increase consumer awareness of our products. During 2000, we have incurred substantial expenses for print advertising and for our program with The Golf Channel, among other things. No assurance can be given that the expansive advertising and marketing will result in increased sales. We have incurred substantial indebtedness in financing the acquisition of Armour and Ram and in financing our losses. As of September 30, 2000, we had $30.8 million in liabilities, approximately $16.1 million of which was payable to Congress Financial Corporation ("Congress"). We signed a credit agreement with Congress on January 20, 2000. Under the new credit agreement, as amended, we have been extended credit of $25.5 million, of which $4.5 million is represented by term loans. The indebtedness to Congress is secured by substantially all of our assets. We are currently in default under our credit agreement with Congress due to our inability to repay an installment of the term loan on November 1, 2000 of $500,000 and due to the total amount of the loan exceeding the lending formula. On August 10, 2000, we were extended a 15-year mortgage loan of $2,500,000 from Sun Life Assurance Company of Canada, the proceeds of which were used to prepay $1,958,000 of a Congress term loan and the remainder of the proceeds added to our general funds. We maintain an in-house research and development and design department. In addition, we work closely with component manufacturers, independent design consultants and our endorsing golf professionals in the design and development of new products and product improvements. Our ability to introduce new products or product improvements is directly related to the efforts and success of this research and development effort. We do not manufacture the components required to assemble our golf clubs, as we rely instead on a number of component suppliers, both domestic and foreign. Our success in 11 assembling our products will be dependent, in part, on maintaining our relationships with these existing suppliers and developing relationships with new suppliers. Any significant delay or disruption in the supply of components from our suppliers or any quality problems with the suppliers' components would delay the delivery of finished products and adversely affect current sales. These circumstances could also adversely affect future sales potential if customers lose faith in our ability to deliver a high-quality product on a timely basis. Further, given the highly seasonal nature of the golf equipment industry, such adverse effect would be exacerbated should any such supply delay or quality problem immediately prior to or during the six-month period ending June 30 (the period during which sales of golf equipment have historically been the highest). We also face the risk that our customers, many of which may be subject to downturns in the golf equipment industry, could, for a variety of reasons, be unable to pay us for delivered goods. As a result, from time to time, we could be required to take write-offs of our accounts receivable. During the three months ended September 30, 2000, one customer, who owed us more than $300,000, filed for protection under the Federal Bankruptcy Law. Results of Operations Three Months Ended September 30, 2000 Compared to Three Months Ended September 30, 1999 Sales for the three month period ended September 30, 2000 were $4,485,000 compared to sales of $14,327,000 for the same period of 1999, a decrease of $9,842,000. This decrease in sales is attributable to a variety of factors, including a general decline in the golf equipment market and reduced demand for our product. In addition, we were forced to reduce substantially our advertising budget during the first half of this year because we were unable to complete a refinancing package until January 20, 2000, which was well past the date necessary to make commitments for advertising in the early part of the year. Gross profit for the three-month period ended September 30, 2000 was $2,064,000, or 46.0% of sales, compared to a gross profit of $6,895,000, or 48.1% of sales, for the corresponding period of 1999. We believe that unabsorbed overhead resulting from lower sales volume, caused the decrease in the gross profit percentage. Selling, general and administrative expenses in the three months ended September 30, 2000 were $4,829,000, or 107.7% of sales, compared to $6,110,000, or 42.6% of sales, for the same period of 1999. We reduced advertising expenses substantially during the period, as well as general and administrative expenses. However, because of the substantial reduction in sales, selling, general and administrative expenses increased as a percentage of sales in 2000 compared to 1999. Royalty income in the three-month period ended September 30, 2000 was $269,000 compared to $13,000 for the corresponding period of 1999. In 1999 we entered into several royalty agreements in the United States, as well as in certain foreign countries, under which certain of our trade names are used on products, for which we receive royalty payments. 12 As a result of our continuing losses, we believe that the value of our goodwill has been diminished and have expensed the unamortized portion in the three-month period ended September 30, 2000. Interest expense in the three-month period ended September 30, 2000 was $576,000 compared to interest expense of $382,000 for the three-month period ended September 30, 1999. Higher levels of borrowings, combined with increases in the prime rate of interest contribute to this increase in interest expense. As a result of all of the above, our net loss for the three month period ended September 30, 2000 was $3,593,000, or $.68 per common share, compared to net income of $416,000, or $.08 per common share, for the three month period ended September 30, 1999. Nine Month Period Ended September 30, 2000 Compared to Nine Month Period Ended September 30, 1999 Sales for the nine month period ended September 30, 2000 were $30,283,000 compared to sales of $51,917,000 for the same period of 1999, a decrease of $21,634,000. This decrease in sales is attributable to a variety of factors, including general decline in the golf equipment market and reduced demand for our products. In addition, we were required to reduce substantially our advertising budget during the first half of the year because we were unable to complete a refinancing package until January 20, 2000, which was well past the date necessary to make commitments for advertising in the early part of the year. Gross profit for the nine-month period ended September 30, 2000 was $14,997,000, or 49.5% of sales, compared to a gross profit of $23,611,000, or 45.5% of sales, for the corresponding period of 1999. Sales of newly introduced products, with higher gross profit margins, in 2000, offset in part by unabsorbed overhead resulting from lower volume, caused the significant increase in the gross profit percentage. Selling, general and administrative expenses in the nine months ended September 30, 2000 were $16,644,000, or 55.0% of sales, compared to $24,443,000, or 47.1% of sales, for the same period of 1999. We reduced advertising expenses substantially during the period, resulting in a decrease in selling general and administrative expenses. In the first quarter of 1999, we had a significant advertising program, which, we did not repeat in the same period of 2000. During the nine month period ended September 30, 2000, our shareholders approved the grant of an option to purchase 1,500,000 shares of our common stock granted to our Chief Executive Officer. The price of our stock on the date of the approval ($1.688) exceeded the option price of $1.375. The difference ($ .313 per share) multiplied by the number of shares is recorded as non-cash compensation expense. This resulted in a non-cash charge of $469,000 during the nine month period ended September 30, 2000. Due to the continuing reduced sales levels in 2000 compared to 1999, the non-cash item in 2000 described above, and the fixed costs included in selling, general and administrative expenses, the percentage of selling, general and administrative expenses to sales increased from 1999 to 2000. 13 Royalty income in the nine-month period ended September 30, 2000 was $777,000 compared to $182,000 for the corresponding period of 1999. In 1999 we entered into several royalty agreements in the United States, as well as in certain foreign countries, under which certain of our trade names are used on products, for which we receive royalty payments. Due to our continuing losses, we believe the value of our goodwill has been diminished and have expensed the unamortized portion in the three and nine-month periods ended September 30, 2000. Interest expense in the nine-month period ended September 30, 2000 was $1,698,000 compared to interest expense of $1,269,000 for the nine-month period ended September 30, 1999. Higher levels of borrowings, combined with increases in the prime rate of interest contributed to this increase in interest expense. During the nine month period ended September 30, 2000, our shareholders approved the convertible feature of $1,000,000 subordinated debt issued to our Chief Executive Officer. The price of our stock on the date of approval ($1.688) exceeded the conversion price of $1 by $ .688. That difference, multiplied by $1,000,000, was recorded as interest expense in the period of shareholder approval. As a result, we recorded $688,000 of non-cash interest expense in the period. As a result of all of the above, our net loss for the nine month period ended September 30, 2000 was $4,246,000, or $.80 per common share, compared to a net loss of $1,919,000, or $.37 per common share, for the nine month period ended September 30, 1999. Liquidity and Capital Resources At September 30, 2000, we had working capital of approximately $6.7 million. In January 2000, we completed a new revolving loan and credit agreement with Congress that currently provides for a maximum facility of $25.5 million, which currently includes term loans of $4.5 million. This new revolving loan replaced and repaid the outstanding amounts due to First Union National Bank ("First Union"). The Congress facility bears interest at First Union's prime lending rate plus 1% as to the revolving portion and First Union's prime lending rate plus 1.5% as to the term loan. The revolving portion has a two-year term and the $4.5 million term is due in equal quarterly installments of $500,000 commencing November 1, 2000 with the balance payable at the termination of the revolving loan. We failed to make the first payment on this loan. Congress has notified us that we are in default on the term loan and the revolving line as a result of the failure to make such a payment as well as the currently outstanding loan is in excess of the lending formula. The loans are secured by substantially all of our assets. In addition, Rudy Slucker, our Chairman and Chief Executive Officer has agreed to personally guaranty a portion of the term loan. We have incurred losses in each year of our existence which losses have increased substantially during the current quarter. In addition, our indebtedness, including our accounts payable and accrued liabilities, continue to be substantial. As a result of our continuing losses, substantial indebtedness and our long list of past due trade payables, we have sought alternative strategies for financing our continued operations. In June 2000, we retained Chase Securities, 14 Inc. to assist us in identifying a strategic partner. On October 18, 2000, we announced that we have executed a Term Sheet with Gen-X Sports, Inc. providing for a merger of Gen-X and TearDrop. The proposed transaction provides for the shareholders of Gen-X to be issued 160 million of our shares and for Gen-X to provide for the investment of no less than $10,000 of additional funding to the new combined company. The transaction will be subject to, among other things, due diligence, the negotiation of definitive agreements, transaction financing and approval of our bank and approval of our shareholders. Upon closing the transaction, we intend to effect a 1 for 15 reverse stock split. On November 16, 23 received a communication from Gen-X that it was terminating its Letter of Intent with respect to a proposed merger. However, in that same communication, Gen-X indicated that it was still interested in purchasing all of our assets, free and clear of all liens and encumbrances, and that they would be submitting an offer in this matter within a few days time. Because of our precarious financial condition and our continuing losses, we would likely have to cease operations if we are unable to complete the contemplated or a similar type of transaction. Additionally, there is uncertainty as to the realizibility of the carry value of the patents and trademarks due to our declining financial condition. We continue to limit expenditures and we continue to evaluate strategic alternative options in order to continue operations and protect our assets. Among the options is a purchase of our stock, which was being considered with Gen-X , as well as seeking relief pursuant to title 11 of the U. S. Code. On August 10, 2000, we entered into a new mortgage and security agreement with Sun Life Assurance Company of Canada under which we borrowed $2,500,000 secured by our land and building. The loan bears interest at 8.68% and is payable in equal monthly installments of $25,000 with a maturity of September 1, 2015. The proceeds of the loan were used to prepay the $1,958,000 balance of a term loan due to Congress, with the remainder of the proceeds added to our general funds. Our expenditures for operations and commitments for advertising and marketing have been and continue to be substantial and we believe that we must continue to incur such costs in order to continue to increase consumer awareness of our products. Our accounts payable and indebtedness continue to be substantial and we are currently facing cash flow shortfalls and expect that we will continue to do so for the foreseeable future. In addition, we have been seeking to provide scheduled payments of amounts due to many of our vendors. As our sales have declined, and we have had difficulty meeting our financial obligations, we have continued to limit our advertising expenditures and seek additional financing in order to continue operations. The inability to obtain additional financing when needed would have a material adverse effect on our liquidity, and, as a result, we could be required to significantly reduce or suspend our operations, seek a merger partner or sell some or all of our assets. There can be no assurance that any additional financing will be available to us on acceptable terms, if at all, when we require it. On March 10, 1999, Rudy Slucker, our Chairman and Chief Executive Officer loaned us $500,000. On January 20, 2000, he increased the loan to $1 million, repayable on demand once we achieve certain debt levels under the Congress facility. The loan bears interest at Congress' prime lending rate plus 1%, and it is convertible into our common stock at the rate of $1 per 15 share. Additionally, we granted Mr. Slucker options to purchase 1,500,000 shares of our common stock. The options are exercisable at $1.38 per share. Under the rules of the Nasdaq SmallCap Market, the convertible feature of the loan and the grant of the stock options were subject to the approval of our shareholders, which approval was obtained on April 27, 2000. The market price of our common stock on the date of shareholder approval was $1.688, which exceeded the conversion price of the loan and the exercise price of the stock options. As a result, we recognized a non-cash compensation charge against earnings in the second quarter of 2000 in the amount of $469,000 and a non-cash interest charge of $688,000. Our credit terms range from 30 days to 90 days, depending on the type of account. Cash needs are highest in the first quarter of the year, as inventories are being purchased, and, while product is being shipped to customers, the cash receipts from those sales may not be received for a period of 90 days. In addition, a significant financial commitment is made for advertising during the first quarter of the year. We have entered into endorsement agreements with golf professionals, which will require the payment of a minimum of approximately $3.2 million and up to an additional $2.1 million in 2000. We do not have any significant capital expansion plans at the present time and any capital expenditures will be financed from internally generated funds. There can be no assurance, however, that the current line of credit is sufficient to allow us to meet our needs, particularly if sales do not increase or if we encounter additional operational difficulties. 16 Our statements of cash flows for the nine months September 30, 2000 and 1999 are summarized below:

~~Six Months Ended June 30 ----------------------~~ 2000 1999 ~~-------- -------- CASH FLOWS FROM OPERATING ACTIVITIES:~~ Net ~~loss~~cash $provided (~~653~~used) ~~$ (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:~~ $(~~Increase) in accounts receivable (2~~1,~~967) (10~~697,~~781~~000) ~~Decrease~~$ ~~in inventories 146 8,071 (Increase) in other current assets (193) (168) Increase (decrease) in accounts payable and other current liabilities (~~2,~~586) 1~~990,~~185~~000 ~~--------~~Net ~~--------~~cash ~~NET CASH~~ (~~USED~~used) INin ~~OPERATING~~investing ~~ACTIVITIES~~activities (4136,~~242~~000) (3416,~~219~~000) ~~--------~~Net ~~--------~~cash ~~CASH~~provided ~~FLOWS FROM INVESTING ACTIVITIES Investment in patents and trademarks~~ (97used) --by ~~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~~activities ~~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~~970,~~009~~000 ~~-------- -------- 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 ======== ========~~004,000)

At September 30, 2000, we had patents and trademarks, primarily related to the acquisition of the assets of Armour and Ram, of approximately $6,072,000. During the three and nine months ended September 30, 2000 and 1999, we recognized amortization expense of approximately $132,000, $396,000, $98,000 and $294,000 respectively. We will continue to amortize patents and trademarks. Due to our continuing losses, we believe the value of our goodwill has been diminished and have therefore expensed the remaining portion in the quarter ended September 30, 2000. Delisting of Common Stock from the Nasdaq SmallCap Market In order for our Common Stock to continue to be quoted on the Nasdaq SmallCap Market, it must maintain a price of $1.00 per share. Our stock has continued to trade at a price less than $1.00. We have received a notice from the Nasdaq SmallCap Market notifying us that our Common Stock will be subject to delisting on January 3, 2001 if it does not close above $1.00 for a period of no less than 10 days prior to such date. Accordingly, we expect that our Common Stock will be delisted from the Nasdaq SmallCap Market. When our Common Stock is no longer eligible for quotation on Nasdaq, trading, if any, of our Common Stock would thereafter be conducted in the non-Nasdaq bulletin board over-the-counter market. As a result of such delisting, an investor may find it more difficult to dispose of or to obtain accurate quotations as to the market value of our Common Stock. In addition if our Common stock were to become delisted from Nasdaq and the trading price of the Common Stock was less than $5.00 per share, trading in the Common Stock would be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which require additional disclosure by broker-dealers in conjunction with any trades involving a stock defined as a penny stock (generally, any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on dealer-brokers who sell penny stocks to persons other than established customers and accredited investors (generally institutions). For these types of transactions, the dealer-broker must make a special suitability determination for the purchaser and must receive the purchaser's written consent to the transaction prior to sale. The additional burdens imposed on broker-dealers by such requirements may discourage them from effecting transactions in the Common Stock, which could severely limit the liquidity of the Common Stock and the ability to sell the Common Stock in the secondary market. 17 In the absence of an active trading market, purchasers of the Common Stock may experience difficulty in selling their shares. The trading price of the Common Stock is expected to be subject to significant fluctuations in response to variations in quarterly operating results, changes in analysts' earnings estimates and other factors. In addition, the stock market is subject to price and volume fluctuations that affect the market prices for companies and that are often unrelated to operating performance. Seasonality The purchasing decisions of most of our customers are typically made in the autumn and a vast majority of sales are expected to occur during the first six months of the year. In addition, our quarterly results may vary from year to year due to the timing of new product introductions, orders and sales, advertising expenditures, promotional periods, and shipments. Accordingly, comparisons of quarterly information of our results of operations may not be indicative of our overall annual performance. Forward Looking Statements When used in this and in future filings by us with the Securities and Exchange Commission ("the Commission"), in our press releases and in oral statements made with the approval of an authorized executive officer of the Company, the words or phrases "will likely result," "expects," "plans," "will continue," "is anticipated," "estimated," "project," or "outlook", or similar expressions (including confirmations by an authorized executive officer of the Company of any such expressions made by a third party with respect to us) are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. We have made such forward-looking statements in, among other places, the section of this Report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations". We wish to caution the reader not to place undue reliance on any such forward-looking statement, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Such risks and other aspects of our business and operations are described in "Risk Factors" included in the Company's Form 10-KSB for the year ended December 31, 1999. We have no obligation to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements. 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk. We do not hedge our foreign currency exchange rate exposure. Therefore, we are exposed to foreign currency exchange rate risks on our foreign sales which constitute 12% of our total sales. We do not invest in speculative or derivative financial instruments. We have significant amounts of debt, which are subject to interest rate fluctuation risk. The amounts outstanding under all of our notes payable and long-term debt have variable interest rates and, therefore, adjust to market conditions. The impact of a 1% increase or decrease in the interest rate would increase or decrease our annual interest expense by approximately $171,000 based on the debt levels at September 30, 2000. 19 PART II - OTHER INFORMATION Item 1. Legal Proceedings. In March 1999, we received a formal notice demanding arbitration from Pro Golf Promotions, LLC, Cal Rogers and Dara O'Neill in connection with certain disputes between such parties and us relating to our purchase of the TearDrop Professional Golf Tour from such parties. Such parties were seeking money damages and the issuance of shares of Common Stock related to alleged incentive obligations for 1998 and 1999. In addition, we instituted a counterclaim against the plaintiffs. In an arbitration proceeding commenced in January 2000, the arbitrator ruled generally in our favor except in connection with one claim, with respect to which the arbitrator awarded approximately $90,000 as compensation for work done in 1998. This amount has been accrued on our balance sheet. On April 27, 2000, we were named as a defendant by a former employee alleging violations of the Americans With Disabilities Act and seeking damages in excess of $287,000. We believe the claim is without merit and plan to defend the case vigorously. We have been named defendants in a lawsuit entitled Hamada Enterprises v. TearDrop Golf Company, which was filed July 5, 2000, in the Circuit Court of Cook County. Hamada is alleging breach of contract in connection with matters that extend back to the time prior to our acquisition of the Tommy Armour Golf Company, seeking damages of $350,231. It is our position that there has been no breach of contract and that we have been ready and willing to send Hamada equipment to offset Hamada's credit, as the parties originally agreed. We intend to vigorously defend this matter. We were also served with a complaint from Nieman Porter & Company, alleging damages of $535,337, in connection with products sold and delivered to us pending in the Northern District of Illinois. The amount that we owe is reflected on our balance sheet as a liability. We have begun settlement discussions. The parties have agreed to an extension of time for us to answer the complaint. We are being sued by Dow Jones Inc. for breach of contract relating to advertising services. Plaintiff is claiming damages of $118,070. The amount is reflected on our balance sheet under accounts payable. We are investigating plaintiff's claim and anticipate that we will be able to resolve this matter through settlement. We have been sued by Industrial Staffing Inc. for damages of $8,455 for breach of contract. We are investigating the validity of plaintiff's allegations and anticipate that we will be able to resolve this matter through settlement. Item 2. Changes in Securities and Use of Proceeds At the Annual Meeting of Stockholders held on April 27, 2000, the Stockholders approved an amendment to the Company's Certificate of Incorporation increasing the Company's authorized shares of Common Stock from 10,000,000 to 20,000,000 shares. 20 The issuance by the Company, however, of additional shares of Common Stock may, depending on the context in which they are issued, dilute the stock ownership of the existing stockholders of the Company. The Company's stockholders do not have any preemptive or similar rights to subscribe for or purchase any additional shares of Common Stock that may be issued in the future. Item 4. Submission of Matters to a Vote of Security Holders. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit No. Description ---------- --------- 3.1++ Certificate of Incorporation 3.2++ Certificate of Merger 3.3++ Agreement and Plan of Merger dated October 21, 1996 between the Company and TearDrop Putter Corporation, a South Carolina Corporation 3.4++ By-Laws 3.6** Certificate of Ownership and Merger of TearDrop Promotions, Inc., Tommy Armour Golf Company and Ram Golf Corporation into the Company dated October 8, 1999. 4.2++ Specimen Stock Certificate 10.1++ Employment Agreement with Rudy A. Slucker 10.2++ Employment Agreement with John Zeravica 10.3+ 1996 Employee Stock Option Plan, as amended 10.4++ Form of Stock Option Agreement 10.23++ Form of Lock-up Agreement 10.24* Property Lease dated August 10, 1997 between the Company and Dolo Realty Co. 10.40** Loan and Security Agreement, dated January 20, 2000, by and between Congress Financial Corporation (Central) and the Company 10.41** Subordination Agreement, dated as of January 20, 2000, by and between Rudy A. Slucker and Congress Financial Corporation (Central) 10.42+ Amended and Restated Subordinated Convertible Demand Note, dated as of January 20, 2000 to Rudy A. Slucker. 10.43+ Stock Option Agreement, dated as of December 31, 1999, between the Company and Rudy A. Slucker. 10.44** Employment Agreement, effective January 27, 2000, by and between the Company and Andrew M. Kairey. 21 10.45 Amendment No. 1 to Loan and Security Agreement, dated as of August 11, 2000 by and between Congress Financial Corporation (Central) and the Company. 10.46 Reaffirmation of Guarantee of Tommy Armour Golf Company, dated August 11, 2000. 10.47 Reaffirmation of Guarantee of Rudy A. Slucker, dated August 11, 2000. 27 Financial Data Schedule ------------ ++ Previously filed with the Securities and Exchange Commission as an Exhibit to our Registration Statement on Form SB-2 (File No.333-14647) and incorporated herein by reference. * Previously filed with the Securities and Exchange Commission as an Exhibit to Post-Effective Amendment No. 1 to our Registration Statement on Form SB-2 (File No. 333-14647) and incorporated herein by reference. + Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Preliminary Proxy Statement for the Annual Meeting of Stockholders filed on March 17, 2000 and incorporated herein by reference. ** Previously filed with the Securities and Exchange Commission as an Exhibit to our Annual Report to Stockholders on Form 10-KSB filed on March 30, 2000 and incorporated herein by reference. (b) Reports on Form 8-K: During the quarter ended September 30, 2000, the Company did not file any Current Reports on Form 8-K. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEARDROP GOLF COMPANY Dated: November 15, 2000 /s/ Rudy A. Slucker ---------------------------------- Rudy A. Slucker, President and Chief Executive Officer (Principal Executive Officer) Dated: November 15, 2000 /s/ Joseph Cioni ------------------------------------ Joseph Cioni, Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 23 INDEX TO EXHIBITS No. Description -- ----------- 27 Financial Data Schedule 24

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