Commission File Number 0-29014
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
TEARDROP GOLF COMPANY
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 57-1056600
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1080 Lousons Road
Union, New Jersey 07083
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (908) 688-4445
Check whether issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Number of shares of Common Stock outstanding as of November 10, 1999: 5,262,565
Transitional Small Business Disclosure Format (Check One): Yes |_| No |X|
<PAGE>
TEARDROP GOLF COMPANY
FORM 10-QSB INDEX
FOR QUARTERLY PERIOD ENDED JUNE 30, 1999
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheet 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-15
Part II. Other Information 15
Signature Page 16
2
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Part I. Financial Information
Item 1. Financial Statements
TearDrop Golf Company
Consolidated Statements of Operations
For the Three Months and Nine Months Ended September 30, 1999 and 1998
(All dollar amounts, except share and per share amounts, in $000's)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 14,327 $ 13,028 $ 51,917 $ 57,602
Cost of sales 7,432 7,093 28,306 32,402
----------- ----------- ----------- -----------
Gross profit 6,895 5,935 23,611 25,200
Selling, general and
administrative expenses 6,097 5,154 24,261 21,151
----------- ----------- ----------- -----------
Income (loss) from operations 798 781 (650) 4,049
Interest (expense), net (382) (379) (1,269) (1,180)
----------- ----------- ----------- -----------
Income (loss) before income taxes 416 402 (1,919) 2,869
Income tax (expense) (150) (140) -- (1,003)
Utilization of net loss carryforward 150 110 -- 973
----------- ----------- ----------- -----------
Net income (loss) 416 372 (1,919) 2,839
Preferred dividends -- -- -- 137
----------- ----------- ----------- -----------
Income (loss) attributable to common
shareholders $ 416 $ 372 $ (1,919) $ 2,702
=========== =========== =========== ===========
Net income (loss) per common share - basic $ 0.08 $ 0.07 $ (0.37) $ 0.74
=========== =========== =========== ===========
Net income (loss) per common share - diluted $ 0.08 $ 0.07 $ (0.37) $ 0.62
=========== =========== =========== ===========
Weighted average number of
common shares outstanding - basic 5,197,928 5,196,045 5,186,481 3,645,946
=========== =========== =========== ===========
Weighted average number of
Common shares outstanding - diluted 5,197,928 5,483,523 5,186,481 4,353,133
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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TearDrop Golf Company
Consolidated Balance Sheet
September 30, 1999
(All dollar amounts, except share and per share amounts, in $000's)
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 954
Accounts receivable less allowance for returns and
doubtful accounts of $1,630 14,456
Inventories 9,284
Other current assets 261
-------
Total current assets $ 24,955
PROPERTY AND EQUIPMENT, less accumulated
depreciation 4,495
PATENTS & TRADEMARKS, less accumulated amortization 6,390
GOODWILL, less accumulated amortization 534
--------
$ 36,374
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,768
Accrued liabilities 2,175
Note payable - shareholder 500
Bank loan 18,278
--------
Total current liabilities $ 30,721
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 outstanding 5,262,565
shares 52
Capital in excess of par value 25,313
Accumulated other comprehensive income (218)
Accumulated deficit (19,494)
--------
Total stockholders' equity 5,653
--------
$ 36,374
========
See accompanying notes to consolidated financial statements.
4
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TearDrop Golf Company
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
(All dollar amounts, except share and per share amounts, in $000's)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,919) $ 2,839
Adjustments to reconcile net income (loss) to net
cash provided (used) in operating activities:
Depreciation and amortization 869 521
Provision for doubtful accounts 359 421
Changes in operating assets and liabilities:
(Increase) in accounts receivable (7,001) (8,341)
Decrease in inventories 9,742 959
(Increase) decrease in other current assets 101 (2,718)
Increase (decrease) in accounts payable and other current liabilities 839 (2,184)
------- -------
NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES 2,990 (8,503)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (234) (191)
Other (182) (22)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (416) (213)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under financing agreements (2,631) 4,004
Proceeds from shareholder note payable 500
Repayment of stockholders' notes (400)
Proceeds from issuance of common stock 127
Proceeds from redemption of common stock warrants 8,514
Redemption of preferred stock (3,000)
Preferred dividends (137)
------- -------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES (2,004) 8,981
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 11
NET INCREASE IN CASH AND CASH EQUIVALENTS 581 265
CASH AND CASH EQUIVALENTS:
Beginning of year 373 257
------- -------
End of period $ 954 $ 522
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TearDrop Golf Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts, except share and per share amounts, in $000's
(Unaudited)
NOTE 1 - ACCOUNTING POLICIES
The accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements in the Company's 1998 Annual Report
to Shareholders. In the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation have been included.
The results for the quarter and nine months ended September 30, 1999 do not
necessarily indicate the results that may be expected for the full year.
As of September 30, 1999, the Company has separated the balance sheet item
captioned "Goodwill and Intangible Assets" into the following two captions:
Patents and Trademarks
Goodwill
During the three and nine month periods ended September 30, 1999 and 1998, total
comprehensive income (loss) amounted to $453, $372 and $(1,930) and $2,839,
respectively.
NOTE 2 - INVENTORIES
Inventories at September 30, 1999 consist of the following:
Raw materials and work in process $ 5,349
Finished goods 3,935
-------
Total inventories $ 9,284
NOTE 3 - BANK LOAN
During 1997, the Company obtained a line of credit with First Union National
Bank, successor by merger to CoreStates Bank, N.A., (the "Bank") initially for
$18,000, later increased to $25,000, collateralized by a security interest in
all the assets of the Company. In March 1999, the line was increased to $30,000.
It was reduced to $25,000 on June 30, 1999, to $20,000 on October 10, 1999 and
to $18,500 through maturity. The loan agreement, as amended, provides, among
other things, that the Company satisfy certain financial covenants. At various
times during the nine months ended September 30, 1999, the Company was in
violation of various financial covenants, as well as certain reporting and
repayment obligations.
As a result of the Company's defaults under the loan agreement, the Company and
the Bank entered into a Forbearance and Overadvance Agreement effective as of
July 20, 1999, which was amended as of November 10, 1999 (as amended, the
"Forbearance Agreement"). In connection with the Forbearance Agreement and an
amendment to the loan agreement of even date, the loan was extended to December
10, 1999, the interest rate under the line of
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<PAGE>
TearDrop Golf Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts, except share and per share amounts, in $000's
(Unaudited)
credit was increased to prime rate plus 1% and the principal amount available
under the credit facility was reduced to $18,500 on November 10, 1999. If the
Company does not pay the loan in full by December 10, 1999, the interest rate
under the line of credit increases to prime rate plus 2% and is retroactive to
November 10, 1999. In addition, the Bank has agreed to forbear from exercising
its rights of enforcement under the loan agreement with respect to certain
covenant defaults until December 10, 1999 or until certain defined events occur.
The line of credit matures on December 10, 1999. Although the Company is
currently in default under the loan agreement, the Bank agreed to loan
additional funds on a discretionary basis provided that such advances will not
exceed certain budgeted amounts set forth in the Forbearance Agreement. However,
there can be no assurance that the Bank will loan additional funds and that any
such amounts will be sufficient to fund the Company's working capital needs.
In March 1999, the Company's Chief Executive Officer loaned the Company $500
bearing interest at 8% due upon demand, once the Company has reached certain
reduced levels of indebtedness under the credit facility with the Bank.
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 the Company's results of operations may not be indicative of the
Company's overall annual performance.
NOTE 5 - COMMITMENTS AND CONTIGENCIES
The Company has 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.
Minimum compensation requirements for the years ending December 31, 1999, 2000
and 2001, are approximately $4,200, $3,100 and $1,900, respectively.
Additionally, the Company has agreed to issue options to purchase 55,000, 46,000
and 16,000 shares of common stock in connection with these agreements for the
years ending December 31, 1999, 2000 and 2001, respectively. Of the options to
be issued under these agreements, 14,000 to be granted in 1999 and 9,000 to be
granted in 2000, could be exchanged for $100 and $75, respectively.
The Company entered into an advertising agreement for the years 1999 and 2000
for which the Company has committed to spend approximately $1,500 in 1999
(substantially all of which has been spent) and $1,551 in 2000.
7
<PAGE>
TearDrop Golf Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts, except share and per share amounts, in $000's
(Unaudited)
The Company has obligations with respect to media placement, primarily for
television advertising which requires the Company to spend no less than $1,000
during 2000.
In November 1996, the Company entered into a three year employment agreement
with its President and Chief Executive Officer commencing December 19, 1996. The
employment agreement has been extended through 2001. The agreement provides for
annual compensation of $250 and performance bonuses, as defined.
NOTE 6 - SEGMENT INFORMATION
It is management's opinion that the Company, at this time, has only one
reportable segment, and that segment is the manufacture, marketing and
distribution of golf clubs. The Company distributes from its 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:
The Company operated as a single reportable segment with sales the first nine
months of 1999 of $51,917, of which $45,208 were sales in the United States and
$6,709 were sales outside of the United States. The Company sells its products
in the United States through its 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. The Company sells its products outside of
the United States through sales offices in Canada and the United Kingdom, and
through distributors in other countries.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read this discussion together with our financial statements and
the related notes and other financial information included elsewhere in this
filing. This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from those discussed
in the forward-looking statements as a result of various factors, including but
not limited to those included in other portions of this filing and those
indicated under the caption "Risk Factors" in our Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998.
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 Armour line of irons and
woods; (c) our Ram line of irons, woods and wedges; and (d) our Zebra putters.
Our line of products are used by golfers throughout the world, including
professional golfers on the Professional Golf Association ("PGA") Tour, the
Senior PGA Tour, the Ladies PGA Tour and the Nike Tour. In addition, we operate
a professional developmental golf tour for aspiring PGA Tour players and are the
sole United States distributor for Walter Genuin shoes.
We introduced our first product, the TearDrop putter, in 1993 and
commenced significant marketing and sales activities in 1994. We completed an
initial public offering of our common stock in December 1996. In January 1997,
we commenced a substantial television and print advertising campaign. The costs
to produce and air the infomercial and television commercials were substantial
and resulted in losses as we continued to roll out our advertising campaign in
the first three quarters of 1997.
In the fourth quarter of 1997, we completed the acquisitions of the assets
of "The TearDrop Professional Golf Tour," the Tommy Armour Golf Company
("Armour") and the Ram Golf Corporation ("Ram").
Since the acquisitions were completed, we have devoted substantial efforts
to reduce costs, eliminate unprofitable product lines, and focus on marketing of
high quality products. However, we cannot assure you that we will be able to
operate the combined enterprises successfully or reverse the history of losses
that TearDrop, Ram and Armour, as stand-alone entities, incurred in the past.
We believe that an important element for increasing awareness and demand
for our golf clubs is the building of a corps of touring professional golfers
that will endorse, use and win with our clubs. Accordingly, as an integral part
of our marketing strategy, we continually seek 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. These
endorsement agreements generally 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 professionals in tournament play.
In addition, potentially substantial bonus payments 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
of our endorsing professionals and intend to continue to do so in the future.
During 1998, we recorded compensation expense of $200,000 in connection with the
grant of such options on the date of grant. 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 professional in tournament play. We, however, will be required to
compensate a professional whether or not he or she is successful. For 1999, we
have entered into endorsement
9
<PAGE>
agreements which required the payment of a minimum of approximately $4.2 million
should each of the professionals use and endorse our products as provided in the
agreements. We anticipate that our payment obligations under endorsement
agreements for 2000 will meet or exceed our obligations under such agreements
for 1999. In addition, we anticipate that we will devote substantial capital to
advertising and marketing during the next year.
We have also 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 1999, we have incurred
substantial expenses for television, print advertising, our program with the
Golf Channel and in connection with our infomercial, among other things. We
cannot assure you that the expansive advertising and marketing will result in
increased sales for us.
We have incurred substantial indebtedness in financing the acquisitions of
Armour and Ram and in financing our expansion and operations. At December 31,
1998, we had $34.3 million in liabilities, approximately $20.9 million of which
was payable to First Union National Bank, successor by merger to CoreStates
Bank, N.A. ("First Union" or the "Bank") pursuant to a certain Loan and Security
Agreement (as amended, the "Loan Agreement"). Under the Loan Agreement, the Bank
provided a $30.0 million revolving credit facility (the "Credit Facility"),
which was reduced to $25.0 million on June 30, 1999, to $20.0 million on October
10, 1999, and to $18.5 million on November 10, 1999. The Credit Facility
terminates on December 10, 1999. We will therefore be required to either
refinance the amounts outstanding under the Credit Facility or identify
alternative financing. As of December 31, 1998, we had a working capital
deficiency of approximately $4.4 million, primarily as a result of the
classification of our $20.9 million credit facility as a current liability since
it terminates and is repayable in December 1999. The working capital deficiency
increased to approximately $5.8 million at September 30, 1999. As a result, our
independent auditor has noted in its report that these conditions, among others,
raise substantial doubt about our ability to continue as a going concern. At
various times during the nine months ended September 30, 1999, we were in
violation of various financial covenants as well as certain reporting and
repayment obligations. However, we cannot assure you that we will maintain
compliance with the covenants in the future or will reach terms for an extension
of the credit facility. We are currently seeking alternative sources of
financing and have been informed that a $30 million credit facility has been
approved by Textron Financial Corporation, a subsidiary of Textron Inc. The
financial package is subject to the signing of a definitive loan agreement. No
assurance can be given that the financing with Textron Financial Corporation
will close. See "Liquidity and Capital Resources."
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.
We rely instead on a number of component suppliers, both domestic and foreign.
Our success in assembling our products will be dependent, in part, on
maintaining our relationships with our existing suppliers and developing
relationships with new suppliers.
We believe that there are readily available alternative sources for each
of the components comprising our clubs, although we cannot assure you of this.
Any significant delay or disruption in the supply of components from our
suppliers or any quality problems with the supplier's components would delay our
delivery of finished products and adversely affect current sales and could
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 occur 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).
10
<PAGE>
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
We had net sales for the three months ended September 30, 1999 of
$14,327,000 compared to net sales of $13,028,000 for the three months ended
September 30, 1998, an increase of 10%. Included in the 1998 sales were
$2,000,000 of sales of one product line which has been discontinued. Therefore,
without giving effect to sales of such product, sales of continuing products in
the 1999 period increased by approximately $3,299,000, or 29.9%, over the
similar period of 1998.
Our gross profit for the three months ended September 30, 1999 was
$6,895,000, or 48.1% of sales, compared to $5,935,000, or 45.6% of sales, for
the same period of 1998. The gross profit percentage on the sales of the
discontinued products referred to above was lower than we realize on our
continuing sales. This had the effect of reducing the overall gross profit
percentage for the three months ended September 30, 1998 relative to the three
months ended September 30, 1999.
We incurred selling, general and administrative expenses of $6,097,000
(42.6% of sales) during the three months ended September 30, 1999 compared to
$5,154,000 (39.6% of sales) for the three months ended September 30, 1998. The
increase from 1998 to 1999 is due principally to the increase in the number of
endorsement contracts for touring professional golfers and increases in sales
commissions related to the increase in sales of continued products.
As a result of the above, our income from operations for the three months
ended September 30, 1999 was $798,000 compared to $781,000 for the three months
ended September 30, 1998.
Interest expense for the three months ended September 30, 1999 was
$382,000 compared to $379,000 for the same period of the previous year.
Our net income for the three months ended September 30, 1999 was $416,000
or $0.08 per common share, basic and diluted (5,197,928 average shares
outstanding) compared to net income of $372,000, or $0.07 per common share,
basic and diluted, based on 5,196,045 weighted average number of shares
outstanding for the three months ended September 30, 1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Our net sales for the nine months ended September 30, 1999 were
$51,917,000 compared to $57,602,000 for the nine months ended September 30,
1998. Included in 1998 sales were $13,710,000 of sales of one product line which
has been discontinued. Therefore, without giving effect to sales of such
product, sales of continuing products increased by approximately $8,025,000, or
18.3%, from 1998 to 1999. Furthermore, we believe that the market generally for
golf equipment was weaker on an industry wide basis in 1999 as compared to 1998.
We believe that we were able to achieve our levels of sales during a decline in
the market by introducing new products, undertaking a substantial advertising
and marketing campaign, and enlisting a team of highly regarded touring golf
professionals to promote our products.
Gross profit for the nine months ended September 30, 1999 was $23,611,000,
or 45.5% of sales, which compares to $25,200,000, or 43.7% of sales, for the
nine months ended September 30, 1998. During the first nine months of 1999, we
disposed of certain inventory at prices that were less than cost, which had the
effect of reducing our gross profit percentage by approximately 5.5%. The sales
of the discontinued product line in the first six months of 1998 had the effect
of reducing the gross profit percentage by approximately 7.6%.
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Our selling, general and administrative expenses for the nine months ended
September 30, 1999 were $24,261,000 (46.7% of sales) as compared to $21,151,000
(36.7% of sales) for the nine months ended September 30, 1998. During the first
nine months of 1999, we undertook an extensive advertising campaign for each of
our brands, the cost of which exceeded the advertising expense for 1998. In
addition, in 1999 we increased the number of endorsement contracts for touring
golf professionals over the 1998 level. Also, for 1998, with $13.7 million of
sales of a discontinued product ($11.7 million of which was to one customer), we
did not incur a proportionate amount of selling expenses on that sale, which had
the effect of reducing the percentage of selling, general and administrative
expenses to sales.
As a result of the above, our loss from operations for the nine months
ended September 30, 1999 was $650,000 compared to a profit of $4,049,000 for the
same period of 1998.
Interest expense on our debt amounted to $1,269,000 for the nine months
ended September 30, 1999 compared to $1,180,000 for the nine months ended
September 30, 1998. The amount has increased from the previous year due to the
increase in the prime lending rate in 1999 over 1998.
We incurred a net loss of $1,919,000 or $0.37 per common share (5,186,481
average number of shares outstanding) for the nine months ended September 30,
1999 compared to a net income (after preferred dividends of $137,000) of
$2,702,000 or $0.74 per share basic ($0.62 fully diluted) for the same period of
1998.
Liquidity and Capital Resources
At September 30, 1999, we had total current assets of approximately
$24,955,000 and total current liabilities of approximately $30,721,000, of which
$18,278,000 represents the amount due under our credit facility which terminates
in December 1999. Therefore, we have a working capital deficiency of $5,766,000.
As a result, our independent auditor has noted in its report upon the financial
statements for the year ended December 31, 1998 that these conditions, among
others, raise doubt about our ability to continue as a going concern. Our
Stockholders' Equity is $5,653,000 at September 30, 1999.
Pursuant to the Loan Agreement with the Bank, the Bank provided the Credit
Facility of $30.0 million to finance the acquisitions of the assets of Armour
and Ram. The Credit Facility is currently being utilized by us to satisfy our
working capital and general corporate expenditures. The Credit Facility, as
amended, terminates on December 10, 1999 and must be repaid by such date. We
currently do not have the resources to repay the entire Credit Facility and will
be required to identify an alternative source of financing prior to such date.
We are currently seeking alternative sources of financing and have been informed
that a $30 million credit facility has been approved by Textron Financial
Corporation, a subsidiary of Textron Inc. The financial package is subject to
the signing of a definitive loan agreement. No assurance can be given that the
financing with Textron Financial Corporation will close.
Pursuant to an amendment to the Loan Agreement effective as of November
10, 1999, funds extended pursuant to the Credit Facility accrue interest at the
prime rate plus 1% which reflects an increase from the prior interest rate of
either prime minus 1/2% or LIBOR plus 2% per annum. However, if we do not pay
the loan in full by December 10, 1999, the interest rate under the Credit
Facility increases to the prime rate plus 2% and is retroactive to November 10,
1999. The Credit Facility was reduced to $25.0 million on June 30, 1999, to
$20.0 million on October 10, 1999 and to $18.5 million on November 10, 1999. The
Credit Facility is secured by substantially all of our assets, including the
assets acquired in connection with the acquisitions. The Loan Agreement contains
restrictions on certain of our activities, including, but not limited to, the
payment of dividends, redemption of securities and the sale of assets outside
our ordinary course of business. The Loan Agreement also requires that we meet
certain financial covenants. At various times during the nine months ended
September 30, 1999, we were in violation of various financial covenants as well
as certain reporting and repayment obligations.
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<PAGE>
Effective as of July 20, 1999 and again as of November 10, 1999, we
amended the Loan Agreement and entered into a Forbearance and Overadvance
Agreement with the Bank (the "Forbearance Agreement"), which resulted in the
increase in the interest rate (described above), a reduction in the Credit
Facility as of November 10, 1999, and the forbearance by the Bank from
exercising its rights with respect to certain of the covenant defaults until
December 10, 1999 or until certain defined events occur. The line of credit
matures on December 10, 1999. Although we are currently in default under the
Loan Agreement, the Bank agreed to loan additional funds on a discretionary
basis provided that such advances will not exceed certain budgeted amounts set
forth in the Forbearance Agreement. However, there can be no assurance that the
Bank will loan additional funds and that any such amounts will be sufficient to
fund our working capital needs.
In March 1999, our Chief Executive Officer loaned the Company $500,000,
bearing interest at 8% and repayable on demand, once we have reached certain
reduced levels of indebtedness under the Credit Facility with the Bank.
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. The majority of sales are typically shipped to customers in
the first six months of the year. Since the cash receipts from those sales may
not be received for up to 90 days, receivable balances should increase through
the first six months of the year and decrease in the second six months of the
year. In addition, in 1999, we made a significant financial commitment for
advertising during the first quarter of the year.
We have entered into a two year agreement with the Golf Channel, providing
for expenditures of approximately $1.5 million and $1.55 million during 1999 and
2000, respectively. In addition, we have entered into endorsement agreements
with golf professionals which required the payment of a minimum of approximately
$4.2 million in 1999. We anticipate that our payment obligations under
endorsement agreements for 2000 will meet or exceed our obligations under such
agreements for 1999. We anticipate that we will continue to devote substantial
capital to advertising and marketing during the next year.
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 operational difficulties.
Our statements of cash flows for the nine months ended September 30, 1999
and 1998 is summarized below:
Net cash provided (used) in operating activities $ 2,990,000 $ (8,503,000)
Net cash used in investing activities (416,000) (213,000)
Net cash provided (used) in financing activities (2,004,000) 8,981,000
13
<PAGE>
Year 2000 Modifications
We rely on both information technology ("IT") and non-IT computer systems
in our operations. The mission-critical IT systems include our operating and
accounting systems, such as IT software applications that allow us to maintain
inventory and customer information and to communicate with our suppliers and
customers. The non-IT systems are primarily telecommunications systems and other
building systems, such as security systems, lighting, fire and safety systems.
In 1997, we began to address the year 2000 problem. The issue is one in
which computer systems may recognize the designation "00" as 1900 when it means
2000, resulting in system failure or miscalculations. We have assigned our
Manager of Information Systems to coordinate and implement measures designed to
prevent disruption in our business operations related to the year 2000 problem.
We completed the remediation of our mission-critical IT applications software in
December 1998 and completed an end-to-end test of our IT systems in July 1999.
We have assessed the effect of the year 2000 problem on our non-IT systems and
have replaced non-IT systems as necessary to become year 2000 ready.
Additionally, we are working with our customers and our suppliers to determine
whether the year 2000 problem will have an adverse effect on our relationships
with them.
During 1999, we spent approximately $200,000 above normal operating costs
in order to comply with year 2000 issues funded through regular operations. We
do not anticipate any other expenditures in connection with year 2000
compliance.
We cannot assure you that our year 2000 remediation has been properly
completed and a failure to do so could have a material adverse effect on our
financial condition. We cannot predict the actual effects to us of the year 2000
issue, which depends on numerous uncertainties such as: (1) whether major third
parties address this issue properly and timely, and (2) whether broad-based or
systemic economic failures may occur. We are currently unaware of any events,
trends, or conditions regarding this issue that may have a material effect on
our results of operations, liquidity, and financial condition. If the year 2000
issue is not resolved by December 31, 1999, our results of operations or
financial condition could be materially adversely affected.
We developed contingency plans to address the risks created by the year
2000 problem. These plans include procuring alternative suppliers, when
available, when we are able to conclude that an existing supplier will not be
year 2000 ready. We completed these contingency plans in July 1999.
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.
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 one of our authorized executive officers,
the words or phrases "will likely result," "expects," "plans," "will continue,"
"is anticipated," "estimated", "project" or "outlook" or similar expressions
(including confirmations by one of our authorized executive officers 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
14
<PAGE>
Private Securities Litigation Reform Act of 1995. We wish to caution readers not
to place undue reliance on any such forward-looking statements, each of which
speak only as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Such risks and
other aspects of our business and operations are described in "Risk Factors"
contained in our Form 10-KSB for the year ended December 31, 1998 on file with
the Securities and Exchange Commission. 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.
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 the purchase by us from such
parties of the TearDrop Professional Golf Tour. Such parties are seeking certain
money damages and the issuance of up to 65,000 shares of our common stock
related to alleged incentive obligations for 1998 and up to 65,000 shares of our
common stock related to such obligations for 1999. We believe that such parties
are not entitled to the issuance of such shares or to money damages and intend
to vigorously defend such claim.
On July 26, 1999, an action was filed in the federal court in Oklahoma
City, Oklahoma entitled Express Personnel Services, Inc. v. TearDrop Golf
Company. Plaintiff alleges damages in the approximate amount of $77,000 for
unpaid invoices. We believe that we have valid defenses to the claim and intend
to vigorously defend such claim.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description
10.38 Sixth Amendment to Loan and Security Agreement
10.39 Letter of Amendment to Forbearance and Overadvance Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K:
During the quarter ended September 30, 1999, we did not file any Current
Report on Form 8-K.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TEARDROP GOLF COMPANY
Dated: November 15, 1999 /s/ Rudy A. Slucker
--------------------------------------
Rudy A. Slucker, President and Chief
Executive Officer (Principal Executive
Officer)
Dated: November 15, 1999 /s/ Joseph Cioni
--------------------------------------
Joseph Cioni, Vice President of Finance
and Chief Financial Officer (Principal
Financial and Accounting Officer)
16
Exhibit 10.38
SIXTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS SIXTH AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Amendment") is
made effective as of this 10th day of November, 1999 among TEARDROP GOLF
COMPANY, successor to merger of Tommy Armour Golf Company and Ram Golf
Corporation with and into TearDrop Golf Company ("TearDrop"), TOMMY ARMOUR GOLF
COMPANY, formerly known as TEARDROP ACQUISITION CORP. ("Acquisition"; TearDrop
and Acquisition shall be referred to individually herein as a "Borrower" and
collectively as "Borrowers") and FIRST UNION NATIONAL BANK (successor by merger
to CORESTATES BANK, N.A.) ("Lender"). All terms capitalized but not defined
herein shall have the meanings given to such terms in the Agreement (as such
term is hereinafter defined).
BACKGROUND
A. The Borrowers (excluding Ram and Acquisition) and Lender entered
into a certain Loan and Security Agreement dated as of November 10, 1997 (as
amended from time to time, the "Agreement") pursuant to which Lender made
available to the Borrowers the revolving credit facility described therein. Ram
Golf Corporation was added as a Borrower pursuant to a Consent and Joinder
Agreement dated as of December 29, 1997. Acquisition was added as a Borrower
pursuant to an Amendment and Joinder Agreement dated as of November 5, 1998, but
effective as of September 30, 1998. The Agreement was further amended by an
Amendment to Loan and Security Agreement dated as of February 24, 1999, a Third
Amendment to Loan and Security Agreement dated as of March 8, 1999, a Fourth
Amendment to Loan and Security Agreement dated as of April 15, 1999, and a Fifth
Amendment to Loan and Security Agreement dated as of July 20, 1999.
B. Borrowers and Lender are also parties to a certain Forbearance
and Overadvance Agreement ("Forbearance Agreement") dated July 20, 1999.
C. Borrowers have asked Lender to extend the term of the Agreement
(as provided herein) and to extend the Forbearance Period (as defined in the
Forbearance Agreement) in order afford the Borrowers an opportunity to complete
their anticipated refinancing of the indebtedness owed pursuant to the
Agreement.
D. Lender has agreed to amend the Agreement on the terms and
conditions set forth herein and in that certain letter amendment to the
Forbearance Agreement of even date herewith.
NOW, THEREFORE, the parties agree as follows, intending to be
legally bound.
1. Subject to the satisfaction of the conditions set forth in
Section 4 hereof, the Agreement is hereby amended as follows:
(A) The following definitions contained in Section 1.1 of the
Agreement are hereby amended to read as follows:
<PAGE>
"Adjusted Prime Rate" means the Prime Rate plus 2%. The
Adjusted Prime Rate shall change simultaneously with each change in
the Prime Rate.
"Commitment" means, from and after November 10, 1999,
$18,500,000.
"Termination Date" means the earlier of (A) the date on which
Lender's obligation to make Advances terminates pursuant to any
provision of this Agreement, or (B) December 10, 1999.
2. In consideration for Lender's entry into this Amendment,
Borrowers agree to pay Lender on the effective date of this Amendment an
extension fee of $25,000 ("Extension Fee"), which fee shall be fully earned by
Lender as of the date of this Amendment but shall be payable on December 10,
1999. Borrowers hereby authorize Lender to charge the Cash Collateral Account
and/or the Operating Account the amount of such extension fee at any time on or
after December 10, 1999.
3. The 1% increase in the Adjusted Prime Rate provided for in this
Amendment shall be effective as of November 10, 1999, provided that Lender
agrees that the incremental amount of interest attributable to such increase
(i.e., the difference between Prime Rate plus 2% and Prime Rate plus 1%)
("Incremental Interest") that is earned from November 10, 1999 through December
10, 1999 shall accrue and not be payable until December 10, 1999. Lender further
agrees that it shall waive its right to collect the Incremental Interest and the
Extension Fee if all Liabilities (excluding such Incremental Interest and
Extension Fee) are repaid in full on or before December 10, 1999.
4. Borrowers have ratified and reaffirmed the release of Lender that
is contained in Section 7 of the Forbearance Agreement, pursuant to the letter
amendment referred to in Recital D hereof. Borrowers agree that it shall be a
condition precedent to any obligation of Lender to release any of its liens or
security interests on its Collateral that Borrowers shall have again ratified
and reaffirmed such release substantially contemporaneously with Borrowers'
repayment of the Liabilities.
5. The terms of this Amendment are hereby incorporated into the
Agreement.
6. The effectiveness of this Amendment is subject to the
satisfaction of each of the following conditions precedent:
(A) Borrowers shall have delivered or caused to be delivered
the following documents, each duly executed by Borrowers:
(1) this Amendment and
(2) that certain letter amendment to the Forbearance
Agreement dated November 10, 1999.
(B) Borrowers shall pay all costs and out-of-pocket expenses
(including, without limitation, reasonable attorneys' fees and costs) of Lender
and Congress in connection with the Agreement (including without limitation this
Amendment), and the transactions contemplated thereby, which includes, among
other things, the preparation, review and negotiation of this Amendment, and all
costs and expenses incurred in connection with the above.
2
<PAGE>
7. Borrowers acknowledge having informed Lender on November 10, 1999
that certain of the Borrowers affiliated with TearDrop were recently merged with
TearDrop in preparation for the contemplated refinancing of the Liabilities.
Lender has advised Borrowers that Lender reserves all of its rights with respect
to such merger(s) and any Defaults or Events of Default arising therefrom
(including without limitation any Default or Event of Default arising under
Section 6.18 of the Agreement); the parties agree that if Defaults or Events of
Default arise from such mergers they are not "Existing Defaults" under the terms
of the Forbearance Agreement.
8. Borrowers represent and warrant to Lender that, except with
regard to the matter referred to in Section 7 hereof:
(A) Except as set forth on Schedule 1 attached hereto, the
representations and warranties set forth in Article V of
the Agreement, as the same have been updated in prior
amendments to the Agreement, are true and correct in all
material respects as of the date hereof;
(B) No Default or Event of Default has occurred or is
continuing, excluding the Existing Defaults (as defined
in the Forbearance Agreement); and
(C) The indebtedness evidenced by the Agreement and the Note
shall continue to be secured as set forth in the
Agreement.
9. This Amendment contains all of the modifications to the
Agreement. No further modifications shall be deemed effective, unless set forth
in writing and executed by the parties hereto.
10. The execution, delivery and effectiveness of this Amendment
shall not operate as a waiver of any right, power or remedy of Lender under the
Agreement, nor constitute a waiver of any Default or Event of Default or any
provision of the Agreement.
11. This Amendment shall be construed and enforced in accordance
with the laws of the State of New Jersey.
12. This Amendment may be executed in any number of counterparts,
all of which taken together shall constitute one and the same instrument, and
any of the parties hereto may execute this Amendment by signing any such
counterpart.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be legally
bound, have caused this Amendment to be executed by their respective officers
thereunto duly authorized, as of the date first above written.
TEARDROP GOLF COMPANY (successor by
merger to Tommy Armour Golf Company and Ram
Golf Corporation)
By: /s/ Rudy Slucker
----------------
Name: Rudy Slucker
Title: President and CEO
TOMMY ARMOUR GOLF COMPANY, formerly
known as TEARDROP ACQUISITION CORP.
By: /s/ Rudy Slucker
----------------
Name: Rudy Slucker
Title: President and CEO
FIRST UNION NATIONAL BANK (successor by
merger to CORESTATES BANK, N.A.)
By: /s/ Ronald L. Bacon
---------------------------------
Name: Ronald L. Bacon
Title: Senior Vice President
[Signature page to Sixth Amendment to Loan and Security Agreement]
4
Exhibit 10.39
November 10, 1999
VIA FACSIMILE AND FEDERAL EXPRESS
TearDrop Golf Company
Tommy Armour Golf Company
(formerly known as
TearDrop Acquisition Corp.)
1080 Lousons Road
Union, New Jersey 07083
Attention: Mr. Rudy Slucker
Dear Mr. Slucker:
Reference is made to the Forbearance and Overadvance Agreement dated
July 20, 1999 between TearDrop Golf Company and its affiliates and First Union
National Bank , as amended by those certain letter agreements dated August 30,
1999 and October 4, 1999 (as amended, the "Agreement"). Capitalized terms used
in this letter shall have the same meaning as in the Agreement or the Loan
Agreement, as applicable.
Borrowers have represented to Lender that (i) Borrowers are actively
pursuing a refinancing of the Liabilities, and (ii) Borrowers are not aware of
any fact or circumstance that is likely to preclude the refinancing ("Textron
Refinancing") described in that certain letter dated August 17, 1999 from
Textron to Borrowers ("Textron Commitment").
Subject to the conditions set forth herein, Lender agrees to amend
the Agreement as follows: the November 10, 1999 date set forth in the first
sentence of Section 3 of the Agreement shall be changed to December 10, 1999.
Borrowers represent and warrant to Lender that (i) Borrowers are
presently indebted to Rudy A. Slucker for a loan in the principal amount of
$500,000 ("Slucker Loan"), which loan is identified on Schedule 5.16 of the
Agreement, and (ii) Borrowers do not owe any other indebtedness to Mr. Slucker.
Borrowers agree (i) that Borrowers shall not make any payments on, or transfers
of any property or interests in property on account of, the Slucker Loan until
all of the Liabilities have been repaid in full, and (ii) a Forbearance Default
shall be deemed to have occurred on November 17, 1999 unless by that date the
Lender and Rudy A. Slucker shall have entered into a subordination agreement
with respect to the Slucker Loan for the benefit of Lender, which subordination
agreement shall be in form and substance acceptable to Lender in Lender's sole
discretion.
Borrowers acknowledge that certain categories of Inventory do not
constitute Qualified Inventory because the Inventory (i) is not in Borrowers'
possession at a location specified on Exhibit 3.5 to the Agreement, or (ii) is
located at a location not owned by Borrowers and Lender has not received a
landlord's waiver or warehouseman's waiver with respect to such location.
Borrowers agree to cooperate
<PAGE>
TearDrop Golf Company
Tommy Armour Golf Company
(formerly known as
TearDrop Acquisition Corp.)
November 10, 1999
Page 2
with Lenders to promptly take any steps requested by Lender pursuant to Section
3.18 of the Loan Agreement to assure that Lender has a valid and enforceable
security interest in such Inventory by no later than November 20, 1999. Lender
has reserved the right to remove any Inventory that is not Qualified Inventory
from the Borrowing Base at any time.
Borrowers acknowledge that from and after the date hereof, Lender
shall have no obligation to provide Borrowers with any Additional Overadvances.
In consideration of the extension of the Forbearance Period provided
for herein, Borrowers expressly ratify and reaffirm, effective as of the date of
Borrowers' execution of this letter, the release of Lender that is contained in
Section 7 of the Agreement.
On or before November 30, 1999, Borrowers shall provide Lender with
a written report on the status of the Textron Commitment and Borrowers' efforts
to close a loan transaction with respect thereto or with respect to any
alternative arrangement for financing and/or an infusion of equity that the
Borrowers are pursuing or contemplating.
Lender's willingness to extend the Forbearance Period through
December 10, 1999 as set forth above is conditioned upon Borrowers having
executed and returned a copy of this letter to Congress to confirm Borrowers'
agreement: (i) with all terms and conditions set forth in this letter, (ii)
Borrowers' agreement to immediately advise Congress upon Borrowers becoming
aware of any fact or circumstance that would preclude or would be reasonably
likely to reduce the likelihood of the Textron Refinancing occurring, (iii) to
provide Congress with copies of any amendments or modifications to the Textron
Commitment promptly upon Borrowers' receipt thereof, (iv) to provide Congress by
November 20, 1999 with copies of Borrowers' financial statements for the period
ended October 31, 1999, and (v) to provide Congress with copies of any public
filings promptly upon their having been filed by Borrowers; without limiting
clause (v), Borrowers have agreed to provide Congress by November 16, 1999 with
a copy of their Form 10-Q for the quarter most recently ended. The effectiveness
of this Amendment is further conditioned upon the Borrowers having executed and
delivered to Congress that certain Sixth Amendment to Loan and Security
Agreement of even date herewith.
If the Borrowers agree with the foregoing, please sign a copy of
this letter in the space below and return it to the undersigned at your earliest
convenience. If this letter has not been so accepted by Borrowers within one
Business Day of the date of this letter, Lender's agreement to extend the
Forbearance Period as provided herein shall terminate without further notice.
<PAGE>
TearDrop Golf Company
Tommy Armour Golf Company
(formerly known as
TearDrop Acquisition Corp.)
November 10, 1999
Page 3
Thank you for your prompt attention to this.
Sincerely,
CONGRESS FINANCIAL CORPORATION
(CENTRAL), as Servicing Agent to
FIRST UNION NATIONAL BANK
By: /s/ Thomas C. Lannon
----------------------------
Its: Vice President
ACCEPTED AND AGREED this 10 day of November, 1999
on behalf of each of the Borrowers identified above
By: /s/ Rudy Slucker
Their: CEO
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