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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number: 0-29014
TEARDROP GOLF COMPANY
(Name of Small Business Issuer in its Charter)
Delaware 57-1056600
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(State or Other Jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1080 Lousons Road Union, New Jersey 07083
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 688-4445
Securities registered pursuant to Section 12(b) of
the Exchange Act of 1934:
Title of Class Name of each exchange on which registered:
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days: Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in a definitive proxy or
information statement incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
The Registrant's revenues for its most recent fiscal year were $59,769,000
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. (The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock as of a specified date within 60 days prior to the date of filing.)
$7,406,888 as of March 27, 2000
Number of shares of common stock outstanding as of March 27, 2000: 5,262,565
Transitional Small Business Disclosure Format: Yes |_| No |X|
PORTIONS OF THE FOLLOWING DOCUMENTS HAVE BEEN INCORPORATED BY REFERENCE INTO
THIS ANNUAL REPORT ON FORM 10-KSB: Portions of the Proxy Statement for the
Registrant's 2000 Annual Meeting of Stockholders to be filed prior to April 29,
2000 are incorporated by reference in Part III
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PART I
Item 1. Description of Business.
General
We (the "Company" or "TearDrop") design, develop and market throughout the
world high-quality, premium price golf clubs including (a) the TearDrop putters
with Roll-Face(TM) Technology; (b) the Tommy Armour ("Tommy Armour" or "Armour")
845 irons and woods; (c) the Ram ("Ram" or "RAM") line of irons, woods, and
wedges; and (d) the Zebra putters with Roll-Face(TM) Technology. The TearDrop,
Tommy Armour and Ram products are used by professional golfers on the
Professional Golf Association ("PGA") Tour, the Senior PGA Tour, the Ladies PGA
Tour and the BUY.COM Tour (formerly the Nike Tour). We also hold the exclusive
North America distribution rights to Walter Genuin golf shoes, an upscale
high-quality Italian-made golf shoe. In addition, we operate the TearDrop Tour,
a developmental golf tour for aspiring PGA Tour players.
We have enlisted over 30 golf professionals, including 13 players on the
PGA tour, to promotional agreements including Fred Couples, Steve Jones, Tommy
Tolles, Omar Uresti, Paul Goydos and Joey Sindelar.
Products
TearDrop Products
The TearDrop putter was first introduced in 1993 and has been redesigned
since then. Today, TearDrop putters are designed, manufactured and marketed
featuring ROLL-FACE(TM) Technology. We believe that the precision radius that is
applied to the face results in a consistent impact zone just below the equator
of the ball, producing a truer roll, regardless of the player's hand position.
TD Milled Putters
We currently manufacture and market, as our premium line of putters, the
TD Milled line. This series consists of twenty four different models, all of
which feature ROLL-FACE(TM) Technology. The TD Milled putters are all 100%
precision milled from cold-rolled steel, and are designed to deliver the highest
level of feel and performance.
TD Zebra Putters
We currently manufacture and market, as our mallet line of putters, the TD
Zebra line. This series consists of six different models, all of which feature
ROLL-FACE(TM) Technology. The TD Zebra putters are modeled after the original
"Zebra Classic," which was a popular putter. The redesign incorporates the
feature of the classic stripes of the Zebra putter into a unique 3-D cavity
design.
Armour Products
Armour golf clubs are designed, manufactured and marketed to be the
highest quality equipment available to the serious golfer, combining traditional
design with modern technology.
845s(R) Irons Introduction
The 845s model was first introduced in 1987 with the 845s Silver Scot
irons. The Silver Scot irons have become an established brand of irons in the
modern golf industry.
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In 1999, we continued to develop the 845s brand with the introduction of
two new Tommy Armour irons - the 845 evo(TM) v-25 and 845 evo v-31 irons. These
two new introductions complement Armour's other products - 845s Oversize, 845s
Reduced Offset Oversize, 845s Titanium and 845s Women's Titanium.
Evolving (evo) Cavity(TM) Technology
The Tommy Armour 845 evo irons were designed to be a replacement for the
845s Silver Scot irons. The Tommy Armour evolving cavity technology provides a
variable combination of stability, control and workability within the set
depending on the desired performance of each iron.
845 evo v-25
The 845 v-25 traditional blade profile irons are forged from cold-rolled
steel. The v-25 irons, unlike other forgings, utilize a near net, triple forging
process, which involves a final coining operation for added molecular
compaction, and is intended to provide a more consistent feeling iron. The v-25
has been designed using a constant moment of inertia, allowing increased
workability in the short irons with added stability and control in the long
irons.
845 evo v-31
The 845 v-31 traditional blade profile irons are cast from stainless
steel. The profile remains the same as the forged v-25 irons, however, more
perimeter weighting is featured in the v-31 because of a lower center step in
the cavity. The cavity pushes weight to perimeter pads in order to provide more
stability (higher overall constant moment of inertia). The v-31 irons feature
progressive offset because it is believed that more offset in the long irons
promotes a higher ball trajectory. Reduced offset in the short irons provides a
traditional appearance and improved shot workability. Tommy Armour 845 evo v-31
irons also feature the new True Temper(R) Tri-Gold(TM) shaft technology.
Tri-Gold shafts ascend in weight. Lighter-weight long iron shafts are intended
to help generate more clubhead speed for increased distance and power. Heavier
weighted short iron shafts are intended to provide superior stability, feel and
control.
845s Silver Scot
During 1999, Armour continued to offer the original 845s Silver Scot. We
believe that the clean, traditional and simple shape of the Silver Scot iron is
attractive to players. The 845s are cavity balanced, in which the center of
gravity is located in the middle of each clubface throughout the set. With both
perimeter weighting and progressive offset, the 845s Silver Scot is believed to
create increased stability.
845s Oversize
The 845s Oversize product line features the original 845s classic shape
combined with oversize technology for irons. Oversize technology is designed to
offer golfers an enlarged sweetspot and improved clubhead stability on
off-center hits. The 845s Oversize maintains the traditional blade shaping and
lines inspired by the original 845s Silver Scot. Along with cavity balancing and
perimeter weighting, the 845s Oversize irons are designed to help golfers
realize increased forgiveness and stability on their golf shots.
845s Oversize Reduced Offset
The 845s Oversize Reduced Offset provides all of the features of the 845s
Oversize iron, but with less offset. The Reduced Offset iron offers a more
traditional appearance in the playing position and improved shot workability for
better golfers.
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845s Titanium Face
To capitalize on the superior benefits of titanium, Armour has developed
the 845s Titanium Face Insert irons, an oversized stainless steel clubhead with
a titanium face insert. Armour's 845s Titanium Face irons have a complete
stainless steel body and a titanium insert in the face. The 845s Titanium is
designed to take advantage of the lightweight properties of titanium in the face
insert, coupled with the denser stainless steel in the perimeter of the iron so
that forgiveness and stability of the club may be increased. Other titanium face
insert irons have only a stainless steel frame with a titanium insert. This may
create a negative vibration and an imprecise insert fit. In addition, the 845s
Titanium Face Insert is only as long as the scorelines of the club, enabling
denser stainless steel in the perimeter of the iron intended to provide
forgiveness.
845s Women's Titanium
The 845s Women's Titanium irons have been specially designed to fit the
physiology and swing characteristics of women golfers, incorporating, among
other attributes, forgiveness, lighter weight and increased playability. The
contoured sole has been cut away for easier shots from the rough. The irons are
cavity balanced to provide a large and consistent sweetspot located in the
center of each iron. The titanium face allows maximum perimeter weighting,
increasing forgiveness and distance on off-center toe and heel shots.
845s Junior Set
To appeal to the growing junior market, Armour offers an 845s Junior Set.
Targeted to the 10-14 year old age group, the set features four irons, a putter
and a driver. The package includes a nylon carry bag and a fur headcover.
845s Titanium Face Woods
To complement the 845s iron sets, Armour offers the 845s Titanium Face
Woods. The oversize wood has been designed with a lighter weight titanium face
insert to accentuate perimeter weighting and stability. The 845s woods are
available in a driver, 3-wood, 5-wood and 7-wood with G Force(R) 3.3 Tour Series
graphite shafts.
845s Women's Titanium Face Woods
The 845s Women's Titanium Face woods have been designed especially for
women, featuring a stainless steel body with a titanium insert for lighter
overall weight and increased forgiveness. The progressive offset is designed to
increase loft in the shot and is intended to cure slicing tendencies. The unique
low-profile design and rail technology positions the center of gravity low,
appropriate for playability from any lie or turf conditions. Women's 845s woods
are available in driver, 3-wood, 5-wood, 7-wood and 9-wood.
RAM Products
RAM manufactures and markets a complete line of high end, quality golf
clubs, including irons, wedges and woods. In addition, it markets a line of golf
accessories including golf bags, golf gloves, golf towels, headcovers and caps.
Tour Grind Irons
The Tour Grind, TG-898's are precision forged in the U.S.A. from carbon
steel designed to produce superior feel, feedback and consistency. The clubs
feature muscle-back blades, thin top-line, minimal offset and square groove
scoring. Tour Grind irons are available in frequency matched Rifle(R) steel
shafts by FM Precision Golf to provide consistent feel from club to club. The
Golf Pride(R) Tour Velvet buffed grip is standard on all Tour Grind irons.
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FX Oversize Irons
FX Oversize irons provide 20% more hitting surface than standard size
irons. The larger sweetspot, precision-balanced head and full cavity-surround
weighting are intended to make these irons extremely forgiving. FX irons come
equipped with either steel or graphite TempoWeight (TM) shafts and Lamkin(R) RAM
Wrap(TM) buffed grips.
Accubar Irons
With a history dating back to 1975, Ram launched a completely redesigned
set of Accubar irons in the fall of 1999. The irons feature a Power Bar that has
been strategically positioned across the back cavity intended to enhance feel
and performance. Accubar irons are offered with AccuFlex(TM) Tour graphite and
steel shafts in a wide array of flexes. The Lamkin(R) Perma-Wrap(R) grip
provides both better grip and durability on all Accubar irons. The Accubar irons
are available only through geographically exclusive retailers.
Tour Grind Wedges
RAM's Tour Grind wedges are precision forged in the U.S.A. from 1030
carbon steel. Tour Grind wedges are available in a broad range of lofts
(50(Degree) to 64(Degree)) to accommodate different turf conditions and playing
styles. Classic profiles and chrome plating ensure that these wedges look as
good as they feel. Tour Grind wedges are available in frequency matched Rifle(R)
steel shafts by FM Precision Golf. The Golf Pride(R) Tour Velvet(R) buffed grip
is standard on all Tour Grind wedges.
FX Wedges
The RAM FX Stainless Steel wedges are designed to combine traditional
profiles with exceptional performance. FX wedges are available in 50(Degree),
55(Degree), 60(Degree) and 64(Degree) lofts. All FX wedges come standard with
the stepless FX Scoring Series steel shaft and RAM X-Grip(R).
FX Oversize Woods
The FX Oversize Stainless Steel woods provide 25% more hitting surface
than previous generation Stainless Steel woods. The larger sweetspot and
forgiveness-enhancing weight distribution are designed to maximize accuracy and
distance. FX woods come equipped with graphite TempoWeight (TM) shafts from
UST(R) and Lamkin RAM Wrap buffed grips.
CONCEPT Woods
The CONCEPT Low Profile woods feature a shallow-face and low center of
gravity, which are designed to allow the average golfer to hit higher
trajectory, softer landing shots with increased accuracy. The club's four-way
cambered sole facilitates play from almost any lie. CONCEPT woods are available
in 13(Degree), 15(Degree), 18(Degree) and 23(Degree) lofts. RAM X-Grips and
exclusive TempoWeight graphite shafts are standard on all CONCEPT woods.
Accubar Woods
The Accubar woods feature a Power Bar sole that accounts for 20% of the
clubhead weight. All drivers incorporate a deep face intended to increase
forgiveness off the tee. The fairway woods are low profile, which is intended to
facilitate playing high-trajectory, soft landing shots off of nearly any lie.
Accubar woods are offered with AccuFlex(TM) Tour graphite shafts in a wide array
of flexes. The Lamkin Perma-Wrap(R) grip provides both better grip and
durability on all Accubar woods. The Accubar woods are available only through
geographically exclusive retailers.
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Walter Genuin Shoes
In August 1998, we acquired the exclusive distribution rights to Walter
Genuin Golf Shoes ("Genuin") for the United States and Canada. Genuin
manufactures over 95 different men and ladies' models, which are available in a
wide range of styles, colors and materials, for both playing golf and casual
wear.
Genuin shoes are all handcrafted in Italy by master shoemakers utilizing
some of the finest materials available. In addition to traditional
craftsmanship, Genuin also strives to add technological edges. For example,
Genuin uses waterproof Gore-Tex(R) lining in certain models of its golf shoes.
The retail prices for Genuin shoes range from $290 to $1,830 per pair, and
Genuin shoes are typically sold in upscale establishments.
TearDrop Professional Golf Tour
The TearDrop Tour's mission is to provide aspiring PGA Tour players with
an opportunity to prepare their game for the highest levels of competition. The
TearDrop Tour conducts approximately 34 golf events over each twelve-month
period, primarily in the Southeast and Midwest regions of the United States
under the name of The TearDrop Professional Golf Tour. Nearly 1,000 professional
golfers are expected to compete on tour during the 2000 season for prize money
up to $3.0 million. The TearDrop Tour conducts pro-ams for individual companies,
including American Airlines and Robb Report, in conjunction with the
professional events. Tournaments are held mid-week, in three-day and four-day
formats.
The TearDrop Tour also serves to introduce TearDrop, Armour, and Ram
products to current and future professional golfers. While some TearDrop Tour
players graduate to the BUY.COM Tour and PGA Tour, others return to their home
course pro-shops as golf professionals where they may have influence over
inventory purchases and club members who are considering golf equipment
purchases.
We have once again teamed with The Golf Channel to air our second season
of the TearDrop Tour show, a half-hour show dedicated to highlights, players,
courses and other interesting stories from The TearDrop Tour. The show is called
"TearDrop Tour 2000." The bi-weekly show airs every other Tuesday and six other
times throughout the following two weeks. Other media venues for the TearDrop
Tour include national television and print, such as CNN, ESPN, HTS, SunShine
Network, USA Today and Golfweek Magazine.
Sales and Marketing
Advertising and Promotion. During 2000, we will continue our marketing
efforts with The Golf Channel. We anticipate that our equipment lines, including
Tommy Armour, and TearDrop and Zebra putters, will have significant advertising
time on The Golf Channel programming. The "TearDrop Putt of the Week," a regular
feature during "Golf Central," will continue to air throughout the year. We will
also launch a print campaign in golf magazines such as Golf Magazine, Golf
Digest, Golf World, Golfweek and Golf Tips. Although we have reduced our print
advertising during the early part of 2000, we anticipate that we will continue
to devote substantial capital to advertising and marketing during the next year.
The TearDrop Tour is in its second year of a two-year agreement with The
Golf Channel to produce "TearDrop Tour 2000." The 30-minute feature show will
air over 300 times per year on The Golf Channel. In addition, The Golf Channel
has agreed to air the TearDrop Tour's four major events live or on tape delay.
In addition, we promote our products through the endorsements by touring
professionals, such as Fred Couples, Steve Jones, and Tommy Tolles. For 2000,
endorsement agreements will require payment of a minimum of $3.2 million. In
addition, we sponsor optional "player pools" to which we have agreed to pay up
to $2.1 million in 2000.
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Nationwide Distribution Network. We market our products through our own
sales representatives to on-course golf pro shops, off-course specialty golf
shops and upscale sporting goods stores. We employ approximately 40
representatives in our domestic sales division who are responsible for all
TearDrop Golf Company brands, including Tommy Armour, Ram, TearDrop and Zebra
and Walter Genuin shoes.
We have operations and sales representatives in Canada and we also utilize
independent distributors in other countries in which golf is popular. Sales of
products to international customers accounted for approximately 13% of our total
sales on a combined basis during 1999 as compared to 10% in 1998.
Our domestic sales division focuses on building and managing strong
relationships with key customers, as well as managing the field marketing effort
and account merchandizing of our products within the local territory.
Endorsements. We believe that the endorsement of our products by touring
professional golfers is an important feature of our overall marketing effort. A
group of touring professionals including Fred Couples, a former Masters
Champion, Steve Jones, a former United States Open Champion, Tommy Tolles, Chip
Beck, Omar Uresti, Tom Byrum, Joey Sindelar, Jim Gallagher, Paul Goydos and
other professionals currently use or endorse our products. The agreements with
the professionals who endorse our products generally are for one to three year
terms and provide for certain payments by us to the touring professionals in
consideration for their using our products. In addition, these agreements
generally provide for bonuses to the touring professionals based on the
professional's performance in certain tournaments. We have also granted options
to purchase shares of Common Stock of TearDrop Golf Company and may grant
additional options in lieu of or in addition to such performance bonuses.
Certain of these options can be exchanged for $50,000 on December 31, 2000. Our
obligation under endorsement agreements in place as of March 15, 2000 provides
for the payment of approximately $3.2 million through December 31, 2000. We have
also instituted a "Player Pool" program, under which we will provide rewards on
a weekly basis to professional players who participate in tournaments using our
products. We have agreed to pay up to $2.1 million in connection with this
"Player Pool" program in 2000.
Product Warranties. We support our golf clubs with a lifetime quality
guaranty, entitling the purchaser to return the clubs for repair or replacement.
We have not experienced a material level of product warranty claims.
Manufacturing and Assembly
We assemble all of our products at our 95,000 square foot office,
manufacturing and warehouse facility in Morton Grove, Illinois. Clubheads are
cast, forged or milled by outside suppliers utilizing, in some cases,
Company-owned tooling and are inspected on-site by our representatives.
Production personnel receive and review incoming components, such as steel
shafts, graphite shafts and grips, most of which are supplied according to our
own proprietary specifications. All operations, including assembly, painting,
stenciling and the application of trade dress, are completed at our Morton Grove
facility, which include finishing and warehousing facilities from which finished
product is shipped. We perform numerous visual and machine inspections at
various points along the assembly process, which are intended to detect any
non-conforming clubs or subassemblies.
We rely on a limited number of suppliers for materials and clubheads. Our
putter clubhead manufacturers are located in the United States. Our iron and
wood head manufacturers are located in the Far East. While management believes
that alternative sources of supply either exist or could be developed, in the
event that we should lose our present sources of supply for these materials and
components, or experience delays in receiving delivery from such sources, we
would sustain at least temporary shortages of materials and components, which
could have a material adverse effect on our operating results.
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New Club Development
Our product development effort is directed by individuals consisting of a
cross-functional selection of marketing, sales, tour and operations. Input is
also obtained from vendors, PGA tour players, and larger key accounts at
strategic times to review possible product introductions. The product
development approach focuses on developing new designs, new technologies, and
new methods of manufacturing. The new product development team strives to
achieve the highest consumer values for our products by optimizing performance
and providing uniqueness through extensive engineering.
Competition
We compete primarily in the premium-priced segment of the golf club
manufacturing industry. The market for premium-priced golf clubs is highly
competitive and a number of established companies compete in this market, many
of which have substantially greater financial and other resources than we do.
Our competitors are well-known and recognizable names in the marketplace
including Callaway, Ping, Taylor Made, Titleist, Cobra, Mizuno, Cleveland and
others. Several of these competitors, including Callaway and Fortune Brands,
which owns Cobra, Foot-Joy and Titleist, have substantially greater financial
and other resources than we do and have substantially greater market share. We
also compete with numerous smaller, specialized companies that may compete
effectively on a regional basis.
The golf club industry is generally characterized by rapid and widespread
imitation of popular golf club designs pioneered by new or existing companies.
Occasionally, new market entrants may develop innovative club designs, which
meet with acceptance from golf club purchasers, leading to unanticipated changes
in consumer preferences. Many purchasers of premium-priced, game-improvement
clubs desire golf clubs that feature the latest technological innovations and
cosmetic designs. Their purchasing decisions are often the result of highly
subjective preferences, which can be influenced by many factors, including,
among others, advertising, media and product endorsement. We face competition on
the basis of price, reputation and qualitative distinctions among available
products. In addition, there are several manufacturers that do not currently
compete with us that could pose significant competition if they were to enter
the market of premium-priced high quality clubs.
Regulatory Matters
The design of new golf clubs is greatly influenced by rules and
interpretations of the United States Golf Association ("USGA"). Although the
golf equipment standards established by the USGA generally apply only to
competitive events sanctioned by that organization, it has become critical for
designers of new clubs to assure compliance with USGA standards. To the extent
that our clubs are ruled ineligible by the USGA standards, professional golfers,
including our paid touring professional golfers, will be unable to use the clubs
and even non-professional golfers will likely be unwilling to purchase them. We
believe that our golf clubs all comply with USGA standards. No assurance can be
given that any new products will receive USGA approval or that existing USGA
standards will not be altered in ways that adversely affect the sales of our
products.
Our facilities are subject to numerous federal, state and local laws and
regulations designed to protect the environment from waste emissions and
hazardous substances. We are also subject to the Federal Occupational Safety and
Health Act and other laws and regulations affecting the safety and health of
employees in the production areas of our facilities. We believe we are in
compliance in all material respects with all applicable environmental and
occupational safety regulations.
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Employees
At December 31, 1999, we had approximately 240 full-time employees engaged
in manufacturing and assembly, sales support and in management and
administration.
Proprietary Rights
We rely on a combination of patents, trademark and trade secret protection
to establish and protect the proprietary rights we have in our products. We own
a variety of trademarks protecting our rights to the TearDrop, Tommy Armour, Ram
and Zebra names and marks. No assurances can be given that any of such
proprietary rights will protect us from competitive practices of others.
Risk Factors
An investment in shares of Common Stock involves a high degree of risk and
should not be made by persons who cannot afford the loss of their entire
investment. Prospective investors and stockholders, prior to making an
investment decision, should consider carefully, in addition to the other
information contained in this Report on Form 10-KSB and the documents and
filings included in or incorporated by reference into this Report (including the
financial statements and notes thereto), the following factors. This Report
contains, in addition to historical information, forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially.
Factors that could cause or contribute to such differences include but are not
limited to, those discussed below, as well as those discussed elsewhere in this
Report.
Limited Operating History; History of Losses; Accumulated Deficit.
Although the businesses of Tommy Armour and Ram have established names and
reputations, we have a relatively short operating history. We commenced
operations in August 1992, shipped our first products in 1993 and commenced
substantial sales activities in 1994. We only acquired the Armour and Ram
businesses at the end of 1997. Although we had net sales of approximately $59.8
million during the year ended December 31, 1999, we had losses of approximately
$4.5 million. We have incurred losses in each year of our existence. At December
31, 1999, we had an accumulated deficit of approximately $22.0 million. No
assurance can be given that we will not continue to incur losses in the future.
See Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Working Capital Shortfalls; Need for Additional Capital. Since our
inception, our internally generated cash flow has not been sufficient to finance
our operations. We have experienced severe working capital shortfalls in the
past, which have restricted our ability to conduct our business. We have been
primarily dependent upon bank debt and sales of our equity securities and other
financings in order to maintain our operations. In January 2000, we refinanced
our long-term debt by obtaining a $28 million credit facility from Congress
Financial Corporation ("Congress"), due in January 2002. The $28 million credit
facility includes term loans totaling $6.675 million. Our expenditures and
commitments for advertising and marketing have been and continue to be
substantial and we must continue to incur such costs in order to continue to
increase consumer awareness of our products. If our sales do not increase
substantially to cover our expenditures, we will be required to limit our
advertising expenditures and expansion plans or 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 required by us. See Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Substantial Indebtedness and Repayment Obligations, Subordination. We have
borrowed substantial amounts of money to finance the acquisitions of Tommy
Armour and Ram and to fund our continuing operations. We had total liabilities
of approximately $31.2 million at December 31, 1999, of which $15.5
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million is classified as current. At December 31, 1999, approximately $17.1
million was payable to First Union National Bank, successor by merger to
CoreStates Bank, N.A. ("First Union" or the "Bank") pursuant to our revolving
line of credit which terminated on November 10, 1999, and was extended until
January 2000 when the debt was refinanced with Congress Financial Corporation
("Congress"). Interest expense under our Credit Facility could continue to be
substantial in the future. The line of credit with Congress is secured by
substantially all of our assets and our facility in Morton Grove, Illinois. The
Loan Agreement with Congress also contains provisions that restrict certain of
our activities, including the sale of assets and the declaration of dividends.
The Loan Agreement also provides for various other restrictive covenants,
including the continuing participation of Rudy A. Slucker, the Chairman of the
Board of Directors, in his current management position. See Financial Statements
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence on Key Personnel; Limited Industry Experience. We believe our
success will depend to a significant extent on the efforts and abilities of
certain of our senior management, particularly those of our President, Chief
Executive Officer and Chairman of the Board, Rudy A. Slucker. We maintain "key
person" life insurance in the amount of $1,000,000 on the life of Mr. Slucker,
under which TearDrop Golf Company is the sole beneficiary. Although we have
entered into an employment agreement with Mr. Slucker, which expires on June 24,
2002, the loss of Mr. Slucker or other key management, marketing or technical
employees could have a material adverse effect on our operating results and
financial condition. Management has only a limited history in the golf club
industry. There is strong competition for qualified personnel in the golf club
industry, and the loss of key personnel or an inability on our part to attract,
retain and motivate key personnel could adversely affect our business, operating
results and financial condition. There can be no assurance that we will be able
to retain our existing key personnel or attract additional qualified personnel.
Dependence upon Endorsements. As an integral part of our marketing
strategy, we seek to obtain endorsements of our clubs from touring
professionals. Typically, our agreements with our endorsing professionals
provide for 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.
The effect of a particular professional's endorsement on the successful
marketing of our clubs, and the heightening of awareness of our brand name, is
directly related to the success of such professional in tournament play.
However, the amount of remuneration required to be paid or provided by us under
a typical endorsement agreement is not substantially dependent on the tournament
success of such professional. Accordingly, if our endorsing professionals do not
have substantial tour victories, we will likely receive less exposure, yet would
still be required to pay endorsement fees. We have entered into endorsement
agreements with over 20 touring professionals that generally are for one to
three year terms and provide for certain payments by us to the touring
professionals in consideration for their using our equipment and bonuses based
on tournament performance. Our obligation under endorsement agreements in place
at March 15, 2000 provides for the payment of a minimum of approximately $3.2
million and up to an additional $2.1 million through December 31, 2000. In order
to succeed with our marketing strategy, we intend to continue to enter into
endorsement agreements with additional professional golfers. An inability to
maintain our relationships with our existing endorsing professionals, to enter
into endorsement agreements with additional professional golfers, or the failure
of our endorsing professionals to achieve tournament success, would diminish the
effectiveness of our marketing strategy and may result in declining sales.
Risks Associated with Management of Growth, Implementation of Growth
Strategy and Potential Inability To Successfully Integrate Acquisitions. The
successful implementation of our expansion strategy will be dependent on, among
other things, consumer acceptance of our new lines of golf products; the
reduction of our costs; our ability to develop and introduce new products to
consumers and the marketplace; our ability to enter into endorsement agreements
with successful professional golfers; our ability to identify potential
acquisition prospects; the establishment of additional distribution
arrangements; the hiring and retaining of additional marketing, creative and
other personnel; and the successful management of such growth (including
monitoring operations, controlling costs and maintaining effective quality,
inventory and service controls). As we continue to grow, there will be
additional demands on our financial, technical and administrative resources. The
failure to maintain and improve such resources or the occurrence of unexpected
difficulties relating to our
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expansion strategy could have a material adverse effect on our business,
prospects, results of operations or financial condition. There can be no
assurance that we will be able to implement successfully our business strategy
or otherwise expand our operations. The complete integration and consolidation
into TearDrop Golf Company of the product lines acquired upon future corporate
acquisitions and new product licensing arrangements will require substantial
management, financial and other resources, and could pose significant pressure
on our financial condition and operating results. There can be no assurance that
our resources will be sufficient to accomplish such integration, or that we will
not experience difficulties with customers, personnel or others. In addition,
although we believe that our acquisition and licensing arrangements will enhance
our competitive position and business prospects, there can be no assurance that
such benefits will be realized or that the combination of other companies with
us will be successful. Although we regularly evaluate possible acquisition
opportunities, we are not a party to any agreements, commitments, arrangements
or understanding with respect to any such acquisition and there can be no
assurance that any such acquisitions will be effected.
Dependence on Major Customers. Sales to our five largest customers
represented approximately 35% of our sales in fiscal 1999. Sales to our top
customer, Sam's Clubs, accounted for approximately 22% of our sales in fiscal
1999. We expect that sales to Sam's Club will decline during 2000, although we
anticipate that sales to our top five customers will continue to account for a
significant percentage of our sales. We have no long-term commitments or
contracts with any of our customers. The loss or decreased sales from one or
more of these customers would have a material adverse effect on our business,
prospects, results of operations and financial condition. Furthermore, the
inability of any of our customers to satisfy any of their obligations to us at
any time or on a timely basis could have a material adverse effect on our
business, prospects, results of operations or financial condition.
Dependence on Limited Number of Component Suppliers. We assemble all of
our clubs at our Morton Grove, Illinois facility. We do not manufacture the
components required to assemble our golf clubs. We rely on a limited number of
suppliers for club heads, shafts and grips. We do not have written supply
agreements with any of our current suppliers. Therefore, our success will be
dependent on maintaining our relationships with existing suppliers and
developing relationships with new suppliers. Any significant delay or disruption
in the supply of components from our suppliers or any diminution of quality
resulting from such supplier's insufficient controls or inadequate component
testing, would have a material adverse effect on our business, operating results
and financial condition. Further, given the highly seasonal nature of the golf
equipment industry, such adverse effect would be exacerbated should any supply
delay or quality problem occur immediately prior to or during any six-month
period ending June 30 (the period during which sales of golf equipment generally
are expected to be the highest). See Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Consumer Preferences and Industry Trends. The golf industry is
characterized by the frequent introduction of new products and services, and is
subject to changing consumer preferences and industry trends, which may
adversely affect our ability to plan for future design, development and
marketing of our products and services. Our success will depend on our ability
to anticipate and respond to these and other factors affecting the industry.
Moreover, if a downturn occurs in the economy, the leisure industry, including
the golf industry, may be particularly vulnerable. There can be no assurance
that we will be able to anticipate and respond quickly and effectively to
changing consumer preferences and industry trends or that competitors will not
develop and commercialize new products that render our products and services
obsolete or less marketable.
International Sales; Reliance on Limited Number of Foreign Distributors.
During the year ended December 31, 1999 sales to international customers
accounted for approximately 13% of our net sales. We have a sales office in
Canada from which sales in that country are conducted. We also engage foreign
distributors to market and sell our products in other countries. Although we
work closely with our foreign distributors, we cannot directly control such
distributors' sales and marketing activities and, accordingly, cannot manage our
product sales in these foreign markets in which such distributors operate. Our
foreign distributors may also distribute, either on behalf of themselves or
other golf club manufacturers, other product lines, including product lines that
may be competitive with ours. There can be no assurance that these distributors
will effectively
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manage the sale of our products worldwide or that their marketing efforts will
prove effective. Additionally, our international sales may be disrupted or
adversely affected by events beyond our control, including currency fluctuations
and political or regulatory changes.
New Products; USGA Regulation. We believe that the introduction of
innovative technologies and club designs will be crucial to our future success.
New models and basic design changes are frequently introduced into the golf club
market but are often met with consumer rejection. Although we have achieved
certain successes in the introduction of our golf putters and irons, no
assurance can be given that we will be able to continue to design and
manufacture golf clubs that meet with market acceptance. In addition, prior
successful designs may be rendered obsolete within a relatively short period of
time as new products are introduced into the market. There can be no assurance
that we will be able to continue to design innovative products that can achieve
market acceptance.
The design of new golf clubs is also greatly influenced by rules and
interpretations of the USGA. Although the golf equipment standards established
by the USGA generally apply only to competitive events sanctioned by that
organization, it has become critical for designers of new clubs to assure
compliance with USGA standards. To the extent that our clubs are ruled
ineligible under USGA standards, even non-professional golfers will likely be
unwilling to purchase them. No assurance can be given that any new products will
receive USGA approval or that existing USGA standards will not be revised in
ways that adversely affect the sales of our products.
Seasonal Business; Quarterly Fluctuations. Golf is primarily a warm
weather sport. The purchasing decisions of most customers are typically made in
the fall 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. See Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Susceptibility to General Economic Conditions. Sales of golf equipment
have historically been dependent on discretionary consumer spending. As a
result, our revenues will be subject to fluctuations based upon general economic
conditions in the United States and in the foreign countries where we sell our
products. If there is a general economic downturn or recession in the United
States or in foreign countries in which we market our clubs, general consumer
spending on golf equipment could be expected to decline, which would have a
material adverse effect on our business, operating results and financial
condition.
Uncertainty of Proprietary Rights; Expense of Intellectual Property
Litigation. We rely on a combination of patents, trademarks and trade secret
protection to establish and protect the proprietary rights we have in our
products. The ability of our competitors to acquire technologies or other
proprietary rights equivalent or superior to ours or our inability to enforce
our proprietary rights would have a material adverse effect on our operating
results and financial condition. There can be no assurance that our competitors
will not independently develop or acquire patented or other proprietary
technologies that are substantially equivalent or superior to ours. There also
can be no assurance that the measures we adopted to protect our proprietary
rights will be adequate to do so or that our products do not infringe on third
party intellectual property rights, including patents. Intellectual property
matters are frequently litigated on allegations that third-party proprietary
rights have been infringed. We may have to defend against such lawsuits, which
could be expensive and time-consuming.
Extremely Competitive Industry. The market for high quality,
premium-priced golf clubs is highly competitive and includes a number of
well-established companies that have more readily recognizable brand names and a
larger, more widely known corps of endorsing golf professionals, as well as
greater market access and financial resources than we do. Many purchasers of
premium clubs desire golf clubs that feature the most
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recent technology, innovative designs and recognized brand names. Additionally,
purchases are often made based upon highly subjective decisions that may be
influenced by numerous factors, many of which are out of our control. Golfers'
subjective preferences are subject to rapid and unanticipated changes. As a
result, we will face substantial competition from existing and new companies
that market golf clubs, which are perceived to enhance performance, are visually
appealing or appeal to other consumer preferences. In addition, the golf club
industry is dominated by a small number of very large corporations such as
Callaway, Fortune Brands, which owns Titleist and Cobra, and Taylor Made. These
companies have substantial shares of the market and substantially greater
financial and other resources than we do. Further, the golf club industry is
subject to rapid and widespread imitation of golf club designs, which,
notwithstanding the existence of any proprietary rights, could further hamper
our ability to compete. We face competition on the basis of price, reputation
and qualitative distinctions among available products. There can be no assurance
as to the market acceptance of our golf clubs in relation to our competition.
Control of the Company by Officers and Directors. Our officers and
directors beneficially own in excess of approximately 46.8% of the outstanding
shares of our Common Stock on a fully diluted basis. As a result, such persons,
acting together, have the ability to exercise significant influence over all
matters requiring stockholder approval. The concentration of ownership could
delay or prevent a change in control of TearDrop Golf Company.
Potential Delisting from Nasdaq; Potential Limited Trading Market;
Possible Volatility of Stock Price; Potential Effects of "Penny Stock" Rules.
Although the Common Stock is quoted on the Nasdaq SmallCap Market ("Nasdaq"), in
order to continue such quotation, we must satisfy certain maintenance criteria.
One of the continued listing requirements provides that we must maintain net
tangible assets of not less than $2 million. At December 31, 1999, we had net
tangible assets of $2,749,000. If we incur losses during 2000 such that our net
tangible assets fall below $2 million, our Common Stock will be subject to
delisting from the Nasdaq SmallCap Market. If the failure to meet these
maintenance criteria results in our Common Stock no longer being eligible for
quotation on Nasdaq, trading, if any, of the Common Stock would thereafter be
conducted in the non-Nasdaq 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
the Common Stock was to become delisted from trading on Nasdaq and the trading
price of the Common Stock was less than $5.00 per share, trading in the Common
Stock would also 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 connection 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
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and must have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon 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.
In the absence of an active trading market, purchasers of the Common Stock
may experience substantial difficulty in selling their shares. The trading price
of our Common Stock is expected to be subject to significant fluctuations in
response to variations in quarterly operating results, changes in analysts'
earnings estimates, announcements of technological innovations by our
competitors, general conditions in the golf club industry 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.
Shares Eligible for Future Sale; Effect of Outstanding Options and
Potential Issuances of Bonus Shares. Sales of our Common Stock in the public
market could adversely affect the market price of the Common Stock. As of the
date hereof, there are outstanding options to purchase an aggregate of 4,387,781
shares of Common Stock at per share exercise prices ranging from $1.38 to
$11.81, including 1,500,000 options granted to Rudy A. Slucker, our Chairman and
Chief Executive Officer, that are subject to stockholder approval at the 2000
Annual Meeting of Stockholders. We have reserved 1,300,000 shares for issuance
under the 1996 Employee Stock Option Plan, have granted options to acquire
1,750,000 shares of Common Stock (and an additional 1,500,000 shares, subject to
shareholder approval) to Rudy A. Slucker, our Chairman of
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the Board and Chief Executive Officer, and have granted options to purchase up
to an aggregate of 73,748 shares of Common Stock to touring golf professionals
who perform consulting and promotional services for us. Under the promotional
agreements with our golf professionals, we may be required to grant additional
stock options if the professional satisfies certain conditions such as winning a
golf tournament. If our professionals win a large number of tournaments, the
number of additional options granted could be substantial. The exercise of such
outstanding options would dilute the then-existing stockholders' percentage
ownership of our Common Stock, and any sales in the public market of Common
Stock underlying such stock options could adversely affect prevailing market
prices for the Common Stock. Moreover, the terms upon which we would be able to
obtain additional equity capital could be adversely affected since the holders
of such securities can be expected to exercise them at a time when we would, in
all likelihood, be able to obtain any needed capital on terms more favorable to
us than those provided in such stock options.
Bonus Shares and Bonus Payments to the Company's Chairman. Our employment
agreement with Rudy A. Slucker, our Chairman and Chief Executive Officer,
provides that Mr. Slucker is entitled to receive a bonus equal to 10% of our
pre-tax net income starting with the year ending December 31, 1998. The bonus
was payable to the extent of 50% of such amount in cash and the remaining 50% in
the form of Common Stock of TearDrop Golf Company. The issuance of these
additional shares could also have an adverse effect on the liquidity of the
Common Stock.
Potential Adverse Effects of Preferred Stock Issuance. The Board of
Directors has the authority, without further stockholder approval, to issue up
to 1,000,000 shares of preferred stock, in one or more series, and to fix the
number of shares and the rights, preferences and privileges of any such series.
The issuance of preferred stock by the Board of Directors could affect the
rights of the holders of the Common Stock. For example, such an issuance could
result in a class of securities outstanding that would have dividend,
liquidation, or other rights superior to those of the Common Stock or could make
a takeover of the Company or the removal of management more difficult. The Board
of Directors does not currently intend to issue any shares of preferred stock in
the foreseeable future.
No Dividends. We have never declared or paid dividends on our Common Stock
and currently do not intend to pay dividends in the foreseeable future. The
payment of dividends in the future will be at the discretion of the Board of
Directors. The Company, Tommy Armour, Ram and Congress are parties to an
Agreement whereby the payment of dividends and redemption payment are restricted
under certain circumstances including (i) where we have failed to make payments
or otherwise failed to comply with covenants in, or an Event of Default has
occurred under, the loan agreement (except where such breach, failure or Event
of Default is cured by the Company or waived by Congress, (ii) where the
Congress accelerates the indebtedness, or (iii) where there occurs an insolvency
event.
Potential Adverse Effects of Convertible Subordinated Debt and Stock
Options Issued to Chairman and Chief Executive Officer. We have issued, subject
to shareholder approval, a one million dollar convertible subordinated note and
granted options to purchase 1,500,000 shares of common stock to our Chairman and
Chief Executive Officer, Rudy A. Slucker. The note is convertible into our
common stock at the rate of one dollar per share. The options are exercisable at
$1.38 per share. Under the rules of the Nasdaq SmallCap Market, the issuance of
Common Stock under the Note and the stock option are subject to the approval of
our shareholders. To the extent that the fair market value of the common stock
on the date of shareholder approval exceeds one dollar, we will be required to
recognize a charge against earnings related to the issuance of the convertible
subordinated note, equal to the difference between the market price of our
common stock on that date and one dollar multiplied by 1,000,000. To the extent
the fair market value of the common stock on the date of shareholder approval
exceeds $1.38, the exercise price of the option, a charge against our earnings
would result, related to the stock option, equal to the difference between the
fair market value of the common stock on that date and $1.38 multiplied by
1,500,000.
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Item 2. Description of Property.
We own 95,000 square feet of office, manufacturing and warehouse and
distribution space in Morton Grove, Illinois. We conduct our assembly, warehouse
and distribution activities from these facilities. We occupy 20,000 square feet
of office and warehouse space in Union, NJ, under a five-year lease agreement
between the Company and Dolo Realty, which terminates in August 2002. The
aggregate minimum rental payments under the lease are approximately $80,000 per
year. During the latter part of 1997 and the first quarter of 1998, we conducted
our TearDrop putter assembly, warehouse and distribution activities from the
Union, New Jersey location as well as our corporate headquarters activities.
Upon the acquisition of Tommy Armour in November 1997, we transferred our putter
assembly, warehouse and distribution activities to the Morton Grove, Illinois
location. As a result, the Union, New Jersey location is used solely for
corporate activities. We have subleased a portion of the Union, New Jersey
location and continue to maintain our corporate headquarters at that location.
We also use an outside warehouse for storage of larger, bulk inventory
items such as golf bags. The arrangement with the warehouse is month-to-month
and the rental and storage charges are directly related to the amount of
inventory being stored each month.
Item 3. Legal Proceedings.
We have been named as a defendant in a lawsuit entitled Express Personnel
Service, Inc. v. TearDrop Golf Company, case number CIV 99 1042 L, in the United
States District Court of Oklahoma, Western Division, in which the plaintiff is
seeking damages of $77,000 for an alleged breach of contract. As of March 15,
2000, both parties are in discussions and the lawsuit has not been settled.
We have also been named as a defendant in a lawsuit entitled Cybertel
Marketing, Inc. v. TearDrop Golf Company in the State Court of Wisconsin. We did
not deny that we are obligated to pay $41,312 owed to Cybertel Marketing, Inc. A
default judgment was filed and both parties are discussing a mutually agreeable
arrangement.
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 are seeking certain money
damages and the issuance of up to 65,000 shares of Common Stock related to
alleged incentive obligations for 1998 and up to 65,000 shares of 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 we intend to
vigorously defend such claim. In addition, we have instituted a counterclaim
against the plaintiffs. An arbitration proceeding commenced on January 2000,
which is currently underway.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Common Equity and Related Shareholder Matters.
Market Information: Since the effective date of our registration statement
on December 19, 1996, our Common Stock has been traded on the Nasdaq SmallCap
Market under the symbol "TDRP." Our Redeemable Common Stock Purchase Warrants
were traded on the Nasdaq SmallCap Market under the symbol "TDRPW" from the
effective date of our registration statement on December 19, 1996 to May 1998.
In May 1998, we notified all registered holders of our Warrants of our intention
to redeem such warrants in June 1998 for $.01.
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Each Warrant entitled the holder thereof to purchase one share of our Common
Stock at a price of $5.50 per share. Pursuant to that notification,
substantially 100% of the Warrants were exercised by the holders and we issued
1,541,700 shares of our Common Stock in exchange for $8.3 million.
The following table shows the range of closing prices for our Common
Stock. These amounts, which have rounded to the nearest eighth, represent
quotations between dealers and do not include retail mark-ups, markdowns or
commissions, and may not represent actual transactions.
Common Stock
Quarter Ended High Low
-------------- ---- ----
March 31, 1998 $6.875 $5.625
June 30, 1998 $14.063 $6.750
September 30, 1998 $10.063 $4.938
December 31, 1998 $6.938 $4.125
March 31, 1999 $5.625 $4.000
June 30, 1999 $4.875 $2.313
September 30, 1999 $2.750 $1.281
December 31, 1999 $2.969 $1.375
Holders: As of March 15, 2000, we believe that there were in excess of
1,800 beneficial holders of our Common Stock.
Dividends: We have never declared or paid dividends on our Common Stock
and do not intend to pay dividends in the foreseeable future. Our ability to pay
dividends by the Company is restricted pursuant to the Loan Agreement with
Congress. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation-Liquidity and Capital Resources."
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Overview
We design, develop, manufacture and market throughout the world
high-quality, premium priced golf clubs based on our proprietary technologies,
including (a) our TearDrop line of putters; (b) our Tommy Armour line of irons
and woods; (c) our Ram line of irons, woods and wedges; and (d) our Zebra
putters. Our product lines are used by golfers throughout the world, including
professional golfers on the PGA Tour, the Senior PGA Tour, the Ladies PGA Tour
and the BUY.COM Tour. In addition, we operate a professional developmental golf
tour for aspiring PGA Tour players and we are the sole United States distributor
for Walter Genuin golf shoes.
We introduced our first product, the TearDrop putter, in 1993 and
commenced significant marketing and sales activities 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 losses of $19.1
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.
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Since the acquisitions were completed, we have devoted substantial efforts
to reduce costs, eliminate unprofitable product lines and focus on developing
and marketing high quality products. However, no assurance can be given that we
will be able to operate the combined enterprises successfully or reverse the
history of losses that each of TearDrop, Ram and Armour has incurred in the
past.
We believe that an important element for increasing awareness and demand
for our golf clubs is the building of a corps of touring professional golfers
that will endorse, use and win with our clubs. Accordingly, as an integral part
of our marketing strategy, we are continually seeking to obtain professional
endorsements of our clubs. We have entered into endorsement agreements, of up to
three years, with professional players principally on the PGA Tour, which
provide for base payments in consideration of the use of the professionals'
names in connection with the marketing of our clubs and the use of the clubs by
such professionals 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 Cub teams. We
have granted stock options to certain of endorsing 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
professional 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 millioin should each of
the professionals use and endorse our products as provided in the agreements. In
addition, we anticipate that we will devote substantial capital to advertising
and marketing during the next year.
We have made substantial expenditures and commitments for advertising and
marketing and must continue to incur such costs in order to continue to increase
consumer awareness of our products. During 2000, we will incur substantial
expenses for print advertising and for our program with The Golf Channel, among
other things. No assurance can be given that the expansive advertising and
marketing will result in increased sales.
We have incurred substantial indebtedness in financing the acquisition of
Armour and Ram and in financing our expansion and operations. As of December 31,
1999, we had $31.2 million in liabilities, approximately $17.1 million of which
was payable to First Union National Bank ("First Union"). The credit facility
with First Union terminated on November 10, 1999. Since we were in the process
of negotiating alternative financing, we operated under a forbearance agreement
from First Union. We signed a new credit agreement with Congress on January 27,
2000. Under the new credit agreement, we were extended credit of $28 million, of
which $6.675 million is represented by term loans.
We maintain an in-house research and development and design department. In
addition, we work closely with component manufacturers, independent design
consultants and our endorsing golf professionals in the design and development
of new products and product improvements. Our ability to introduce new products
or product improvements is directly related to the efforts and success of this
research and development effort.
We do not manufacture the components required to assemble our golf clubs,
as we rely instead on a number of component suppliers, both domestic and
foreign. Our success in assembling our products will be dependent, in part, on
maintaining our relationships with these existing suppliers and developing
relationships with new suppliers.
We believe that there are readily available alternative sources for each
of the components comprising our clubs, although there can be no assurance of
this. Any significant delay or disruption in the supply of components from our
suppliers or any quality problems with the supplier's 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
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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).
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Sales for 1999 were $59,769,000 compared to sales for 1998 of $60,715,000,
a decrease of $946,000 or 1.6%. Included in 1998 are sales of $13,000,000 of
discontinued products. Therefore, sales of continuing product lines actually
increased $12,054,000 or 25.3% in 1999 from 1998. We attribute this increase to
an increase in advertising and marketing of the TearDrop, Armour and Ram lines,
all of which had increases in continuing product lines in 1999 over 1998.
Gross profit on sales in 1999 was $26,904,000 or 45.0% of sales, compared
to $24,287,000 or 40.0% of sales in 1998. The sales of discontinued product
lines in 1998 were made at lower than normal gross profit levels, which had the
effect of decreasing our overall gross profit percentage in 1998.
Selling, general and administrative expenses in 1999 were $29,837,000 or
49.9% of sales compared to $28,836,000 or 47.5% of sales in 1998. The increase
in selling, general and administrative expenses from 1998 to 1999 is due
principally to increased advertising and an increase in the number of
endorsement contracts signed with touring PGA professional golfers.
Interest expense, net of interest and other income, amounted to $1,805,000
in 1999 compared to $1,595,000 in 1998. Debt levels and interest rates in 1999
were higher than in 1998, leading to an increase in interest expense of
$210,000, but were offset by other income from royalties and licensing of
approximately $267,000.
As a result of all of the above, loss before and after taxes in 1999
decreased to $4,471,000 from a loss in 1998 of $6,144,000.
Liquidity and Capital Resources
At December 31, 1999, we had working capital of approximately $7.8
million. At 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 with First Union National Bank ("First Union") as
a current liability since it was repayable in November 1999. In January 2000, we
completed a new revolving loan and credit agreement with Congress Financial
Corporation ("Congress") for $28 million, which included term loans of $6.675
million. This new revolving loan replaced and repaid the outstanding amounts due
to First Union. The Congress facility bears interest at First Union's prime
lending rate plus 1% as to the revolving portion and $2.175 million portion of
the term loans, and First Union's prime lending rate plus 1.5% as to $4.5
million portion of the term loan. The revolving portion has a two-year term, the
$2.175 million term is due in 60 equal monthly installments of $36,250
commencing February 2000, and the $4.5 million term is due in equal quarterly
installments of $500,000 commencing August 2000 with the balance payable at the
termination of the revolving loan. The loans are secured by substantially all of
our assets. In addition, our Chairman and Chief Executive Officer has agreed to
personally guaranty a portion of the term loan.
Our expenditures 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.
If our sales do not increase substantially to cover our expenditures, we will be
required to limit our advertising expenditures and expansion plans or 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.
- 17 -
<PAGE>
On March 10, 1999, Rudy Slucker, our President 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 First Union's prime lending rate
plus 1%, and it is convertible into our common stock at the rate of $1 per
share. Additionally, we granted Mr. Slucker options to purchase 1,500,000 shares
of our common stock. The options are exercisable at $1.38 per share. Under the
rules of the Nasdaq SmallCap Market, the issuance of Common Stock under the Note
and the stock option are subject to the approval of our shareholders. To the
extent that the market price of the Common Stock on the date of shareholder
approval exceeds $1, we will be required to recognize a charge against earnings
related to the convertible subordinated note, equal to the difference between
the fair market value of our Common Stock on that date and $1 multiplied by
1,000,000. To the extent the fair market value of the Common Stock on the date
of shareholder approval exceeds $1.38, the exercise price of the option, a
charge against our earnings would result, related to the stock option, equal to
the difference between the fair market value of the Common Stock on that date
and $1.38 multiplied by 1,500,000.
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 up to 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 operational difficulties.
Our statements of cash flows for the years ended December 31, 1999 and
1998 are summarized below:
1999 1998
Net cash provided (used) by operating activities $ 3,770,000 $ (8,115,000)
Net cash (used) in investing activities (481,000) (190,000)
Net cash provided (used) by financing activities (3,331,000) 8,625,000
In connection with the acquisition of assets of Armour, we issued 100,000
shares of Series A Preferred Stock. On June 24, 1998, 70,000 shares of the
Series A Preferred Stock were converted by the holder thereof into 933,333
shares of Common Stock. Simultaneously with such conversion, we redeemed the
remaining 30,000 outstanding shares of Series A Preferred Stock for $3,000,000.
At December 31, 1999, we had patents and trademarks and goodwill,
primarily related to the acquisition of the assets of Armour and Ram of
approximately $6,302,000 and $ 525,000, respectively. During 1999 and 1998, we
recognized amortization expense of approximately $532,000 and $513,000,
respectively. We will continue to amortize patents and trademarks and goodwill.
In September 1999, we issued to our 401(k) plan for the benefit of certain
employees who participated in such plan, 80,575 shares of Common Stock, in
satisfaction of a prior repurchase obligation.
- 18 -
<PAGE>
Year 2000 Statement
We believe that our year 2000 remediation was timely completed and that
our systems are completely Y2K compatible. We are currently unaware of any
events, trends, or conditions regarding this issue that may have a material
effect on our results of operations, financial condition or liquidity.
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 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" herein. 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.
Item 7. Financial Statements.
The Financial Statements required by this item appear under the caption
"Index to Financial Statements" and are included elsewhere herein commencing on
page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure and Control Persons; Compliance.
Effective February 27, 1998 (the "Effective Date of Dismissal"),
Rothstein, Kass & Company, P.C. ("Rothstein Kass") ceased serving as our
accountants. The report of Rothstein Kass on our financial statements as of
December 31, 1995 was initially qualified as to uncertainty regarding our
ability to continue as a going concern. In reissuing such report in connection
with the December 31, 1996 audit, the qualification was removed and the report
contained no adverse opinion or disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope or accounting principles. The decision
to change accountants was ratified by the Audit Committee of the Company's Board
of Directors. During the two most recent fiscal years prior to the Effective
Date of Dismissal and all subsequent interim periods preceding the date hereof,
there were no disagreements between us and Rothstein Kass on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Rothstein Kass, would have caused Rothstein Kass to make reference to the
subject matter of disagreement in connection with Rothstein Kass's reports.
- 19 -
<PAGE>
Effective February 27, 1998 (the "Effective Date of Engagement"), we
engaged Ernst & Young LLP ("E&Y") as our principal accountants. During the two
most recent fiscal years prior to the Effective Date of Engagement and all
subsequent interim periods preceding the date hereof, we have not consulted E&Y
regarding any matters or events as set forth in Item 304(a)(2) of Regulation
S-B.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
Incorporated by reference to our Proxy Statement for Annual Meeting to
Shareholders to be filed with the Securities and Exchange Commission within 120
days after the close of the fiscal year ended December 31, 1999.
Item 10. Executive Compensation.
Director Compensation
Incorporated by reference to our Proxy Statement for Annual Meeting to
Shareholders to be filed with the Securities and Exchange Commission within 120
days after the close of the fiscal year ended December 31, 1999.
Executive Compensation
Incorporated by reference to our Proxy Statement for Annual Meeting to
Shareholders to be filed with the Securities and Exchange Commission within 120
days after the close of the fiscal year ended December 31, 1999.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to our Proxy Statement for Annual Meeting to
Shareholders to be filed with the Securities and Exchange Commission within 120
days after the close of the fiscal year ended December 31, 1999.
Item 12. Certain Relationships and Related Transactions.
Incorporated by reference to our Proxy Statement for Annual Meeting to
Shareholders to be filed with the Securities and Exchange Commission within 120
days after the close of the fiscal year ended December 31, 1999.
Item 13. Exhibits, List 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
- 20 -
<PAGE>
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.
16** Letter from Rothstein, Kass & Company, P.C. to the
Commission dated March 2, 1998
21 Subsidiaries
23 Consent of Ernst & Young LLP
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 Current Report on Form 8-K filed on March 4, 1998 and
incorporated herein by reference.
(b) During the last quarter of the period covered by this report and up to
March 30, 2000, we did not file any Current Reports on Form 8-K.
- 21 -
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
TearDrop Golf Company
We have audited the accompanying consolidated balance sheet of TearDrop Golf
Company as of December 31, 1999 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two years in the
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
TearDrop Golf Company at December 31, 1999 and the consolidated results of its
operations and its cash flows for each of the two years in the period then
ended, in conformity with accounting principles generally accepted in the United
States.
Ernst & Young LLP
Chicago, Illinois
March 17, 2000
F-1
<PAGE>
TearDrop Golf Company
Consolidated Balance Sheet
December 31, 1999
(All dollar amounts, except share and per share amounts, in $000's)
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 481
Accounts receivable less allowance for returns and
doubtful accounts of $1,793 11,932
Inventories 10,778
Other current assets 148
--------
Total current assets $ 23,339
PROPERTY AND EQUIPMENT, less accumulated
depreciation 4,334
PATENTS and TRADEMARKS, less accumulated amortization 6,302
GOODWILL, less accumulated amortization 525
--------
$ 34,500
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,064
Accrued liabilities 2,594
Note payable - shareholder 500
Current portion of long term debt 1,363
--------
Total current liabilities $ 15,521
LONG TERM DEBT 15,705
PREFERRED STOCK
$.01 par value, authorized 1,000,000 shares, issued
and outstanding none
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 53
Capital in excess of par value 25,346
Accumulated other comprehensive loss (79)
Accumulated deficit (22,046)
--------
Total stockholders' equity 3,274
--------
$ 34,500
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
TearDrop Golf Company
Consolidated Statements of Operations
For the Years Ended December 31, 1999 and 1998
(All dollar amounts, except share and per share amounts, in $000's)
Years Ended December 31
--------------------------
1999 1998
----------- -----------
Net sales $ 59,769 $ 60,715
Cost of sales 32,865 36,428
----------- -----------
Gross profit 26,904 24,287
Selling, general and
administrative expenses 29,837 28,836
Other income 267 --
----------- -----------
Loss from operations (2,666) (4,549)
Interest (expense) income, net (1,805) (1,595)
----------- -----------
Loss before income taxes (4,471) (6,144)
Income tax (expense) -- --
----------- -----------
Net loss $ (4,471) $ (6,144)
=========== ===========
Preferred dividends -- 137
----------- -----------
Loss attributable to common shareholders $ (4,471) $ (6,281)
=========== ===========
Net loss per common share - basic and diluted $ (0.86) $ (1.58)
=========== ===========
Weighted average number of
common shares outstanding - basic and diluted 5,205,449 3,982,382
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
TearDrop Golf Company
Consolidated Statements of Stockholders' Equity (Deficiency)
For the Years Ended December 31, 1999 and 1998
(All dollar amounts, except share and per share amounts in $000's)
<TABLE>
<CAPTION>
Accumulated
Common Stock Capital in Other
--------------------------- Excess of Comprehensive Accumulated
Shares Amount Par Value Loss Deficit Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1998 2,654,857 $ 27 $ 9,634 ($25) ($11,431) ($1,795)
Comprehensive loss:
Net loss (6,144) (6,144)
Currency translation adjustment (204) (204)
Comprehensive loss (6,348)
Conversion of preferred stock to
common stock 933,333 9 6,991 7,000
Exercise of common stock options 50,000 1 199 200
Redemption of common stock warrants 1,541,700 15 8,299 8,314
Options issued to non-employees 200 200
Preferred dividends paid (137) (137)
--------- ------- ------- ---- -------- -------
Balance December 31, 1998 5,179,890 52 25,186 (229) (17,575) 7,434
Comprehensive loss:
Net loss (4,471) (4,471)
Currency translation adjustment 150 150
------
Comprehensive loss (4,321)
------
Exercise of common stock options 2,000 10 10
Redemption of common stock warrants 100 1 1
Issuance of common stock to employee
401(k) plan 80,575 1 149 150
--------- ------- ------- ---- -------- -------
Balance December 31, 1999 5,262,565 $ 53 $25,346 ($79) ($22,046) $ 3,274
========= ======= ======= ==== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TearDrop Golf Company
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998
(All Dollar amounts, except share and per share amounts, $000's)
<TABLE>
<CAPTION>
Years
Ended December 31
------------------
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,471) $(6,144)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,192 1,116
Provision for doubtful accounts 411 801
Common stock and options issued for services -- 200
Changes in operating assets and liabilities:
(Increase) in accounts receivable (2,229) (3,568)
(Increase) decrease in inventories 8,248 (20)
(Increase) decrease in other current assets 214 (330)
Increase (decrease) in accounts payable and other current liabilities 405 (170)
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,770 (8,115)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in patents and trademarks (216) --
Purchases of property and equipment (265) (190)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (481) (190)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under financing agreements (3,842) 3,648
Proceeds from stockholder's note 500 --
Repayment of stockholder's notes -- (400)
Proceeds from exercise of common stock options 10 200
Proceeds from redemption of common stock warrants 1 8,314
Redemption of preferred stock -- (3,000)
Preferred dividends -- (137)
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,331) 8,625
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 150 (204)
NET INCREASE IN CASH AND CASH EQUIVALENTS 108 116
CASH AND CASH EQUIVALENTS:
Beginning of year 373 257
------- -------
End of year $ 481 $ 373
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Tear Drop Golf Company
Notes to Consolidated Financial Statements
(All dollar amounts, except share and per share amounts, in $000's)
1. Organization and Nature of Operations
The TearDrop Golf Company ("TearDrop" and/or the "Company") was
incorporated under the laws of Delaware in September 1996. Our common stock is
traded on the Nasdaq SmallCap Market under the symbol TDRP.
TearDrop and our subsidiaries manufacture and market golf clubs, including
putters, irons, drivers and wedges throughout the world, distribute high quality
golf shoes in the United States, and operate a professional golf tour in the
United States.
2. Summary of Significant Accounting Policies
Basis of Presentation - The accompanying financial statements have been
prepared on a going concern basis. In January 2000, we successfully completed
the refinancing of our debt (See Note 5 - Long Term Debt) and in connection
therewith appropriately classified a significant portion of our December 31,
1999 outstanding debt balance as long term. Therefore as of December 31, 1999,
we had working capital of $7,818.
Basis of Consolidation - The consolidated balance sheet contains the
accounts of TearDrop Golf Company and our wholly owned subsidiaries. The related
statements of operations and cash flow contain the operations of TearDrop and
our wholly owned subsidiaries for each period. All significant inter-company
accounts have been eliminated in consolidation.
Inventories - Inventories are stated at the lower of cost, on a first-in,
first-out method, or market.
Property and Equipment - Property and equipment is stated at cost less
accumulated depreciation and amortization. We provide for depreciation and
amortization for operations acquired after 1996 principally using the
straight-line method. We use the double declining balance method for assets
acquired prior to 1997. There is no significant difference between the two
methods for either 1998 or 1999. Estimated useful lives, for each method, are as
follows:
Asset Estimated Useful Lives
Building and improvements 10 to 40 years
Machinery and equipment 5 to 10 years
Office furniture and equipment 5 years
Patents and Trademarks - Patents and trademarks are stated at the cost
associated with obtaining patents and trademarks within and outside the United
States. Patents and trademarks acquired in acquisitions were valued on the basis
of independent appraisals of the fair market values of such assets at the time
of acquisition. All patents and trademarks are amortized on a straight-line
basis over 15 years.
F-6
<PAGE>
Goodwill - Goodwill relates to the excess of fair value over the cost of
net assets acquired and is amortized on a straight-line basis over 15 years.
During the years ended December 31, 1999 and 1998, amortization expense of
patents and trademarks and goodwill was $532 and $513, respectively.
Impairment of Long-Lived Assets - We periodically assess the
recoverability of the carrying amounts of long-lived assets, including
intangible assets. A loss is recognized when expected undiscounted future cash
flows are less than the carrying amount of the asset. The impairment loss is the
difference by which the carrying amount exceeds its fair value.
Revenue Recognition - We recognize revenue from sales of product when
title to the product has passed, which is generally the date product is shipped.
Advertising Costs - We expense production costs of advertising and
promotions on the first date the advertisements take place. Advertising costs
included in selling, general and administrative expenses for the years ended
December 31, 1999 and 1998 were approximately $9,317 and $7,523, respectively.
Research and Development Expense - We expense research and development
costs as incurred. Research and development expenses included in selling,
general and administrative expenses for the years ended December 31, 1999 and
1998 were approximately $612 and $572, respectively.
Foreign Currency Translation - The functional currency for our foreign
subsidiary is the applicable local currency. Assets and liabilities of our
foreign subsidiary and operations are translated at the exchange rates in effect
at the balance sheet dates, while revenue, expenses and cash flows are
translated at average exchange rates for the period.
Income Taxes - Deferred income tax assets and liabilities are computed
annually for differences between financial reporting and tax bases of assets and
liabilities, if any, that will result in taxable or deductible amounts in the
future, based on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce the deferred income tax assets to the
amount expected to be realized.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported. Management believes
that our estimates are reasonable and proper; however actual results could
differ from those estimates.
Net Income or Loss Per Common Share - Net loss per common share is
computed based on net loss applicable to common shareholders, divided by the
weighted average number of common shares outstanding in each period. Due to the
operating loss in each period presented, the effect of all outstanding options
and warrants is antidilutive. Therefore, they have been excluded from our
computation of net loss per share.
Stock Options - We account for stock options in accordance with Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and
includes proforma information in Note 7, as permitted the Statement of Financial
Accounting Standards ("SFAS") No. 123 "Accounting for Stock Based Compensation".
Accordingly, there is no compensation expense to us when stock options are
granted to employees at prices equal to the fair market value at the date of
grant. Proceeds from exercises of stock options and the associated income tax
benefits are credited to stockholders' equity when received. Stock options
granted to professional golfers result in compensation expense equal to the fair
value of the options on the date of grant using an option-pricing model in
accordance with SFAS No. 123.
F-7
<PAGE>
3. Inventories
Inventories at December 31, 1999 consist of the following:
Raw materials $5,401
Finished goods 5,377
-------
$10,778
4. Property and Equipment
Property and equipment at December 31, 1999 consist of the following:
Land $1,730
Building and improvements 1,389
Machinery and equipment 1,805
Office furniture and equipment 856
------
5,780
Less accumulated depreciation and amortization 1,446
------
$4,334
5. Long Term Debt
At December 31, 1999, there was $17,068 outstanding under a line of credit
we obtained from First Union National Bank, successor by merger to CoreStates
Bank, N.A. (the "Bank"). The line of credit was initially $18,000, later
increased to $25,000, increased to $30,000 from March 1999 through June 30,
1999, reduced to $25,000 through October 1999 and reduced to $20,000 through
maturity. The maturity date of the line of credit was November 10, 1999, which
was extended in several steps to January 21, 2000. Interest on the outstanding
principal amount was payable, at our option, at either the Bank's prime lending
rate less 0.5% or LIBOR plus 2%. The Bank increased this interest rate on
October 10, 1999 to the Bank's prime lending rate plus 1%. We were in violation
of certain financial covenants of the line of credit throughout 1999 for which
the Bank issued waivers. The Bank also agreed to a forbearance agreement from
October 10, 1999 to January 21, 2000.
On January 21, 2000, we completed a new revolving loan and credit
agreement with Congress Financial Corporation ("Congress") for $28,000,
including term loans of $6,675, which replaced and repaid the outstanding
amounts due the Bank under the line described above. The loan is due in two
years and bears interest at Congress' prime lending rate plus a) 1% for the
revolving portion and $2,175 of the term portion and b) 1.5% for $4,500 of the
term loan, and is secured by substantially all of our assets. Of the term loans,
$4,500 is payable at the rate of $500 quarterly, commencing August 1, 2000 with
the balance due at maturity of the line and $2,175 is payable at the rate of $36
on the first day of each month for 60 months, commencing March 1, 2000.
As a result of the new credit agreement, we have classified $15,705, which
is the amount due under the Bank's line of credit at December 31, 1999 less
those portions of the term loans due prior to December 31, 2000, as a
non-current liability. The carrying value of the outstanding debt approximates
its fair value.
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
F-8
<PAGE>
agreement and was made convertible into our Common Stock at the rate of $1 per
share, subject to shareholder approval at the 2000 Annual Meeting of the
Stockholders. In this connection, the difference between the fair market value
of our Common Stock on the date of shareholder approval at the 2000 annual
meeting of shareholders and the conversion price of $1 would result in a charge
to earnings in the quarter such shareholder approval is obtained.
Interest paid for the years ended December 31, 1999 and 1998 was $1,767
and $1,570, respectively.
6. Stockholders' Equity
In connection with an acquisition in 1997, we issued 100,000 shares of
Series A Redeemable Convertible Preferred Stock. During 1998, we redeemed 30,000
shares at a cost of $3,000 and the remaining 70,000 shares were converted into
933,333 shares of our common stock. In that connection, the excess of the par
value of the preferred stock converted over the par value of the common stock
issued, $6,991, was credited to Capital in Excess of Par Value.
Also during 1998, we issued 1,541,700 common shares in connection with the
redemption of common stock purchase warrants and 50,000 shares in connection
with the exercise of a stock option.
In connection with 1997 acquisitions, we issued warrants to purchase
50,000 shares of common stock at a price of $6.625, which expire on December 29,
2002, and options to purchase 25,000 shares at a price of $4.50 per share, and
agreed to issue up to 50,000 additional shares, such issuance being dependent on
the performance of the acquired operations in the years 1998 and 1999. In March
1999, 12,500 shares were issued under that agreement.
During 1999, we satisfied an obligation to certain of our employees by
issuing an additional 80,575 shares of our common stock to the applicable 401(k)
accounts.
7. Stock Options
We have adopted the TearDrop Golf Company Stock Option Plan (the "Plan")
providing for the issuance of up to 800,000 (increased to 1,300,000 subject to
stockholder approval at the 2000 Annual Meeting of Stockholders) shares of
common stock for incentive stock options ("ISO's") and non-qualified stock
options. The exercise price of and ISO or non-qualified stock option will not be
less than 100% of the fair market value of our common stock at the date of
grant. The exercise price of an ISO granted to an employee owning greater than
10% of our common stock will not be less than 110% of the fair market value of
our common stock at the date of the grant and will have a maximum term of five
years.
We granted, in 1998, various ISO's to employees to purchase up to 259,700
shares at prices ranging from $5.25 to $8.00 per share, and in 1999, various
ISO's to employees to purchase up to 325,400 shares at prices ranging from $1.38
to $2.19 per share. The options, generally, vest ratably over three years and
expire five years from the date of grant.
We have reserved 250,000 shares of common stock (outside the Plan) to be
issued to touring golf professionals based upon their performance. In 1998, we
granted options to touring professional golfers to
F-9
<PAGE>
purchase up to 55,448 shares of common stock at prices ranging from $4.75 per
share to $11.81 per share, exercisable immediately and expiring five years from
the date of grant. Of those options granted in 1998, options to purchase 19,000
shares at $4.75 contained a provision allowing the grantee to sell the option
back to us at the end of the first year for $150. All of the grantees exercised
their right under this provision and the purchase price to us is included in
compensation expense.
We have recorded compensation of $ 0 and $200 in 1999 and 1998,
respectively, which includes the fair value of the options on the date of grant
and the cost of the options purchased by us.
In June 1999, our shareholders approved the grant of an option to purchase
up to 1,250,000 shares of common stock to our Chairman of the Board and Chief
Executive Officer. The options are exercisable immediately, as to 250,000
shares, and the remainder upon attainment of certain earnings or share price
levels of our common stock. The options expire 10 years from date of grant.
In December 1999, the Board of Directors approved, subject to shareholder
approval, the grant of an option to purchase 1,500,000 shares of common stock to
our Chairman of the Board and Chief Executive Officer at an exercise price of
$1.38. The options are exercisable immediately and expire 10 years from date of
grant.
The following table summarizes the activity for stock options during 1998
and 1999 including the weighted average exercise price:
Under the Plan Outside the Plan
Shares Price Shares Price
Outstanding, January 1, 1998 368,400 $6.03 804,300 $4.95
Granted during 1998 259,700 5.40 55,448 5.51
Options exercised -- -- 50,000 4.00
Options expired or canceled 74,800 6.62 69,000 4.21
------- ---------
Outstanding December 31, 1998 553,300 5.65 740,748 4.63
Granted during 1999 325,400 1.51 1,250,000 3.38
Options exercised -- -- 2,000 4.75
Options expired or canceled 94,667 5.74 -- --
------- ---------
Outstanding December 31, 1999 784,033 $3.93 1,988,748 $3.84
The following table summarizes information concerning outstanding options
at December 31, 1999:
Range of Exercise Price Options Remaining Currently
Outstanding Life in Years Exercisable
$1.38 to $3.00 344,100 4.72 38,000
$3.01 to $5.81 2,254,500 7.34 1,089,166
$6.00 to $11.81 174,181 2.09 121,182
--------- ---------
Totals 2,772,781 6.69 1,248,348
F-10
<PAGE>
Pro forma net loss and net loss per share, determined as if we had
accounted for our employee stock options under the fair value method of SFAS No.
123 are as follows:
1999 1998
Net loss:
As reported $ 4,471 $ 6,144
Pro forma 5,632 7,454
Loss per share, basic and diluted
As reported $ .86 $ 1.58
Pro forma 1.08 1.87
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1999, as follows:
1999 1998
Fair value of options granted with exercise price
Above market at date of grant $ 2.08 $ 0.00
At market at date of grant 1.05 3.49
Below market at date of grant -0- 5.16
Expected stock price volatility 84% 85%
Expected dividend yield 0.0% 0.0%
Risk free interest rate 5.10% 5.36%
Expected life of options 5-10 years 5 years
8. Major Customers, Suppliers and Export Sales
During the years ended December 31, 1999 and 1998, we derived
approximately $12,984 (21.7%) and $15,160 (25.1%), respectively, of our net
sales from one customer.
During the years ended December 31, 1999 and 1998, approximately 13% and
10%, respectively, of our net sales were export sales.
During the years December 31, 1999 and 1998, we purchased approximately
$1,944 and $4,885, respectively, from one supplier.
9. Employee Benefit Plans
Tommy Armour Golf Company, which was acquired in November 1997, had a
defined benefit pension plan covering substantially all of our United States
employees and a 401(k) defined contribution plan. Under the pension plan,
benefits were based primarily on years of credited service and compensation as
defined under the respective plan provisions.
We have suspended the pension plan and frozen benefits to those vested
participants at the date of the transfer of the plan and our assets from
Armour's previous parent to the Company.
F-11
<PAGE>
Assumptions used in the accounting for the Armour defined benefit plan,
for our fiscal years ended September 30, 1999 and 1998, were as follows:
1999 1998
Weighted average discount rate 7.5% 7.5%
Rate of increase in compensation levels 4.5% 4.5%
Expected long-term rate of return on assets 9.0% 9.0%
The following table sets forth the plan's change in the benefit obligation
for the year ended December 31, 1999:
Benefit obligation at beginning of year $3,189
Service cost 0
Interest cost 222
Actuarial gain (185)
Curtailment gain 0
Benefits paid (84)
------
Benefit obligation at end of the year $3,142
The following table sets forth the plan's assets for the year ended
December 31, 1999:
Fair value of assets at beginning of year $3,120
Actual return on plan assets 427
Benefits paid (84)
------
Fair value of assets at end of year $3,463
The following table sets forth the plan's funded status at December 31,
1999:
Funded status of plan $(321)
Unrecognized prior actuarial gain 355
-----
Accrued pension liability recognized in balance sheet $ 34
Net periodic pension cost for 1999 and 1998 includes the following
components:
1999 1998
Service cost-benefit earned during the period $ 0 $ 512
Interest cost on projected benefit obligation 222 298
Expected return on plan assets (277) (331)
----- -----
Net periodic pension costs $ (55) $ 479
F-12
<PAGE>
Under our 401(k) plan, all U.S. employees are eligible to contribute up to
10% of their compensation. We, at the discretion of the Board of Directors, make
matching contributions. We made no matching contributions to the 401(k) plan
during the years ended December 31, 1999 or 1998.
Pension and other employee benefits of our foreign subsidiaries and
operations are primarily provided by government-sponsored plans and being
accrued currently over the period of active employment. The costs of such plans
are not significant.
10. Income Taxes
There were no provisions for income taxes or current income tax expense
during the years ended December 31, 1999 and 1998, due to net operating losses
during those two years. The reconciliation of the income tax benefit computed at
the federal statutory rate of 34% and the provision for income taxes, is as
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Income tax benefit computed at statutory rate (34.0%) (34.0%)
State income tax benefit at statutory rate, net of federal tax benefit (4.8%) (4.8%)
Other permanent differences 1.0% (0.4%)
Valuation allowance against net deferred tax asset 37.8% 39.2%
----- -----
Provision for income taxes 00.0% 00.0%
</TABLE>
No deferred taxes have been reflected in the consolidated statements of
operations because we have fully reserved the tax benefit of net deductible
temporary differences and operating loss carry forwards due to the fact that the
likelihood of realization of the tax benefits cannot be established. We did not
pay any income taxes during the years ended December 31, 1999 or 1998.
Deferred tax assets (liabilities) are as follows:
1999 1998
Net operating loss carry-forwards $ 9,435 $ 7,115
Allowance for doubtful accounts 527 551
Accrued expenses 319 1,371
Restructuring reserves 629 1,053
Other 1,783 1,156
-------- --------
12,693 11,246
Valuation allowance (12,693) (11,246)
-------- --------
Net deferred taxes $ 0 $ 0
At December 31, 1999, we have cumulative net operating loss carry forwards
expiring between 2011 and 2020 of approximately $25,000. Net operating loss
carry forwards are also available for state income tax purposes.
F-13
<PAGE>
11. Commitments and Contingencies
We have entered into endorsement agreements with touring golf
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, 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 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 $50,000.
In April 1999, we extended an employment agreement with our Chairman of
the Board and Chief Executive Officer to expire on June 24, 2002. The agreement,
as amended, provides for annual compensation of $500 for the year ending
December 31, 2000, and performance bonuses, as defined. No bonuses were earned
in 1999 or 1988.
We have received formal notice demanding arbitration from Pro Golf
Promotions, LLC and its former owners 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 the Company's Common Stock
related to alleged incentive obligations for 1998 and up to 65,000 shares of the
Company's Common Stock related to such obligations for 1999. We believe that
such parties are not entitled to the issuance of any shares or to any money
damages and we are vigorously defending such claim. Accordingly, no reserve has
been established in this connection.
12. Segment Information
It is management's opinion that we, at this time, have only one reportable
segment, and that segment is the manufacture, marketing and distribution of golf
clubs. 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 operate as a single reportable segment in the United States with 1999
sales of $59.8 million, of which $52.0 million were sales in the United States
and $7.8 million 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 over 10,000 green grass accounts (golf course pro shops), who 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.
F-14
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEARDROP GOLF COMPANY
Dated: March 27, 2000 /s/ Rudy A. Slucker
----------------------------------
Rudy A. Slucker
President and Chief Executive
Officer
(Principal Executive Officer)
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Dated: March 27, 2000 /s/ Rudy A. Slucker
----------------------------------
Rudy A. Slucker
Director
Dated: March 27, 2000 /s/ Joseph A. Cioni
----------------------------------
Joseph A. Cioni
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: March 27, 2000 /s/ Fred K. Hochman
----------------------------------
Fred K. Hochman
Director
Dated: March 27, 2000 /s/ Leslie E. Goodman
----------------------------------
Leslie E. Goodman
Director
Dated: March 27, 2000 /s/ Jeffrey Baker
----------------------------------
Jeffrey Baker
Director
Dated: March 27, 2000 /s/ Bruce H. Nagel
----------------------------------
Bruce H. Nagel
Director
Exhibit 3.6
CERTIFICATE OF OWNERSHIP AND MERGER
OF
TEARDROP PROMOTIONS, INC.,
a Delaware corporation,
TOMMY ARMOUR GOLF COMPANY,
a Delaware corporation
AND
RAM GOLF CORPORATION,
a Delaware corporation
INTO
TEARDROP GOLF COMPANY,
a Delaware corporation
It is hereby certified that:
1. TearDrop Golf Company (the "Corporation") is a business corporation of
the State of Delaware.
2. The Corporation is the owner of all of the issued and outstanding
shares of capital stock of TearDrop Promotions, Inc., a Delaware corporation,
Tommy Armour Golf Company, a Delaware corporation, and Ram Golf Corporation, a
Delaware corporation.
3. On October 4, 1999, the Board of Directors of the Corporation adopted
the following resolutions to merge each of TearDrop Promotions, Inc., Tommy
Armour Golf Company and Ram Golf Corporation with and into the Corporation, with
the Corporation being the surviving corporation to the merger:
RESOLVED, that each of TearDrop Promotions, Inc., Tommy Armour Golf
Company and Ram Golf Corporation be merged with and into the Corporation, and
that all of the estate, property, rights, privileges, powers and franchises of
each of TearDrop Promotions, Inc., Tommy Armour Golf Company and Ram Golf
Corporation be vested in and held and enjoyed by the Corporation as fully and
entirely and without change or diminution as the same were before held and
enjoyed by each of TearDrop Promotions, Inc., Tommy Armour Golf Company and Ram
Golf Corporation in its respective names.
RESOLVED, that the Corporation shall assume all of the obligations
of each of TearDrop Promotions, Inc., Tommy Armour Golf Company and Ram Golf
Corporation.
RESOLVED, that the Corporation shall cause to be executed and filed
and/or recorded the documents prescribed by the laws of the State of Delaware
and by the laws of any
<PAGE>
other appropriate jurisdiction and will cause to be performed all necessary acts
within the State of Delaware and within any other appropriate jurisdiction.
RESOLVED, that the effective time of the Certificate of Ownership
and Merger setting forth a copy of these resolutions, and the time when the
merger therein provided for, shall become effective shall be upon filing.
Executed on this 8th day of October, 1999.
TEARDROP GOLF COMPANY
By: /s/ Rudy A. Slucker
-------------------
Name: Rudy A. Slucker
Title: President
Exhibit 10.40
Loan and Security Agreement
by and between
CONGRESS FINANCIAL CORPORATION (CENTRAL)
as Lender
and
TEARDROP GOLF COMPANY
as Borrower
Dated: January 20, 2000
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1 DEFINITIONS......................................................1
SECTION 2 CREDIT FACILITIES...............................................10
2.1 Revolving Loans.................................................10
2.2 Letter of Credit Accommodations.................................11
2.3 Term Loan.......................................................13
2.4 Availability Reserves...........................................14
2.5 Acceptances.....................................................14
SECTION 3 INTEREST AND FEES...............................................17
3.1 Interest........................................................17
3.2 Closing Fee.....................................................17
3.3 Unused Line Fee.................................................17
SECTION 4 CONDITIONS PRECEDENT............................................18
4.1 Conditions Precedent to Initial Loans and Letter of Credit
Accommodations..................................................18
4.2 Conditions Precedent to All Loans, Letter of Credit
Accommodations and Acceptances..................................20
SECTION 5 GRANT OF SECURITY INTEREST......................................21
SECTION 6 COLLECTION AND ADMINISTRATION...................................22
6.1 Borrower's Loan Account.........................................22
6.2 Statements......................................................22
6.3 Collection of Accounts..........................................22
6.4 Payments........................................................23
6.5 Authorization to Make Loans.....................................24
6.6 Use of Proceeds.................................................24
SECTION 7 COLLATERAL REPORTING AND COVENANTS..............................24
7.1 Collateral Reporting............................................24
7.2 Accounts Covenants..............................................25
7.3 Inventory Covenants.............................................26
7.4 Equipment Covenants.............................................27
7.5 Power of Attorney...............................................28
7.6 Right to Cure...................................................28
7.7 Access to Premises..............................................28
i
<PAGE>
SECTION 8 REPRESENTATIONS AND WARRANTIES..................................29
8.1 Corporate Existence, Power and Authority; Subsidiaries..........29
8.2 Financial Statements; No Material Adverse Change................29
8.3 Chief Executive Office; Collateral Locations....................30
8.4 Priority of Liens; Title to Properties..........................30
8.5 Tax Returns.....................................................30
8.6 Litigation......................................................30
8.7 Compliance with Other Agreements and Applicable Laws............30
8.8 Bank Accounts...................................................31
8.9 Solvency........................................................31
8.10 Year 2000 Representations.......................................31
8.11 [Intentionally Deleted].........................................31
8.12 Employee Benefits...............................................31
8.13 Environmental Compliance........................................32
8.14 Accuracy and Completeness of Information........................33
8.15 Survival of Warranties; Cumulative..............................33
SECTION 9 AFFIRMATIVE AND NEGATIVE COVENANTS..............................33
9.1 Maintenance of Existence........................................33
9.2 New Collateral Locations........................................34
9.3 Compliance with Laws, Regulations, Etc..........................34
9.4 Payment of Taxes and Claims.....................................35
9.5 Insurance.......................................................35
9.6 Financial Statements and Other Information......................36
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc.........37
9.8 Encumbrances....................................................37
9.9 Indebtedness....................................................38
9.10 Loans, Investments, Guarantees, Etc.............................38
9.11 Dividends and Redemptions.......................................39
9.12 Transactions with Affiliates....................................39
9.13 Additional Bank Accounts........................................39
9.14 [Intentionally Deleted].........................................40
9.15 [Intentionally Deleted].........................................40
9.16 Costs and Expenses..............................................40
9.17 Further Assurances..............................................40
9.18 Year 2000 Covenant..............................................41
9.19 Compliance with ERISA...........................................41
9.20 Customs, Duty and Freight.......................................41
9.21 In-Transit Inventory............................................42
9.22 Booking of In-Transit Inventory and Related Liabilities.........42
9.23 Transporter Agreements..........................................42
9.24 Subsidiary Business Activities..................................42
9.25 Illinois Qualification..........................................42
9.26 Accounts Payable................................................42
ii
<PAGE>
9.27 Canadian Operations.............................................42
9.28 Intellectual Property...........................................43
SECTION 10 EVENTS OF DEFAULT AND REMEDIES................................43
10.1 Events of Default...............................................43
10.2 Remedies........................................................45
10.3 ................................................................46
SECTION 11 JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW.....46
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial
Waiver..........................................................46
11.2 Waiver of Notices...............................................48
11.3 Amendments and Waivers..........................................48
11.4 Waiver of Counterclaims.........................................48
11.5 Indemnification.................................................48
SECTION 12 TERM OF AGREEMENT; MISCELLANEOUS..............................49
12.1 Term............................................................49
12.2 Notices.........................................................50
12.3 Partial Invalidity..............................................50
12.4 Successors......................................................50
12.5 Entire Agreement................................................51
12.6 Participant's Security Interest.................................51
12.7 Restatement of Assignment Documents.............................51
iii
<PAGE>
INDEX TO
EXHIBITS AND SCHEDULES
Exhibit A Information Certificate
Exhibit 4.1 Closing Checklist
Schedule 8.1 Foreign Qualification
Schedule 8.3 Collateral Locations
Schedule 8.4 Existing Liens
Schedule 8.7 Defaults
Schedule 8.8 Bank Accounts
Schedule 8.13 Environmental Matters
Schedule 9.9 Existing Indebtedness
Schedule 9.10 Existing Loans, Advances and Guarantees
iv
<PAGE>
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement dated January 20, 2000 is entered into by
and between Congress Financial Corporation (Central), an Illinois corporation
("Lender"), and TearDrop Golf Company, a Delaware corporation ("Borrower").
W I T N E S S E T H:
WHEREAS, Borrower has requested that Lender enter into certain financing
arrangements with Borrower pursuant to which Lender may make loans and provide
other financial accommodations to Borrower; and
WHEREAS, Lender is willing to make such loans and provide such financial
accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1 DEFINITIONS
All terms used herein which are defined in Article 1 or Article 9 of the
Uniform Commercial Code shall have the meanings given therein unless otherwise
defined in this Agreement. All references to the plural herein shall also mean
the singular and to the singular shall also mean the plural unless the context
otherwise requires. All references to Borrower and Lender pursuant to the
definitions set forth in the recitals hereto, or to any other person herein,
shall include their respective successors and assigns. The words "hereof",
"herein", "hereunder", "this Agreement" and words of similar import when used in
this Agreement shall refer to this Agreement as a whole and not any particular
provision of this Agreement and as this Agreement now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced. The
word "including" when used in this Agreement shall mean "including, without
limitation". An Event of Default shall exist or continue or be continuing until
such Event of Default is waived in accordance with Section 11.3 hereof or is
cured in a manner satisfactory to Lender, if such Event of Default is capable of
being cured as determined by Lender. Any accounting term used herein unless
otherwise defined in this Agreement shall have the meanings customarily given to
such term in accordance with GAAP. For purposes of this Agreement, the following
terms shall have the respective meanings given to them below:
1.1 "Acceptance" shall mean a time draft (including, without limitation,
any banker's acceptance or bill or letter of exchange) naming Borrower or First
Union National Bank as drawee which is used to finance the purchase by Borrower
of In-Transit Inventory and which has been accepted by Lender, on behalf of
Borrower or First Union National Bank, pursuant to the terms hereof and the
Documentation Agent Agreement.
<PAGE>
1.2 "Acceptance Reserve" shall mean, at any time, a reserve against
Revolving Loans in an amount equal to one hundred percent (100%) of the
outstanding amount (including principal, interest and fees) on all Acceptances.
1.3 "Accounts" shall mean all present and future rights of Borrower to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.
1.4 "Availability Reserves" shall mean, as of any date of determination,
the Acceptance Reserve, the In-Transit Reserve, the Trade Reserve and such other
amounts as Lender may from time to time establish and revise in good faith
reducing the amount of Revolving Loans, Acceptances and Letter of Credit
Accommodations which would otherwise be available to Borrower under the lending
formula(s) provided for herein: (a) to reflect events, conditions, contingencies
or risks not otherwise adjusted for by the Dilution Reserve, In-Transit Reserve
or Trade Reserve which, as determined by Lender in good faith, do or may affect
either (i) the Collateral or any other property which is security for the
Obligations or its value, (ii) the assets, business or prospects of Borrower or
any Obligor or (iii) the security interests and other rights of Lender in the
Collateral (including the enforceability, perfection and priority thereof) or
(b) to reflect Lender's good faith belief that any collateral report or
financial information furnished by or on behalf of Borrower or any Obligor to
Lender is or may have been incomplete, inaccurate or misleading in any material
respect or (c) to reflect outstanding Letter of Credit Accommodations and
Acceptances as provided in Sections 2.2 and 2.5 hereof or (d) in respect of any
state of facts which Lender determines in good faith constitutes an Event of
Default or may, with notice or passage of time or both, constitute an Event of
Default.
1.5 "Blocked Accounts" shall have the meaning set forth in Section 6.3
hereof.
1.6 "Carrier Letter" shall mean a letter agreement executed by a common
carrier of Borrower's Inventory in favor of and in form and substance acceptable
to Lender prohibiting such carrier from diverting such Inventory and waiving
such carrier's offset rights against such Inventory.
1.7 "Collateral" shall have the meaning set forth in Section 5 hereof.
1.8 "Dilution Reserve" shall mean an amount, calculated for each month as
of the last business day of the prior month, equal to the product of (a) the
gross amount of all Accounts of Borrower as of the last business day of such
prior month and (b) the amount (expressed as a percentage), if any, by which all
write-offs, returns, offsets and other non-cash reductions in Borrower's
Accounts for the 12 month period then ended expressed as a percentage of sales
for such period exceeds twenty percent (20%), as determined by Lender using its
customary auditing procedures. For administrative convenience, Lender may elect
to determine the amount of the Dilution Reserve by making estimates based on
what Lender reasonably believes to be the most accurate financial information
which is available to Lender if reliable data for the date in question is not
available.
2
<PAGE>
1.9 "Documentation Agent Agreement" shall mean that certain Documentation
Agent Agreement dated as of the date hereof among Borrower, Lender and First
Union National Bank with respect to Qualifying Bills of Lading.
1.10 "Eligible Accounts" shall mean Accounts created by Borrower which are
and continue to be acceptable to Lender based on the criteria set forth below.
In general, Accounts shall be Eligible Accounts if:
(a) such Accounts arise from the actual and bona fide sale and
delivery of goods by Borrower or rendition of services by Borrower in the
ordinary course of its business which transactions are completed in accordance
with the terms and provisions contained in any documents related thereto;
(b) such Accounts are not unpaid more than sixty (60) days after the
date due or one hundred twenty (120) days after the date of the original invoice
for them;
(c) such Accounts comply with the terms and conditions contained in
Section 7.2(c) of this Agreement;
(d) such Accounts do not arise from sales on consignment, guaranteed
sale, sale and return, sale on approval, or other terms under which payment by
the account debtor may be conditional or contingent;
(e) the chief executive office of the account debtor with respect to
such Accounts is located in the United States of America or Canada, or, at
Lender's option, if either: (i) the account debtor has delivered to Borrower an
irrevocable letter of credit issued or confirmed by a bank satisfactory to
Lender and payable only in the United States of America and in U.S. dollars,
sufficient to cover such Account, in form and substance satisfactory to Lender
and, if required by Lender, the original of such letter of credit has been
delivered to Lender or Lender's agent and the issuer thereof notified of the
assignment of the proceeds of such letter of credit to Lender, or (ii) such
Account is subject to credit insurance payable to Lender issued by an insurer
and on terms and in an amount acceptable to Lender, or (iii) such Account is
otherwise acceptable in all respects to Lender (subject to such lending formula
with respect thereto as Lender may determine);
(f) such Accounts do not consist of progress billings, bill and hold
invoices or retainage invoices, except as to bill and hold invoices, if Lender
shall have received an agreement in writing from the account debtor, in form and
substance satisfactory to Lender, confirming the unconditional obligation of the
account debtor to take the goods related thereto and pay such invoice;
(g) the account debtor with respect to such Accounts has not
asserted a counterclaim, defense or dispute and does not have, and does not
engage in transactions which may give rise to, any right of setoff against such
Accounts (but the portion of the Accounts of such account debtor in excess of
the amount at any time and from time to
3
<PAGE>
time owed by Borrower to such account debtor or claimed owed by such account
debtor may be deemed Eligible Accounts);
(h) there are no facts, events or occurrences which would impair the
validity, enforceability or collectability of such Accounts or reduce the amount
payable or delay payment thereunder;
(i) such Accounts are subject to the first priority, valid and
perfected security interest of Lender and any goods giving rise thereto are not,
and were not at the time of the sale thereof, subject to any liens except those
permitted in this Agreement;
(j) neither the account debtor nor any officer or employee of the
account debtor with respect to such Accounts is an officer, employee or agent of
or affiliated with Borrower directly or indirectly by virtue of family
membership, ownership, control, management or otherwise;
(k) the account debtors with respect to such Accounts are not any
foreign government, the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, unless, if the
account debtor is the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, upon Lender's
request, the Federal Assignment of Claims Act of 1940, as amended or any similar
State or local law, if applicable, has been complied with in a manner
satisfactory to Lender;
(l) there are no proceedings or actions which are threatened or
pending against the account debtors with respect to such Accounts which might
result in any material adverse change in any such account debtor's financial
condition;
(m) such Accounts of a single account debtor or its affiliates do
not constitute more than fifteen percent (15%) of all otherwise Eligible
Accounts (but the portion of the Accounts not in excess of such percentage may
be deemed Eligible Accounts);
(n) such Accounts are not owed by an account debtor who has Accounts
unpaid more than one hundred twenty (120) days after the date of the original
invoice for them which constitute more than fifty percent (50%) of the total
Accounts of such account debtor;
(o) such Accounts are owed by account debtors whose total
indebtedness to Borrower does not exceed the credit limit with respect to such
account debtors as determined by Lender from time to time (but the portion of
the Accounts not in excess of such credit limit may be deemed Eligible
Accounts); and
(p) such Accounts are owed by account debtors deemed creditworthy at
all times by Lender, as determined by Lender.
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General criteria for Eligible Accounts may be established and revised from time
to time by Lender in good faith. Any Accounts which are not Eligible Accounts
shall nevertheless be part of the Collateral.
1.11 "Eligible Inventory" shall mean Inventory (including In-Transit
Inventory) consisting of finished goods held for resale in the ordinary course
of the business of Borrower and raw materials for such finished goods which are
acceptable to Lender based on the criteria set forth below. In general, Eligible
Inventory shall not include (a) work-in-process; (b) components which are not
part of finished goods; (c) spare parts for equipment; (d) packaging and
shipping materials; (e) supplies used or consumed in Borrower's business; (f)
Inventory (other than In-Transit Inventory) at premises other than those owned
and controlled by Borrower, except if Lender shall have received an agreement in
writing from the person in possession of such Inventory and/or the owner or
operator of such premises in form and substance satisfactory to Lender
acknowledging Lender's first priority security interest in the Inventory,
waiving security interests and claims by such person against the Inventory and
permitting Lender access to, and the right to remain on, the premises so as to
exercise Lender's rights and remedies and otherwise deal with the Collateral;
(g) Inventory subject to a security interest or lien in favor of any person
other than Lender except those permitted in this Agreement; (h) bill and hold
goods; (i) unserviceable, obsolete or slow moving Inventory; (j) Inventory which
is not subject to the first priority, valid and perfected security interest of
Lender; (k) returned, damaged and/or defective Inventory; and (l) Inventory
purchased or sold on consignment. General criteria for Eligible Inventory may be
established and revised from time to time by Lender in good faith. Any Inventory
which is not Eligible Inventory shall nevertheless be part of the Collateral.
1.12 "Environmental Laws" shall mean all foreign, Federal, State and local
laws (including common law), legislation, rules, codes, licenses, permits
(including any conditions imposed therein), authorizations, judicial or
administrative decisions, injunctions or agreements between Borrower and any
governmental authority, (a) relating to pollution and the protection
preservations or restoration of the environment (including air, water vapor,
surface water, ground water, drinking water, drinking water supply, surface
land, subsurface land, plant and animal life or any other natural resource), or
to human health or safety, (b) relating to the exposure to, or the use, storage,
recycling, treatment, generation, manufacture, processing, distribution ,
transportation, handling, labeling, production, release or disposal, or
threatened release, of Hazardous Materials, or (c) relating to all laws with
regard to recordkeeping, notification, disclosure and reporting requirements
respecting Hazardous Materials. The term "Environmental Laws" includes (i) the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, the Federal Superfund Amendments and Reauthorization Act, the Federal
Water Pollution Control Act of 1972, the Federal Clean Water Act, the Federal
Clean Air Act, the Federal Resource Conservation and Recovery Act of 1976
(including the Hazardous and the Solid Waste Amendments thereto), the Federal
Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal
Insecticide, Fungicide and Rodenticide Act, and the Federal Safe Drinking Water
Act of 1974, (ii) applicable state counterparts to such laws, and (iii) any
common law or equitable doctrine that may impose liability or obligations for
injuries or documents, certificates and instruments now or at any time hereafter
executed and/or delivered
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by Borrower or any Obligor in connection with this Agreement, as the same now
exist or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced.
1.13 "Equipment" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
1.14 "ERISA" shall mean the United States Employee Retirement Income
Security Act of 1974, as the same now exists or may hereafter from time to time
be amended, modified, recodified or supplemented, together with all rules,
regulations and interpretations thereunder or related thereto.
1.15 "ERISA Affiliate" shall mean any person required to be aggregated
with Borrower or any of its Subsidiaries under Sections 414(b), 414(c), 414(m)
or 414(o) of the Code.
1.16 "Excess Availability" shall mean the amount, as determined by Lender,
calculated at any time, equal to: (a) the lesser of: (i) the amount of the
Revolving Loans available to Borrower as of such time based on the applicable
lending formulas under Section 2.1, and (ii) the Maximum Credit (less the then
outstanding principal amount of the Term Loans), minus (b) the sum of: (i) the
amount of all then outstanding and unpaid Obligations (but not including for
this purpose the then outstanding principal amount of the Term Loans), plus (ii)
the aggregate amount of all then outstanding and unpaid trade payables of
Borrower which are more than ninety (90) days past due as of such time, plus
(iii) the amount of checks issued by Borrower to pay trade payables, but not yet
sent and the book overdraft of Borrower, plus (iv) any taxes due and unpaid.
1.17 "Event of Default" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.
1.18 "Financing Agreements" shall mean, collectively, this Agreement and
all notes, guarantees, security agreements, pledge agreements, the Mortgage,
subordination agreements and other agreements, documents, certificates and
instruments now or at any time hereafter executed and/or delivered by Borrower
or any Obligor in connection with this Agreement (including those listed on
Exhibit 4.1 hereto), as the same now exist or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
1.19 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Board which are applicable to the
circumstances as of the date of determination consistently applied.
1.20 "Hazardous Materials" shall mean any hazardous, toxic or dangerous
substances, materials and wastes, including hydrocarbons (including naturally
occurring or man-made
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petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde
insulation radioactive materials, biological substances, polychlorinated
biphenyls, pesticides, herbicides and any other kind and/or type of pollutants
or contaminants (including materials which include hazardous constituents),
sewage, sludge, industrial slag, solvents and/or any other similar substances,
materials, or wastes and including any other substances, materials or wastes
that are or become regulated under any Environmental Law (including any that are
or become classified as hazardous or toxic under any Environmental Law).
1.21 "Information Certificate" shall mean the Information Certificate of
Borrower constituting Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.
1.22 "In-Transit Inventory" shall mean Eligible Inventory which consists
of first quality raw materials of the type normally used for the production of
Borrower's Eligible Inventory consisting of finished goods which are currently
in-transit to Borrower from a supplier thereof and (I) if located outside the
United States, are (a) either evidenced by a Qualifying Bill of Lading or to be
acquired by Borrower from a supplier to which a Letter of Credit Accommodation
has been issued for the full purchase price thereof which contains as a
condition to drawing thereunder the presentation of a Qualifying Bill of Lading,
(b) fully insured in-transit against such risks (including war risks) and
pursuant to such terms and conditions and in such amounts as Lender may deem
appropriate which insurance shall name Lender loss payee thereunder and (c)
subject to agreements from Borrower's customs agents, freight forwarders and/or
documentation agents as Lender shall require, in form and substance satisfactory
to Lender; or (II) if located in the United States, are (a) under the control of
a common carrier which has executed a Carrier Letter and/or (b) evidenced by
bills of lading or other documents of title issued by a common carrier in
non-negotiable form in the name of Borrower and (c) fully insured in-transit
against such risks and pursuant to such terms and conditions and in such amounts
as Lender may deem appropriate which insurance shall name Lender loss payee
thereunder.
1.23 "In-Transit Reserve" means a reserve against Revolving Loans in an
amount determined by Lender in its discretion to reflect the estimated costs
relating to unpaid freight charges, warehousing or storage charges, taxes,
duties and other similar unpaid costs associated with the acquisition or
transportation of In-Transit Inventory.
1.24 "Inventory" shall mean all of Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
1.25 "Letter of Credit Accommodations" shall mean the letters of credit,
merchandise purchase guarantee or other guarantees which are from time to time
either (a) issued or opened by Lender for the account of Borrower or any Obligor
or (b) with respect to which Lender has
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agreed to indemnify the issuer or guaranteed to the issuer the performance by
Borrower of its obligations to such issuer.
1.26 "Loans" shall mean the Revolving Loans and the Term Loans.
1.27 "Maximum Credit" shall mean the amount of $28,000,000.
1.28 "Mortgage" shall mean the Future Advances Open End Mortgage, Security
Agreement, Assignment of Leases and Rents, Financing Statement and Fixture
Filing, dated as of even date herewith (as amended or modified from time to
time), by Borrower in favor of Lender with respect to the Real Property and
related assets of Borrower.
1.29 "Net Amount of Eligible Accounts" shall mean the gross amount of
Eligible Accounts less (a) sales, excise or similar taxes included in the amount
thereof and (b) returns, discounts, claims, credits and allowances of any nature
at any time issued, owing, granted, outstanding, available or claimed with
respect thereto.
1.30 "Net Orderly Liquidation Value" shall mean the liquidation value of
Eligible Inventory less liquidation expenses, in each case as determined by Ozer
Valuation Services LLC (or another appraiser acceptable to Lender in its sole
discretion) from time to time pursuant to its most recently completed appraisal
of Borrower's Inventory.
1.31 "Obligations" shall mean any and all Revolving Loans, the Term Loans,
Letter of Credit Accommodations, Acceptances and all other obligations,
liabilities and indebtedness of every kind, nature and description owing by
Borrower to Lender and/or its affiliates, including principal, interest,
charges, fees, costs and expenses, however evidenced, whether as principal,
surety, endorser, guarantor or otherwise, whether arising under this Agreement
or otherwise, whether now existing or hereafter arising, whether arising before,
during or after the initial or any renewal term of this Agreement or after the
commencement of any case with respect to Borrower under the United States
Bankruptcy Code or any similar statute (including the payment of interest and
other amounts which would accrue and become due but for the commencement of such
case, whether or not such amounts are allowed or allowable in whole or in part
in such case), whether direct or indirect, absolute or contingent, joint or
several, due or not due, primary or secondary, liquidated or unliquidated,
secured or unsecured, and however acquired by Lender.
1.32 "Obligor" shall mean any guarantor, endorser, acceptor, surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations, other than Borrower.
1.33 "Participant" shall mean any person which at any time participates
with Lender in respect of the Loans, the Letter of Credit Accommodations,
Acceptances or other Obligations or any portion thereof.
1.34 "Payment Account" shall have the meaning set forth in Section 6.3
hereof.
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1.35 "Person" or "person" shall mean any individual, sole proprietorship,
partnership, corporation (including any corporation which elects subchapter S
status under the Internal Revenue Code of 1986, as amended), limited liability
company, limited liability partnership, business trust, unincorporated
association, joint stock corporation, trust, joint venture or other entity or
any government or any agency or instrumentality or political subdivision
thereof.
1.36 "Prime Rate" shall mean the rate from time to time publicly announced
by First Union National Bank, or its successors, at its office in Charlotte,
North Carolina, as its prime rate, whether or not such announced rate is the
best rate available at such bank.
1.37 "Qualifying Bill(s) of Lading" means a negotiable bill of lading
issued by a common carrier in form and substance acceptable to Lender (i)
specifying as the consignee thereof the issuer of the applicable Letter of
Credit Accommodation issued to facilitate the payment of the goods represented
by such negotiable bill of lading or (ii) which, pursuant to the Documentation
Agent Agreement, has been properly endorsed to Lender (or Lender's duly
appointed agent) if no Letter of Credit Accommodation was required to be issued
as a condition to the issuance of such negotiable bill of lading.
1.38 "Real Property" shall mean the real property of Borrower, including
leasehold interests, together with all buildings, structures, and other
improvements located thereon and all licenses, easements and appurtenances
relating thereto and related assets of Borrower.
1.39 "Records" shall mean all of Borrower's present and future books of
account of every kind or nature, purchase and sale agreements, invoices, ledger
cards, bills of lading and other shipping evidence, statements, correspondence,
memoranda, credit files and other data relating to the Collateral or any account
debtor, together with the tapes, disks, diskettes and other data and software
storage media and devices, file cabinets or containers in or on which the
foregoing are stored (including any rights of Borrower with respect to the
foregoing maintained with or by any other person).
1.40 "Renewal Date" shall have the meaning set forth in Section 12.1(a)
hereof.
1.41 "Revolving Loans" shall mean the loans now or hereafter made by
Lender to or for the benefit of Borrower on a revolving basis (involving
advances, repayments and readvances) as set forth in Section 2.1 hereof.
1.42 "Subordinated Debt" shall have the meaning set forth in Section
4.1(k) hereof.
1.43 "Term Loans" shall mean collectively, the Term Loan A and Term Loan B
made by Lender to Borrower as provided for in Section 2.3 hereof.
1.44 "Term Loan A" shall have the meaning set forth in Section 2.3(a)
hereof.
1.45 "Term Loan B" shall have the meaning set forth in Section 2.3(b)
hereof.
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1.46 "Trade Reserve" shall mean a reserve against Revolving Loans in the
amount of $1,000,000 which reserve shall be reduced by (i) $500,000 on the date
that is forty-five (45) days after the date hereof if Lender determines in its
sole discretion that Borrower has an acceptable level of trade credit as of such
date and (ii) the remaining $500,000 on the date that is ninety (90) days after
the date hereof if Lender determines in its sole discretion that Borrower has an
acceptable level of trade credit as of such date.
1.47 "Value" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) cost computed on a first-in-first-out
basis in accordance with GAAP or (b) market value.
SECTION 2 CREDIT FACILITIES
2.1 Revolving Loans.
(a) Subject to and upon the terms and conditions contained herein,
Lender agrees to make Revolving Loans to Borrower from time to time in amounts
requested by Borrower up to the amount equal to the sum of:
(i) seventy percent (70%) of the total obtained by subtracting
the Dilution Reserve from the Net Amount of Eligible Accounts, plus
(ii) the lesser of: (A) (1) prior to June 30, 2000, sixty
percent (60%) of the Value of Eligible Inventory consisting of finished
goods and raw materials for such finished goods or (2) from and after June
30, 2000, eighty percent (80%) of the Net Orderly Liquidation Value of
Eligible Inventory consisting of finished goods and raw materials for such
finished goods or (B) $10,000,000; provided that in no event may the
amount of Revolving Loans at any time outstanding based on Eligible
Inventory consisting of raw materials exceed $5,000,000, less
(iii) any Availability Reserves other than the Dilution
Reserve.
(b) Lender may, in its discretion, from time to time, upon not less
than five (5) days prior notice to Borrower, (i) reduce the lending formula with
respect to Eligible Accounts to the extent that Lender determines in good faith
that: (A) to the extent not reflected in the Dilution Reserve, the dilution with
respect to the Accounts for any period (based on the ratio of (1) the aggregate
amount of reductions in Accounts other than as a result of payments in cash to
(2) the aggregate amount of total sales) has increased in any material respect
or may be reasonably anticipated to increase in any material respect above
historical levels, or (B) the general creditworthiness of account debtors has
declined or (ii) reduce the lending formula(s) with respect to Eligible
Inventory to the extent that Lender determines that: (A) the number of days of
the turnover of the Inventory for any period has changed in any material respect
or (B) the liquidation value of the Eligible Inventory, or any category thereof,
has decreased, or (C) the nature and quality of the Inventory has deteriorated.
In determining whether to reduce
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the lending formula(s), Lender may consider events, conditions, contingencies or
risks which are also considered in determining Eligible Accounts, Eligible
Inventory or in establishing Availability Reserves.
(c) Except in Lender's discretion, the aggregate amount of the
Loans, Acceptances and the Letter of Credit Accommodations outstanding at any
time shall not exceed the Maximum Credit. In the event that the outstanding
amount of any component of the Loans, or the aggregate amount of the outstanding
Loans, Acceptances and Letter of Credit Accommodations, exceed the amounts
available under the lending formulas, the sublimits for Letter of Credit
Accommodations set forth in Section 2.2(d) hereof, the sublimits for Acceptances
set forth in Section 2.5(d) hereof or the Maximum Credit, as applicable, such
event shall not limit, waive or otherwise affect any rights of Lender in that
circumstance or on any future occasions and Borrower shall, upon demand by
Lender, which may be made at any time or from time to time, immediately repay to
Lender the entire amount of any such excess(es) for which payment is demanded.
(d) For purposes only of applying the sublimits on Revolving Loans
based on Eligible Inventory pursuant to Section 2.1(a)(ii) hereof, Lender may
treat the then undrawn amounts of outstanding Letter of Credit Accommodations
for the purpose of purchasing Eligible Inventory as Revolving Loans to the
extent Lender is in effect basing the issuance of the Letter of Credit
Accommodations on the Value of the Eligible Inventory being purchased with such
Letter of Credit Accommodations. In determining the actual amounts of such
Letter of Credit Accommodations to be so treated for purposes of the sublimits,
the outstanding Revolving Loans and Availability Reserves shall be attributed
first to any components of the lending formulas in Section 2.1(a) hereof that
are not subject to such sublimits, before being attributed to the components of
the lending formulas subject to such sublimits.
2.2 Letter of Credit Accommodations.
(a) Subject to and upon the terms and conditions contained herein,
at the request of Borrower, Lender agrees to provide or arrange for Letter of
Credit Accommodations for the account of Borrower containing terms and
conditions acceptable to Lender and the issuer thereof. Any payments made by
Lender to any issuer thereof and/or related parties in connection with the
Letter of Credit Accommodations shall constitute additional Revolving Loans to
Borrower pursuant to this Section 2. Any Letter of Credit Accommodation shall
have an expiry date no later than thirty (30) days prior to the last day of the
Renewal Date.
(b) In addition to any charges, fees or expenses charged by any bank
or issuer in connection with the Letter of Credit Accommodations, Borrower shall
pay to Lender a letter of credit fee at a rate equal to one and one-half percent
(1.50%) per annum on the daily outstanding balance of the Letter of Credit
Accommodations for the immediately preceding month (or part thereof), payable in
arrears as of the first day of each succeeding month, except that Borrower shall
pay to Lender such letter of credit fee,
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at Lender's option, without notice, at a rate equal to four and one-half percent
(4.50%) per annum on such daily outstanding balance for: (i) the period from and
after the date of termination or non-renewal of the Financing Agreements until
Lender has received full and final payment of all Obligations (notwithstanding
entry of a judgment against Borrower) and (ii) the period from and after the
date of the occurrence of an Event of Default for so long as such Event of
Default is continuing as determined by Lender. Such letter of credit fee shall
be calculated on the basis of a three hundred sixty (360) day year and actual
days elapsed and the obligation of Borrower to pay such fee shall survive the
termination or non-renewal of this Agreement.
(c) No Letter of Credit Accommodations shall be available unless on
the date of the proposed issuance of any Letter of Credit Accommodations, the
Revolving Loans available to Borrower (subject to the Maximum Credit and any
Availability Reserves) are equal to or greater than: (i) if the proposed Letter
of Credit Accommodation is for the purpose of purchasing Eligible Inventory, the
sum of (A) the percentage equal to one hundred (100%) percent minus the then
applicable percentage set forth in Section 2.1(a)(ii)(A)(1) or (2), as
applicable, above of the Value or Net Orderly Liquidation Value, as applicable,
of such Eligible Inventory, plus (B) freight, taxes, duty and other amounts
which Lender estimates must be paid in connection with such Inventory upon
arrival and for delivery to one of Borrower's locations for Eligible Inventory
within the United States of America and (ii) if the proposed Letter of Credit
Accommodation is for any other purpose, an amount equal to one hundred (100%)
percent of the face amount thereof and all other commitments and obligations
made or incurred by Lender with respect thereto. Effective on the issuance of
each Letter of Credit Accommodation, an Availability Reserve shall be
established in the applicable amount set forth in Section 2.2(c)(i) or Section
2.2(c)(ii) hereof.
(d) Except in Lender's discretion, the amount of all outstanding
Letter of Credit Accommodations and all other commitments and obligations made
or incurred by Lender in connection therewith shall not at any time exceed
$2,000,000. At any time an Event of Default exists or has occurred and is
continuing, upon Lender's request, Borrower will either furnish cash collateral
to secure the reimbursement obligations to the issuer in connection with any
Letter of Credit Accommodations or furnish cash collateral to Lender for the
Letter of Credit Accommodations, and in either case, the Revolving Loans
otherwise available to Borrower shall not be reduced as provided in Section
2.2(c) hereof to the extent of such cash collateral.
(e) Borrower shall indemnify and hold Lender harmless from and
against any and all losses, claims, damages, liabilities, costs and expenses
which Lender may suffer or incur in connection with any Letter of Credit
Accommodations and any documents, drafts or acceptances relating thereto,
including any losses, claims, damages, liabilities, costs and expenses due to
any action taken by any issuer or correspondent with respect to any Letter of
Credit Accommodation. Borrower assumes all risks with respect to the acts or
omissions of the drawer under or beneficiary of any Letter of Credit
Accommodation and for such purposes the drawer or beneficiary shall be deemed
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Borrower's agent. Borrower assumes all risks for, and agrees to pay, all
foreign, Federal, State and local taxes, duties and levies relating to any goods
subject to any Letter of Credit Accommodations or any documents, drafts or
acceptances thereunder. Borrower hereby releases and holds Lender harmless from
and against any acts, waivers, errors, delays or omissions, whether caused by
Borrower, by any issuer or correspondent or otherwise with respect to or
relating to any Letter of Credit Accommodation. The provisions of this Section
2.2(e) shall survive the payment of Obligations and the termination or
non-renewal of this Agreement.
(f) Nothing contained herein shall be deemed or construed to grant
Borrower any right or authority to pledge the credit of Lender in any manner.
Lender shall have no liability of any kind with respect to any Letter of Credit
Accommodation provided by an issuer other than Lender unless Lender has duly
executed and delivered to such issuer the application or a guarantee or
indemnification in writing with respect to such Letter of Credit Accommodation.
Borrower shall be bound by any interpretation made in good faith by Lender, or
any other issuer or correspondent under or in connection with any Letter of
Credit Accommodation or any documents, drafts or acceptances thereunder,
notwithstanding that such interpretation may be inconsistent with any
instructions of Borrower. Lender shall have the sole and exclusive right and
authority to, and Borrower shall not: (i) at any time an Event of Default exists
or has occurred and is continuing, (A) approve or resolve any questions of
non-compliance of documents, (B) give any instructions as to acceptance or
rejection of any documents or goods or (C) execute any and all applications for
steamship or airway guarantees, indemnities or delivery orders, and (ii) at all
times, (A) grant any extensions of the maturity of, time of payment for, or time
of presentation of, any drafts, acceptances, or documents, and (B) agree to any
amendments, renewals, extensions, modifications, changes or cancellations of any
of the terms or conditions of any of the applications, Letter of Credit
Accommodations, or documents, drafts or acceptances thereunder or any letters of
credit included in the Collateral. Lender may take such actions either in its
own name or in Borrower's name.
(g) Any rights, remedies, duties or obligations granted or
undertaken by Borrower to any issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement in favor of any issuer or
correspondent relating to any Letter of Credit Accommodation, shall be deemed to
have been granted or undertaken by Borrower to Lender. Any duties or obligations
undertaken by Lender to any issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement by Lender in favor of any
issuer or correspondent relating to any Letter of Credit Accommodation, shall be
deemed to have been undertaken by Borrower to Lender and to apply in all
respects to Borrower.
2.3 Term Loan. Lender is making Term Loans to Borrower as follows:
(a) Lender is making a Term Loan A to Borrower in the original
principal amount of $2,175,000 ("Term Loan A"). Term Loan A shall be payable by
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Borrower as follows: (i) successive monthly principal installments in the amount
of Thirty-Six Thousand Two Hundred Fifty Dollars ($36,250) on the first business
day of each month, beginning March 1, 2000 and continuing each month thereafter
and (ii) a final installment in the amount of all unpaid principal and interest
on Term Loan A due and payable upon termination of this Agreement, whether by
its terms, by prepayment, by acceleration or otherwise.
(b) Lender is making a Term Loan B to Borrower in the original
principal amount of $4,500,000 ("Term Loan B"). Term Loan B shall be payable by
Borrower as follows: (i) successive quarterly principal installments in the
amount of Five Hundred Thousand Dollars ($500,000) beginning August 1, 2000 and
on the first business day of each November, February, May and August thereafter
and (ii) a final installment in the amount of all unpaid principal and interests
on Term Loan B due and payable upon termination of this Agreement, whether by
its terms, by prepayment, by acceleration or otherwise. Notwithstanding the
foregoing, Lender may require that Borrower make mandatory prepayments against
Term Loan B from time to time based on updated appraisals of Borrower's
intellectual property which appraisals Lender may request at any time at
Borrower's expense and which shall be conducted by Business Valuation Services,
Inc. or another appraiser designated by Lender in its sole discretion. If at any
time Lender determines, based upon the most recent intellectual property
appraisal, that the outstanding principal amount of Term Loan B exceeds nineteen
percent (19%) of the orderly liquidation value of the Borrower's intellectual
property based on such appraisal, then upon demand by Lender, Borrower shall
make a prepayment of Term Loan B in an amount equal to such excess. Each
prepayment shall be applied to prepay the scheduled installments of Term Loan B
in inverse order of maturity.
(c) Borrower may at any time on at least five (5) days' prior
written notice to Lender voluntarily prepay all or part of the Term Loans;
provided that any such prepayments shall be in a minimum amount of $36,250 with
respect to Term Loan A and $500,000 with respect to Term Loan B. Any prepayment
of the Term Loans shall be applied to prepay the scheduled installments of the
applicable Term Loans in inverse order of maturity.
2.4 Availability Reserves(a) . All Revolving Loans otherwise available to
Borrower pursuant to the lending formulas and subject to the Maximum Credit and
other applicable limits hereunder shall be subject to Lender's continuing right
to establish and revise Availability Reserves.
2.5 Acceptances.
(a) Subject to and upon the terms and conditions contained herein
and in that certain Documentation Agent Agreement, at the request of Borrower,
Lender agrees to arrange for payment, on behalf of Borrower, on any Acceptance
for the account of Borrower; provided, that the terms of such Acceptance are
acceptable to Lender. Any payments made by Lender to any drawer or payee of an
Acceptance and/or related parties
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in connection with an Acceptance shall constitute additional Revolving Loans to
Borrower pursuant to this Section 2. Borrower shall take all actions to ensure
that the final payment date of any Acceptance shall have an expiry date no later
than thirty (30) days prior to the last day of the Renewal Date. Should the
final payment date of any Acceptance for any reason have an expiry date later
than thirty (30) days prior to the last day of the Renewal Date, Borrower shall
furnish cash collateral to Lender for the outstanding amount of all Acceptances
not matured as of such date.
(b) In addition to any charges, fees or expenses charged by any bank
or issuer in connection with an Acceptance, Borrower shall pay to Lender an
acceptance fee at a rate equal to four percent (4.00%) per annum on the daily
outstanding balance of all Acceptances for the immediately preceding month (or
part thereof), payable in arrears as of the first day of each succeeding month,
except that Borrower shall pay to Lender such acceptance fee, at Lender's
option, without notice, at a rate equal to seven and one-half percent (7.50%)
per annum on such daily outstanding balance for: (i) the period from and after
the date of termination or non-renewal of the Financing Agreements until Lender
has received full and final payment of all Obligations (notwithstanding entry of
a judgment against Borrower) and (ii) the period from and after the date of the
occurrence of an Event of Default for so long as such Event of Default is
continuing as determined by Lender. Such acceptance fee shall be calculated on
the basis of a three hundred sixty (360) day year and actual days elapsed and
the obligation of Borrower to pay such fee shall survive the termination or
non-renewal of this Agreement.
(c) No Acceptance shall be deemed accepted by Lender, on behalf of
Borrower or First Union National Bank, pursuant to the terms hereof and the
Documentation Agent Agreement unless on the date of such proposed acceptance by
Lender, (i) Lender has approved of the terms and conditions of such Acceptance
in its sole discretion, (ii) the Revolving Loans available to Borrower (subject
to the Maximum Credit and any Availability Reserves) are equal to or greater
than one hundred (100%) percent of the face amount thereof and all other
commitments and obligations made or incurred by Lender with respect thereto and
(iii) no Event of Default exists. Effective upon Lender's acceptance thereof, an
Acceptance Reserve shall be established in the applicable amount.
(d) Except in Lender's discretion, the amount of all outstanding
Acceptances and all other commitments and obligations made or incurred by Lender
in connection therewith shall not at any time exceed $1,000,000. At any time an
Event of Default exists or has occurred and is continuing, upon Lender's
request, Borrower will furnish cash collateral to Lender for the outstanding
amount of all Acceptances, and in such case, the Revolving Loans otherwise
available to Borrower shall not be reduced as provided in this Section 2.5 to
the extent of such cash collateral.
(e) Borrower shall indemnify and hold Lender harmless from and
against any and all losses, claims, damages, liabilities, costs and expenses
which Lender may suffer or incur in connection with any Acceptance and any
documents, drafts or
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acceptances relating thereto, including any losses, claims, damages,
liabilities, costs and expenses due to any action taken by any issuer or
correspondent with respect to any Acceptance. Borrower assumes all risks with
respect to the acts or omissions of the drawer under or beneficiary of any
Acceptance and for such purposes the drawer or beneficiary shall be deemed
Borrower's agent. Borrower assumes all risks for, and agrees to pay, all
foreign, Federal, State and local taxes, duties and levies relating to any goods
subject to any Acceptance or any documents, drafts or acceptances thereunder.
Borrower hereby releases and holds Lender harmless from and against any acts,
waivers, errors, delays or omissions, whether caused by Borrower, by any issuer
or correspondent or otherwise with respect to or relating to any Acceptance. The
provisions of this Section 2.5(e) shall survive the payment of Obligations and
the termination or non-renewal of this Agreement.
(f) Nothing contained herein shall be deemed or construed to grant
Borrower any right or authority to pledge the credit of Lender in any manner.
Lender shall have no liability of any kind with respect to any Acceptance unless
Lender has duly executed and delivered to the drawer, payee or First Union
National Bank, as applicable, the application or a guarantee or indemnification
in writing with respect to such Acceptance. Borrower shall be bound by any
interpretation made in good faith by Lender, or any other issuer or
correspondent under or in connection with any Acceptance or any documents,
drafts or acceptances thereunder, notwithstanding that such interpretation may
be inconsistent with any instructions of Borrower. Lender shall have the sole
and exclusive right and authority to, and Borrower shall not: (i) at any time an
Event of Default exists or has occurred and is continuing, (A) approve or
resolve any questions of non-compliance of documents, (B) give any instructions
as to acceptance or rejection of any documents or goods or (C) execute any and
all applications for steamship or airway guarantees, indemnities or delivery
orders, and (ii) at all times, (A) grant any extensions of the maturity of, time
of payment for, or time of presentation of, any Acceptance or related documents,
and (B) agree to any amendments, renewals, extensions, modifications, changes or
cancellations of any of the terms or conditions of any Acceptance or related
documents. Lender may take such actions either in its own name or in Borrower's
name.
(g) Any rights, remedies, duties or obligations granted or
undertaken by Borrower to any issuer or correspondent in any Acceptance, or any
other agreement in favor of any issuer or correspondent relating to any
Acceptance, shall be deemed to have been granted or undertaken by Borrower to
Lender. Any duties or obligations undertaken by Lender to any issuer or
correspondent in any Acceptance, or any other agreement by Lender in favor of
any issuer or correspondent relating to any Acceptance, shall be deemed to have
been undertaken by Borrower to Lender and to apply in all respects to Borrower.
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SECTION 3 INTEREST AND FEES
3.1 Interest.
(a) Borrower shall pay to Lender interest on the outstanding
principal amount of the non-contingent Obligations at the rate of (i) one
percent (1%) per annum in excess of the Prime Rate for all Loans other than Term
Loan B and (ii) one and one-half percent (1.50%) per annum in excess of the
Prime Rate for Term Loan B. Notwithstanding the foregoing, at Lender's option,
without notice, Borrower shall pay to Lender interest at the rate of (i) four
percent (4.0%) per annum in excess of the Prime Rate for all Loans other than
Term Loan B and (ii) four and one-half percent (4.50%) per annum in excess of
the Prime Rate for Term Loan B for (A) the period from and after the date of
termination or non-renewal of the Financing Agreements until such time as Lender
has received full and final payment of all such Obligations (notwithstanding
entry of any judgment against Borrower), (B) the period from and after the date
of the occurrence of an Event of Default for so long as such Event of Default is
continuing as determined by Lender and (C) on the Revolving Loans at any time
outstanding in excess of the amounts available to Borrower under Section 2
hereof (whether or not such excess(es), arise or are made with or without
Lender's knowledge or consent and whether made before or after an Event of
Default).
(b) Interest shall be payable by Borrower to Lender monthly in
arrears not later than the first day of each calendar month and shall be
calculated on the basis of a three hundred sixty (360) day year and actual days
elapsed. The interest rate shall increase or decrease by an amount equal to each
increase or decrease in the Prime Rate effective on the first day of the month
after any change in such Prime Rate is announced. The increase or decrease shall
be based on the Prime Rate in effect on the last day of the month in which any
such change occurs. All interest accruing hereunder on and after an Event of
Default or termination or non-renewal hereof shall be payable on demand. In no
event shall charges constituting interest payable by Borrower to Lender exceed
the maximum amount or the rate permitted under any applicable law or regulation,
and if any part or provision of this Agreement is in contravention of any such
law or regulation, such part or provision shall be deemed amended to conform
thereto.
3.2 Closing Fee. Borrower shall pay to Lender as a closing fee the amount
of $210,000, which shall be fully earned as of the date hereof and payable in
seven monthly installments of $30,000 commencing on the date hereof and on each
one month anniversary of the date hereof until paid in full.
3.3 Unused Line Fee. Borrower shall pay to Lender monthly an unused line
fee at a rate equal to one-quarter of one percent (0.25%) per annum calculated
upon the amount by which $28,000,000 exceeds the average daily principal balance
of the outstanding Revolving Loans, Term Loans, Acceptances and Letter of Credit
Accommodations during the immediately preceding month (or part thereof) while
this Agreement is in effect and for so long thereafter as
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any of the Obligations are outstanding, which fee shall be payable on the first
day of each month in arrears.
SECTION 4 CONDITIONS PRECEDENT
4.1 Conditions Precedent to Initial Loans and Letter of Credit
Accommodations. Each of the following is a condition precedent to Lender making
the initial Loans and providing the initial Letter of Credit Accommodations
hereunder:
(a) Lender shall have received evidence, in form and substance
satisfactory to Lender, that Lender has valid perfected and first priority
security interests in and liens upon the Collateral and any other property which
is intended to be security for the Obligations or the liability of any Obligor
in respect thereof, subject only to the security interests and liens permitted
herein or in the other Financing Agreements;
(b) all requisite corporate action and proceedings in connection
with this Agreement and the other Financing Agreements shall be satisfactory in
form and substance to Lender, and Lender shall have received all information and
copies of all documents, including records of requisite corporate action and
proceedings which Lender may have requested in connection therewith, such
documents where requested by Lender or its counsel to be certified by
appropriate corporate officers or governmental authorities;
(c) no material adverse change shall have occurred in the assets,
business or prospects of Borrower since the date of Lender's latest field
examination and no change or event shall have occurred which would impair the
ability of Borrower or any Obligor to perform its obligations hereunder or under
any of the other Financing Agreements to which it is a party or of Lender to
enforce the Obligations or realize upon the Collateral;
(d) Lender shall have completed a field review of the Records and
such other information with respect to the Collateral as Lender may require to
determine the amount of Revolving Loans available to Borrower, the results of
which shall be satisfactory to Lender, not more than three (3) business days
prior to the date hereof;
(e) Lender shall have received, in form and substance satisfactory
to Lender, all consents, waivers, acknowledgments and other agreements from
third persons which Lender may deem necessary or desirable in order to permit,
protect and perfect its security interests in and liens upon the Collateral or
to effectuate the provisions or purposes of this Agreement and the other
Financing Agreements, including acknowledgments by lessors, mortgagees and
warehousemen of Lender's security interests in the Collateral, waivers by such
persons of any security interests, liens or other claims by such persons to the
Collateral and agreements permitting Lender access to, and the right to remain
on, the premises to exercise its rights and remedies and otherwise deal with the
Collateral;
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(f) Lender shall have received evidence of insurance and loss payee
endorsements required hereunder and under the other Financing Agreements, in
form and substance satisfactory to Lender, and certificates of insurance
policies and/or endorsements naming Lender as loss payee;
(g) Lender shall have received, in form and substance satisfactory
to Lender, such opinion letters of counsel to Borrower with respect to the
Financing Agreements and such other matters as Lender may request;
(h) Borrower shall have established the Blocked Accounts and Payment
Account and Lender shall have received, in form and substance satisfactory to
Lender, all agreements with the depository banks and Borrower with respect to
such Blocked Accounts and Payment Account as Lender may require pursuant to
Section 6.3 hereof, duly authorized, executed and delivered by such depository
banks and Borrower;
(i) Lender shall have received, in form and substance satisfactory
to Lender, agreements from Borrower's customs agents, freight forwarders,
documentation agents, and domestic common carriers as Lender shall require;
(j) Lender shall have received, in form and substance satisfactory
to Lender, a valid and effective title insurance policy with respect to the
Mortgage issued by a company and agent acceptable to Lender (i) insuring the
priority, amount and sufficiency of the Mortgage, (ii) insuring against matters
that would be disclosed by surveys and (iii) containing any legally available
endorsement, assurances or affirmative coverage requested by Lender for
protection of its interests;
(k) Lender shall have received satisfactory evidence that Rudy
Slucker shall have made a subordinated loan to Borrower in the amount of
$1,000,000 (the "Subordinated Debt") on terms and conditions acceptable to
Lender. Lender shall have received, in form and substance satisfactory to
Lender, a subordination agreement between Lender and Rudy Slucker as
acknowledged and agreed to by Borrower, providing for such parties' relative
rights and priorities with respect to the Borrower's obligations under this
Agreement and the Subordinated Debt;
(l) Borrower shall have Excess Availability as determined by Lender,
as of the date hereof, in amount not less than $3,800,000 (taking into account
the Trade Reserve) after giving effect to (i) the initial Loans made or to be
made, (ii) Letter of Credit Accommodations issued or to be issued in connection
with the initial transaction hereunder, (iii) the incurrence of the Subordinated
Debt and (iv) payment of any and all fees and expenses due on the date hereof in
connection with the transactions contemplated by this Agreement;
(m) Lender shall have received, in form and substance satisfactory
to Lender, (i) a limited guaranty of Term Loan B executed by Rudy Slucker in
favor of Lender and (ii) guarantees against fraud and/or misrepresentations
executed by Rudy Slucker and Joe Cioni in favor of Lender;
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(n) Lender shall be satisfied that Borrower shall have established a
system of monitoring its Collateral in a manner consistent with Section 7.1;
(o) Lender shall have received, in form and substance satisfactory
to Lender, an Assignment and Assumption Agreement executed by First Union
National Bank and Borrower and such other documents as Lender may reasonably
request to evidence and effectuate the assignment of certain loan documents and
the assumption of debt with respect to the financing arrangements between First
Union National Bank and Borrower existing prior to the date hereof;
(p) Lender shall have sold participation interests or entered into
co-lending arrangements, in either case on terms acceptable to, and with
participants or lenders acceptable to, Lender in Lender's sole discretion, for
portions of the Maximum Credit aggregating at least $10,000,000;
(q) Lender shall have received, in form and substance satisfactory
to Lender, such terminations and releases by First Union National Bank and such
other Persons as Lender shall determine to evidence and effectuate the
termination and release of security interests in any assets and properties of
Borrower; and
(r) the other Financing Agreements and all instruments and documents
hereunder and thereunder (including those listed on Exhibit 4.1) shall have been
duly executed and/or delivered to Lender, in form and substance satisfactory to
Lender.
4.2 Conditions Precedent to All Loans, Letter of Credit Accommodations and
Acceptances. Each of the following is an additional condition precedent to
Lender making Loans, providing Letter of Credit Accommodations and/or approving
Acceptances, including the initial Loans and Letter of Credit Accommodations and
any future Loans, Letter of Credit Accommodations and Acceptances:
(a) all representations and warranties contained herein and in the
other Financing Agreements shall be true and correct in all material respects
with the same effect as though such representations and warranties had been made
on and as of the date of the making of each such Loan, providing each such
Letter of Credit Accommodation or approving any Acceptance and after giving
effect thereto; and
(b) no Event of Default and no event or condition which, with notice
or passage of time or both, would constitute an Event of Default, shall exist or
have occurred and be continuing on and as of the date of the making of such
Loan, providing each such Letter of Credit Accommodation or approving each such
Acceptance and after giving effect thereto.
SECTION 5 GRANT OF SECURITY INTEREST
To secure payment and performance of all Obligations, Borrower hereby
grants to Lender a continuing security interest in, a lien upon, and a right of
set off against, and hereby assigns to
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Lender as security, the following property and interests in property of
Borrower, whether now owned or hereafter acquired or existing, and wherever
located (collectively, the "Collateral"):
5.1 Accounts;
5.2 all present and future contract rights, general intangibles (including
tax and duty refunds, registered and unregistered patents, trademarks, service
marks, copyrights, trade names, applications for the foregoing, trade secrets,
goodwill, processes, drawings, blueprints, customer lists, licenses, whether as
licensor or licensee, choses in action and other claims and existing and future
leasehold interests in equipment, real estate and fixtures), chattel paper,
documents, instruments, securities and other investment property, letters of
credit, bankers' acceptances and guarantees;
5.3 all present and future monies, securities, credit balances, deposits,
deposit accounts and other property of Borrower now or hereafter held or
received by or in transit to Lender or its affiliates or at any other depository
or other institution from or for the account of Borrower, whether for
safekeeping, pledge, custody, transmission, collection or otherwise, and all
present and future liens, security interests, rights, remedies, title and
interest in, to and in respect of Accounts and other Collateral, including (a)
rights and remedies under or relating to guarantees, contracts of suretyship,
letters of credit and credit and other insurance related to the Collateral, (b)
rights of stoppage in transit, replevin, repossession, reclamation and other
rights and remedies of an unpaid vendor, lienor or secured party, (c) goods
described in invoices, documents, contracts or instruments with respect to, or
otherwise representing or evidencing, Accounts or other Collateral, including
returned, repossessed and reclaimed goods, and (d) deposits by and property of
account debtors or other persons securing the obligations of account debtors;
5.4 Inventory;
5.5 Equipment;
5.6 Records;
5.7 Real Property; and
5.8 all products and proceeds of the foregoing, in any form, including
insurance proceeds and all claims against third parties for loss or damage to or
destruction of any or all of the foregoing.
SECTION 6 COLLECTION AND ADMINISTRATION
6.1 Borrower's Loan Account. Lender shall maintain one or more loan
account(s) on its books in which shall be recorded (a) all Loans, Letter of
Credit Accommodations, Acceptances and other Obligations and the Collateral, (b)
all payments made by or on behalf of Borrower and (c) all other appropriate
debits and credits as provided in this Agreement,
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including fees, charges, costs, expenses and interest. All entries in the loan
account(s) shall be made in accordance with Lender's customary practices as in
effect from time to time.
6.2 Statements. Lender shall render to Borrower each month a statement
setting forth the balance in the Borrower's loan account(s) maintained by Lender
for Borrower pursuant to the provisions of this Agreement, including principal,
interest, fees, costs and expenses. Each such statement shall be subject to
subsequent adjustment by Lender but shall, absent manifest errors or omissions,
be considered correct and deemed accepted by Borrower and conclusively binding
upon Borrower as an account stated except to the extent that Lender receives a
written notice from Borrower of any specific exceptions of Borrower thereto
within thirty (30) days after the date such statement has been mailed by Lender.
Until such time as Lender shall have rendered to Borrower a written statement as
provided above, the balance in Borrower's loan account(s) shall be presumptive
evidence of the amounts due and owing to Lender by Borrower.
6.3 Collection of Accounts.
(a) Borrower shall establish and maintain, at its expense, blocked
accounts or lockboxes and related blocked accounts (in either case, "Blocked
Accounts"), as Lender may specify, with such banks as are acceptable to Lender
into which Borrower shall promptly deposit and direct its account debtors to
directly remit all payments on Accounts and all payments constituting proceeds
of Inventory or other Collateral in the identical form in which such payments
are made, whether by cash, check or other manner. The banks at which the Blocked
Accounts are established shall enter into an agreement, in form and substance
satisfactory to Lender, providing that all items received or deposited in the
Blocked Accounts are the property of Lender, that the depository bank has no
lien upon, or right to setoff against, the Blocked Accounts, the items received
for deposit therein, or the funds from time to time on deposit therein and that
the depository bank will wire, or otherwise transfer, in immediately available
funds, on a daily basis, all funds received or deposited into the Blocked
Accounts to such bank account of Lender as Lender may from time to time
designate for such purpose ("Payment Account"). Borrower agrees that all
payments made to such Blocked Accounts or other funds received and collected by
Lender, whether on the Accounts or as proceeds of Inventory or other Collateral
or otherwise shall be the property of Lender.
(b) For purposes of calculating the amount of the Loans available to
Borrower, such payments will be applied (conditional upon final collection) to
the Obligations on the business day of receipt by Lender of immediately
available funds in the Payment Account provided such payments and notice thereof
are received in accordance with Lender's usual and customary practices as in
effect from time to time and within sufficient time to credit Borrower's loan
account on such day, and if not, then on the next business day. For the purposes
of calculating interest on the Obligations, such payments or other funds
received will be applied (conditional upon final collection) to the Obligations
one (1) business day following the date of receipt of immediately available
funds by Lender in the Payment Account provided such payments or other funds and
notice thereof are received in accordance with Lender's usual and customary
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practices as in effect from time to time and within sufficient time to credit
Borrower's loan account on such day, and if not, then on the next business day.
(c) Borrower and all of its affiliates, subsidiaries, shareholders,
directors, employees or agents shall, acting as trustee for Lender, receive, as
the property of Lender, any monies, checks, notes, drafts or any other payment
relating to and/or proceeds of Accounts or other Collateral which come into
their possession or under their control and immediately upon receipt thereof,
shall deposit or cause the same to be deposited in the Blocked Accounts, or
remit the same or cause the same to be remitted, in kind, to Lender. In no event
shall the same be commingled with Borrower's own funds. Borrower agrees to
reimburse Lender on demand for any amounts owed or paid to any bank at which a
Blocked Account is established or any other bank or person involved in the
transfer of funds to or from the Blocked Accounts arising out of Lender's
payments to or indemnification of such bank or person. The obligation of
Borrower to reimburse Lender for such amounts pursuant to this Section 6.3 shall
survive the termination or non-renewal of this Agreement.
6.4 Payments. All Obligations shall be payable to the Payment Account as
provided in Section 6.3 hereof or such other place as Lender may designate from
time to time. Lender may apply payments received or collected from Borrower or
for the account of Borrower (including the monetary proceeds of collections or
of realization upon any Collateral) to such of the Obligations, whether or not
then due, in such order and manner as Lender determines. At Lender's option, all
principal, interest, fees, costs, expenses and other charges provided for in
this Agreement or the other Financing Agreements may be charged directly to the
loan account(s) of Borrower. Borrower shall make all payments to Lender on the
Obligations free and clear of, and without deduction or withholding for or on
account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts,
fees, deductions, withholding, restrictions or conditions of any kind. If after
receipt of any payment of, or proceeds of Collateral applied to the payment of,
any of the Obligations, Lender is required to surrender or return such payment
or proceeds to any Person for any reason, then the Obligations intended to be
satisfied by such payment or proceeds shall be reinstated and continue and this
Agreement shall continue in full force and effect as if such payment or proceeds
had not been received by Lender. Borrower shall be liable to pay to Lender, and
does hereby indemnify and hold Lender harmless for the amount of any payments or
proceeds surrendered or returned. This Section 6.4 shall remain effective
notwithstanding any contrary action which may be taken by Lender in reliance
upon such payment or proceeds. This Section 6.4 shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
6.5 Authorization to Make Loans. Lender is authorized to make the Loans
and provide the Letter of Credit Accommodations based upon telephonic or other
instructions received from anyone purporting to be an officer of Borrower or
other authorized person or, at the discretion of Lender, if such Loans are
necessary to satisfy any Obligations. All requests for Loans or Letter of Credit
Accommodations hereunder shall specify the date on which the requested advance
is to be made or Letter of Credit Accommodations established (which day shall be
a business day) and the amount of the requested Loan. Requests received after
11:00
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a.m. Chicago time on any day shall be deemed to have been made as of the opening
of business on the immediately following business day. All Loans and Letter of
Credit Accommodations under this Agreement shall be conclusively presumed to
have been made to, and at the request of and for the benefit of, Borrower when
deposited to the credit of Borrower or otherwise disbursed or established in
accordance with the instructions of Borrower or in accordance with the terms and
conditions of this Agreement.
6.6 Use of Proceeds. Borrower shall use the initial proceeds of the Loans
provided by Lender to Borrower hereunder only for: (a) payments to each of the
persons listed in the disbursement direction letter furnished by Borrower to
Lender on or about the date hereof and (b) costs, expenses and fees in
connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Financing Agreements. All other Loans made or Letter of
Credit Accommodations provided by Lender to Borrower pursuant to the provisions
hereof shall be used by Borrower only for general operating, working capital and
other proper corporate purposes of Borrower not otherwise prohibited by the
terms hereof. None of the proceeds will be used, directly or indirectly, for the
purpose of purchasing or carrying any margin security or for the purposes of
reducing or retiring any indebtedness which was originally incurred to purchase
or carry any margin security or for any other purpose which might cause any of
the Loans to be considered a "purpose credit" within the meaning of Regulation G
of the Board of Governors of the Federal Reserve System, as amended.
SECTION 7 COLLATERAL REPORTING AND COVENANTS
7.1 Collateral Reporting. Borrower shall provide Lender with the following
documents in a form satisfactory to Lender: (a) on a regular basis as required
by Lender, a schedule of Accounts, sales made, credits issued and cash received;
(b) on a monthly basis by the fifteenth day of the following month or more
frequently as Lender may request, (i) perpetual inventory reports, (ii)
inventory reports by category and (iii) agings of accounts payable, (c) upon
Lender's request, (i) copies of customer statements and credit memos, remittance
advices and reports, and copies of deposit slips and bank statements, (ii)
copies of shipping and delivery documents, and (iii) copies of purchase orders,
invoices and delivery documents for Inventory and Equipment acquired by
Borrower; (d) agings of accounts receivable on a monthly basis by the fifteenth
day of the following month or more frequently as Lender may request; and (e)
such other reports as to the Collateral as Lender shall request from time to
time. If any of Borrower's records or reports of the Collateral are prepared or
maintained by an accounting service, contractor, shipper or other agent,
Borrower hereby irrevocably authorizes such service, contractor, shipper or
agent to deliver such records, reports, and related documents to Lender and to
follow Lender's instructions with respect to further services at any time that
an Event of Default exists or has occurred and is continuing.
7.2 Accounts Covenants.
(a) Borrower shall notify Lender promptly of: (i) any material delay
in Borrower's performance of any of its obligations to any account debtor or the
assertion of any claims, offsets, defenses or counterclaims by any account
debtor, or any disputes with
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account debtors, or any settlement, adjustment or compromise thereof, (ii) all
material adverse information relating to the financial condition of any account
debtor and (iii) any event or circumstance which, to Borrower's knowledge would
cause Lender to consider any then existing Accounts as no longer constituting
Eligible Accounts. No credit, discount, allowance or extension or agreement for
any of the foregoing shall be granted to any account debtor without Lender's
consent, except in the ordinary course of Borrower's business in accordance with
practices and policies previously disclosed in writing to Lender. So long as no
Event of Default exists or has occurred and is continuing, Borrower shall
settle, adjust or compromise any claim, offset, counterclaim or dispute with any
account debtor. At any time that an Event of Default exists or has occurred and
is continuing, Lender shall, at its option, have the exclusive right to settle,
adjust or compromise any claim, offset, counterclaim or dispute with account
debtors or grant any credits, discounts or allowances.
(b) Without limiting the obligation of Borrower to deliver any other
information to Lender, Borrower shall promptly report to Lender any return of
Inventory by any one account debtor if the inventory so returned in such case
has a value in excess of $100,000. At any time that Inventory is returned,
reclaimed or repossessed, the Account (or portion thereof) which arose from the
sale of such returned, reclaimed or repossessed Inventory shall not be deemed an
Eligible Account. In the event any account debtor returns Inventory when an
Event of Default exists or has occurred and is continuing, Borrower shall, upon
Lender's request, (i) hold the returned Inventory in trust for Lender, (ii)
segregate all returned Inventory from all of its other property, (iii) dispose
of the returned Inventory solely according to Lender's instructions, and (iv)
not issue any credits, discounts or allowances with respect thereto without
Lender's prior written consent.
(c) With respect to each Account: (i) the amounts shown on any
invoice delivered to Lender or schedule thereof delivered to Lender shall be
true and complete, (ii) no payments shall be made thereon except payments
immediately delivered to Lender pursuant to the terms of this Agreement, (iii)
no credit, discount, allowance or extension or agreement for any of the
foregoing shall be granted to any account debtor except as reported to Lender in
accordance with this Agreement and except for credits, discounts, allowances or
extensions made or given in the ordinary course of Borrower's business in
accordance with practices and policies previously disclosed to Lender, (iv)
there shall be no setoffs, deductions, contras, defenses, counterclaims or
disputes existing or asserted with respect thereto except as reported to Lender
in accordance with the terms of this Agreement, (v) none of the transactions
giving rise thereto will violate any applicable State or Federal laws or
regulations, all documentation relating thereto will be legally sufficient under
such laws and regulations and all such documentation will be legally enforceable
in accordance with its terms.
(d) Lender shall have the right at any time or times, in Lender's
name or in the name of a nominee of Lender, to verify the validity, amount or
any other matter
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relating to any Account or other Collateral, by mail, telephone, facsimile
transmission or otherwise.
(e) Borrower shall deliver or cause to be delivered to Lender, with
appropriate endorsement and assignment, with full recourse to Borrower, all
chattel paper and instruments which Borrower now owns or may at any time acquire
immediately upon Borrower's receipt thereof, except as Lender may otherwise
agree.
(f) Lender may, at any time or times that an Event of Default exists
or has occurred and is continuing, (i) notify any or all account debtors that
the Accounts have been assigned to Lender and that Lender has a security
interest therein and Lender may direct any or all accounts debtors to make
payment of Accounts directly to Lender, (ii) extend the time of payment of,
compromise, settle or adjust for cash, credit, return of merchandise or
otherwise, and upon any terms or conditions, any and all Accounts or other
obligations included in the Collateral and thereby discharge or release the
account debtor or any other party or parties in any way liable for payment
thereof without affecting any of the Obligations, (iii) demand, collect or
enforce payment of any Accounts or such other obligations, but without any duty
to do so, and Lender shall not be liable for its failure to collect or enforce
the payment thereof nor for the negligence of its agents or attorneys with
respect thereto and (iv) take whatever other action Lender may deem necessary or
desirable for the protection of its interests. At any time that an Event of
Default exists or has occurred and is continuing, at Lender's request, all
invoices and statements sent to any account debtor shall state that the Accounts
and such other obligations have been assigned to Lender and are payable directly
and only to Lender and Borrower shall deliver to Lender such originals of
documents evidencing the sale and delivery of goods or the performance of
services giving rise to any Accounts as Lender may require.
7.3 Inventory Covenants. With respect to the Inventory: (a) Borrower shall
at all times maintain inventory records reasonably satisfactory to Lender,
keeping correct and accurate records itemizing and describing the kind, type,
quality and quantity of Inventory, Borrower's cost therefor and daily
withdrawals therefrom and additions thereto; (b) Borrower shall conduct a
physical count of the Inventory at least once each year, but at any time or
times as Lender may request on or after an Event of Default, and promptly
following such physical inventory shall supply Lender with a report in the form
and with such specificity as may be reasonably satisfactory to Lender concerning
such physical count; (c) Borrower shall not remove any Inventory from the
locations set forth or permitted herein, without the prior written consent of
Lender, except for sales of Inventory in the ordinary course of Borrower's
business and except to move Inventory directly from one location set forth or
permitted herein to another such location; (d) upon Lender's request, Borrower
shall, at its expense, no more than twice in any twelve (12) month period, but
at any time or times as Lender may request on or after an Event of Default,
deliver or cause to be delivered to Lender written reports or appraisals as to
the Inventory in form, scope and methodology acceptable to Lender and by an
appraiser acceptable to Lender, addressed to Lender or upon which Lender is
expressly permitted to rely; (e) Borrower shall produce, use, store and maintain
the Inventory with all reasonable care and caution and in
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accordance with applicable standards of any insurance and in conformity with
applicable laws (including the requirements of the Federal Fair Labor Standards
Act of 1938, as amended and all rules, regulations and orders related thereto);
(f) Borrower assumes all responsibility and liability arising from or relating
to the production, use, sale or other disposition of the Inventory; (g) Borrower
shall not sell Inventory to any customer on approval, or any other basis which
entitles the customer to return or may obligate Borrower to repurchase such
Inventory; (h) Borrower shall keep the Inventory in good and marketable
condition; and (i) Borrower shall not, without prior written notice to Lender,
acquire or accept any Inventory on consignment or approval.
7.4 Equipment Covenants. With respect to the Equipment: (a) upon Lender's
request, Borrower shall, at its expense, at any time or times as Lender may
request on or after an Event of Default, deliver or cause to be delivered to
Lender written reports or appraisals as to the Equipment in form, scope and
methodology acceptable to Lender and by an appraiser acceptable to Lender; (b)
Borrower shall keep the Equipment in good order, repair, running and marketable
condition (ordinary wear and tear excepted); (c) Borrower shall use the
Equipment with all reasonable care and caution and in accordance with applicable
standards of any insurance and in conformity with all applicable laws; (d) the
Equipment is and shall be used in Borrower's business and not for personal,
family, household or farming use; (e) Borrower shall not remove any Equipment
from the locations set forth or permitted herein, except to the extent necessary
to have any Equipment repaired or maintained in the ordinary course of the
business of Borrower or to move Equipment directly from one location set forth
or permitted herein to another such location and except for the movement of
motor vehicles used by or for the benefit of Borrower in the ordinary course of
business; (f) the Equipment is now and shall remain personal property and
Borrower shall not permit any of the Equipment to be or become a part of or
affixed to real property; and (g) Borrower assumes all responsibility and
liability arising from the use of the Equipment.
7.5 Power of Attorney. Borrower hereby irrevocably designates and appoints
Lender (and all persons designated by Lender) as Borrower's true and lawful
attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name, to: (a)
at any time an Event of Default or event which with notice or passage of time or
both would constitute an Event of Default exists or has occurred and is
continuing (i) demand payment on Accounts or other proceeds of Inventory or
other Collateral, (ii) enforce payment of Accounts by legal proceedings or
otherwise, (iii) exercise all of Borrower's rights and remedies to collect any
Account or other Collateral, (iv) sell or assign any Account upon such terms,
for such amount and at such time or times as the Lender deems advisable, (v)
settle, adjust, compromise, extend or renew an Account, (vi) discharge and
release any Account, (vii) prepare, file and sign Borrower's name on any proof
of claim in bankruptcy or other similar document against an account debtor,
(viii) notify the post office authorities to change the address for delivery of
Borrower's mail to an address designated by Lender, and open and dispose of all
mail addressed to Borrower, and (ix) do all acts and things which are necessary,
in Lender's determination, to fulfill Borrower's obligations under this
Agreement and the other Financing Agreements and (b) at any time to (i) take
control in any manner of any item of payment or proceeds thereof, (ii) have
access to any lockbox or postal box into which Borrower's mail is deposited,
(iii) endorse Borrower's name upon any items of payment or proceeds thereof and
deposit the same in the Lender's account for application to the
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Obligations, (iv) endorse Borrower's name upon any chattel paper, document,
instrument, invoice, or similar document or agreement relating to any Account or
any goods pertaining thereto or any other Collateral, (v) sign Borrower's name
on any verification of Accounts and notices thereof to account debtors and (vi)
execute in Borrower's name and file any UCC financing statements or amendments
thereto. Borrower hereby releases Lender and its officers, employees and
designees from any liabilities arising from any act or acts under this power of
attorney and in furtherance thereof, whether of omission or commission, except
as a result of Lender's own gross negligence or willful misconduct as determined
pursuant to a final non-appealable order of a court of competent jurisdiction.
7.6 Right to Cure. Lender may, at its option, (a) cure any default by
Borrower under any agreement with a third party or pay or bond on appeal any
judgment entered against Borrower, (b) discharge taxes, liens, security
interests or other encumbrances at any time levied on or existing with respect
to the Collateral and (c) pay any amount, incur any expense or perform any act
which, in Lender's judgment, is necessary or appropriate to preserve, protect,
insure or maintain the Collateral and the rights of Lender with respect thereto.
Lender may add any amounts so expended to the Obligations and charge Borrower's
account therefor, such amounts to be repayable by Borrower on demand. Lender
shall be under no obligation to effect such cure, payment or bonding and shall
not, by doing so, be deemed to have assumed any obligation or liability of
Borrower. Any payment made or other action taken by Lender under this Section
shall be without prejudice to any right to assert an Event of Default hereunder
and to proceed accordingly.
7.7 Access to Premises. From time to time as requested by Lender, at the
cost and expense of Borrower, (a) Lender or its designee shall have complete
access to all of Borrower's premises during normal business hours and after
notice to Borrower, or at any time and without notice to Borrower if an Event of
Default exists or has occurred and is continuing, for the purposes of
inspecting, verifying and auditing the Collateral and all of Borrower's books
and records, including the Records, and (b) Borrower shall promptly furnish to
Lender such copies of such books and records or extracts therefrom as Lender may
request, and (c) use during normal business hours such of Borrower's personnel,
equipment, supplies and premises as may be reasonably necessary for the
foregoing and if an Event of Default exists or has occurred and is continuing
for the collection of Accounts and realization of other Collateral.
SECTION 8 REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Lender the following (which
shall survive the execution and delivery of this Agreement), the truth and
accuracy of which are a continuing condition of the making of Loans, providing
Letter of Credit Accommodations and approving Acceptances by Lender:
8.1 Corporate Existence, Power and Authority; Subsidiaries. Borrower is a
corporation duly organized and in good standing under the laws of its state of
incorporation and, except as set forth on Schedule 8.1 hereto, is duly qualified
as a foreign corporation and in good standing in all states, provinces or other
jurisdictions where the nature and extent of the business
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transacted by it or the ownership of assets makes such qualification necessary,
except for those jurisdictions in which the failure to so qualify would not have
a material adverse effect on Borrower's financial condition, results of
operation or business or the rights of Lender in or to any of the Collateral.
The execution, delivery and performance of this Agreement, the other Financing
Agreements and the transactions contemplated hereunder and thereunder are all
within Borrower's corporate powers, have been duly authorized and are not in
contravention of law or the terms of Borrower's certificate of incorporation,
by-laws, or other organizational documentation, or any indenture, agreement or
undertaking to which Borrower is a party or by which Borrower or its property
are bound. This Agreement and the other Financing Agreements constitute legal,
valid and binding obligations of Borrower enforceable in accordance with their
respective terms. Borrower does not have any subsidiaries except as set forth on
the Information Certificate.
8.2 Financial Statements; No Material Adverse Change. All financial
statements relating to Borrower which have been or may hereafter be delivered by
Borrower to Lender have been prepared in accordance with GAAP and fairly present
the financial condition and the results of operation of Borrower as at the dates
and for the periods set forth therein. Except as disclosed in any interim
financial statements furnished by Borrower to Lender prior to the date of this
Agreement, there has been no material adverse change in the assets, liabilities,
properties and condition, financial or otherwise, of Borrower, since the date of
the most recent audited financial statements furnished by Borrower to Lender
prior to the date of this Agreement.
8.3 Chief Executive Office; Collateral Locations. The chief executive
office of Borrower and Borrower's Records concerning Accounts are located only
at the addresses set forth on Schedule 8.3 hereto and its only other places of
business and the only other locations of Collateral, if any, are the addresses
set forth in the Information Certificate, subject to the right of Borrower to
establish new locations in accordance with Section 9.2 below. The Information
Certificate correctly identifies any of such locations which are not owned by
Borrower and sets forth the owners and/or operators thereof and to the best of
Borrower's knowledge, the holders of any mortgages on such locations.
8.4 Priority of Liens; Title to Properties. The security interests and
liens granted to Lender under this Agreement and the other Financing Agreements
constitute valid and perfected first priority liens and security interests in
and upon the Collateral subject only to the liens indicated on Schedule 8.4
hereto and the other liens permitted under Section 9.8 hereof. Borrower has good
and marketable title to all of its properties and assets subject to no liens,
mortgages, pledges, security interests, encumbrances or charges of any kind,
except those granted to Lender and such others as are specifically listed on
Schedule 8.4 hereto or permitted under Section 9.8 hereof.
8.5 Tax Returns. Borrower has filed, or caused to be filed, in a timely
manner all tax returns, reports and declarations which are required to be filed
by it (without requests for extension except as previously disclosed in writing
to Lender). All information in such tax returns, reports and declarations is
complete and accurate in all material respects. Borrower has paid or caused to
be paid all taxes due and payable or claimed due and payable in any assessment
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received by it, except taxes the validity of which are being contested in good
faith by appropriate proceedings diligently pursued and available to Borrower
and with respect to which adequate reserves have been set aside on its books.
Adequate provision has been made for the payment of all accrued and unpaid
Federal, State, county, local, foreign and other taxes whether or not yet due
and payable and whether or not disputed.
8.6 Litigation. Except as set forth on the Information Certificate, there
is no present investigation by any governmental agency pending, or to the best
of Borrower's knowledge threatened, against or affecting Borrower, its assets or
business and there is no action, suit, proceeding or claim by any Person
pending, or to the best of Borrower's knowledge threatened, against Borrower or
its assets or goodwill, or against or affecting any transactions contemplated by
this Agreement, which if adversely determined against Borrower would result in
any material adverse change in the assets, business or prospects of Borrower or
would impair the ability of Borrower to perform its obligations hereunder or
under any of the other Financing Agreements to which it is a party or of Lender
to enforce any Obligations or realize upon any Collateral.
8.7 Compliance with Other Agreements and Applicable Laws. Except as set
forth on Schedule 8.7 hereto, Borrower is not in default in any material respect
under, or in violation in any material respect of any of the terms of, any
agreement, contract, instrument, lease or other commitment to which it is a
party or by which it or any of its assets are bound and Borrower is in
compliance in all material respects with all applicable provisions of laws,
rules, regulations, licenses, permits, approvals and orders of any foreign,
Federal, State or local governmental authority.
8.8 Bank Accounts. All of the deposit accounts, investment accounts or
other accounts in the name of or used by Borrower maintained at any bank or
other financial institution are set forth on Schedule 8.8 hereto, subject to the
right of Borrower to establish new accounts in accordance with Section 9.13
below.
8.9 Solvency. Borrower is solvent and will continue to be solvent after
the creation of the Obligations, the security interests of Lender and the other
transactions contemplated hereunder, is able to pay its debts as they mature and
has (and has reason to believe it will continue to have) sufficient capital (and
not unreasonably small capital) to carry on its business and all businesses in
which it is about to engage. The assets and properties of Borrower at a fair
valuation and at their present fair salable value are, and will be, greater than
the indebtedness of Borrower, and including subordinated and contingent
liabilities computed at the amount which, to the best of Borrower's knowledge,
represents an amount which can reasonably be expected to become an actual or
matured liability.
8.10 Year 2000 Representations. Borrower has taken all action necessary to
assure that there will be no material adverse change to Borrower's business by
reason of the advent of the year 2000, including that all computer-based
systems, embedded microchips and other processing capabilities effectively
recognize and process dates after December 31, 1999.
8.11 [Intentionally Deleted]
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8.12 Employee Benefits.
(a) Borrower has not engaged in any transaction in connection with
which Borrower or any of its ERISA Affiliates could be subject to either a civil
penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section
4975 of the Code, including any accumulated funding deficiency described in
Section 8.12(c) hereof and any deficiency with respect to vested accrued
benefits described in Section 8.12(d) hereof.
(b) Except as disclosed in Borrower's annual year-end financial
statements for 1998, no liability to the Pension Benefit Guaranty Corporation
has been or is expected by Borrower to be incurred with respect to any employee
benefit plan of Borrower or any of its ERISA Affiliates. There has been no
reportable event (within the meaning of Section 4043(b) of ERISA) or any other
event or condition with respect to any employee pension benefit plan of Borrower
or any of its ERISA Affiliates which presents a risk of termination of any such
plan by the Pension Benefit Guaranty Corporation.
(c) Full payment has been made of all amounts which Borrower or any
of its ERISA Affiliates is required under Section 302 of ERISA and Section 412
of the Code to have paid under the terms of each employee benefit plan as
contributions to such plan as of the last day of the most recent fiscal year of
such plan ended prior to the date hereof, and no accumulated funding deficiency
(as defined in Section 302 of ERISA and Section 412 of the Code), whether or not
waived, exists with respect to any employee benefit plan, including any penalty
or tax described in Section 8.12(a) hereof and any deficiency with respect to
vested accrued benefits described in Section 8.12(d) hereof.
(d) The current value of all vested accrued benefits under all
employee benefit plans maintained by Borrower that are subject to Title IV of
ERISA does not exceed the current value of the assets of such plans allocable to
such vested accrued benefits, including any penalty or tax described in Section
8.12(a) hereof and any accumulated funding deficiency described in Section
8.12(c) hereof. The terms "current value" and "accrued benefit" have the
meanings specified in ERISA.
(e) Neither Borrower nor any of its ERISA Affiliates is or has ever
been obligated to contribute to any "multiemployer plan" (as such term is
defined in Section 4001(a)(3) of ERISA) that is subject to Title IV of ERISA.
8.13 Environmental Compliance.
(a) Except as set forth on Schedule 8.13 hereto, Borrower has not
generated, used, stored, treated, transported, manufactured, handled, produced
or disposed of any Hazardous Materials, on or off its premises (whether or not
owned by it) in any manner which at any time violates any applicable
Environmental Law or any license, permit, certificate, approval or similar
authorization thereunder and the
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operations of Borrower complies in all material respects with all Environmental
Laws and all licenses, permits, certificates, approvals and similar
authorizations thereunder.
(b) Except as set forth on Schedule 8.13 hereto, there has been no
investigation, proceeding, complaint, order, directive, claim, citation or
notice by any governmental authority or any other person nor is any pending or
to the best of Borrower's knowledge threatened, with respect to any
non-compliance with or violation of the requirements of any Environmental Law by
Borrower or the release, spill or discharge, threatened or actual, of any
Hazardous Material or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials or any
other environmental, health or safety matter, which affects Borrower or its
business, operations or assets or any properties at which Borrower has
transported, stored or disposed of any Hazardous Materials.
(c) Borrower has no material liability (contingent or otherwise) in
connection with a release, spill or discharge, threatened or actual, of any
Hazardous Materials or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials.
(d) Borrower has all licenses, permits, certificates, approvals or
similar authorizations required to be obtained or filed in connection with the
operations of Borrower under any Environmental Law and all of such licenses,
permits, certificates, approvals or similar authorizations are valid and in full
force and effect.
8.14 Accuracy and Completeness of Information. All information furnished
by or on behalf of Borrower in writing to Lender in connection with this
Agreement or any of the other Financing Agreements or any transaction
contemplated hereby or thereby, including all information on the Information
Certificate is true and correct in all material respects on the date as of which
such information is dated or certified and does not omit any material fact
necessary in order to make such information not misleading. No event or
circumstance has occurred which has had or could reasonably be expected to have
a material adverse effect on the business, assets or prospects of Borrower,
which has not been fully and accurately disclosed to Lender in writing.
8.15 Survival of Warranties; Cumulative. All representations and
warranties contained in this Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this Agreement and shall be deemed
to have been made again to Lender on the date of each additional borrowing or
other credit accommodation hereunder and shall be conclusively presumed to have
been relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
Borrower shall now or hereafter give, or cause to be given, to Lender.
SECTION 9 AFFIRMATIVE AND NEGATIVE COVENANTS
9.1 Maintenance of Existence. Borrower shall at all times preserve, renew
and keep in full, force and effect its corporate existence and rights and
franchises with respect thereto and
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maintain in full force and effect all permits, licenses, trademarks, tradenames,
approvals, authorizations, leases and contracts necessary to carry on the
business as presently or proposed to be conducted. Borrower shall give Lender
thirty (30) days prior written notice of any proposed change in its corporate
name, which notice shall set forth the new name and Borrower shall deliver to
Lender a copy of the amendment to the Certificate of Incorporation of Borrower
providing for the name change certified by the Secretary of State of the
jurisdiction of incorporation of Borrower as soon as it is available.
9.2 New Collateral Locations. Borrower may open any new location within
the continental United States provided Borrower (a) gives Lender thirty (30)
days prior written notice of the intended opening of any such new location and
(b) executes and delivers, or causes to be executed and delivered, to Lender
such agreements, documents, and instruments as Lender may deem reasonably
necessary or desirable to protect its interests in the Collateral at such
location, including UCC financing statements.
9.3 Compliance with Laws, Regulations, Etc.
(a) Borrower shall, at all times, comply in all material respects
with all laws, rules, regulations, licenses, permits, approvals and orders
applicable to it and duly observe all requirements of any Federal, State or
local governmental authority, including the Employee Retirement Security Act of
1974, as amended, the Occupational Safety and Health Act of 1970, as amended,
the Fair Labor Standards Act of 1938, as amended, and all statutes, rules,
regulations, orders, permits and stipulations relating to environmental
pollution and employee health and safety, including all of the Environmental
Laws.
(b) Borrower shall give both oral and written notice to Lender
immediately upon Borrower's receipt of any notice of, or Borrower's otherwise
obtaining knowledge of, (i) the occurrence of any event involving the release,
spill or discharge, threatened or actual, of any Hazardous Material or (ii) any
investigation, proceeding, complaint, order, directive, claims, citation or
notice with respect to: (A) any non-compliance with or violation of any
Environmental Law by Borrower or (B) the release, spill or discharge, threatened
or actual, of any Hazardous Material or (C) the generation, use, storage,
treatment, transportation, manufacture, handling, production or disposal of any
Hazardous Materials or (D) any other environmental, health or safety matter,
which affects Borrower or its business, operations or assets or any properties
at which Borrower transported, stored or disposed of any Hazardous Materials.
(c) Without limiting the generality of the foregoing, whenever
Lender reasonably determines that there is non-compliance, or any condition
which requires any action by or on behalf of Borrower in order to avoid any
material non-compliance, with any Environmental Law, Borrower shall, at Lender's
request and Borrower's expense: (i) cause an independent environmental engineer
acceptable to Lender to conduct such tests of the site where Borrower's
non-compliance or alleged non-compliance with such Environmental Laws has
occurred as to such non-compliance and prepare and deliver to Lender a report as
to such non-compliance setting forth the results of such tests, a
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proposed plan for responding to any environmental problems described therein,
and an estimate of the costs thereof and (ii) provide to Lender a supplemental
report of such engineer whenever the scope of such non-compliance, or Borrower's
response thereto or the estimated costs thereof, shall change in any material
respect.
(d) Borrower shall indemnify and hold harmless Lender, its
directors, officers, employees, agents, invitees, representatives, successors
and assigns, from and against any and all losses, claims, damages, liabilities,
costs, and expenses (including attorneys' fees and legal expenses) directly or
indirectly arising out of or attributable to the use, generation, manufacture,
reproduction, storage, release, threatened release, spill, discharge, disposal
or presence of a Hazardous Material, including the costs of any required or
necessary repair, cleanup or other remedial work with respect to any property of
Borrower and the preparation and implementation of any closure, remedial or
other required plans. All representations, warranties, covenants and
indemnifications in this Section 9.3 shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
9.4 Payment of Taxes and Claims. Borrower shall duly pay and discharge all
taxes, assessments, contributions and governmental charges upon or against it or
its properties or assets, except for taxes the validity of which are being
contested in good faith by appropriate proceedings diligently pursued and
available to Borrower and with respect to which adequate reserves have been set
aside on its books. Borrower shall be liable for any tax or penalties imposed on
Lender as a result of the financing arrangements provided for herein and
Borrower agrees to indemnify and hold Lender harmless with respect to the
foregoing, and to repay to Lender on demand the amount thereof, and until paid
by Borrower such amount shall be added and deemed part of the Loans, provided,
that, nothing contained herein shall be construed to require Borrower to pay any
income or franchise taxes attributable to the income of Lender from any amounts
charged or paid hereunder to Lender. The foregoing indemnity shall survive the
payment of the Obligations and the termination or non-renewal of this Agreement.
9.5 Insurance. Borrower shall, at all times, maintain with financially
sound and reputable insurers insurance with respect to the Collateral against
loss or damage and all other insurance of the kinds and in the amounts
customarily insured against or carried by corporations of established reputation
engaged in the same or similar businesses and similarly situated. Said policies
of insurance shall be satisfactory to Lender as to form, amount and insurer.
Borrower shall furnish certificates, policies or endorsements to Lender as
Lender shall require as proof of such insurance, and, if Borrower fails to do
so, Lender is authorized, but not required, to obtain such insurance at the
expense of Borrower. All policies shall provide for at least thirty (30) days
prior written notice to Lender of any cancellation or reduction of coverage and
that Lender may act as attorney for Borrower in obtaining, and at any time an
Event of Default exists or has occurred and is continuing, adjusting, settling,
amending and canceling such insurance. Borrower shall cause Lender to be named
as a loss payee and an additional insured (but without any liability for any
premiums) under such insurance policies and Borrower shall obtain
non-contributory lender's loss payable endorsements to all insurance policies in
form and substance satisfactory to Lender. Such lender's loss payable
endorsements shall specify that the proceeds
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of such insurance shall be payable to Lender as its interests may appear and
further specify that Lender shall be paid regardless of any act or omission by
Borrower or any of its affiliates. At its option, Lender may apply any insurance
proceeds received by Lender at any time to the cost of repairs or replacement of
Collateral and/or to payment of the Obligations, whether or not then due, in any
order and in such manner as Lender may determine or hold such proceeds as cash
collateral for the Obligations.
9.6 Financial Statements and Other Information.
(a) Borrower shall keep proper books and records in which true and
complete entries shall be made of all dealings or transactions of or in relation
to the Collateral and the business of Borrower and its subsidiaries (if any) in
accordance with GAAP and Borrower shall furnish or cause to be furnished to
Lender: (i) within thirty (30) days after the end of each fiscal month, monthly
unaudited consolidated financial statements, and, if Borrower has any
subsidiaries, unaudited consolidating financial statements (including in each
case balance sheets, statements of income and loss, statements of cash flow, and
statements of shareholders' equity), all in reasonable detail, fairly presenting
the financial position and the results of the operations of Borrower and its
subsidiaries as of the end of and through such fiscal month and (ii) within
ninety (90) days after the end of each fiscal year, audited financial statements
and, if Borrower has any subsidiaries, unaudited consolidating financial
statements of Borrower and its subsidiaries (including in each case balance
sheets, statements of income and loss, statements of cash flow and statements of
shareholders' equity), and the accompanying notes thereto, all in reasonable
detail, fairly presenting the financial position and the results of the
operations of Borrower and its subsidiaries as of the end of and for such fiscal
year, together with the unqualified opinion of independent certified public
accountants (in the case of audited financial statements), which accountants
shall be an independent accounting firm selected by Borrower and reasonably
acceptable to Lender, that such financial statements have been prepared in
accordance with GAAP, and present fairly the results of operations and financial
condition of Borrower and its subsidiaries as of the end of and for the fiscal
year then ended.
(b) Borrower shall promptly notify Lender in writing of the details
of (i) any loss, damage, investigation, action, suit, proceeding or claim
relating to the Collateral or any other property which is security for the
Obligations or which would result in any material adverse change in Borrower's
business, properties, assets, goodwill or condition, financial or otherwise and
(ii) the occurrence of any Event of Default or event which, with the passage of
time or giving of notice or both, would constitute an Event of Default.
(c) Borrower shall promptly after the sending or filing thereof
furnish or cause to be furnished to Lender copies of all reports which Borrower
sends to its stockholders generally and copies of all reports and registration
statements which Borrower files with the Securities and Exchange Commission, any
national securities exchange or the National Association of Securities Dealers,
Inc.
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(d) Borrower shall furnish or cause to be furnished to Lender such
budgets, forecasts, projections and other information respecting the Collateral
and the business of Borrower, as Lender may, from time to time, reasonably
request. Lender is hereby authorized to deliver a copy of any financial
statement or any other information relating to the business of Borrower to any
court or other government agency or to any participant or assignee or
prospective participant or assignee. Borrower hereby irrevocably authorizes and
directs all accountants or auditors to deliver to Lender, at Borrower's expense,
copies of the financial statements of Borrower and any reports or management
letters prepared by such accountants or auditors on behalf of Borrower and to
disclose to Lender such information as they may have regarding the business of
Borrower. Any documents, schedules, invoices or other papers delivered to Lender
may be destroyed or otherwise disposed of by Lender one (1) year after the same
are delivered to Lender, except as otherwise designated by Borrower to Lender in
writing.
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Borrower
shall not, directly or indirectly, (a) merge into or with or consolidate with
any other Person or permit any other Person to merge into or with or consolidate
with it, or (b) sell, assign, lease, transfer, abandon or otherwise dispose of
any stock or indebtedness to any other Person or any of its assets to any other
Person (except for (i) sales of Inventory in the ordinary course of business and
(ii) the disposition of worn-out or obsolete Equipment or Equipment no longer
used in the business of Borrower so long as (A) if an Event of Default exists or
has occurred and is continuing, any proceeds are paid to Lender and (B) such
sales do not involve Equipment having an aggregate fair market value in excess
of $50,000 for all such Equipment disposed of in any fiscal year of Borrower),
or (c) form or acquire any subsidiaries, or (d) wind up, liquidate or dissolve
or (e) agree to do any of the foregoing.
9.8 Encumbrances. Borrower shall not create, incur, assume or suffer to
exist any security interest, mortgage, pledge, lien, charge or other encumbrance
of any nature whatsoever on any of its assets or properties, including the
Collateral, except: (a) liens and security interests of Lender; (b) liens
securing the payment of taxes, either not yet overdue or the validity of which
are being contested in good faith by appropriate proceedings diligently pursued
and available to Borrower and with respect to which adequate reserves have been
set aside on its books; (c) non-consensual statutory liens (other than liens
securing the payment of taxes) arising in the ordinary course of Borrower's
business to the extent: (i) such liens secure indebtedness which is not overdue
or (ii) such liens secure indebtedness relating to claims or liabilities which
are fully insured and being defended at the sole cost and expense and at the
sole risk of the insurer or being contested in good faith by appropriate
proceedings diligently pursued and available to Borrower, in each case prior to
the commencement of foreclosure or other similar proceedings and with respect to
which adequate reserves have been set aside on its books; (d) zoning
restrictions, easements, licenses, covenants and other restrictions affecting
the use of real property which do not interfere in any material respect with the
use of such real property or ordinary conduct of the business of Borrower as
presently conducted thereon or materially impair the value of the real property
which may be subject thereto; (e) purchase money security interests in Equipment
(including capital leases) and purchase money mortgages on real estate not to
exceed $50,000 in the aggregate at any time outstanding so long as such security
interests and
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mortgages do not apply to any property of Borrower other than the Equipment or
real estate so acquired, and the indebtedness secured thereby does not exceed
the cost of the Equipment or real estate so acquired, as the case may be; and
(f) the security interests and liens set forth on Schedule 8.4 hereto.
9.9 Indebtedness. Borrower shall not incur, create, assume, become or be
liable in any manner with respect to, or permit to exist, any obligations or
indebtedness, except: (a) the Obligations; (b) trade obligations and normal
accruals in the ordinary course of business not yet due and payable, or with
respect to which the Borrower is contesting in good faith the amount or validity
thereof by appropriate proceedings diligently pursued and available to Borrower,
and with respect to which adequate reserves have been set aside on its books;
(c) purchase money indebtedness (including capital leases) to the extent not
incurred or secured by liens (including capital leases) in violation of any
other provision of this Agreement; and (d) the indebtedness set forth on
Schedule 9.9 hereto including the Subordinated Debt; provided, that, (i)
Borrower may only make regularly scheduled payments of principal and interest in
respect of such indebtedness in accordance with the terms of the agreement or
instrument evidencing or giving rise to such indebtedness as in effect on the
date hereof subject to the terms of any subordination agreement governing such
indebtedness, (ii) Borrower shall not, directly or indirectly, (A) amend,
modify, alter or change the terms of such indebtedness or any agreement,
document or instrument related thereto as in effect on the date hereof, or (B)
redeem, retire, defease, purchase or otherwise acquire such indebtedness, or set
aside or otherwise deposit or invest any sums for such purpose, and (iii)
Borrower shall furnish to Lender all notices or demands in connection with such
indebtedness either received by Borrower or on its behalf, promptly after the
receipt thereof, or sent by Borrower or on its behalf, concurrently with the
sending thereof, as the case may be.
9.10 Loans, Investments, Guarantees, Etc. Borrower shall not, directly or
indirectly, make any loans or advance money or property to any person, or invest
in (by capital contribution, dividend or otherwise) or purchase or repurchase
the stock or indebtedness or all or a substantial part of the assets or property
of any person, or guarantee, assume, endorse, or otherwise become responsible
for (directly or indirectly) the indebtedness, performance, obligations or
dividends of any Person or agree to do any of the foregoing, except: (a) the
endorsement of instruments for collection or deposit in the ordinary course of
business; (b) investments in: (i) short-term direct obligations of the United
States Government, (ii) negotiable certificates of deposit issued by any bank
satisfactory to Lender, payable to the order of the Borrower or to bearer and
delivered to Lender, and (iii) commercial paper rated A1 or P1; provided, that,
as to any of the foregoing, unless waived in writing by Lender, Borrower shall
take such actions as are deemed necessary by Lender to perfect the security
interest of Lender in such investments and (c) the loans, advances and
guarantees set forth on Schedule 9.10 hereto; provided, that, as to such loans,
advances and guarantees, (i) Borrower shall not, directly or indirectly, (A)
amend, modify, alter or change the terms of such loans, advances or guarantees
or any agreement, document or instrument related thereto, or (B) as to such
guarantees, redeem, retire, defease, purchase or otherwise acquire the
obligations arising pursuant to such guarantees, or set aside or otherwise
deposit or invest any sums for such purpose, and (ii) Borrower shall furnish to
Lender all notices or demands in connection with such loans, advances or
guarantees or other indebtedness subject to such
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guarantees either received by Borrower or on its behalf, promptly after the
receipt thereof, or sent by Borrower or on its behalf, concurrently with the
sending thereof, as the case may be.
9.11 Dividends and Redemptions. Borrower shall not, directly or
indirectly, declare or pay any dividends on account of any shares of class of
capital stock of Borrower now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose, or redeem, retire,
defease, purchase or otherwise acquire any shares of any class of capital stock
(or set aside or otherwise deposit or invest any sums for such purpose) for any
consideration other than common stock or apply or set apart any sum, or make any
other distribution (by reduction of capital or otherwise) in respect of any such
shares or agree to do any of the foregoing.
9.12 Transactions with Affiliates. Borrower shall not, directly or
indirectly, (a) purchase, acquire or lease any property from, or sell, transfer
or lease any property to, any officer, director, agent or other person
affiliated with Borrower, except in the ordinary course of and pursuant to the
reasonable requirements of Borrower's business and upon fair and reasonable
terms no less favorable to the Borrower than Borrower would obtain in a
comparable arm's length transaction with an unaffiliated person or (b) make any
payments of management, consulting or other fees for management or similar
services, or of any indebtedness owing to any officer, employee, shareholder,
director or other person affiliated with Borrower except reasonable compensation
to officers, employees and directors for services rendered to Borrower in the
ordinary course of business.
9.13 Additional Bank Accounts. Borrower shall not, directly or indirectly,
open, establish or maintain any deposit account, investment account or any other
account with any bank or other financial institution, other than the Blocked
Accounts and the accounts set forth in Schedule 8.8 hereto, except: (a) as to
any new or additional Blocked Accounts and other such new or additional accounts
which contain any Collateral or proceeds thereof, with the prior written consent
of Lender and subject to such conditions thereto as Lender may establish and (b)
as to any accounts used by Borrower to make payments of payroll, taxes or other
obligations to third parties, after prior written notice to Lender.
9.14 [Intentionally Deleted].
9.15 [Intentionally Deleted].
9.16 Costs and Expenses. Borrower shall pay to Lender on demand all costs,
expenses, filing fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and all
other documents related hereto or thereto, including any amendments, supplements
or consents which may hereafter be contemplated (whether or not executed) or
entered into in respect hereof and thereof, including: (a) all costs and
expenses of filing or recording (including Uniform Commercial Code financing
statement filing taxes and fees, documentary taxes, intangibles taxes and
mortgage recording taxes and fees, if applicable); (b) all insurance premiums,
appraisal fees and search fees; (c) costs and expenses of remitting loan
proceeds, collecting checks and other items of payment, and establishing and
maintaining the Blocked
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Accounts, together with Lender's customary charges and fees with respect
thereto; (d) charges, fees or expenses charged by any bank or issuer in
connection with the Letter of Credit Accommodations or Acceptances; (e) costs
and expenses of preserving and protecting the Collateral; (f) costs and expenses
paid or incurred in connection with obtaining payment of the Obligations,
enforcing the security interests and liens of Lender, selling or otherwise
realizing upon the Collateral, and otherwise enforcing the provisions of this
Agreement and the other Financing Agreements or defending any claims made or
threatened against Lender arising out of the transactions contemplated hereby
and thereby (including preparations for and consultations concerning any such
matters); (g) all out-of-pocket expenses and costs heretofore and from time to
time hereafter incurred by Lender during the course of periodic field
examinations of the Collateral and Borrower's operations, plus a per diem charge
at the rate of $650 per person per day for Lender's examiners in the field and
office; and (h) the fees and disbursements of counsel (including legal
assistants) to Lender in connection with any of the foregoing.
9.17 Further Assurances. At the request of Lender at any time and from
time to time, Borrower shall, at its expense, duly execute and deliver, or cause
to be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary or
proper to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any of the other Financing Agreements. Lender may
at any time and from time to time request a certificate from an officer of
Borrower representing that all conditions precedent to the making of Loans,
providing Letter of Credit Accommodations and approving Acceptances contained
herein are satisfied. In the event of such request by Lender, Lender may, at its
option, cease to make any further Loans, provide any further Letter of Credit
Accommodations or approve any further Acceptances until Lender has received such
certificate and, in addition, Lender has determined that such conditions are
satisfied. Where permitted by law, Borrower hereby authorizes Lender to execute
and file one or more UCC financing statements signed only by Lender.
9.18 Year 2000 Covenant. Borrower shall take all action necessary to
assure that there will be no material adverse change to Borrower's business by
reason of the advent of the year 2000, including without limitation that all
computer-based systems, embedded microchips and other processing capabilities
effectively recognize and process dates after December 31, 1999.
9.19 Compliance with ERISA.
(a) Borrower shall not with respect to any "employee benefit plans"
maintained by Borrower or any of its ERISA Affiliates: (i) terminate any of such
employee benefit plans so as to incur any liability to the Pension Benefit
Guaranty Corporation established pursuant to ERISA, (ii) allow or suffer to
exist any prohibited transaction involving any of such employee benefit plans or
any trust created thereunder which would subject Borrower or such ERISA
Affiliate to a tax or penalty or other liability on prohibited transactions
imposed under Section 4975 of the Code or ERISA, (iii) fail to pay to any such
employee benefit plan any contribution which it is obligated to pay under
Section 302 of ERISA, Section 412 of the Code or the terms of such plan, (iv)
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allow or suffer to exist any accumulated funding deficiency, whether or not
waived, with respect to any such employee benefit plan, (v) allow or suffer to
exist any occurrence of a reportable event or any other event or condition which
presents a material risk of termination by the Pension Benefit Guaranty
Corporation of any such employee benefit plan that is a single employer plan,
which termination could result in any liability to the Pension Benefit Guaranty
Corporation or (vi) incur any withdrawal liability with respect to any
multiemployer pension plan.
(b) As used in this Section 9.19, the terms "employee benefit
plans", "accumulated funding deficiency" and "reportable event" shall have the
respective meanings assigned to them in ERISA, and the term "prohibited
transaction" shall have the meaning assigned to it in Section 4975 of the Code
and ERISA.
9.20 Customs, Duty and Freight. Promptly, but in no event later than three
(3) Business Days after any Inventory ceases to be covered by a bill of lading
from the carrier transporting such goods to the applicable United States port,
Borrower shall (i) pay all applicable freight costs and duties, tariffs, taxes
and any other governmental assessments applicable to the importation and/or sale
of all such Inventory no longer constituting In-Transit Inventory and (ii)
satisfy all other requirements necessary for permitting all such Inventory to
gain entry into the United States through the United States Customs Service in
compliance with any applicable import quotas for immediate sale and/or
distribution in the United States.
9.21 In-Transit Inventory. Borrower shall cause all bills of lading and
other documents of title issued by any carrier of goods owned by Borrower being
transported to the United States or Canada from any other country to issue only
documents of title constituting a Qualifying Bill of Lading. If such goods are
being transported other than from overseas, Borrower shall cause all bills of
lading and other documents of title issued by any carrier of goods owned by
Borrower to be in non-negotiable form in the name of Borrower or such other
Person as Lender shall designate.
9.22 Booking of In-Transit Inventory and Related Liabilities. Borrower
shall reflect all purchases of Inventory and related liabilities resulting
therefrom in its financial books and records upon the issuance of a Qualifying
Bill of Lading in respect of such Inventory (or, if such goods are being
transported other than by sea, any other negotiable document of title which has
been issued in a manner consistent with the requirements of Section 9.21 hereof
and for a Qualifying Bill of Lading).
9.23 Transporter Agreements. Borrower shall not enter into any arrangement
or agreement with any customs agents, freight forwarders or principal domestic
common carriers, unless Lender receives an agreement with such party on terms
and conditions acceptable to Lender.
9.24 Subsidiary Business Activities. Other than the existing lines of
business carried on by TearDrop U.K. Ltd. and TearDrop Germany OMG as of the
date hereof (collectively, the "Foreign Subsidiaries"), Borrower shall not
permit any of its subsidiaries to engage in any line of business or maintain any
material assets. Borrower shall not permit the Foreign Subsidiaries to
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engage in any other lines of business or materially increase their respective
operations, assets or liabilities from levels existing as of the date hereof.
9.25 Illinois Qualification. Within two (2) business days after the date
hereof, Borrowers shall have taken all actions necessary to cause it to be
qualified to do business in the state of Illinois and Borrower shall have
provided Lender with satisfactory evidence of such qualification.
9.26 Accounts Payable. Within thirty (30) days after the Closing Date,
Borrower shall have used at least $2,800,000 of its Excess Availability required
by Section 4.1 hereof to reduce its outstanding accounts payable to a level and
condition acceptable to Lender.
9.27 Canadian Operations. Borrower shall not permit its office located at
1460 Bishop Street North in Cambridge, Ontario, Canada to maintain aggregate
funds in excess of (i) $75,000 at any time during the period in any year from
July 1 to December 31, (ii) $100,000 at any time during the period in any year
from January 1 to February 29 and (iii) $150,000 at any time during the period
in any year from March 1 to June 30. Borrower shall cause any funds received by
such office in excess of the amounts permitted in the preceding sentence to be
immediately remitted into the Payment Account.
9.28 Intellectual Property. Within twenty (20) days after the date hereof,
Borrower shall have (i) caused to be filed in the United States Patent and
Trademark Office (the "Office") all certificates of merger relating to the
merger of TearDrop Putter Corporation, TearDrop Promotions, Inc., TearDrop
Acquisition Corp., Ram Golf Corporation and Tommy Armour Golf Corporation with
and into Borrower and all applicable assignments and other documents required to
be filed by the Office to evidence ownership by Borrower of all intellectual
property that may be registered in the name of any of the foregoing entities at
the Office as of the date hereof and (ii) delivered to Lender satisfactory
evidence that all such certificates of merger, assignments and other applicable
documents were filed in the Office along with copies thereof. As soon as
available thereafter, Borrower shall have delivered to Lender recorded copies of
all the foregoing documents filed in the Office showing Borrower as the
registered owner of all the patents and trademarks disclosed on the Information
Certificate.
SECTION 10 EVENTS OF DEFAULT AND REMEDIES
10.1 Events of Default. The occurrence or existence of any one or more of
the following events are referred to herein individually as an "Event of
Default", and collectively as "Events of Default":
(a) Borrower fails to pay when due any of the Obligations or fails
to perform any of the terms, covenants, conditions or provisions contained in
this Agreement or any of the other Financing Agreements;
(b) any representation, warranty or statement of fact made by
Borrower to Lender in this Agreement, the other Financing Agreements or any
other
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agreement, schedule, confirmatory assignment or otherwise shall when made or
deemed made be false or misleading in any material respect;
(c) any Obligor revokes, terminates or fails to perform any of the
terms, covenants, conditions or provisions of any guarantee, endorsement or
other agreement of such party in favor of Lender;
(d) any judgment for the payment of money is rendered against
Borrower or any Obligor in excess of $50,000 in any one case or in excess of
$100,000 in the aggregate with all other outstanding judgments and shall remain
undischarged or unvacated for a period in excess of thirty (30) days or
execution shall at any time not be effectively stayed, or any judgment other
than for the payment of money, or injunction, attachment, garnishment or
execution is rendered against Borrower or any Obligor or any of their assets;
(e) any Obligor (being a natural person or a general partner of an
Obligor which is a partnership) dies or Borrower or any Obligor, which is a
partnership, limited liability company, limited liability partnership or a
corporation, dissolves or suspends or discontinues doing business;
(f) Borrower or any Obligor becomes insolvent (however defined or
evidenced), makes an assignment for the benefit of creditors, makes or sends
notice of a bulk transfer or calls a meeting of its creditors or principal
creditors;
(g) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed against Borrower or any Obligor or all or any part of its
properties and such petition or application is not dismissed within thirty (30)
days after the date of its filing or Borrower or any Obligor shall file any
answer admitting or not contesting such petition or application or indicates its
consent to, acquiescence in or approval of, any such action or proceeding or the
relief requested is granted sooner;
(h) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at a law
or equity) is filed by Borrower or any Obligor or for all or any part of its
property; or
(i) any default by Borrower or any Obligor under any agreement,
document or instrument relating to any indebtedness for borrowed money owing to
any person other than Lender, or any capitalized lease obligations, contingent
indebtedness in connection with any guarantee, letter of credit, indemnity or
similar type of instrument in favor of any person other than Lender, in any case
in an amount in excess of $50,000, which default continues for more than the
applicable cure period, if any, with respect
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thereto, or any default by Borrower or any Obligor under any material contract,
lease, license or other obligation to any person other than Lender, which
default continues for more than the applicable cure period, if any, with respect
thereto;
(j) Rudy Slucker ceases to serve as Chief Executive Officer of the
Borrower;
(k) the indictment or threatened indictment of Borrower or any
Obligor under any criminal statute, or commencement or threatened commencement
of criminal or civil proceedings against Borrower or any Obligor, pursuant to
which statute or proceedings the penalties or remedies sought or available
include forfeiture of any of the property of Borrower or such Obligor;
(l) there shall be a material adverse change in the business, assets
or prospects of Borrower or any Obligor after the date hereof; or
(m) there shall be an event of default under any of the other
Financing Agreements.
10.2 Remedies.
(a) At any time an Event of Default exists or has occurred and is
continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by Borrower or any Obligor, except as such notice or consent is
expressly provided for hereunder or required by applicable law. All rights,
remedies and powers granted to Lender hereunder, under any of the other
Financing Agreements, the Uniform Commercial Code or other applicable law, are
cumulative, not exclusive and enforceable, in Lender's discretion,
alternatively, successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of equity for
an injunction to restrain a breach or threatened breach by Borrower of this
Agreement or any of the other Financing Agreements. Lender may, at any time or
times, proceed directly against Borrower or any Obligor to collect the
Obligations without prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event of Default
exists or has occurred and is continuing, Lender may, in its discretion and
without limitation, (i) accelerate the payment of all Obligations and demand
immediate payment thereof to Lender (provided, that, upon the occurrence of any
Event of Default described in Sections 10.1(g) and 10.1(h) hereof, all
Obligations shall automatically become immediately due and payable), (ii) with
or without judicial process or the aid or assistance of others, enter upon any
premises on or in which any of the Collateral may be located and take possession
of the Collateral or complete processing, manufacturing and repair of all or any
portion of the Collateral, (iii) require Borrower, at Borrower's expense, to
assemble and make available to Lender any part or all of the Collateral at any
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place and time designated by Lender, (iv) collect, foreclose, receive,
appropriate, setoff and realize upon any and all Collateral, (v) remove any or
all of the Collateral from any premises on or in which the same may be located
for the purpose of effecting the sale, foreclosure or other disposition thereof
or for any other purpose, (vi) sell, lease, transfer, assign, deliver or
otherwise dispose of any and all Collateral (including entering into contracts
with respect thereto, public or private sales at any exchange, broker's board,
at any office of Lender or elsewhere) at such prices or terms as Lender may deem
reasonable, for cash, upon credit or for future delivery, with the Lender having
the right to purchase the whole or any part of the Collateral at any such public
sale, all of the foregoing being free from any right or equity of redemption of
Borrower, which right or equity of redemption is hereby expressly waived and
released by Borrower, (vii) require Borrower to permit any agents and/or
consultants designated by Lender to have full access to Borrower's books,
records, and operations for the purpose of monitoring and analyzing them and/or
(viii) terminate this Agreement. If any of the Collateral is sold or leased by
Lender upon credit terms or for future delivery, the Obligations shall not be
reduced as a result thereof until payment therefor is finally collected by
Lender. If notice of disposition of Collateral is required by law, five (5) days
prior notice by Lender to Borrower designating the time and place of any public
sale or the time after which any private sale or other intended disposition of
Collateral is to be made, shall be deemed to be reasonable notice thereof and
Borrower waives any other notice. In the event Lender institutes an action to
recover any Collateral or seeks recovery of any Collateral by way of prejudgment
remedy, Borrower waives the posting of any bond which might otherwise be
required.
(c) Lender may apply the cash proceeds of Collateral actually
received by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment of the Obligations, in whole or in part and in such order
as Lender may elect, whether or not then due. Borrower shall remain liable to
Lender for the payment of any deficiency with interest at the highest rate
provided for herein and all costs and expenses of collection or enforcement,
including attorneys' fees and legal expenses.
10.3 Without limiting the foregoing, upon the occurrence of an Event of
Default or an event which with notice or passage of time or both would
constitute an Event of Default, Lender may, at its option, without notice, (i)
cease making Loans or arranging for Letter of Credit Accommodations or
Acceptances or reduce the lending formulas or amounts of Revolving Loans, Letter
of Credit Accommodations or Acceptances available to Borrower and/or (ii)
terminate any provision of this Agreement providing for any future Loans, Letter
of Credit Accommodations or Acceptances to be made by Lender to Borrower.
SECTION 11 JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial
Waiver.
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(a) The validity, interpretation and enforcement of this Agreement
and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of Illinois
(without giving effect to principles of conflicts of law).
(b) Borrower and Lender irrevocably consent and submit to the
non-exclusive jurisdiction of the Circuit Court of Cook County, Illinois and the
United States District Court for the Northern District of Illinois and waive any
objection based on venue or forum non conveniens with respect to any action
instituted therein arising under this Agreement or any of the other Financing
Agreements or in any way connected with or related or incidental to the dealings
of the parties hereto in respect of this Agreement or any of the other Financing
Agreements or the transactions related hereto or thereto, in each case whether
now existing or hereafter arising, and whether in contract, tort, equity or
otherwise, and agree that any dispute with respect to any such matters shall be
heard only in the courts described above (except that Lender shall have the
right to bring any action or proceeding against Borrower or its property in the
courts of any other jurisdiction which Lender deems necessary or appropriate in
order to realize on the Collateral or to otherwise enforce its rights against
Borrower or its property).
(c) Borrower hereby waives personal service of any and all process
upon it and consents that all such service of process may be made by certified
mail (return receipt requested) directed to its address set forth on the
signature pages hereof and service so made shall be deemed to be completed five
(5) days after the same shall have been so deposited in the U.S. mails, or, at
Lender's option, by service upon Borrower in any other manner provided under the
rules of any such courts. Within thirty (30) days after such service, Borrower
shall appear in answer to such process, failing which Borrower shall be deemed
in default and judgment may be entered by Lender against Borrower for the amount
of the claim and other relief requested.
(d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY
JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT
OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND LENDER
EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR
LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY.
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<PAGE>
(e) Lender shall not have any liability to Borrower (whether in
tort, contract, equity or otherwise) for losses suffered by Borrower in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment or court order binding on Lender, that the losses were
the result of acts or omissions constituting gross negligence or willful
misconduct. In any such litigation, Lender shall be entitled to the benefit of
the rebuttable presumption that it acted in good faith and with the exercise of
ordinary care in the performance by it of the terms of this Agreement.
11.2 Waiver of Notices. Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement, except such as are expressly provided for herein. No notice
to or demand on Borrower which Lender may elect to give shall entitle Borrower
to any other or further notice or demand in the same, similar or other
circumstances.
11.3 Amendments and Waivers. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender, and as to amendments, as also signed by an authorized officer of
Borrower. Lender shall not, by any act, delay, omission or otherwise be deemed
to have expressly or impliedly waived any of its rights, powers and/or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Lender. Any such waiver shall be enforceable only to the extent specifically set
forth therein. A waiver by Lender of any right, power and/or remedy on any one
occasion shall not be construed as a bar to or waiver of any such right, power
and/or remedy which Lender would otherwise have on any future occasion, whether
similar in kind or otherwise.
11.4 Waiver of Counterclaims. Borrower waives all rights to interpose any
claims, deductions, setoffs or counterclaims of any nature (other then
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.
11.5 Indemnification. Borrower shall indemnify and hold Lender, and its
directors, agents, employees and counsel, harmless from and against any and all
losses, claims, damages, liabilities, costs or expenses imposed on, incurred by
or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act, omission, event or transaction related or attendant thereto,
including amounts paid in settlement, court costs, and the fees and expenses of
counsel. To the extent that the undertaking to indemnify, pay and hold harmless
set forth in this Section may be unenforceable because it violates any law or
public policy, Borrower shall pay the maximum portion which it is permitted to
pay under applicable
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law to Lender in satisfaction of indemnified matters under this Section. The
foregoing indemnity shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
SECTION 12 TERM OF AGREEMENT; MISCELLANEOUS
12.1 Term.
(a) This Agreement and the other Financing Agreements shall become
effective as of the date set forth on the first page hereof and shall continue
in full force and effect for a term ending on the date two (2) years from the
date hereof (the "Renewal Date"), and, if agreed to in writing by both Lender
and Borrower, from year to year thereafter, unless sooner terminated pursuant to
the terms hereof. Lender or Borrower may terminate this Agreement and the other
Financing Agreements effective on the Renewal Date or on the anniversary of the
Renewal Date in any year by giving to the other party at least ninety (90) days
prior written notice; provided, that, this Agreement and all other Financing
Agreements must be terminated simultaneously. Upon the effective date of
termination or non-renewal of the Financing Agreements, Borrower shall pay to
Lender, in full, all outstanding and unpaid Obligations and shall furnish cash
collateral to Lender in such amounts as Lender determines are reasonably
necessary to secure Lender from loss, cost, damage or expense, including
attorneys' fees and legal expenses, in connection with any contingent
Obligations, including issued and outstanding Letter of Credit Accommodations,
Acceptances and checks or other payments provisionally credited to the
Obligations and/or as to which Lender has not yet received final and
indefeasible payment. Such payments in respect of the Obligations and cash
collateral shall be remitted by wire transfer in Federal funds to such bank
account of Lender, as Lender may, in its discretion, designate in writing to
Borrower for such purpose. Interest shall be due until and including the next
business day, if the amounts so paid by Borrower to the bank account designated
by Lender are received in such bank account later than 12:00 noon, Chicago time.
(b) No termination of this Agreement or the other Financing
Agreements shall relieve or discharge Borrower of its respective duties,
obligations and covenants under this Agreement or the other Financing Agreements
until all Obligations have been fully and finally discharged and paid, and
Lender's continuing security interest in the Collateral and the rights and
remedies of Lender hereunder, under the other Financing Agreements and
applicable law, shall remain in effect until all such Obligations have been
fully and finally discharged and paid.
(c) If for any reason this Agreement is terminated prior to the end
of the then current term or renewal term of this Agreement, in view of the
impracticality and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Lender's lost
profits as a result thereof, Borrower agrees to pay to Lender, upon the
effective date of such termination, an early termination fee in the amount set
forth below if such termination is effective in the period indicated:
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===============================================================================
Amount Period
------ ------
- -------------------------------------------------------------------------------
.(i) 2% of the total obtained From the date hereof to and
by subtracting the including the first anniversary
original principal date of the date hereof
amount of Term Loan B
from the Maximum Credit
- --------------------------------------------------------------------------------
.(ii) 1% of the total obtained From the first anniversary date of
by subtracting the the date hereof to and including
original principal the second anniversary date of the
amount of Term Loan B date hereof or if the term of this
from the Maximum Credit Agreement is extended for an
additional year as provided above,
then to and including each
successive anniversary date of the
date hereof
===============================================================================
Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrower agrees
that it is reasonable under the circumstances currently existing. In addition,
Lender shall be entitled to such early termination fee upon the occurrence of
any Event of Default described in Sections 10.1(g) and 10.1(h) hereof, even if
Lender does not exercise its right to terminate this Agreement, but elects, at
its option, to provide financing to Borrower or permit the use of cash
collateral under the United States Bankruptcy Code. The early termination fee
provided for in this Section 12.1 shall be deemed included in the Obligations.
12.2 Notices. All notices, requests and demands hereunder shall be in
writing and (a) made to Lender at its address set forth below and to Borrower at
its chief executive office set forth below, or to such other address as either
party may designate by written notice to the other in accordance with this
provision, and (b) deemed to have been given or made: if delivered in person,
immediately upon delivery; if by telex, telegram or facsimile transmission,
immediately upon sending and upon confirmation of receipt; if by nationally
recognized overnight courier service with instructions to deliver the next
business day, one (1) business day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing.
12.3 Partial Invalidity. If any provision of this Agreement is held to be
invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
12.4 Successors. This Agreement, the other Financing Agreements and any
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, Borrower and their respective
successors and assigns, except that Borrower may not assign its rights under
this Agreement, the other Financing Agreements and any other document referred
to herein or therein without the prior written consent of Lender. Lender may,
after notice to Borrower, assign its rights and delegate its obligations under
this Agreement and the other Financing Agreements and further may assign, or
sell participations in,
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all or any part of the Loans, the Letter of Credit Accommodations, the
Acceptances or any other interest herein to another financial institution or
other person, in which event, the assignee or participant shall have, to the
extent of such assignment or participation, the same rights and benefits as it
would have if it were the Lender hereunder, except as otherwise provided by the
terms of such assignment or participation.
12.5 Entire Agreement. This Agreement, the other Financing Agreements, any
supplements hereto or thereto, and any instruments or documents delivered or to
be delivered in connection herewith or therewith represents the entire agreement
and understanding concerning the subject matter hereof and thereof between the
parties hereto, and supersede all other prior agreements, understandings,
negotiations and discussions, representations, warranties, commitments,
proposals, offers and contracts concerning the subject matter hereof, whether
oral or written. In the event of any inconsistency between the terms of this
Agreement and any schedule or exhibit hereto, the terms of this Agreement shall
govern.
12.6 Participant's Security Interest. If a Participant shall at any time
participate with Lender in the Loans, Letter of Credit Accommodations, the
Acceptances or other Obligations, Borrower hereby grants to such Participant and
such Participant shall have and is hereby given, a continuing lien on and
security interest in any money, securities and other property of Borrower in the
custody or possession of the Participant, including the right of setoff, to the
extent of the Participant's participation in the Obligations, and such
participant shall be deemed to have the same right of setoff to the extent of
its participation in the Obligations, as it would have if it were a direct
lender.
12.7 Restatement of Assignment Documents. Borrower and Lender agree that
on the date hereof, the following transactions shall be deemed to occur
automatically, without further action by any party hereto: (a) the Loan and
Security Agreement dated as of November 10, 1997 (as amended, the "1997 Loan
Agreement") and the other Assigned Loan Documents (as defined in that certain
Assignment and Assumption Agreement dated as of the date hereof between Lender
and First Union National Bank but excluding therefrom any UCC financing
statements) shall be deemed to be amended and restated in their entirety in the
form of this Agreement and (b) all "Liabilities" (as defined in the Assignment
and Assumption Agreement) outstanding under the 1997 Loan Agreement and the
other Assigned Loan Documents (collectively, the "Prior Obligations") shall, to
the extent not paid on the date hereof, be deemed to be Obligations outstanding
hereunder. The parties acknowledge and agree that this Agreement and the other
Financing Agreements do not constitute a novation, payment and reborrowing or
termination of the Prior Obligations under the 1997 Loan Agreement and the other
Assigned Loan Documents delivered thereunder (except that the Borrower hereby
represents and warrants that it has paid all accrued and unpaid interest and/or
fees under the 1997 Loan Agreement) and that all such Prior Obligations are in
all respects continued and outstanding as Obligations under this Agreement with
only the terms being modified from and after the date hereof as provided in this
Agreement.
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IN WITNESS WHEREOF, Lender and Borrower have caused these presents to be
duly executed as of the day and year first above written.
================================================================================
LENDER BORROWER
CONGRESS FINANCIAL CORPORATION TEARDROP GOLF COMPANY
(CENTRAL)
/s/ Thomas C. Lennon /s/ Rudy Slucker
- ------------------------------------ -------------------------------------
By: Thomas C. Lennon By: Rudy Slucker
--------------------------------- ----------------------------------
Title: Vice President Title: President
------------------------------ -------------------------------
Address: Chief Executive Office:
150 South Wacker Drive, Suite 2200 1080 Lousons Road
Chicago, Illinois 60606 Union, New Jersey 07083
================================================================================
[Signature Page to Loan and Security Agreement]
S-1
Exhibit 10.41
SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT ("Agreement") is made and entered into
by and between the undersigned, Rudy Slucker (the "undersigned"), and Congress
Financial Corporation (Central) ("Lender"). Capitalized terms used herein which
are not defined herein are used herein as such terms are defined in the Loan and
Security Agreement dated as of January 20, 2000 (as amended, restated or
otherwise modified from time to time, the "Loan Agreement") between Lender and
Teardrop Golf Company (the "Debtor").
WITNESSETH:
WHEREAS, the Debtor is now indebted to the undersigned, pursuant to
that certain Amended and Restated Subordinated Convertible Demand Promissory
Note dated January 20, 2000 in the total initial principal amount of One Million
Dollars ($1,000,000) (which subordinated note, together with any instrument(s)
which may hereafter be substituted therefor under the terms of any agreement
between Debtor and the undersigned, are hereinafter referred to as the "Notes").
WHEREAS, Debtor shall be indebted to Lender as a result of loans to
be made by Lender to Debtor pursuant to the Loan Agreement; and
WHEREAS, the undersigned acknowledges that the loans or other
extensions of any financial accommodation or credit to Debtor by Lender are of
value to the undersigned;
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, receipt of
which is hereby acknowledged by the undersigned, and in order to induce Lender,
at its option, now or from time to time hereafter, to make loans or extend
credit or any other financial accommodation to or for the benefit of Debtor; or
to grant such renewals or extensions thereof as Lender may deem advisable; and
to better secure Lender in respect of the foregoing, the undersigned hereby
agrees with Lender as hereinafter set forth.
As used herein the following terms shall have the meanings set forth
below:
"Bankruptcy Code" shall mean Title 11 of the United States Code (11
U.S.C. 101 et. seq.) or any replacement or supplemental federal statute dealing
with the bankruptcy of debtors.
"Borrower" shall mean individually and collectively, each Debtor and
any successor or assign of any Debtor, including, without limitation, a
receiver, trustee or debtor-in-possession of or for any Debtor.
<PAGE>
"Senior Obligations" shall mean the Obligations (as defined in the
Loan Agreement) and all interest and costs of enforcement or preservation and
protection of collateral which may at any time accrue with respect to the
Obligations or which would accrue but for the operation of any provision or
doctrine with respect to the Bankruptcy Code and any obligations of, advances
made to or claims against Borrower pursuant to or with respect to any financing
or extension of credit provided to Borrower by Lender pursuant to Section 363 or
364 of the Bankruptcy Code.
"Subordinated Debt" shall mean any principal, interest, fees or
other monies which may now or hereafter be owing by Borrower to the undersigned
or be owing by any other person, firm, partnership or corporation to the
undersigned for the benefit of Borrower (whether such amounts represent
principal or interest, or obligations which are due or not due, direct or
indirect, absolute or contingent) including, without limitation, the Notes and
any negotiable instruments evidencing such amounts.
1. Standby; Subordination; Subrogation. The payment and performance
of the Subordinated Debt is hereby subordinated to the Senior Obligations and
the undersigned will not ask, demand, sue for, take or receive from Borrower by
setoff or in any other manner, the whole or any part of the Subordinated Debt
which may now or hereafter be owing by Borrower and will not take any negotiable
instruments evidencing such amounts, nor any security (including guaranties and
third party credit support) for any of the foregoing, unless and until all such
Senior Obligations of Borrower whether now existing or hereafter arising
directly between Borrower and Lender, and whether such Senior Obligations arise
after the Borrower or the Borrower's estate becomes the subject of proceedings
under the Bankruptcy Code or whether such Senior Obligations are acquired
outright, conditionally or as collateral security from another by Lender, shall
have been fully paid and satisfied with interest, including interest on any
loans or advances made to the Borrower after the Borrower or the Borrower's
estate becomes the subject of proceedings under the Bankruptcy Code and all
commitments under the Loan Agreement have expired or been terminated. All liens
and security interests of the undersigned, whether now or hereafter arising and
howsoever existing, in any assets of Borrower or any assets securing any of the
Senior Obligations shall be and hereby are subordinated to the rights and
interests of Lender in those assets; the undersigned shall have no right to
possession of any such assets or to foreclose upon any such assets, whether by
judicial action or otherwise, unless and until all of the Senior Obligations
shall have been fully paid and satisfied and all commitments under the Loan
Agreement have expired or been terminated. The undersigned also hereby agrees
that, regardless of whether any of the Senior Obligations are secured or
unsecured, Lender shall be subrogated for the undersigned with respect to the
undersigned's claims against Borrower and the undersigned's rights, liens and
security interests, if any, in any of Borrower's assets and the proceeds thereof
until all of the Senior Obligations have been fully paid and satisfied and all
commitments under the Loan Agreement have expired or been terminated. In the
event, at the request of Borrower, Lender releases any of its security for any
of the Senior Obligations which constitutes part or all of the security for the
Subordinated Debt, the undersigned shall thereupon execute and deliver to
Borrower such termination statements and releases as the Borrower shall
reasonably request to release the undersigned's security interest in or lien
against such property of Borrower. The undersigned acknowledges and agrees that,
to the extent the terms and
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<PAGE>
provisions of either this Agreement or the Loan Agreement are inconsistent with
the Notes, the Notes shall be deemed to be subject to the Loan Agreement and
this Agreement.
2. Payment of Interest and Principal. (a) Notwithstanding any other
provision of this Agreement, the undersigned shall be entitled to collect
interest on the Subordinated Debt that accrues from and after the date hereof
and is payable at the non-default rate specified in the Notes (which rate shall
in no event exceed the rate set forth in the Notes as of the date hereof),
provided that such right shall automatically be suspended, without the necessity
of Lender providing the undersigned with any notice, at any time there exists an
Event of Default (as defined in the Loan Agreement) under the terms of the Loan
Agreement (which has not been waived).
(b) Notwithstanding any other provision of this Agreement, upon ten
(10) days' prior written notice to Lender by Borrower, Borrower shall be
entitled to pay, and the undersigned shall be entitled to collect, the principal
amount on the Subordinated Debt not to exceed $1,000,000 at any time that Lender
has determined in its sole discretion that all three of the following conditions
have been satisfied: (i) no Event of Default exists before and immediately after
giving effect to such payment or would result from allowing such payment, (ii)
Borrower shall have Excess Availability (as defined in the Loan Agreement) of at
least $1,000,000 after giving effect to such payment and (iii) Borrower shall
have received either (a) a subordinated loan of $1,000,000 on terms and
conditions acceptable to Lender which shall be subject to a Subordination
Agreement acceptable to Lender or (b) a cash equity investment in Borrower of at
least $1,000,000 on terms and conditions acceptable to Lender. For purposes of
determining whether the Excess Availability test has been satisfied on any
payment date, Borrower and the undersigned shall assume that such payment will
be funded only after payment of any amounts owing by Borrower to Lender.
3. Enforcement Rights. The undersigned, prior to the payment in full
of the Senior Obligations and the termination of all financing arrangements
between Borrower and Lender, shall have no right to enforce any claim with
respect to the Subordinated Debt, or otherwise to take any action against
Borrower or Borrower's property without the prior written consent of Lender,
except for claims for interest and/or principal to which the undersigned is
entitled pursuant to Section 2 hereof.
4. Subordinated Debt Owed Only to the Undersigned. The undersigned
warrants and represents that the undersigned has not previously assigned any
interest in the Subordinated Debt or any security interest in connection
therewith, that no other person, firm or corporation owns an interest in the
Subordinated Debt or security therefor other than the undersigned (whether as
joint holders of the Subordinated Debt, participants or otherwise) and that the
entire Subordinated Debt is owing only to the undersigned and covenants that the
entire Subordinated Debt shall continue to be owing only to the undersigned and
all security therefor shall continue to be held solely for the benefit of the
undersigned unless assigned in accordance with the terms of this Agreement.
- 3 -
<PAGE>
5. Lender Priority. In the event of any distribution, division, or
application, partial or complete, voluntary or involuntary, by operation of law
or otherwise, of all or any part of the assets of Borrower or the proceeds
thereof to the creditors of Borrower or readjustment of the Senior Obligations
and Subordinated Debt of Borrower, whether by reason of liquidation, bankruptcy,
arrangement, receivership, assignment for the benefit of creditors or any other
action or proceeding involving the readjustment of all or any part of the Senior
Obligations or the Subordinated Debt, or the application of the assets of
Borrower to the payment or liquidation thereof, or upon the dissolution or other
winding up of Borrower's business, or upon the sale of all or substantially all
of Borrower's assets, then, and in any such event, (i) Lender shall be entitled
to receive payment in full of any and all of the Senior Obligations then owing
prior to the payment of all or any part of the Subordinated Debt, and (ii) any
payment or distribution of any kind or character, whether in cash, securities or
other property, which shall be payable or deliverable upon or with respect to
any or all of the Subordinated Debt shall be paid or delivered directly to
Lender for application on any of the Senior Obligations, due or not due, until
such Senior Obligations shall have first been fully paid and satisfied.
6. Payments Received by the Undersigned. Except for claims for
interest and principal to which the undersigned is entitled pursuant to Section
2 hereof, should any payment or distribution or security or instrument or
proceeds thereof be received by the undersigned upon or with respect to the
Subordinated Debt or any other obligations of Borrower to the undersigned prior
to the satisfaction of all of the Senior Obligations and termination of all
financing arrangements between Borrower and Lender, the undersigned shall
receive and hold the same in trust, as trustee, for the benefit of Lender, and
shall forthwith deliver the same to Lender, in precisely the form received
(except for the endorsement or assignment of the undersigned where necessary),
for application on any of the Senior Obligations, due or not due, and, until so
delivered, the same shall be held in trust by the undersigned as the property of
Lender. In the event of the failure of the undersigned to make any such
endorsement or assignment to Lender, Lender, or any of its officers or
employees, is hereby irrevocably authorized to make the same.
7. Instrument Legend. Any instrument evidencing any of the
Subordinated Debt (including, without limitation, the Notes), or any portion
thereof, will, on the date hereof or promptly hereafter, be inscribed with a
legend conspicuously indicating that payment thereof is subordinated to the
claims of Lender pursuant to the terms of this Agreement, and (i) a copy thereof
will be delivered to Lender on the date hereof, and (ii) the original of any
such instrument will be immediately delivered to Lender upon request therefor by
Lender after the occurrence of an Event of Default (as defined in the Loan
Agreement) or if Lender at any time determines, in its sole discretion, that the
financial condition of the undersigned is or becomes such that Lender wishes to
have such possession to protect Lender's interest hereunder. Any instrument
evidencing any of the Subordinated Debt, or any portion thereof, which is
hereafter executed by Borrower, will, on the date thereof, be inscribed with the
aforesaid legend and a copy thereof will be delivered to Lender on the date of
its execution or within five (5) business days thereafter and the original
thereof will be delivered as and when described hereinabove.
8. Assignment of Claims. The undersigned agrees that until the
Senior Obligations have been paid in full and satisfied and all financing
arrangements between
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<PAGE>
Borrower and Lender have been terminated, the undersigned will not assign or
transfer to others any claim the undersigned has or may have against Borrower,
unless such assignment or transfer is made expressly subject to this Agreement.
9. Continuing Nature of Subordination. This Agreement shall be
effective and may not be terminated or otherwise revoked by the undersigned
until the Senior Obligations shall have been fully discharged and all
commitments under the Loan Agreement have been terminated. In the event the
undersigned shall have any right under applicable law otherwise to terminate or
revoke this Agreement which right cannot be waived, such termination or
revocation shall not be effective until written notice of such termination or
revocation, signed by the undersigned, is actually received by Lender's officer
responsible for such matters. In the absence of the circumstances described in
the immediately preceding sentence, this is a continuing agreement of
subordination and Lender may continue, at any time and without notice to the
undersigned, to extend credit or other financial accommodations and loan monies
to or for the benefit of Borrower on the faith hereof. Any termination or
revocation described hereinabove shall not affect this Agreement in relation to
(a) any of the Senior Obligations which arose prior to receipt thereof, (b) any
of the Senior Obligations which represent interest on Senior Obligations, or (c)
any of the Senior Obligations created after receipt thereof, if such Obligations
were incurred either through extensions of credit by Lender pursuant to Lender's
financing arrangements with Borrower in an aggregate outstanding amount not to
exceed the Credit Limit, and/or for the purpose of preserving or protecting any
collateral (including, but not limited to, all protective advances, costs,
expenses) and/or for attorneys' and paralegals' fees, whensoever made, advanced
or incurred by Lender in connection with the Senior Obligations. If, in reliance
on this Agreement, Lender makes loans or other advances to or for the benefit of
Borrower or takes other action under the Loan Agreement after such aforesaid
termination or revocation by the undersigned but prior to the receipt by Lender
of said written notice as set forth above, the rights of Lender shall be the
same as if such termination or revocation had not occurred; and, in any event,
no obligation of the undersigned hereunder shall be affected pursuant to this
Section 9 by the death, incapacity or written revocation of the undersigned or
any other subordinated party, pledgor, endorser, or guarantor, if any.
10. Additional Agreements Between Lender and Borrower. Lender, at
any time and from time to time, either before or after any such aforesaid notice
of termination or revocation, may enter into such agreement or agreements with
Borrower as Lender may deem proper, extending the time of payment of or renewing
or otherwise altering the terms of all or any of the Senior Obligations or
affecting the security underlying any or all of the Senior Obligations, and may
exchange, sell, release, surrender or otherwise deal with any such security,
without in any way thereby impairing or affecting this Agreement.
11. Undersigned's Waivers. All of the Senior Obligations shall be
deemed to have been made or incurred in reliance upon this Agreement. The
undersigned expressly waives all notice of the acceptance by Lender of the
subordination and other provisions of this Agreement and all other notices not
specifically required pursuant to the terms of this Agreement whatsoever, and
the undersigned expressly waives reliance by Lender upon the subordination and
other agreements as herein provided. The undersigned agrees that Lender has made
no
- 5 -
<PAGE>
warranties or representations with respect to the due execution, legality,
validity, completeness or enforceability of the Loan Agreement, or the
collectibility of the Senior Obligations, that Lender shall be entitled to
manage and supervise its loans, extensions of credit or other financial
accommodations to Borrower in accordance with applicable law and Lender's usual
practices, modified from time to time as Lender deems appropriate under the
circumstances, without regard to the existence of any rights that the
undersigned may now or hereafter have in or to any of the assets of Borrower,
and that Lender shall have no liability to the undersigned for, and waives any
claim which the undersigned may now or hereafter have against, Lender arising
out of any and all actions which Lender, in good faith, takes or omits to take
(including, without limitation, actions with respect to the creation, perfection
or continuation of liens or security interests in the Collateral (as defined in
the Loan Agreement) and other security for the Senior Obligations, actions with
respect to the occurrence of an Event of Default, actions with respect to the
foreclosure upon, sale, release, or depreciation of, or failure to realize upon,
any of the Collateral and actions with respect to the collection of any claim
for all or any part of the Senior Obligations from any account debtor, guarantor
or any other party) with respect to the Loan Agreement or any other agreement
related thereto or to the collection of the Senior Obligations or the valuation,
use, protection or release of the Collateral and/or other security for the
Senior Obligations.
12. Bankruptcy Issues. If Borrower or Borrower's estate becomes the
subject of proceedings under the Bankruptcy Code and if Lender desires to permit
the use of cash collateral or to provide financing to Borrower under either
Section 363 or Section 364 of the Bankruptcy Code, the undersigned agrees that
adequate notice of such financing to the undersigned shall have been provided if
the undersigned received notice two (2) business days prior to the entry of any
order approving such cash collateral usage or financing. Notice of a proposed
financing or use of cash collateral shall be deemed given upon the sending of
such notice by telegraph, telecopy or hand delivery to the undersigned at the
address indicated above. All allocations of payments between Lender and the
undersigned shall, subject to any court order, continue to be made after the
filing of a petition under the Bankruptcy Code on the same basis that the
payments were to be allocated prior to the date of such filing. In the event
that the undersigned has or at any time acquires any security for the
Subordinated Debt, the undersigned agrees not to assert any right it may have to
"adequate protection" of its interest in such security in any bankruptcy
proceeding and agrees that it will not seek to have the automatic stay lifted
with respect to such security, without the prior written consent of Lender. The
undersigned waives any claim or defense the undersigned may now or hereafter
have arising out of the election by Lender, in any proceeding instituted under
Chapter 11 of the Bankruptcy Code, of the application of Section 1111(b)(2) of
the Bankruptcy Code, and/or any borrowing or grant of a security interest under
Section 364 of the Bankruptcy Code by Borrower, as debtor-in-possession. To the
extent that Lender receives payments on, or proceeds of collateral for, the
Senior Obligations which are subsequently invalidated, declared to be fraudulent
or preferential, set aside and/or required to be repaid to a trustee, receiver
or any other party under any bankruptcy law, state or federal law, common law,
or equitable cause, then, to the extent of such payment or proceeds received,
the Senior Obligations, or part thereof, intended to be satisfied shall be
revived and continue in full force and effect as if such payments or proceeds
had not been received by Lender.
- 6 -
<PAGE>
13. Lender's Waivers. No waiver shall be deemed to be made by Lender
of its rights hereunder, unless the same shall be in writing signed on behalf of
Lender and each waiver, if any, shall be a waiver only with respect to the
specific instance involved and shall in no way impair the rights of Lender or
the obligations of the undersigned to Lender in any other respect at any other
time.
14. Subrogation Rights of the Undersigned. Upon payment in full and
satisfaction of all the Senior Obligations, the undersigned shall be subrogated
to the rights of Lender to receive payments and distributions of cash, property
and securities applicable to the Senior Obligations to the extent that
distributions otherwise payable to the undersigned have been applied to the
Senior Obligations, until all amounts payable under the Subordinated Debt shall
have been paid in full. For purposes of such subrogation, no payments or
distributions to Lender of any cash, property or securities to which the
undersigned would be entitled except for the provisions of this Agreement, and
no payment pursuant to the provisions of this Agreement to Lender by the
undersigned shall, as among Borrower and its creditors other than Lender, be
deemed to be a payment or distribution by Borrower to or on account of the
Senior Obligations.
15. Severability. Wherever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
16. Headings. The headings contained in this Agreement are and shall
be without substantive meaning or content of any kind whatsoever and are not a
part of the agreement between the parties hereto.
17. Authority. The undersigned hereby certifies that it has all
necessary authority to grant the subordination evidenced hereby and to execute
this Agreement on behalf of the undersigned.
18. Binding Effect. This Agreement shall be immediately binding upon
the undersigned and its successors and assigns, and shall inure to the benefit
of the successors and assigns of Lender.
19. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL.
(a) THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF ILLINOIS AND ANY DISPUTE ARISING OUT OF, CONNECTED WITH,
RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THE
UNDERSIGNED AND LENDER IN CONNECTION WITH THIS AGREEMENT, AND WHETHER ARISING IN
CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE
INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAWS PROVISIONS) AND DECISIONS OF
THE STATE OF ILLINOIS.
- 7 -
<PAGE>
(b) EXCEPT AS PROVIDED IN THE NEXT PARAGRAPH, THE UNDERSIGNED AND
LENDER AGREE THAT ALL DISPUTES BETWEEN THEM ARISING OUT OF, CONNECTED WITH,
RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS AGREEMENT, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY,
OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE OR FEDERAL COURTS LOCATED IN
CHICAGO, ILLINOIS, BUT THE UNDERSIGNED AND LENDER ACKNOWLEDGE THAT ANY APPEALS
FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF CHICAGO,
ILLINOIS. THE UNDERSIGNED WAIVES IN ALL DISPUTES ANY OBJECTION THAT IT MAY HAVE
TO THE LOCATION OF THE COURT CONSIDERING THE DISPUTE INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF
FORUM NON CONVENIENS.
(c) THE UNDERSIGNED AGREES THAT LENDER SHALL HAVE THE RIGHT, TO THE
EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE UNDERSIGNED OR ITS
PROPERTY IN A COURT IN ANY LOCATION REASONABLY SELECTED IN GOOD FAITH TO ENABLE
LENDER TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE A JUDGMENT OR OTHER COURT
ORDER ENTERED IN FAVOR OF LENDER. THE UNDERSIGNED AGREES THAT IT WILL NOT ASSERT
ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING BROUGHT BY LENDER TO REALIZE ON
SUCH PROPERTY, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LENDER.
THE UNDERSIGNED WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE
COURT IN WHICH LENDER HAS COMMENCED A PROCEEDING DESCRIBED IN THIS PARAGRAPH
INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON
THE GROUNDS OF FORUM NON CONVENIENS.
(d) THE UNDERSIGNED AND LENDER EACH WAIVE ANY RIGHT TO HAVE A JURY
PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR
OTHERWISE ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT.
INSTEAD, ANY DISPUTES RESOLVED IN COURT WILL BE RESOLVED IN A BENCH TRIAL
WITHOUT A JURY.
[Signature Page Follows]
- 8 -
<PAGE>
IN WITNESS WHEREOF, this instrument has been signed and sealed this
20th day of January 2000.
/s/ Rudy Slucker
------------------------------
Mr. Rudy Slucker, individually
Teardrop Golf Company hereby accepts, and acknowledges receipt of a
copy of, the foregoing Subordination Agreement (the "Agreement") this __ day of
January, 2000, and agrees that it will not pay any of the Subordinated Debt (as
such term is defined in the Agreement) or grant any security therefor, except as
the Agreement provides. In the event of a breach by the undersigned of any of
the provisions herein, or by the holder of any Subordinated Debt of any of the
provisions of the Agreement, all of the Senior Obligations (as such term is
defined in the Agreement) shall, without presentment, demand, protest or notice
of any kind, become immediately due and payable, unless Lender shall otherwise
elect in writing.
TEARDROP GOLF COMPANY
By:/s/ Rudy Slucker
----------------------------
Its: President
[Signature Page To Subordination Agreement]
Exhibit 10.44
EMPLOYMENT AGREEMENT
This Agreement, is made effective January 27, 2000, by and between TearDrop Golf
Company, ("TEARDROP") a Delaware Corporation, with its principal offices located
at 8350 North Lehigh Avenue, Morton Grove, Illinois, and Mr. ANDREW M. KAIREY
individual, ("EMPLOYEE") with his current address being 25737 Simpson Place,
Calabasas, California 91302:
WITNESSETH
WHEREAS, EMPLOYEE shall be employed by TEARDROP as President and Chief Operating
Officer of TearDrop Golf Company, for a period of three years from the date of
execution of this document.
WHEREAS, TEARDROP has determined that it is in the best interest of TEARDROP to
obtain the services of EMPLOYEE in order to better assure the continued success
of TEARDROP, and;
WHEREAS, TEARDROP desires to insure, to the extent feasible, that for a time
certain from the date hereof, EMPLOYEE will be given the opportunity to continue
in the employ of TEARDROP for the mutual benefit of the parties hereto.
NOW, THEREFORE, in consideration of the mutual agreements and covenants
contained herein, the parties have agreed and do hereby agree as follows:
1. Term: TEARDROP hereby agrees to employ EMPLOYEE, and EMPLOYEE hereby
agrees to be employed by TEARDROP as President of TearDrop Golf
Corporation, from January 27, 2000, through December 31, 2002.
EMPLOYEE shall give his best efforts to carry out his duties in an
efficient, timely and workman like manner and in the continuing best
interest if TEARDROP. Additionally, EMPLOYEE shall be awarded a seat
on TEARDROP'S Board of Directors (Details to be determined by
EMPLOYEE and The Board in another document).
2. Compensation: TEARDROP shall compensate EMPLOYEE during the term
hereof as follows:
a) Annual Salary: Year 2000 - Salary shall be based on an annual
salary of Two Hundred Twenty-Five Thousand Dollars ($225,000),
beginning January 27, 2000; Year 2001 - Two Hundred Fifty
1
<PAGE>
Thousand Dollars ($250,000); and Year 2002 - Two Hundred
Seventy Five Thousand Dollars ($275,000);
b) Bonus: The current bonus program shall be used for the year
2000 and subsequent changes may be made to the bonus program
in subsequent years of this Agreement. Said program, with
respect to EMPLOYEE, shall be targeted at Fifty Percent (50%)
of EMPLOYEE'S base salary and will be prorated upwards or
downwards depending on the actual results when measured
against the established targets. The program shall be
determined by the executive management team and attached to
this Agreement and incorporated herein as Exhibit A.
c) Medical Insuruance/401K Benefits: EMPLOYEE shall be entitled
to the same medical and 401K benefits that current President
and CEO is entitled to and shall have the option to defer
medical/health insurance until his current benefits from his
previous employer have expired (TearDrop shall contribute to
payment of EMPLOYEE'S medical/health insurance if EMPLOYEE
chooses to maintain his current insurance coverage in an
amount equal to that amount which TearDrop would contribute if
EMPLOYEE chose coverage under TearDrop's plan);
d) Stock Options: EMPLOYEE shall receive One Hundred Thousand
Stock Options at the option price of Two Dollars and
Twenty-Five Cents ($2.25), which was the price of the stock at
the close of the market on January 27, 2000, the date EMPLOYEE
began working for TearDrop. The options shall vest in favor of
EMPLOYEE in equal 1/3 installments at the end of each calendar
year during the term of this Agreement. Additionally, EMPLOYEE
shall be eligible to receive additional stock options
annually, if approved by the board of directors;
e) Automobile: EMPLOYEE shall receive a One Thousand Dollar per
month automobile allowance, plus automobile insurance;
f) Country Club Allowance: An annual allowance of up to Twenty
Thousand Dollars ($20,000) per year for actual expenses shall
be given to EMPLOYEE each year during the term of this
Agreement (however, TearDrop shall not contribute any funds
for EMPLOYEE'S initiation or entry fee); and
g) Relocation Package: EMPLOYEE shall be reimbursed for all
moving expenses incurred in moving all of the contents of
EMPLOYEE'S home from California to Illinois. Estimates of said
moving expenses are from $15,000 to $20,000. A three bid
process shall be undertaken at the time of the move to
determine the most efficient and well equipped company to
handle the move. Additionally, EMPLOYEE shall be awarded
Fifteen Thousand (15000) Vested Stock Options at the option
price of Two Dollars and Twenty-Five Cents ($2.25), in order
to assist EMPLOYEE with closing costs on his home.
2
<PAGE>
3. Performance: During the term of employment under this Agreement,
EMPLOYEE will devote his entire time during reasonable business
hours to the performance of his duties hereunder (reasonable sick
leave and vacations excluded).
4. Employment Termination:
a) In the event EMPLOYEE'S employment with TEARDROP is terminated
due to his death, incapacity, disability, retirement, and/or
EMPLOYEE is discharged for "good cause", (which for the
purposes of this Agreement, shall mean substantial or repeated
failure to meet minimum job standards, willful misconduct,
serious negligence, and/or acts or omissions harmful to
TEARDROP), or EMPLOYEE voluntarily leaves employment without
cause, EMPLOYEE shall immediately tender the resignation of
his seat on TEARDROP'S Board of Directors, to the Board.
b) Additionally, In the event EMPLOYEE'S employment with TEARDROP
is terminated for any of the reasons stated in paragraph a)
above, EMPLOYEE waives any and all rights to the severance
benefits contained herein.
5. Severance Pay: TEARDROP shall pay to EMPLOYEE, as severance and as
consideration for EMPLOYEE'S agreement not to compete with TEARDROP,
beginning promptly after termination, except if Paragraph 4 (a)
applies, the following: (1) six months salary equal to EMPLOYEE'S
current salary, paid to EMPLOYEE by TEARDROP during regular pay
periods throughout the calendar year following termination. If
EMPLOYEE is terminated during the 2002 contract year, EMPLOYEE shall
receive the remainder of his annual salary as severance and as
consideration for his non-compete agreement. The amount of any
payment provided for herein shall not be reduced in any manner as
the result of EMPLOYEE obtaining other employment after termination.
Also, payments hereunder that would be included in a determination
of any "Excess Parachute Payments" as defined under IRS Code Section
280G, shall not exceed three (3) times the "base amount" as defined
therein, to thereby enable TEARDROP and any such participant to
avoid triggering any of the special tax disincentives related to any
such Excess Parachute Payments as therein described.
6. Insolvency: insolvency, EMPLOYEE shall remain entitled to severance
compensation as determined by the Bankruptcy Court. If Company is
purchased by another entity out of Bankruptcy, this Agreement shall
remain in force, and purchasing entity shall be bound by the terms
and conditions stated herein.
3
<PAGE>
7. Competitive Employment: During the term of EMPLOYEE'S employment
hereunder, and for one year after termination of EMPLOYEE'S
employment, EMPLOYEE agrees that he shall not become employed by any
third party in North America which directly competes with TEARDROP.
The severance provision of this Agreement shall be consideration for
this non-compete. In the event EMPLOYEE is terminated for cause and
company chooses to enforce this provision, EMPLOYEE shall receive
six (6) months salary as consideration for his agreement not to
compete. This provision shall not apply if EMPLOYEE is
constructively discharged due to the company's insolvency.
8. Severability: The provisions of this Agreement shall be severable
and in the event that any provision is hereafter determined to be
inconsistent with the law, or is found by any court or be invalid or
unenforceable, the unlawful portion shall be void and of no effect
and the invalidity of such provision shall not affect the other
provisions of this Agreement, and all provisions not affected shall
remain in full force and effect.
9. Applicable Law: The laws of the State of Illinois shall govern this
Agreement and both parties shall be bound by all applicable State
and Federal Laws.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the effective date set forth herein.
TEARDROP GOLF COMPANY
By:/s/ Rudy Slucker /s/ Andrew Kairey
-------------------------- --------------------------
Rudy Slucker EMPLOYEE
President and CEO Andrew Kairey
Date: January 27, 2000 Date: January 27, 2000
4
Exhibit 21
The following are the direct and indirect subsidiaries of TearDrop Golf Company:
Name Jurisdiction of Formation
- ---- -------------------------
Tommy Armour Golf Company Delaware
Exhibit (23)
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-59117 pertaining to the TearDrop Golf Co. and subsidiaries
401(k) Plan and Form S-8 No. 333-59115 pertaining to the TearDrop Golf Company
1996 Stock Option Plan) of our report dated March 17, 2000 with respect to the
consolidated financial statements of TearDrop Golf Company included in its
Annual Report (Form 10-KSB) for the year ended December 31, 1999.
ERNST & YOUNG LLP
Chicago, Illinois
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from 10-KSB and
is qualified in its entirity by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 481
<SECURITIES> 0
<RECEIVABLES> 11,932
<ALLOWANCES> 1,793
<INVENTORY> 10,778
<CURRENT-ASSETS> 23,339
<PP&E> 5,780
<DEPRECIATION> 1,446
<TOTAL-ASSETS> 34,500
<CURRENT-LIABILITIES> 15,521
<BONDS> 0
0
0
<COMMON> 53
<OTHER-SE> 3,221
<TOTAL-LIABILITY-AND-EQUITY> 34,500
<SALES> 59,769
<TOTAL-REVENUES> 59,769
<CGS> (32,865)
<TOTAL-COSTS> (32,865)
<OTHER-EXPENSES> (29,570)
<LOSS-PROVISION> 411
<INTEREST-EXPENSE> 1,805
<INCOME-PRETAX> (4,471)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,471)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,471)
<EPS-BASIC> (0.86)
<EPS-DILUTED> (0.86)
</TABLE>
