FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-18553
Ashworth, Inc.
Delaware 84-1052000
(State or other (I.R.S. Employee
jurisdiction of Identification No.)
incorporation or organization)
2791 LOKER AVENUE WEST
CARLSBAD, CA 92008
(Address of Principal Executive Offices)
(619) 438-6610
(Telephone No. Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Title Outstanding at May 31, 1996
$.001 par value Common Stock 12,040,626
<PAGE>
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statements of Cash Flows 3
Notes to consolidated financial statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 5
Part II. Other Information 7
Signature 8
-i-
<PAGE>
<TABLE>
<CAPTION>
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
April 30 October 31
1996 1995
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,570,304 $ 1,613,029
Accounts receivable-trade 19,900,506 10,040,200
Accounts receivable - other 900,608 1,133,771
Inventories 26,540,789 27,845,721
Deferred income tax benefit 1,693,062 1,684,776
Income tax refund receivable 0 1,239,648
Other current assets 1,715,274 1,650,792
---------- ----------
Total current assets 52,320,543 45,207,937
PROPERTY AND EQUIPMENT 17,170,349 13,778,742
Less accumulated depreciation (5,695,699) (4,169,348)
---------- ----------
11,474,650 9,609,394
CAPITAL LEASES - EQUIPMENT 1,971,533 3,561,512
Less accumulated amortization (885,753) (1,401,653)
---------- ----------
1,085,780 2,159,859
OTHER ASSETS 1,035,509 1,094,834
----------- -----------
$65,916,482 $58,072,024
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $9,900,000 $ 6,670,000
Current portion of long-term debt 1,555,985 1,557,006
Accounts payable-trade 3,649,695 5,865,878
Income tax payable 801,574 0
Accrued salaries and commissions 1,183,368 972,094
Accrued liabilities\- other 2,104,509 926,857
---------- ----------
Total current liabilities 19,195,131 15,991,835
LONG-TERM DEBT, less current portion 6,074,550 5,195,434
DEFERRED INCOME TAX LIABILITY 535,872 494,747
STOCKHOLDERS' EQUITY:
Common stock 12,041 11,902
Capital in excess of par value 23,586,551 23,242,390
Retained earnings 16,647,666 13,296,418
Deferred compensation (135,329) (160,702)
----------- -----------
Total stockholders' equity 40,110,929 36,390,008
----------- -----------
$65,916,482 $58,072,024
========== ==========
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Six Months
ended April 30 ended April 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET SALES $26,355,684 $26,438,854 $43,425,548 $41,029,549
COST OF GOODS SOLD 15,400,546 17,403,588 25,869,699 26,496,620
----------- ----------- ----------- -----------
Gross profit 10,955,138 9,035,266 17,555,849 14,532,929
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,499,782 5,833,853 11,356,306 9,749,313
----------- ----------- ------------ ----------
Operating profit 4,455,356 3,201,413 6,199,543 4,783,616
OTHER INCOME (EXPENSE):
Interest income 9,752 5,586 22,414 28,234
Interest expense (379,501) (326,896) (698,086) (475,693)
Other income (expense) (33,247) 33,812 (34,484) (4,940)
----------- ---------- ----------- -----------
Total other
income (expense) (402,996) (287,498) (710,156) (452,399)
Net profit before
income tax 4,052,360 2,913,915 5,489,387 4,331,217
INCOME TAX PROVISION 1,535,175 1,103,778 2,138,139 1,715,149
----------- ----------- ----------- -----------
Net earnings $2,517,185 $1,810,317 $3,351,248 $2,616,068
========== ========= ========== ==========
NET INCOME PER COMMON AND
COMMON SHARE EQUIVALENT:
Primary:
Weighted average shares
outstanding 12,232,755 12,187,819 12,061,644 12,087,874
Net earnings per share $0.21 $0.15 $0.28 $0.22
Fully Diluted:
Weighted average shares
outstanding 12,232,755 12,472,229 12,120,697 12,339,795
Net earnings per share $0.21 $0.15 $0.28 $0.21
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended April 30
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net cash used in operating activities ($2,655,242) ($14,355,980)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,839,878) (1,017,285)
Proceeds from sale of equipment 0 2,800
---------- ----------
Net cash used in investing activities (1,839,878) (1,014,485)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 344,300 1,102,132
Proceeds from revolving line of credit 16,905,000 19,900,000
Principal payments on
revolving line of credit (13,675,000) (9,125,000)
Proceeds from long-term borrowings 1,930,013 0
Principal payments on long-term debt (570,040) (381,323)
Principal payments on
capital lease obligations (481,878) (352,712)
--------- ----------
Net cash provided by
financing activities 4,452,395 11,143,097
--------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (42,725) (4,227,368)
CASH AND CASH EQUIVALENTS,
beginning of period 1,613,029 5,344,244
---------- ----------
CASH AND CASH EQUIVALENTS,
end of period $1,570,304 $1,116,876
========== ==========
</TABLE>
-3-
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
NOTE 1- Basis of Presentation.
In the opinion of management, the accompanying balance sheets and related
interim statements of operations and cash flows include all adjustments
(consisting only of normal recurring items) necessary for their fair
presentation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses. Actual results could differ from those
estimates. Interim results are not necessarily indicative of results for a
full year.
Certain information in footnote disclosure normally included in financial
statements has been condensed or omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. The information
included in this Form 10-Q should be read in conjunction with Management's
Discussion and Analysis and financial statements and notes thereto included
in the annual report on Form 10-K for the year ended October 31, 1995.
NOTE 2 - Inventories.
Inventories consisted of the following at April 30, 1996, and October 31,
1995:
<TABLE>
<CAPTION>
April 30 October 31,
1996 1995
<S> <C> <C>
Raw materials $ 3,123,436 $ 4,317,017
Work in Process 885,797 2,839,828
Finished Goods 22,531,556 20,688,876
----------- -----------
$26,540,789 $27,845,721
========== ==========
</TABLE>
NOTE 3 - Property & Equipment - Leased.
During the six month period, equipment leases with an original capital
value of $1,585,628 expired, or were soon to expire, and were purchased for
their residual values. The original capitalized amounts were transferred to
Property and Equipment (Company-owned).
NOTE 4 - Long-Term Debt.
During the six month period, long-term debt and the current portion of
long-term debt increased by $878,095. The Company entered into three
equipment financing agreements, one for $602,513 to purchase warehouse
racking, one for $327,500 to pay for upgrading the AS400 computer, and
another for $1,000,000 for embroidery machines and equipment and for
warehouse racking. Principal repayments on equipment financing agreements
and capital leases were $1,051,918.
-4-
<PAGE>
NOTE 5 - Per Share Information.
Earnings per share amounts are computed based on the weighted average
number of shares actually outstanding plus the shares that would be
outstanding assuming the conversion of the outstanding dilutive options,
all of which are considered to be Common Stock equivalents. The number of
shares that would be issued from the exercise of stock options has been
reduced by the number of shares that could have been purchased from the
proceeds at the average market price of the Company's stock.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
Consolidated sales for the quarter were $26,355,684, compared to sales of
$26,438,854 for the same period in 1995. Adjusting for the discontinuation, in
fiscal 1995, of the Women's and Kid's divisions, sales increased 6.5% to
$26,355,684 from $24,738,392 in the April quarter 1995. This increase was
primarily due to increased sales volume.
<TABLE>
<CAPTION>
Apr Qtr 1996 Apr Qtr 1995
------------ ------------
Consolidated Sales:
<S> <C> <C>
Ashworth Golf Apparel $16,135,521 $17,532,566
Ashworth Golf Headwear 1,100,845 1,174,552
Ashworth Golf Footwear 820,912 2,302,131
--------------- ---------------
Ashworth Golf Sales 18,057,278 21,009,249
Ashworth Harry Logan Division 2,096,335 1,625,989
Ashworth Factory Stores 2,399,797 1,073,641
Ashworth U.K., Ltd. 3,802,274 2,729,975
--------------- ---------------
Consolidated Sales $26,355,684 $26,438,854
Less Women's & Kids 0 1,700,462
---------- ---------------
Sales excluding Women's & Kids $26,355,684 $24,738,392
========== ==========
Consolidated Sales Analysis - Domestic & Foreign:
Sales from the United States
Canada $173,330 $463,058
Japan 146,366 659,394
Other 1,142,540 1,127,685
------------- -------------
Sales from the U.S. 1,462,236 2,250,137
Ashworth U.K., Ltd. 3,802,274 2,729,975
------------- -------------
Foreign Sales 5,264,510 4,980,112
-5-
<PAGE>
Domestic Sales 21,091,174 21,458,742
--------------- -------------
Consolidated Sales $26,355,684 $26,438,854
Less Women's & Kid's 0 1,700,462
--------------- ---------------
Sales excluding Women's & Kid's $26,355,684 $24,738,392
========= =========
</TABLE>
Sales for the Ashworth Harry Logan division grew 29% in the quarter to
$2,096,335 from $1,625,989 in the second quarter of 1995. With a growing
interest in the game of golf, and a trend towards casual dress in the workplace,
management believes that the Ashworth Harry Logan division has an excellent
opportunity for growth. To help accelerate sales in this division, the Company
plans to launch a "shop within a shop" fixture program for 1997. Although there
can be no assurance that the goal can be reached, the Company's goal is to have
60 of these "Golfman Shops" in place by the Spring of 1997.
Domestic sales of Ashworth golf apparel, after adjusting for the
discontinuation of the Women's and Kid's divisions, increased 5% in the quarter
to $14,967,959 as compared to $14,194,483 in the second quarter of 1995. This
sales increase was largely the result of a better customer order fill rate.
Domestic sales of Ashworth golf footwear were $762,214 in the quarter
down from $1,917,068 in the same quarter of 1995. The higher sales figures in
the second quarter 1995 largely reflected the shipment of initial stocking
inventories for this new division.
The Company's Factory Store sales increased to $2,399,797 in the
quarter up from $1,073,641 in the comparable quarter of the prior year. This
increase primarily resulted from the addition of four new stores since April
1995, from volume increases in the older stores, and from a small increase in
the average unit price. Except for opening an additional store in 1996, the
Company does not plan any major expansion of its Factory Store business in the
future.
In a continued effort to build the Ashworth brand into a global apparel
brand, the Company, during the quarter, acquired Ashworth Europe, the Company's
European distributor. Ashworth U.K., Ltd., a wholly-owned subsidiary of
Ashworth, Inc., will ship all Ashworth products for continental Europe from its
distribution center in England.
Management anticipates that sales for the second half year will be
approximately the same as they were in the second half of fiscal 1995, despite
the discontinuance of the Women's and Kid's divisions which had sales of
approximately $1.0 million in the May through October 1995 period.
Gross margin for the quarter was 41.6% compared to 34.2% in the
second quarter of 1995. The gross margin for the April quarter 1995 was
-6-
<PAGE>
impacted by management's decision to discontinue the women's and kid's divisions
and to make an increase of $1,800,000 in the reserve for excess and obsolete
inventory. This resulted in a charge to Cost of Sales of $1,800,000 which
reduced the 1995 second quarter gross margin by 6.8%.
Selling, General and Administrative expenses increased to 24.7% of net
sales in the quarter compared with 22.1% in the April quarter 1995. This
increase resulted mainly from the expense of sales and marketing activities in
the U.S. and in Europe, an increase in the cost of compensating the golf
professionals who endorse the Company's products, higher total sales
commissions, the addition of a new distribution facility, and employment
severance expenses.
Other income (expense) shows a net increase in expense of $115,498 for
the quarter. The major part of this is attributable to a loss on currency
transactions between Ashworth, Inc. and Ashworth U.K., Ltd. In the April quarter
1996, the Company experienced a currency loss of $23,547 on its inter-company
transactions compared to a currency gain of $66,728 in the same quarter a year
earlier.
-7-
<PAGE>
Financial Condition
The Company has a working capital line of credit with Bank of America.
At April 30, 1996, borrowings against the line were $9,900,000 as compared to
$6,670,000 at October 31, 1995, and $10,775,000 at April 30, 1995. At June 5,
1996, repayments by the Company had reduced the balance outstanding to
$5,675,000. The current available line of credit is $15,000,000. Management
believes that the line of credit base is adequate for the remainder of the 1996
fiscal year.
Trade receivables were $19.9 million at April 30, 1996, an increase of
$9.9 million over the balance at October 31, 1995. Because the Company's
business is seasonal, the receivables balance should be compared to the balance
of $24.4 million at April 30, 1995, rather than the balance at October 31, 1995.
Despite sales being $26.4 million for both 1995 and 1996 second quarters, trade
receivables as of April 30, 1996, were 18.3% lower than trade receivables as of
April 30, 1995.
Inventory decreased to $26.5 million from $27.8 million at October 31,
1995, a reduction of 4.7%. Management believes that the inventory level is still
higher than needed for anticipated sales and is taking action to reduce the
inventory, largely through its Factory stores.
-8-
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
There were no material pending or threatened legal proceedings as to
which the Company or any of its subsidiaries was a party or of which any of
their property was the subject during the fiscal quarter ended April 30, 1996.
Item 2. Changes in Securities - None.
Item 3. Defaults upon Senior Securities - None.
Item 4. Submission of Matters to a Vote of Security Holders
April 23, 1996 - Annual Meeting:
<TABLE>
<CAPTION>
(1) Director elected at the meeting:
Gerald W. Montiel
<S> <C>
Number of votes FOR 11,155,952
Number of votes WITHHELD 260,137
</TABLE>
Each other director whose term of office as a director continued after
the meeting:
John L. Ashworth
Andre P. Gambucci
John M. Hanson, Jr.
(2) Other matters voted upon at the meeting:
<TABLE>
<CAPTION>
To ratify the appointment by the Board of Directors of Arthur Andersen
& Co as the Company's independent public accountants for the fiscal
year ending October 31, 1996.
<S> <C>
Number of affirmative votes 11,312,344
Number of negative votes 58,682
</TABLE>
Item 5. Other Information - None.
Item 6. Exhibits and Reports on Form 8-K.
Exhibit No. Description of Exhibit
10(r)(1) Business Loan Agreement dated March 18, 1996, between
the Registrant and Bank of America, expiring February
28, 1997. Under the agreement, the Bank provides the
Company with a revolving line of credit of up to
$17,000,000 collateralized by the assets of the Company
and its subsidiaries.
27 Financial Data Schedule.
Form 8-K:
-9-
<PAGE>
No reports on Form 8-K were filed by the Company during the second
quarter of the fiscal year ended October 31, 1996.
-10-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Ashworth, Inc
Date: June 14, 1996 By:__/s/ Gerald W. Montiel_________
---------------------
Gerald W. Montiel
Chairman of Board of Directors,
President and
Chief Executive Officer
Date: June 14, 1996 By:__/s/ John Newman_____________
---------------
John Newman
Chief Financial Officer and
Chief Accounting Officer
-12-
Bank of America Business Loan Agreement
National Trust and Savings Association (Receivables and Inventory)
This Agreement dated as of ___March 18, __________, 1996, is among Bank of
America National Trust and Savings Association (the "Bank"), Ashworth, Inc.
("AI"), Ashworth Store I, Inc. ("AS-I"), Ashworth Store II, Inc. ("AS-II"),
Ashworth International, Inc. ("AII") and Ashworth U.K., Ltd. ("AUK") (AI,
AS-I, AS-II, AII and AUK are sometimes referred to collectively as the
"Borrowers" and individually as the "Borrower").
DEFINITIONS
In addition to the terms which are defined elsewhere in this Agreement, the
following terms have the meanings indicated for the purposes of this Agreement:
1.1 "Borrowing Base" means the sum of:
(a) 75% of the balance due on Acceptable Receivables; and
(b) a percentage of the value of Acceptable Inventory calculated by adding
together:
(i) 30% of the value of Acceptable Inventory; and
(ii) 15% of the value of inventory segregated to be sold through
retail outlet stores commonly referred to as slow
moving/obsolete inventory ("Secondary Inventory").
In determining the value of Acceptable Inventory to be included in the Borrowing
Base, the Bank will use the lowest of (i) the Borrowers' cost, (ii) the
Borrowers' estimated market value, or (iii) the Bank's independent determination
of the resale value of such inventory in such quantities and on such terms as
the Bank deems appropriate. Prior to multiplying the value of Secondary
Inventory by the percentage rate specified above, the Bank will deduct the
Borrowers' inventory reserves. The value of Secondary Inventory shall be
included in the Borrowing Base from the date of this Agreement through August
31, 1996. The aggregate value of Acceptable Inventory and Secondary Inventory to
be included in the Borrowing Base shall not exceed 75% of the balance due on
Acceptable Receivables.
1.2 "Acceptable Receivable" means an account receivable which satisfies the
following requirements:
(a) The account has resulted from the sale of goods or the performance of
services by any Borrower in the ordinary course of such Borrower's
business.
(b) There are no conditions which must be satisfied before the Borrowers
are entitled to receive payment of the account. Accounts arising from COD sales,
consignments or guaranteed sales are not acceptable.
(c) The debtor upon the account does not claim any defense to payment
of the account.
(d) The account balance does not include the amount of any counterclaims or
offsets which have been or may be asserted against the Borrowers by the account
debtor (inlcuding offsets for any "contra accounts"
<PAGE>
owed by the Borrowers or any Borrower to the account debtor for goods purchased
by the Borrowers or any Borrower or for services performed for the Borrowers or
any Borrower). To the extent any counterclaims, offsets, contra accounts, or
credit balances exist in favor of the debtor, such amounts shall be deducted
from the account balance.
(e) The account represents a genuine obligation of the debtor for goods
sold and accepted by the debtor, or for services performed for and accepted by
the debtor.
(f) The Borrowers have sent an invoice to the debtor in the amount of
the account.
(g) The account is owned by the Borrowers free of any title defects or any
liens or interests of others except the security interest in favor of the Bank.
(h) The debtor upon the account is not any of the following:
(i) an employee, affiliate, parent or subsidiary of any Borrower, or
an entity which has common officers or directors with any
Borrower.
(ii) the U.S. government or any agency or department of the U.S.
government unless the Bank agrees in writing to accept the
obligation and the Borrowers comply with the procedures in the
Federal Assignment of Claims Act of 1940 with respect to the
obligation.
(iii) any state, county, city, town or municipality.
(iv) any person or entity located in a foreign country unless the
account is supported by a letter of credit issued by a bank
acceptable to the Bank.
(v) any person or entity to whom any Borrower is obligated for goods
purchased by such Borrower or for services performed for such
Borrower.
(i) The account is not in default. An account will be considered in
default if any of the following occur:
(i) The account is not paid after the 60 day period from its due
date; or for accounts on extended terms, the account is not paid
after the 120 day period from its invoice date;
(ii) The debtor obligated upon the account suspends business, makes a
general assignment for the benefit of creditors, or fails to pay
its debts generally as they come due; or
(iii) Any petition is filed by or against the debtor obligated upon
the account under any bankruptcy law or any other law or laws
for the relief of debtors.
(j) The account is not the obligation of a debtor who is in default (as
defined above) on 25% or more of the accounts upon which such debtor is
obligated.
<PAGE>
(k) The account does not arise from the sale of goods which remain in any
Borrower's possession or under any Borrower's control.
(l) The account is not evidenced by a promissory note or chattel
paper.
(m) The account is otherwise acceptable to the Bank.
In addition to the foregoing limitations, the dollar amount of accounts included
as Acceptable Receivables which are the obligations of a single debtor shall not
exceed the concentration limit established for that debtor. To the extent the
total of such accounts exceeds a debtor's concentration limit, the amount of any
such excess shall be excluded. The concentration limit for each debtor shall be
equal to 10% of the total amount of the Borrowers' Acceptable Receivables at
that time.
1.3 "Acceptable Inventory" means inventory which satisfies the following
requirements:
(a) The inventory is owned by any of the Borrowers free of any title
defects or any liens or interests of others except the security interest in
favor of the Bank.
(b) The inventory is permanently located at locations which the Borrowers
have disclosed to the Bank and which are acceptable to the Bank. If the
inventory is covered by a negotiable document of title (such as a warehouse
receipt) that document must be delivered to the Bank.
(c) The inventory is held for sale or use in the ordinary course of the
Borrowers' business and is of good and merchantable quality. Inventory which is
obsolete, unsalable, damaged, defective, discontinued or slow-moving, or which
has been returned by the buyer, is not acceptable. Display items, work in
process and packing and shipping materials are not acceptable.
(d) The inventory is not placed on consignment.
(e) The inventory is otherwise acceptable to the Bank.
1.4 "Credit Limit" means the amount of Seventeen Million Dollars
($17,000,000).
2. LINE OF CREDIT AMOUNT AND TERMS
2.1 Line of Credit Amount.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrowers. The amount of the line of credit (the
"Commitment") is equal to the lesser of (i) the Credit Limit or (ii) the
Borrowing Base.
(b) This is a revolving line of credit for advances with a within line
facility for letters of credit. During the availability period, the
Borrowers may repay principal amounts and reborrow them.
(c) The Borrowers agree not to permit the outstanding principal balance of
the line of credit plus the outstanding amounts of any letters of
credit, including amounts drawn on letters of credit and not yet
<PAGE>
reimbursed, to exceed the Commitment. If the Borrowers exceed this
limit, the Borrowers will immediately pay the excess to the Bank upon
the Bank's demand. The Bank may apply payments received from the
Borrowers under this Paragraph to the obligations of the Borrowers to
the Bank in the order and the manner as the Bank, in its discretion, may
determine.
2.2 Availability Period. The line of credit is available between the date
of this Agreement and February 28, 1997 (the "Expiration Date") unless any
Borrower is in default.
2.3 Conditions to Each Extension of Credit. Before each extension of
credit under the line of credit, including the first, the Borrowers will
deliver the following to the Bank if requested by the Bank:
(a) a borrowing certificate, in form and detail satisfactory to the Bank,
setting forth the Acceptable Receivables and the Acceptable Inventory on
which the requested extension of credit is to be based;
(b) copies of the invoices or the record of invoices from each Borrower's
sales journal for such Acceptable Receivables and a listing of the names
and addresses of the debtors obligated thereunder; and
(c) copies of the delivery receipts, purchase orders, shipping instructions,
bills of lading and other documentation pertaining to such Acceptable
Receivables.
2.4 Interest Rate.
(a) Unless the Borrowers elect an optional interest rate as described below,
the interest rate is the Bank's Reference Rate.
(b) The Reference Rate is the rate of interest publicly announced from time
to time by the Bank in San Francisco, California, as its Reference
Rate. The Reference Rate is set by the Bank based on various factors,
including the Bank's costs and desired return, general economic
conditions and other factors, and is used as a reference point for
pricing some loans. The Bank may price loans to its customers at,
above, or below the Reference Rate. Any change in the Reference Rate
shall take effect at the opening of business on the day specified in
the public announcement of a change in the Bank's Reference Rate.
2.5 Repayment Terms.
(a) The Borrowers will pay interest on March 31, 1996, and then monthly
thereafter until payment in full of any principal outstanding under this line of
credit.
(b) The Borrowers will repay in full all principal and any unpaid interest
or other charges outstanding under this line of credit no later than the
Expiration Date. Any amount bearing interest at an optional interest
rate (as described below) may be repaid at the end of the applicable
interest period, which shall be no later than the Expiration Date.
2.6 Optional Interest Rates. Instead of the interest rate based on the
Bank's Reference Rate, the Borrowers may elect to have all or portions of
the line of credit (during the availability period) bear interest at the
<PAGE>
rate(s) described below during an interest period agreed to by the Bank and the
Borrowers. Each interest rate is a rate per year. Interest will be paid on the
last day of each interest period, and on the last day of each month during the
interest period. At the end of any interest period, the interest rate will
revert to the rate based on the Reference Rate, unless the Borrowers have
designated another optional interest rate for the portion. Upon the occurrence
of an event of default under this Agreement, the Bank may terminate the
availability of optional interest rates for interest periods commencing after
the default occurs.
2.7 Short Term Fixed Rate. The Borrowers may elect to have all or
portions of the principal balance of the line of credit bear interest at
the Short Term Fixed Rate, subject to the following requirements:
(a) The "Short Term Fixed Rate" means the Short Term Base Rate the Bank and
the Borrowers agree will apply to the portion during the applicable
interest period.
(b) The "Short Term Base Rate" means the fixed interest rate per annum,
determined solely by the Bank on the first day of the applicable interest
period for the Short Term Fixed Rate portion, as the rate at which the
Bank would be able to borrow funds in the Money Market in the amount of
the Short Term Fixed Rate portion and with an interest and principal
payment schedule equal to the Short Term Fixed Rate portion and for a
term equal to the applicable interest period. The Short Term Base Rate
shall include adjustments for reserve requirements, federal deposit
insurance, and any other similar adjustment which the Bank deems
appropriate. The Short Term Base Rate is the Bank's estimate only and
the Bank is under no obligation to actually purchase or match funds for
any transaction.
(c) "Money Market" means one or more wholesale funding markets available to the
Bank, including domestic negotiable certificates of deposit, eurodollar
deposits, bank deposit notes or other appropriate money market instruments
selected by the Bank.
(d) The interest period during which the Short Term Fixed Rate will be in effect
will be no shorter than 14 days and no longer than one year.
(e) Each Short Term Fixed Rate portion will be for an amount not less than
Five Hundred Thousand Dollars ($500,000).
(f) Any portion of the principal balance of the line of credit already bearing
interest at the Short Term Fixed Rate will not be converted to a different
rate during its interest period.
(g) Each prepayment of a Short Term Fixed Rate portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee equal to the
amount (if any) by which:
(i) the additional interest which would have been payable on the
amount prepaid had it not been prepaid, exceeds
(ii)the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the Money Market for a period starting
on the date on which it was prepaid and ending on the last day of the
interest period for such portion (or the scheduled payment
<PAGE>
date for the amount prepaid, if earlier). The Borrower may elect to
have all or portions of the principal balance of the [loan] [line of
credit] bear interest at the Short Term Fixed Rate, subject to the
following requirements:
2.8 Offshore Rate. The Borrowers may elect to have all or portions of the
principal balance of the line of credit bear interest at the Offshore Rate,
subject to the following requirements:
(a) The "Offshore Rate" means the interest rate the Bank and the Borrowers
agree will apply to the portion during the applicable interest period.
(b) The interest period during which the Offshore Rate will be in effect
will be no shorter than 30 days and no longer than one year. The last
day of the interest period will be determined by the Bank using the
practices of the offshore dollar inter-bank market.
(c) Each Offshore Rate portion will be for an amount not less than Five
Hundred Thousand Dollars ($500,000).
(d) The Borrowers may not elect an Offshore Rate with respect to any portion
of the principal balance of the line of credit which is scheduled to be
repaid before the last day of the applicable interest period.
(e) Any portion of the principal balance of the line of credit already
bearing interest at the Offshore Rate will not be converted to a
different rate during its interest period.
(f) Each prepayment of an Offshore Rate portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount
of accrued interest on the amount prepaid, and a prepayment fee equal to
the amount (if any) by which
(i) the additional interest which would have been payable on the
amount prepaid had it not been paid until the last day of the
interest period, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the offshore dollar
market for a period starting on the date on which it was prepaid
and ending on the last day of the interest period for such
portion.
(g) The Bank will have no obligation to accept an election for an Offshore
Rate portion if any of the following described events has occurred and
is continuing:
(i) Dollar deposits in the principal amount, and for periods equal to
the interest period, of an Offshore Rate portion are not available
in the offshore dollar inter-bank market; or
(ii) the Offshore Rate does not accurately reflect the cost of an
Offshore Rate portion.
2.9 Letters of Credit. This line of credit may be used for financing:
<PAGE>
(i) commercial letters of credit with a maximum maturity of 365 days but not
to extend more than 180 days beyond the Expiration Date. Each commercial
letter of credit will require drafts payable at sight.
(ii) standby letters of credit with a maximum maturity of 365 days but not to
extend more than 180 days beyond the Expiration Date.
(iii) The amount of letters of credit outstanding at any one time (including
amounts drawn on letters of credit and not yet reimbursed) may not
exceed One Million Dollars ($1,000,000).
Each Borrower agrees:
(a) any sum drawn under a letter of credit may, at the option of the Bank,
be added to the principal amount outstanding under this Agreement. The
amount will bear interest and be due as described elsewhere in this
Agreement.
(b) if there is a default under this Agreement, to immediately prepay and
make the Bank whole for any outstanding letters of credit.
(c) the issuance of any letter of credit and any amendment to a letter of
credit is subject to the Bank's written approval and must be in form and
content satisfactory to the Bank and in favor of a beneficiary
acceptable to the Bank. Without limiting the foregoing, no letter of
credit may be issued to support any obligation of the Borrowers in
connection with workers' compensation laws.
(d) to sign the Bank's form Application and Agreement for Commercial Letter
of Credit or Application and Agreement for Standby Letter of Credit.
(e) to pay any issuance and/or other fees that the Bank notifies the
Borrowers will be charged for issuing and processing letters of credit
for the Borrowers.
(f) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
2.10 Foreign Exchange Facility.
(a) During the availability period, the Bank at its discretion may enter
into spot and forward foreign exchange contracts with AI. The foreign exchange
contract limit will be Six Hundred Fifty Thousand U.S. Dollars (U.S. $650,000),
and the settlement limit will be Ninety-Seven Thousand Five Hundred U.S. Dollars
(U.S. $97,500). The "foreign exchange contract limit" is the maximum limit on
the net difference between the total foreign exchange contracts outstanding less
the total foreign exchange contracts for which the Borrowers have already
compensated the Bank. The "settlement limit" is the maximum limit on the gross
total amount of all sale and purchase contracts on which delivery is to be
effected and settlement allowed on any one banking day.
(b) The Bank shall not be required to pay AI or deliver any foreign currency
to AI under any foreign exchange contract until the Bank receives evidence
satisfactory to it that AI has paid the Bank the required U. S. Dollars in
immediately available funds or delivered the required foreign currency to the
Bank under such foreign exchange contract at least 2 Banking Days prior to the
settlement date. The Bank shall not be liable
<PAGE>
for interest or other damages caused by any such failure to pay or deliver or
any such delay in payment or delivery.
(c) AI will pay the Bank on demand the Bank's then standard foreign exchange
contract fees for each contract.
(d) Foreign exchange contracts will be in form and substance
satisfactory to the Bank.
(e) No foreign exchange contracts will mature later than 120 days after
Expiration Date.
(f) AI understands the risks of, and is financially able to bear any losses
resulting from, entering into foreign exchange contracts. The Bank shall not be
liable for any loss suffered by AI as a result of the Borrower's foreign
exchange trading. AI will enter into each foreign exchange contract in reliance
only upon the Borrower's own judgment. AI acknowledges that in entering into
foreign exchange contracts with AI, the Bank is not acting as a fiduciary. AI
understand that neither the Bank nor AI has any obligation to enter into any
particular foreign exchange contract with the other.
(g) AI hereby requests the Bank to rely upon and execute the Borrower's
telephonic instructions regarding foreign exchange contracts, and AI
agrees that the Bank shall incur no liability for its acts or
omissions which result from interruption of communications,
misunderstood communications or instructions from unauthorized
persons, unless caused by the wilful misconduct of the Bank or its
officers or employees. AI agrees to protect the Bank and hold it
harmless from any and all loss, damage, claim, expense (including the
reasonable fees of outside counsel and the allocated costs of staff
counsel) or inconvenience, however arising, which the Bank suffers or
incurs or might suffer or incur, based on or arising out of said acts
or omissions.
(h) AI agrees to promptly review all confirmations sent to AI by the Bank.
AI understand that these confirmations are not legal contracts but
only evidence of the valid and binding oral contract which AI has
already entered into with the Bank. AI agrees to promptly execute
and return to the Bank confirmations which accurately reflect the
terms of a foreign exchange contract, and immediately contact the Bank
if AI believe a confirmation is not accurate. In the event of a
conflict, inconsistency or ambiguity between the provisions of this
Agreement and the provisions of a confirmation, the provisions of this
Agreement will prevail.
(i) AI agrees that the Bank may electronically record all telephonic
conversations with AI relating to foreign exchange contracts and that
such tape recordings may be submitted in evidence to any court or in
any other proceedings relating to such contracts. AI agrees that in
the event of a conflict, inconsistency or ambiguity between the terms
of a foreign exchange contract as reflected in a tape recording and
the terms stated on a confirmation, the terms reflected in the tape
recording shall control.
(j) Any sum owed to the Bank under a foreign exchange contract may, at the
option of the Bank, be added to the principal amount outstanding under
this Agreement. The amount will bear interest and be due as described
<PAGE>
elsewhere in this Agreement. AI hereby authorizes the Bank to debit the
Borrower's account with the Bank for payments due from AI to the Bank
with respect to any foreign exchange contract. AI acknowledges that any
collateral pledged to secure the Borrower's performance of its
obligations under this Agreement secures its obligations under foreign
exchange contracts with the Bank.
(k) In addition to any other rights or remedies which the Bank may have
under this Agreement or otherwise, upon the occurrence of an event of
default under this Agreement, the Bank may:
(1) Suspend performance of its obligations to AI under any foreign
exchange contract;
(2) Declare all foreign exchange contracts, interest and any other
amounts which are payable by AI to the Bank immediately due and
payable; and
(3) Without notice to AI, close out any or all foreign exchange
contracts or positions of AI with the Bank.
The Bank shall not be under any obligation to exercise any such rights
or remedies or to exercise them at a time or in a manner beneficial to
AI. AI shall be liable for any amounts owing to the Bank after exercise
of any such rights and remedies.
3. FEES AND EXPENSES
3.1 Unused Commitment Fee. The Borrowers agree to pay a fee on any difference
between the Credit Limit and the amount of credit the Borrowers actually use,
determined by the weighted average loan balance maintained during the specified
period. The fee will be calculated at 0.25% per year. This fee will be
calculated as of the last day of each calendar quarter. This fee is payable
quarterly in arrears.
3.2 Expenses.
(a) The Borrowers agree to immediately repay the Bank for expenses that
include, but are not limited to, filing, recording and search fees,
appraisal fees, title report fees and documentation fees.
(b) The Borrowers agree to reimburse the Bank for any expenses it incurs in
the preparation of this Agreement and any agreement or instrument
required by this Agreement. Expenses include, but are not limited to,
reasonable attorneys' fees, including any allocated costs of the Bank's
in-house counsel.
(c) The Borrowers agree to reimburse the Bank for the cost of periodic
audits and appraisals of the personal property collateral securing this
Agreement, at such intervals as the Bank may reasonably require. The
audits and appraisals may be performed by employees of the Bank or by
independent appraisers.
4. COLLATERAL
4.1 Personal Property. The Borrowers' obligations to the Bank under this
Agreement will be secured by personal property AI, AS-I and AS-II now own
or will own in the future as listed below. The collateral is further
<PAGE>
defined in security agreement(s) executed by AI, AS-I and AS-II. In addition,
all personal property collateral securing this Agreement shall also secure all
other present and future obligations of the Borrowers or any one of them to the
Bank (excluding any consumer credit covered by the federal Truth in Lending law,
unless the Borrowers have otherwise agreed in writing). All personal property
collateral securing any other present or future obligations of the Borrowers or
any one of them to the Bank shall also secure this Agreement.
(a) Equipment.
(b) Inventory.
(c) Receivables.
(d) Ashworth name trademark.
5. DISBURSEMENTS, PAYMENTS AND COSTS
5.1 Requests for Credit. Each request for an extension of credit will be made in
writing in a manner acceptable to the Bank, or by another means acceptable to
the Bank.
5.2 Disbursements and Payments. Each disbursement by the Bank and each
payment by the Borrowers will be:
(a) made at the Bank's branch (or other location) selected by the Bank
from time to time;
(b) made for the account of the Bank's branch selected by the Bank from
time to time;
(c) made in immediately available funds, or such other type of funds
selected by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank
may, at its discretion, require the Borrowers to sign one or more
promissory notes.
5.3 Telephone Authorization.
(a) The Bank may honor telephone instructions for advances or repayments or
for the designation of optional interest rates given by any one of the
individuals authorized to sign loan agreements on behalf of the Borrowers, or
any other individual designated by any one of such authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from
Borrower 1's account number 14503-50974, or such other of the Borrowers'
accounts with the Bank as designated in writing by the Borrowers.
(c) The Borrowers indemnify and excuse the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in connection with
any act resulting from telephone instructions it reasonably believes are made by
any individual authorized by the Borrowers to give such instructions. This
indemnity and excuse will survive this Agreement's termination.
<PAGE>
5.4 Direct Debit (Pre-Billing)
(a) The Borrowers agree that the Bank will debit the Borrower 1's deposit
account number 14503-50974, or such other of the Borrowers' accounts with the
Bank as designated in writing by the Borrowers (the "Designated Account") on the
date each payment of principal and interest and any fees from the Borrowers
becomes due (the "Due Date"). If the Due Date is not a banking day, the
Designated Account will be debited on the next banking day.
(b) Approximately 10 days prior to each Due Date, the Bank will mail to the
Borrowers a statement of the amounts that will be due on that Due Date (the
"Billed Amount"). The calculation will be made on the assumption that no new
extensions of credit or payments will be made between the date of the billing
statement and the Due Date, and that there will be no changes in the applicable
interest rate.
(c) The Bank will debit the Designated Account for the Billed Amount,
regardless of the actual amount due on that date (the "Accrued Amount"). If the
Billed Amount debited to the Designated Account differs from the Accrued Amount,
the discrepancy will be treated as follows:
(i) If the Billed Amount is less than the Accrued Amount, the Billed
Amount for the following Due Date will be increased by the
amount of the discrepancy. The Borrowers will not be in default
by reason of any such discrepancy.
(ii) If the Billed Amount is more than the Accrued Amount, the Billed
Amount for the following Due Date will be decreased by the
amount of the discrepancy.
Regardless of any such discrepancy, interest will continue to accrue based
on the actual amount of principal outstanding without compounding. The Bank will
not pay the Borrowers interest on any overpayment.
(d) The Borrowers will maintain sufficient funds in the Designated Account
to cover each debit. If there are insufficient funds in the Designated Account
on the date the Bank enters any debit authorized by this Agreement, the debit
will be reversed.
5.5 Banking Days. Unless otherwise provided in this Agreement, a banking day is
a day other than a Saturday or a Sunday on which the Bank is open for business
in California. For amounts bearing interest at an offshore rate (if any), a
banking day is a day other than a Saturday or a Sunday on which the Bank is open
for business in California and dealing in offshore dollars. All payments and
disbursements which would be due on a day which is not a banking day will be due
on the next banking day. All payments received on a day which is not a banking
day will be applied to the credit on the next banking day.
5.6 Taxes. The Borrowers will not deduct any taxes from any payments they make
to the Bank. If any government authority imposes any taxes or charges on any
payments made by the Borrowers, the Borrowers will pay the taxes and will also
pay to the Bank, at the time interest is paid, any additional amount which the
Bank specifies as necessary to preserve the after tax yield the Bank would have
received if such taxes had not been imposed. Upon request by the Bank, the
Borrowers will confirm that they have paid the taxes by giving the Bank official
tax receipts (or notarized copies)
<PAGE>
within 30 days after the due date. However, the Borrowers will not pay the
Bank's net income taxes.
5.7 Additional Costs. The Borrowers will pay the Bank, on demand, for the Bank's
costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and
commitments for credit.
5.8 Interest Calculation. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher fee
than if a 365-day year is used.
5.9 Interest on Late Payments. At the Bank's sole option in each instance, any
amount not paid when due under this Agreement (including interest) shall bear
interest from the due date at the Bank's Reference Rate plus 1.00 percentage
point. This may result in compounding of interest.
5.10 Default Rate. Upon the occurrence and during the continuation of any
default under this Agreement, advances under this Agreement will at the option
of the Bank bear interest at a rate which is 2.00 percentage points higher than
the rate of interest otherwise provided under this Agreement.
This will not constitute a waiver of any default.
5.11 Overdrafts. At the Bank's sole option in each instance, the Bank may
do one of the following:
(a) The Bank may make advances under this Agreement to prevent or cover an
overdraft on any account of the Borrowers with the Bank. Each such advance will
accrue interest from the date of the advance or the date on which the account is
overdrawn, whichever occurs first, at the interest rate described in this
Agreement.
(b) The Bank may reduce the amount of credit otherwise available under this
Agreement by the amount of any overdraft on any account of the Borrowers with
the Bank.
This paragraph shall not be deemed to authorize the Borrowers to create
overdrafts on any of the Borrowers' accounts with the Bank.
5.12 Payments in Kind. The proceeds of collections of the Borrowers' accounts
receivable, when received by the Bank in kind, shall be credited to interest,
principal, and other sums owed to the Bank under this Agreement in the order and
proportion determined by the Bank in its sole discretion. All such credits will
be conditioned upon collection and any returned items may, at the Bank's option,
be charged to the Borrowers.
6. CONDITIONS
The Bank must receive the following items, in form and content acceptable
<PAGE>
to the Bank, before it is required to extend any credit to the Borrowers
under this Agreement:
6.1 Authorizations. Evidence that the execution, delivery and performance by
each Borrower (and each guarantor) of this Agreement and any instrument or
agreement required under this Agreement have been duly authorized.
6.2 Security Agreements. Signed original security agreements, assignments,
financing statements and fixture filings (together with collateral in which the
Bank requires a possessory security interest), which the Bank requires.
6.3 Evidence of Priority. Evidence that security interests and liens in favor of
the Bank are valid, enforceable, and prior to all others' rights and interests,
except those the Bank consents to in writing.
6.4 Insurance. Evidence of insurance coverage, as required in the
"Covenants" section of this Agreement.
6.5 Other Items. Any other items that the Bank reasonably requires.
7. REPRESENTATIONS AND WARRANTIES
When the Borrowers sign this Agreement, and until the Bank is repaid in full,
each Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation.
7.1 Organization of Borrowers. Each Borrower is a corporation duly formed
and existing under the laws of the state where organized.
7.2 Authorization. This Agreement, and any instrument or agreement required
hereunder, are within each Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
7.3 Enforceable Agreement. This Agreement is a legal, valid and binding
agreement of each Borrower, enforceable against each Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
7.4 Good Standing. In each state in which each Borrower does business, it
is properly licensed, in good standing, and, where required, in compliance
with fictitious name statutes.
7.5 No Conflicts. This Agreement does not conflict with any law, agreement,
or obligation by which any Borrower is bound.
7.6 Financial Information. All financial and other information that has
been or will be supplied to the Bank, including the Borrowers' consolidated
and consolidating financial statement dated as of January 31, 1996, is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrowers' (and any guarantor's) financial condition.
(b) in form and content required by the Bank.
(c) in compliance with all government regulations that apply.
<PAGE>
Since the date of the financial statement(s) specified above, there has been no
material adverse change in the assets or the financial condition of any Borrower
(or any guarantor).
7.7 Lawsuits. There is no lawsuit, tax claim or other dispute pending or
threatened against any Borrower which, if lost, would impair the Borrowers' or
any Borrower's financial condition or ability to repay the loan, except as have
been disclosed in writing to the Bank.
7.8 Collateral. All collateral required in this Agreement is owned by the
grantor of the security interest free of any title defects or any liens or
interests of others.
7.9 Permits, Franchises. Each Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
7.10 Other Obligations. No Borrower is in default on any obligation
for borrowed money, any purchase money obligation or any other material
lease, commitment, contract, instrument or obligation.
7.11 Income Tax Returns. No Borrower has any knowledge of any pending
assessments or adjustments of its income tax for any year, except as have
been disclosed in writing to the Bank.
7.12 No Event of Default. There is no event which is, or with notice
or lapse of time or both would be, a default under this Agreement.
7.13 Merchantable Inventory. All inventory which is included in the
Borrowing Base is of good and merchantable quality and free from defects.
7.14 Location of Borrowers. Each Borrower's place of business (or, if any
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrowers' signature on this Agreement.
8. COVENANTS
The Borrowers agree, so long as credit is available under this Agreement and
until the Bank is repaid in full:
8.1 Use of Proceeds. To use the proceeds of the credit only for working
capital advances and letters of credit.
8.2 Financial Information. To provide the following financial information
and statements and such additional information as requested by the Bank
from time to time:
(a) Within 90 days of the Borrowers' fiscal year end, the Borrowers'
annual financial statements. These financial statements must be audited
(with an unqualified opinion) by a Certified Public Accountant ("CPA")
acceptable to the Bank and include the CPA's management letter. The
statements shall be prepared on a consolidated basis.
(b) Within 90 days of the Borrowers' fiscal year end, the Borrowers'
annual financial statements. These financial statements may be prepared by
the Borrowers. The statements shall be prepared on a consolidating basis
<PAGE>
which shall include the Borrowers' wholly owned subsidiaries.
(c) Within 30 days of the period's end, the Borrowers' monthly financial
statements (including without limitation the twelfth fiscal month in each fiscal
year). These financial statements may be Borrower prepared. The statements shall
be prepared on a consolidated and consolidating basis.
(d) Within 30 days of the period's end, a monthly certificate of
compliance, to include calculations, duly executed by the Borrower's chief
financial officer or a designated officer acceptable to the Bank.
(e) Within 60 days of the Borrowers' fiscal year end, the Borrowers'
annual projections.
(f) Copies of each Borrower's Form l0-K Annual Report and Form l0-Q
Quarterly Report within 15 days after the date of filing with the Securities and
Exchange Commission.
(g) A borrowing certificate setting forth the respective amounts of
Acceptable Receivables and Acceptable Inventory as of the last day of each month
within 20 days after month end, together with copies of the invoices or the
record of invoices from each Borrower's sales journal for such Acceptable
Receivables and copies of the delivery receipts, purchase orders, shipping
instructions, bills of lading and other documentation pertaining to such
Acceptable Receivables.
(h) Statements showing an aging and reconciliation of each Borrower's
receivables within 20 days after the end of each month.
(i) A statement showing an aging of accounts payable within 20 days
after the end of each month.
(j) If the Bank requires the Borrowers to deliver the proceeds of accounts
receivable to the Bank upon collection by the Borrowers, a schedule of the
amounts so collected and delivered to the Bank.
(k) An inventory listing within 20 days after the end of each month; the
listing must include a description of the inventory, its location and cost, and
such other information as the Bank may require.
(l) A listing of the names and addresses of all debtors obligated upon each
Borrower's accounts receivable within 30 days after the end of each annual
accounting period.
(m) Promptly upon the Bank's request, such other statements, lists of
property and accounts, budgets, name and address listing, forecasts or reports
as to the Borrowers and as to each guarantor of the Borrowers' obligations to
the Bank as the Bank may request.
8.3 Quick Ratio. To maintain on a consolidated basis a ratio of quick
assets to current liabilities of at least the amounts indicated for each
period specified below:
<TABLE>
<CAPTION>
Period Ratio
From the date of this Agreement
<S> <C>
through May 31, 1996 0.70:1.0
From June 1, 1996 through October 31, 1996 1.25:1.0
From November 1, 1996 and thereafter 1.00:1.0
</TABLE>
"Quick assets" means cash, short-term cash investments, net trade receivables
and marketable securities not classified as long-term investments.
8.4 Tangible Net Worth. To maintain on a consolidated basis tangible net
worth equal to at least the amounts indicated for each period specified
below:
<TABLE>
<CAPTION>
Period Amount
<S> <C>
From the date of this Agreement $36,000,000
through July 30, 1996
From July 31, 1996 and thereafter $40,000,000
</TABLE>
"Tangible net worth" means the gross book value of the Borrowers' assets
(excluding goodwill, patents, trademarks, trade names, organization expense,
treasury stock, unamortized debt discount and expense, deferred research and
development costs, deferred marketing expenses, and other like intangibles, and
monies due from affiliates, officers, directors or shareholders of the
Borrowers) less total liabilities, including but not limited to accrued and
deferred income taxes, and any reserves against assets.
8.5 Total Liabilities to Tangible Net Worth. To maintain on a
consolidated basis a ratio of total liabilities to tangible net worth not
exceeding 0.80:1.0.
"Total liabilities" means the sum of current liabilities plus long term
liabilities.
8.6 Debt Service Coverage Ratio. To maintain on a consolidated basis debt
service coverage ratio of at least 1.25:1.0.
"Debt service coverage ratio" means the ratio of EBITDA to the current portion
of long term debt plus interest expense and unfinanced capital expeditures.
"EBITDA" is defined as earnings before interest expense, taxes, depreciation and
amortization. This ratio will be calculated at the end of each fiscal quarter,
using the results of that quarter and each of the 3 immediately preceding
quarters.
8.7 Limitation on Losses. With respect to each Borrower, not to incur net losses
for 2 consecutive fiscal quarters, and in no event incur a net less in excess of
Five Hundred Thousand Dollars ($500,000) in any one fiscal quarter.
8.8 Other Debts. Not to have outstanding or incur any direct or contingent debts
or lease obligations (other than those to the Bank), or become liable for the
debts of others without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
<PAGE>
business.
(c) Obtaining surety bonds in the usual course of business.
(d) Debts, lines of credit and leases in existence on the date of this
Agreement disclosed in writing to the Bank in the Borrowers' financial statement
dated January 31, 1996.
(e) Additional debts and lease obligations for the acquisition of fixed or
capital assets, to the extent permitted elsewhere in this Agreement.
8.9 Other Liens. Not to create, assume, or allow any security interest or
lien (including judicial liens) on property any Borrower now or later owns,
except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in
writing to the Bank.
(d) Additional purchase money security interests in personal property
acquired by the Borrowers or any one of them after the date of this Agreement.
8.10 Capital Expenditures. With respect to all Borrowers on an aggregate basis,
not to spend or incur obligations (including the total amount of any capital
leases) for more than Three Million Dollars ($3,000,000) in any single fiscal
year to acquire fixed or capital assets.
8.11 Dividends. Not to declare or pay any dividends on any of the Borrowers'
shares except dividends payable in capital stock of the Borrowers, and not to
purchase, redeem or otherwise acquire for value any of the Borrowers' shares, or
create any sinking fund in relation thereto.
8.12 Notices to Bank. To promptly notify the Bank in writing of:
(a) any lawsuit over Five Hundred Thousand Dollars ($500,000) against
any one or more of Borrowers (or any guarantor).
(b) any substantial dispute between any Borrower (or any guarantor)
and any government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in any Borrower's (or any
guarantor's) financial condition or operations.
(e) any change in any Borrower's name, legal structure, place of
business, or chief executive office if such Borrower has more than one
place of business;
8.13 Books and Records. To maintain adequate books and records.
8.14 Audits. To allow the Bank and its agents to inspect the Borrowers'
properties and examine, audit and make copies of books and records at any
<PAGE>
reasonable time. If any of the Borrowers' properties, books or records are in
the possession of a third party, the Borrowers authorize that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.
8.15 Compliance with Laws. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over each Borrower's business.
8.16 Preservation of Rights. To maintain and preserve all rights,
privileges, and franchises each Borrower now has.
8.17 Maintenance of Properties. To make any repairs, renewals, or
replacements to keep each Borrower's properties in good working condition.
8.18 Perfection of Liens. To help the Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to protect its
security interests and liens.
8.19 Cooperation. To take any action requested by the Bank to carry out
the intent of this Agreement.
8.20 Insurance.
(a) Insurance Covering Collateral. To maintain all risk property damage
insurance policies covering the tangible property comprising the collateral.
Each insurance policy must be in an amount acceptable to the Bank. The insurance
must be issued by an insurance company acceptable to the Bank and must include a
lender's loss payable endorsement in favor of the Bank in a form acceptable to
the Bank.
(b) General Business Insurance. To maintain insurance as is usual
for the Borrowers' business.
(c) Evidence of Insurance. Upon the request of the Bank, to deliver to the
Bank a copy of each insurance policy, or, if permitted by the Bank, a
certificate of insurance listing all insurance in force.
8.21 Additional Negative Covenants. Not to, without the Bank's written
consent:
(a) engage in any business activities substantially different from
the Borrowers' or any Borrower's present business.
(b) liquidate or dissolve the Borrowers' or any Borrower's business.
(c) enter into any consolidation, merger, pool, joint venture,
syndicate, or other combination.
(d) lease, or dispose of all or a substantial part of the Borrowers'
or any Borrower's business or the Borrowers' or any Borrower's assets.
(e) acquire or purchase a business or its assets.
(f) sell or otherwise dispose of any assets for less than fair market value
or enter into any sale and leaseback agreement covering any of the Borrowers' or
any Borrower's fixed or capital assets.
<PAGE>
9. DEFAULT
If any of the following events occur, the Bank may do one or more of the
following: declare the Borrowers in default, stop making any additional credit
available to the Borrowers, and require the Borrowers to repay their entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to any Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.
9.1 Failure to Pay. Any Borrower fails to make a payment under this
Agreement when due.
9.2 Lien Priority. The Bank fails to have an enforceable first lien (except for
any prior liens to which the Bank has consented in writing) on or security
interest in any property given as security for this loan.
9.3 False Information. Any Borrower has given the Bank false or
misleading information or representations.
9.4 Bankruptcy. Any Borrower (or any guarantor) files a bankruptcy petition, a
bankruptcy petition is filed against any Borrower (or any guarantor), or any
Borrower (or any guarantor) makes a general assignment for the benefit of
creditors.
9.5 Receivers. A receiver or similar official is appointed for any
Borrower's (or any guarantor's) business, or the business is terminated.
9.6 Lawsuits. Any lawsuit or lawsuits are filed on behalf of one or more trade
creditors against any one or more of Borrowers in an aggregate amount of Two
Hundred Fifty Thousand Dollars ($250,000) or more in excess of any insurance
coverage.
9.7 Judgments. Any judgments or arbitration awards are entered against any one
or more of Borrowers (or any guarantor), or any one or more of Borrowers (or any
guarantor) enters into any settlement agreements with respect to any litigation
or arbitration, in an aggregate amount of Two Hundred Fifty Thousand Dollars
($250,000) or more in excess of any insurance coverage.
9.8 Government Action. Any government authority takes action that the
Bank believes materially adversely affects any Borrower's (or any
guarantor's) financial condition or ability to repay.
9.9 Material Adverse Change. A material adverse change occurs in any
Borrower's (or any guarantor's) financial condition, properties or
prospects, or ability to repay the loan.
9.10 Cross-default. Any default occurs under any agreement in connection with
any credit any Borrower (or any guarantor) has obtained from anyone else or
which any Borrower (or any guarantor) has guaranteed.
9.11 Default under Related Documents. Any guaranty, subordination
agreement, security agreement, deed of trust, or other document required by
this Agreement is violated or no longer in effect.
9.12 Other Bank Agreements. Any Borrower (or any guarantor) fails to meet
<PAGE>
the conditions of, or fails to perform any obligation under any other agreement
any Borrower (or any guarantor) has with the Bank or any affiliate of the Bank.
9.13 Other Breach Under Agreement. Any Borrower fails to meet the
conditions of, or fails to perform any obligation under, any term of this
Agreement not specifically referred to in this Article.
10. ENFORCING THIS AGREEMENT; MISCELLANEOUS
10.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
10.2 California Law. This Agreement is governed by California law.
10.3 Successors and Assigns. This Agreement is binding on the Borrowers' and the
Bank's successors and assignees. The Borrowers agree that they may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrowers with actual or potential participants or assignees; provided
that such actual or potential participants or assignees shall agree to treat all
financial information exchanged as confidential. If a participation is sold or
the loan is assigned, the purchaser will have the right of set-off against the
Borrowers.
10.4 Arbitration.
(a) This paragraph concerns the resolution of any controversies or claims
between any one or more of Borrowers and the Bank, including but not
limited to those that arise from:
(i) This Agreement (including any renewals, extensions or
modifications of this Agreement);
(ii) Any document, agreement or procedure related to or delivered
in connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted
between any one or more of Borrowers and the Bank, including
claims for injury to persons, property or business interests
(torts).
(b) At the request of any Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United
States Arbitration Act. The United States Arbitration Act will apply
even though this Agreement provides that it is governed by California
law.
(c) Arbitration proceedings will be administered by the American
Arbitration Association and will be subject to its commercial rules of
arbitration.
(d) For purposes of the application of the statute of limitations, the
filing of an arbitration pursuant to this paragraph is the equivalent
<PAGE>
of the filing of a lawsuit, and any claim or controversy which may be
arbitrated under this paragraph is subject to any applicable statute of
limitations. The arbitrators will have the authority to decide whether
any such claim or controversy is barred by the statute of limitations
and, if so, to dismiss the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the
arbitrators will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be
submitted to any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy or
claim, at the time of the proposed submission to arbitration, arises
from or relates to an obligation to the Bank secured by real property
located in California. In this case, both the Borrowers and the Bank
must consent to submission of the claim or controversy to arbitration.
If all parties do not consent to arbitration, the controversy or claim
will be settled as follows:
(i) The Borrowers and the Bank will designate a referee (or a panel
of referees) selected under the auspices of the American
Arbitration Association in the same manner as arbitrators are
selected in Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be
appointed by a court as provided in California Code of Civil
Procedure Section 638 and the following related sections;
(iii) The referee (or the presiding referee of the panel) will be
an active attorney or a retired judge; and
(iv) The award that results from the decision of the referee (or the
panel) will be entered as a judgment in the court that appointed
the referee, in accordance with the provisions of California
Code of Civil Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrowers or the Bank
to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property
collateral; or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrowers or the Bank, including
the suing party, to submit the controversy or claim to arbitration if
the other party contests the lawsuit. However, if the controversy or
claim arises from or relates to an obligation to the
<PAGE>
Bank which is secured by real property located in California at the time
of the proposed submission to arbitration, this right is limited
according to the provision above requiring the consent of both the
Borrowers and the Bank to seek resolution through arbitration.
(j) If the Bank forecloses against any real property securing this
Agreement, the Bank has the option to exercise the power of sale under
the deed of trust or mortgage, or to proceed by judicial foreclosure.
10.5 Severability; Waivers. If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Bank retains all rights, even if
it makes a loan after default. If the Bank waives a default, it may enforce a
later default. Any consent or waiver under this Agreement must be in writing.
10.6 Administration Costs. The Borrowers shall pay the Bank for all
reasonable costs incurred by the Bank in connection with administering this
Agreement.
10.7 Attorneys' Fees. The Borrowers shall reimburse the Bank for any reasonable
costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and including
any amendment, waiver, "workout" or restructuring under this Agreement. In the
event of a lawsuit or arbitration proceeding, the prevailing party is entitled
to recover costs and reasonable attorneys' fees incurred in connection with the
lawsuit or arbitration proceeding, as determined by the court or arbitrator. As
used in this paragraph, "attorneys' fees" includes the allocated costs of the
Bank's in-house counsel.
10.8 Joint and Several Liability.
(a) Each Borrower agrees that it is jointly and severally liable to the Bank
for the payment of all obligations arising under this Agreement, and
that such liability is independent of the obligations of the other
Borrower(s). The Bank may bring an action against any Borrower, whether
an action is brought against the other Borrower(s).
(b) Each Borrower agrees that any release which may be given by the Bank to
the other Borrower(s) or any guarantor will not release such Borrower
from its obligations under this Agreement.
(c) Each Borrower waives any right to assert against the Bank any defense,
setoff, counterclaim, or claims which such Borrower may have against the
other Borrower(s) or any other party liable to the Bank for the
obligations of the Borrowers under this Agreement.
(d) Each Borrower agrees that it is solely responsible for keeping itself
informed as to the financial condition of the other Borrower(s) and of
all circumstances which bear upon the risk of nonpayment. Each Borrower
waives any right it may have to require the Bank to disclose to such
Borrower any information which the Bank may now or hereafter acquire
concerning the financial condition of the other Borrower(s).
(e) Each Borrower waives all rights to notices of default or nonperformance
by any other Borrower under this Agreement. Each Borrower further
<PAGE>
waives all rights to notices of the existence or the creation of new
indebtedness by any other Borrower.
(f) The Borrowers represent and warrant to the Bank that each will derive
benefit, directly and indirectly, from the collective administration and
availability of credit under this Agreement. The Borrowers agree that
the Bank will not be required to inquire as to the disposition by any
Borrower of funds disbursed in accordance with the terms of this
Agreement.
(g) Each Borrower waives any right of subrogation, reimbursement,
indemnification and contribution (contractual, statutory or otherwise),
including without limitation, any claim or right of subrogation under
the Bankruptcy Code (Title 11 of the U.S. Code) or any successor
statute, which such Borrower may now or hereafter have against any
other Borrower with respect to the indebtedness incurred under this
Agreement. Each Borrower waives any right to enforce any remedy which
the Bank now has or may hereafter have against any other Borrower, and
waives any benefit of, and any right to participate in, any security
now or hereafter held by the Bank.
10.9 One Agreement. This Agreement and any related security or other
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank
and the Borrowers concerning this credit;
(b) replace any prior oral or written agreements between the Bank and the
Borrowers concerning this credit; and
(c) are intended by the Bank and the Borrowers as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
10.10 Disposition of Schedules, Reports, Etc. Delivered by Borrowers.
The Bank will not be obligated to return any schedules, invoices,
statements, budgets, forecasts, reports or other papers delivered by the
Borrowers. The Bank will destroy or otherwise dispose of such materials at
such time as the Bank, in its discretion, deems appropriate.
10.11 Returned Merchandise. Until the Bank exercises its rights to collect the
accounts receivable as provided under any security agreement required under this
Agreement, the Borrowers may continue their present policies for returned
merchandise and adjustments. Credit adjustments with respect to returned
merchandise shall be made immediately upon receipt of the merchandise by the
Borrowers or upon such other disposition of the merchandise by the debtor in
accordance with the Borrowers' instructions. If a credit adjustment is made with
respect to any Acceptable Receivable, the amount of such adjustment shall no
longer be included in the amount of such Acceptable Receivable in computing the
Borrowing Base.
10.12 Verification of Receivables. The Bank may at any time, either orally or in
writing, request confirmation from any debtor of the current amount and status
of the accounts receivable upon which such debtor is obligated.
<PAGE>
10.13 Indemnification. The Borrowers agree to indemnify the Bank against, and
hold the Bank harmless from, all claims, actions, losses, costs and expenses
(including attorneys' fees and allocated costs for in-house legal services)
incurred by the Bank and arising from any contention, whether well-founded or
otherwise, that there has been a failure to comply with any law regulating the
Borrowers' sales or leases to or performance of services for debtors obligated
upon the Borrowers' accounts receivable and disclosures in connection therewith.
This indemnity will survive repayment of the Borrowers' obligations to the Bank
and termination of this Agreement.
10.14 Notices. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrowers may specify from time to time in writing.
10.15 Headings. Article and paragraph headings are for reference only
and shall not affect the interpretation or meaning of any provisions of
this Agreement.
10.16 Prior Agreement Superseded. This Agreement supersedes the Business Loan
Agreement entered into as of October 27, 1995, between the Bank and Borrower 1,
and any credit outstanding thereunder shall be deemed to be outstanding under
this Agreement.
This Agreement is executed as of the date stated at the top of the first page.
Bank of America
National Trust and Savings Association Ashworth, Inc.
/s/ Susan J. Pepping /s/ Gerald W. Montiel
BY: Susan J. Pepping By:
Title: Vice President Title: CEO & President
Ashworth Store I, Inc. Ashworth Store II, Inc.
/s/ Gerald W. Montiel /s/ Gerald W. Montiel
BY: BY:
Title: CEO & President Title: CEO & President
Ashworth International, Inc. Ashworth U.K., Ltd.
/s/ Gerald W. Montiel /s/ Gerald W. Montiel
BY: BY:
Title: CEO & Presiden Title: CEO & President
Address where notices to the Bank Address where notices to the Borrowers
are to be sent: are to be sent:
450 B Street 2791 Loker Avenue West
San Diego, California 92101 Carlsbad, California 92008
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> APR-30-1996
<CASH> 1,570,304
<SECURITIES> 0
<RECEIVABLES> 21,585,816
<ALLOWANCES> 784,702
<INVENTORY> 26,540,789
<CURRENT-ASSETS> 52,320,543
<PP&E> 19,141,882
<DEPRECIATION> 6,581,452
<TOTAL-ASSETS> 65,916,482
<CURRENT-LIABILITIES> 19,195,131
<BONDS> 0
<COMMON> 12,041
0
0
<OTHER-SE> 40,098,888
<TOTAL-LIABILITY-AND-EQUITY> 65,916,482
<SALES> 43,425,548
<TOTAL-REVENUES> 43,425,548
<CGS> 25,869,699
<TOTAL-COSTS> 37,226,005
<OTHER-EXPENSES> 34,484
<LOSS-PROVISION> 70,965
<INTEREST-EXPENSE> 675,672
<INCOME-PRETAX> 5,489,387
<INCOME-TAX> 2,138,139
<INCOME-CONTINUING> 3,351,248
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,351,248
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
