FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1996
[ ] 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 jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2791 LOKER AVENUE WEST, CARLSBAD, CA 92008 (Address of
Principal Executive Office, including Zip Code)
(619) 438-6610
(Registrant's Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock,
$.001 Par Value
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of January 8, 1997, was $74,231,151 based upon the last reported
sale price of the Company's Common Stock as reported by the NASDAQ National
Market System.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock, $.001 Par Value 12,179,626
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE>
PART I
Item 1. BUSINESS
GENERAL DESCRIPTION OF THE COMPANY
GENERAL DESCRIPTION
Ashworth, Inc., based in Southern California was incorporated in
Delaware on March 19, 1987. It changed its corporate name from Charter Golf,
Inc. to Ashworth, Inc. on April 6, 1994. The Company designs, markets and
distributes a full line of quality sports apparel, headwear, and shoes under the
Ashworth(R) label. The Ashworth products have been retailed in golf pro shops,
resorts and in the international market, and at better department and specialty
retail stores.
The Company has wholly owned subsidiaries which own and operate the
company stores. A wholly owned United Kingdom subsidiary distributes the
Company's products in Europe. The Company also established a wholly owned
subsidiary in the Virgin Islands as a foreign sales corporation to take
advantage of certain federal income tax benefits with respect to profits from
foreign sales. Ashworth, Inc. and its wholly owned subsidiary, Ashworth U.K.,
Ltd., are partners of a Luxembourg partnership, Ashworth, Inc. et Cie., formed
to qualify for trademark registration in Europe under the Madrid Convention.
NARRATIVE DESCRIPTION OF BUSINESS
At its inception, the Company began designing and marketing
classically-styled, natural fiber golfwear distributed in the United States
under the Ashworth(R) brand exclusively to golf pro shops and resort. The
Company has been credited with developing the new look in golfwear over the past
nine years, using natural fibers and a loose relaxed fit emphasizing quality in
product and presentation, which are now industry standards. Its golf lifestyle
apparel is aimed at predominately the younger active male consumer in the
middle/upper middle income range and is priced in the middle to upper middle
price range for golf apparel. For the past four years, Ashworth has been the
leading golf apparel line sold at pro shops in the United States with a market
share of approximately 10%.
ASHWORTH PRODUCTS
All Ashworth products are designed in-house. The Company designs two
Spring, two Summer, two Fall, one Resort and one Holiday line per year. Each
line consists of approximately 30 to 60 styles. Product design is largely one of
classic, timeless designs with an emphasis on quality and natural fibers.
Through the fall lines of 1996, the Company designed two labels,
Ashworth and Ashworth Harry Logan(R). The Ashworth label products were sold to
golf pro shops with the Ashworth Harry Logan line sold to the department and
speciality store trade. Going forward, the Company will continue to design some
different product for the department store trade, however, the label will be
Ashworth. This will provide management with better control over inventory,
design and distribution costs.
The Company's line consists of knit and woven shirts, pullovers,
sweaters, vests, pants, shorts, hats, shoes and accessories. In 1996, the
Company designed the new Weather Systems(TM) collection. These products are made
largely of micro fibers and are produced for a variety of
<PAGE>
weather conditions including cold and rainy as well as hot and humid.
Going forward, the Company intends to place less emphasis on growing
its golf shoe business, in an effort to improve inventory turns and reduce
costs. The product focus on shoes will be in casual and golf training shoes
rather than spiked golf shoes.
In 1996, the Company introduced for the first time a new Basics line
which consists of shirts, pants and shorts. This line consists of popular styles
and colors which do not change significantly from year to year in customer
preference. This line is projected to be the Company's highest volume line in
1997.
DISTRIBUTION CHANNELS
The Company distributes and sells its products through the following
four channels of distribution.
Golf Pro Shops and Resorts
The Company's core business is selling to golf pro shops located at
golf courses. According to surveys by GOLF PRO MAGAZINE, the Company is the
leading golf apparel company in golf pro shops in the United States with an
approximately 10% market share. The Company presently distributes to pro shops
in all 50 states.
Department Stores and Specialty Stores
The Company presently sells its products to selected upscale department
and specialty stores which include Nordstrom, Dillards, Parisians, Dayton
Hudson, and Saks Fifth Avenue.
International Market
The Company operates a wholly owned subsidiary in Essex England that
distributes Ashworth products to customers in the United Kingdom and other
European countries such as Germany, France, Spain, Sweden and Portugal.
The Company also uses distributors who resale the Ashworth products in
other countries such as Canada, Japan, Korea, Taiwan, Singapore, and Indonesia.
Ashworth Retail Stores
The Company operates, through wholly owned subsidiaries, eleven retail
stores in California, Texas, Nebraska, Colorado, Arizona, Utah and Nevada. The
main purpose of these stores is to help control inventory by selling prior
season and irregular merchandise.
<PAGE>
SALES AND MARKETING
The Company's products are sold in the United States and Europe largely
by independent sales representatives. The Company presently has 44 sales
representatives in the United States and 12 sales representatives in Europe. The
Company uses 13 different distributors in other international locations.
In an effort to add exposure and consumer credibility to its Ashworth
brand, the Company has five popular and well known golf celebrities who wear and
endorse the Company's products. They are: (1) Fred Couples, considered by many
as the most popular golfer in the world; (2) John Cook, who won two PGA events
in 1996; (3) Ernie Els, who won the 1995 U.S. Open; (4) Dave Stockton, who was
"Player of the Year" on the PGA senior tour two of the past four years; and (5)
Jim Nantz the popular CBS golf announcer.
As part of its marketing strategy, the Company plans to use more of
these players and celebrities in advertisements, in store displays, and for
special appearances for trade shows and store appearances.
In 1996, the Company developed a new in-store fixture program that will
be expanded in 1997. This modular fixture program is designed to help create a
dedicated in-store shop for Ashworth products coupled with pictures and displays
of our golf professionals.
In an effort to introduce new young customers to the Ashworth brand,
the Company is the national apparel sponsor of American Junior Golf Association.
Additionally, Ashworth supports collegiate golf by providing team uniforms to
numerous college and university golf teams.
The Company's future marketing and sales growth efforts will focus on
(1) increasing the annual sales amounts to existing customers; (2) the addition
of new customers; (3) increasing the number of trained sales representatives;
(4) emphasizing Ashworth "in-store shop" concept stores utilizing the Company's
new fixture program.
The Company's domestic market for the Ashworth apparel has been
seasonal, with the highest sales volume traditionally in the period January
through August and the lowest volume in the months of September through
December. However, the addition of the department and specialty retail store
market, which is a year-round business, and additional fall and winter European
market has reduced the impact of the seasonality of the Company's business.
After adjusting for the discontinuation of the Women's and Kids'
divisions in fiscal 1995, sales increased 6.2% to $75,413,000 from $71,018,000.
This increase was primarily due to an increase in the volume of sales.
During the last three fiscal years, the Company had the following
domestic and international sales of Ashworth products:
<TABLE>
<CAPTION>
Year ended October 31,
1996 1995 1994
(In Thousands)
Consolidated Sales:
<S> <C> <C> <C>
Ashworth Apparel $50,615 $55,250 $51,771
Ashworth Headwear 3,614 4,016 3,672
Ashworth Footwear 1,645 3,486 N/A
-------- -------- --------
Ashworth Brand Sales 55,874 62,752 55,443
Ashworth Harry Logan Apparel 6,057 4,414 1,287
Company stores 10,104 5,572 3,469
Ashworth U.K., Ltd. Net of InterCo. Transfers 3,378 1,786 640
-------- -------- --------
Total Consolidated Sales $75,413 $74,524 $60,839
Less Women's & Kids' 0 3,506 4,058
------------ -------- --------
Sales excluding Women's & Kids' $75,413 $71,018 $56,781
====== ====== ======
Consolidated Sales Analysis - Domestic & Foreign:
Exports from the United States to:
Japan $ 6,515 $ 7,860 $ 4,880
England - Ashworth U.K., Ltd. 3,103 2,994 2,432
Other Foreign Jurisdictions 6,372 5,538 4,143
-------- -------- --------
Total Exports 15,990 16,392 11,455
Ashworth U.K., Ltd., Net of InterCo. Transfers 3,378 1,786 640
-------- ------- --------
Total Foreign Sales 19,368 18,178 12,095
Total Domestic Sales 56,045 56,346 48,744
------ -------- ------
Total Consolidated Sales $75,413 $74,524 $60,839
Less Women's & Kids' 0 3,506 4,058
------------ -------- --------
Sales excluding Women's & Kids' $75,413 $71,018 $56,781
====== ====== ======
</TABLE>
<PAGE>
At December 31, 1996, the Company had backlog orders of approximately
$27,824,000 compared with approximately $31,007,000 at December 31, 1995. The
amount of backlog orders at a particular time is affected by a number of
factors, including the scheduling of manufacture and shipping of the product
which, in some instances, depends on the customers' demands. Accordingly, a
comparison of backlog orders from period to period is not necessarily meaningful
and may not be indicative of eventual actual shipments during the quarter.
Orders may be changed or canceled up to 45 days prior to the ship date of the
order. The Company's experience has been that the cancellations, rejections or
returns of orders do not materially reduce the amount of sales realized from its
backlog.
The Company's trading terms generally require payment from customers
within 30 days after shipment. The Company extends discounts of 3%-5% for early
payment.
COMPETITION
The golf apparel market is not dominated by any single company, yet it
is highly competitive both in the United States and abroad. However, the
Ashworth brand is the market leader with approximately 10% of the market share.
The Company competes not only with golf apparel manufactures, but also other
branded sports and sportswear apparel manufactures who have entered the growing
golf apparel market in recent years. Although many of the Company's competitors
have greater financial resources and greater experience, the Ashworth brand has
been the market leader in the golf pro shop business for the past four years.
PRODUCT SOURCING
The Company sources its products in the following three ways:
1. Contract Manufacturing: Most of the Company's knit shirts and pullovers are
manufactured through arrangements with independent cutting and sewing
contractors in the San Diego area. Although the Company uses numerous
contractors, over 80% of its contract work is performed by two main contractors.
The Company has no written agreements with these firms but has used these
contractors since the Company's inception. The Company considers its relations
with these contractors to be excellent. The Company purchases most of its fabric
from United States mills and then distributes the fabrics to its contractors
after quality inspection.
2. Finished Goods Sourcing: The Company also sources finished
garments made to the Company's quality and styling
specifications from manufactures in Asia, Europe and Central
America. Approximately 255 of the Company's products are now
being made from manufacturers outside of the United States.
Ashworth is now importing products from Italy, Scotland,
China, India, the Phillippines and Costa Rica. In 1996, the
Company entered into an agreement with an American mill to
have a significant amount of its new basics line made in Costa
Rica.
In the future years, the Company plans to source more product outside
the United States in such areas as Central America and Mexico to help increase
gross profits. The Company will, at the same time, continue to emphasize
quality.
In-House Manufacturing
The Company operates its own in-house hat manufacturing facility.
Approximately 95% of the Company's hats are made in this facility with the
balance purchased from other hat manufacturing companies. Presently, the
Company's hat factory is running at close to 100% capacity. The factory could be
easily expanded, however, as needed.
In-House Embroidery
The embroidery of custom golf course logos and logos for tournaments is
done in-house by the Company. The Company operates 39 multi-head,
computer-controlled embroidery machines. The machines consist of 2-head, 6-head,
12-head, 15-head and 20-head capacity, totaling 399 heads. The Company
embroiders either the Company's or customer's designs which total over 20,000
designs at the present time. Embroidery is applied on garments as well as custom
made caps. The Company averages 90,000 logos per week which amounts to 65,000
garments. One to three logos are applied to a single garment. The Company runs a
second shift to accommodate seasonal demand during the period from January
through July. The Company's
<PAGE>
embroidery department has been ranked by two major trade publications as one of
the top 100 embroidery plants in the country.
OPERATIONS
Approximately 97% of the Company's products are warehoused in and
distributed from its distribution facilities in Carlsbad and Vista, California.
The remaining 3% are products drop-shipped from off-shore factories directly to
our international distributors.
All products delivered to the Company's distribution facilities must
pass a quality inspection before acceptance. The Company uses a state-of-the-
art rail and trolley garment handling system designed specifically for the
garment industry. This system holds the majority of the inventory at a second
and third floor level that frees the ground floor space for order processing,
embroidery, packing and shipping functions.
The Company's computer operations run on an IBM AS400 computer. The
Company has completed a software conversion project that has significantly
enhanced the Company's management information systems. The new package is an
established, fully integrated, relational database for manufacturing companies
that has been adapted for the apparel industry.
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company owns and utilizes several trademarks, principal among which
are the Ashworth word and design marks, the Golfman word and design marks, the
Ashworth Harry Logan word mark, and the Weather Systems word mark. The Ashworth
word and design marks, Ashworth Harry Logan word mark, and Golfman design marks
have been registered on the Principal Register of the United States Patent and
Trademark Office. The Company filed an application in January 1997 for
registration of the Golfman and Weather Systems word marks in the United States
and intends to register these marks throughout its major international markets.
The Company has obtained registration of the Ashworth word and design
marks and the Golfman design marks in 32 countries and is processing
applications for registration of these trademarks in 20 additional countries.
The application process takes from six months to two years to complete.
The Company regards its trademarks and other proprietary rights as
valuable assets and believes that they have significant value in the marketing
of its products. Although the Company believes that it has the exclusive right
to use the trademarks and intends to vigorously protect its trademarks against
infringement, there can be no assurance that the Company can successfully
protect the trademarks from conflicting uses or claims of ownership.
John L. Ashworth, an officer, director and stockholder of the Company,
has no personal rights to the Ashworth trademark and will receive no
compensation from the Company for its use of the trademark.
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<PAGE>
EMPLOYEES
At January 17, 1996, the Company had approximately 436 regular and 119
seasonal full-time employees.
Item 2. PROPERTIES
The Company owns two buildings located on Loker Avenue West in
Carlsbad, California, which were purchased on December 9, 1993, for $3,500,000.
The buildings total approximately 77,000 square feet, consisting of space for
administrative, embroidery, warehousing and distribution functions. The purchase
was financed with a down payment of $700,000 and a mortgage of $2,800,000
amortized over thirty years but due and payable in seven years.
The Company and its subsidiaries have the following leases for
manufacturing and distribution facilities, as well as leases for retail space
for its stores:
<TABLE>
<CAPTION>
Lease Min/Current Maximum
Square Expiration Base Rent Base Rent
Location Footage Date per Month per Month
($) ($)
Manufacturing and Distribution Centers:
<S> <C> <C> <C> <C>
Carlsbad, CA. 47,800 10/31/00 21,443 24,000
Vista, CA. 42,000 10/31/97 16,800 16,800
Essex, England 5,500 10/31/03 3,062 3,062 (a)
Essex, England 5,500 10/31/03 3,445 3,445 (b)
Retail Stores
San Ysidro, CA 2,450 4/30/98 4,451 4,629
San Marcos, TX 3,000 8/31/00 4,263 4,514
Vacaville, CA 2,500 11/30/00 4,428 5,060
Gretna, NE 2,000 2/28/99 2,500 2,500
Carlsbad, CA 1,600 6/30/97 995 995
Barstow, CA 2,300 12/31/00 4,420 4,420
Phoenix, AZ 4,000 9/30/00 5,312 5,976
Park City, UT 2,250 5/31/00 2,915 3,103
Hillsboro, TX 2,700 5/31/00 4,163 4,613
Silverthorne, CO 2,250 6/30/00 3,656 4,031
Las Vegas, NV 2,450 9/30/01 4,088 4,088
Costa Mesa, CA 6,020 1/31/08 25,088 32,613
</TABLE>
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(a) The rate increase for years 6-10 is to be negotiated at the end of
year 5.
(b) The rate increase for years 5-9 is to be negotiated at the end of year 4.
The tenant also pays percentage rent based on sales which exceed certain
breakpoints for all of the leases except the Carlsbad, California, lease. All of
the leases require the tenant to pay its pro rata share of taxes, insurance, and
maintenance expenses. The Company has entered into guaranties for some portion
or all of certain of the subsidiaries' leases.
The Company's subsidiary, Ashworth Store II, Inc., has also entered into
a lease for retail store space in the San Marcos, Texas, Sports Center, which
was planned to be completed in 1996. However, the project has been put on hold
for at least a year. The Sports Center lease will replace the above-referenced
San Marcos lease if and when the Sports Center is completed.
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<PAGE>
Item 3. 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 fiscal 1996.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this report, either by
proxy solicitation or otherwise.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded in the over-the-counter market on
the NASDAQ National Market System under the symbol "ASHW". The following table
sets forth the high and low sale prices on the NASDAQ National Market System for
the quarters indicated.
HIGH LOW
1995
January 31 11 1/2 7 1/8
April 30 10 7/8 7 1/2
July 31 10 5/8 7
October 31 8 7/8 5 7/8
1996
January 31 7 3/4 5
April 30 7 3/8 6
July 31 7 4 1/2
October 31 7 5/8 4 7/8
Holders
There is only one class of Common Stock. As of January 27, 1997 there
were 885 stockholders of record and approximately 10,000 beneficial owners of
the Company's Common Stock.
Dividends
No dividends have been declared during the past two fiscal years with
respect to the Common Stock.
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<PAGE>
Item 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
which are included elsewhere in this report. The statement of income data set
forth below with respect to the fiscal years ended October 31, 1996, 1995, and
1994 and the balance sheet data at October 31, 1996 and 1995 are derived from,
and should be read in conjunction with the audited Consolidated Financial
Statements included elsewhere in this report. The statement of income data set
forth below with respect to the fiscal years ended October 31, 1993 and 1992 and
the balance sheet data at October 31, 1994, 1993, and 1992 are derived from
audited financial statements not included in this report. No dividends have been
paid for any of the periods presented.
<TABLE>
<CAPTION>
Years Ended October 31,
1996 1995 1994 1993 1992
(In thousands, except per share amount)
Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Net Sales $75,413 $74,524 $60,839 $45,823 $28,562
Gross Profit 27,395 25,025 23,898 17,816 10,605
Selling, general, and
administrative expense 24,086 21,521 15,525 11,161 7,120
Income from operations 3,309 3,504 8,373 6,655 3,485
Net Income 1,403 1,401 4,860 3,946 2,020
Net income per common
and equivalent share 0.12 0.12 0.40 0.34 0.19
Weighted average common and
equivalent shares outstanding 12,098 12,112 12,224 11,766 10,910
October 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Working capital $31,583 $29,216 $26,368 $22,128 $17,461
Total assets 54,912 58,072 47,694 33,757 25,681
Long-term debt
(less current portion) 5,307 5,195 5,774 2,885 1,713
Stockholders' equity 38,867 36,390 32,926 26,050 20,203
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.
RESULTS OF OPERATIONS
1996 Compared to 1995
Consolidated net sales were $75,413,000 for fiscal 1996, an increase of
1.2% over net sales of $74,524,000 in fiscal 1995. Management's focus in 1996
was not to increase sales, but was rather to reposition the Company for growth
in 1997 and in future years. The Company discontinued its Women's and Kids'
lines in fiscal year 1995 which accounted for 4.7% of that year's sales.
Excluding these discontinued lines, sales increased 6.2% in fiscal 1996 in
comparison to fiscal 1995.
Cost of goods sold decreased from 66.4% of net sales in fiscal 1995 to
63.7% in fiscal 1996. This resulted in improved gross margins of 2.7%. This
improvement was the result of improved and more conservative forecasting and
fewer mark downs.
Consolidated selling, general and administrative expenses for fiscal
1996 increased 11.9% to $24,087,000 or 31.9% of net sales compared to
$21,522,000 or 28.9% of net sales in fiscal 1995. This increase resulted mainly
from the expense of sales and marketing activities in the U.S. and Europe, and
an increase in the cost of compensating the golf professionals who endorse the
Company's products.
Additional marketing expenses were incurred during the year in an
effort to position the Company for increased sales growth in 1997. These
marketing expenses included increased endorsement fees of our PGA professionals
and costs associated with the Company's new integrated marketing plan which
includes in-store shop fixture and display programs, color catalogs and salaries
associated with new marketing personnel.
Other expenses decreased to $948,000 for 1996 compared to $1,088,000 in
1995. Increased bank borrowings in fiscal 1996 resulted in higher interest
payments of $86,000 for the year which was offset by a currency transaction gain
in fiscal 1996 of $131,000 by Ashworth U.K., Ltd. compared with a transaction
loss of $117,000 in fiscal 1995 (See Liquidity and Capital Resources - Currency
Fluctuation.)
1995 compared to 1994
Consolidated net sales were $74,524,000 for fiscal 1995, an increase of
$13,685,000 over net sales of $60,839,000 in fiscal 1994. The increase was
primarily due to increased sales volume in the main areas of the Company's
business, price increases in the outlet stores, and the introduction of golf
footwear. Ashworth brand apparel sales to golf pro shops increased by only 2.3%
in the year due in large part to incomplete or late shipments resulting from the
slower than expected conversion of the Company's Management Information System
(MIS). Total sales increased by 22.5% over fiscal 1994. An analysis of
sales for the two years is shown under Business - Sales and Marketing.
The increase in cost of sales was due primarily to the inventory reserve
markdown as a result of discontinuing the women's and kid's apparel lines.
Additionally, the conversion to the new MIS software resulted in problems in the
area of forecasting and production scheduling. This resulted in an excess of
finished goods being produced for the spring and summer seasons. The MIS
conversion is now completed, and the Company is better equipped
to monitor inventory levels through better forecasting and production
scheduling.
Consolidated selling, general and administrative expenses for fiscal 1995
increased 38.6% to $21,522,000 or 28.9% of net sales compared to $15,525,000 or
25.5% of sales in fiscal 1994. The increase was primarily attributed to
increased sales volume.
Income from operations decreased to $3,504,000 in fiscal 1995 from
$8,373,000 in 1994. The decrease was primarily due to lower gross profits and
higher selling, general and administrative expenses.
Other expenses increased to $1,088,000 for 1995 compared to $313,000 in
1994. This was primarily a result of interest payments on increased bank
borrowings in fiscal 1995 and a currency exchange rate loss of $117,000 on the
transactions between Ashworth U.K., Ltd. and the Company compared to a gain of
$210,000 in 1994.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's need for working capital is seasonal with the greatest
requirements from approximately October through the end of April each year. The
inventory buildup during this period is to provide product for shipment for the
primary spring/summer selling season. However, management believes that cash
from operations and the bank line of credit will be sufficient to meet the
Company's working capital requirements through fiscal 1997.
Cash from operations in fiscal 1996 generated a positive cash flow of
$8,469,000, compared to a negative cash flow of $9,727,000 in fiscal 1995. The
primary reasons were a reduction in overall inventory levels, improved control
over future season inventory levels, and increased sales of prior season
merchandise at the Company's outlet stores.
In December 1996, the Company entered into a new business loan agreement
with its bank. The agreement provides a revolving line of credit of $20,000,000
compared to $17,000,000 under the old agreement. The new agreement no longer
restricts borrowings to a specified asset base. Interest is charged at the
bank's reference (prime) rate and loans are collateralized by substantially all
of the assets of the Company. The loan agreement contains certain financial
covenants, the most restrictive of which require the Company to maintain, as
defined, a minimum tangible net worth, a liabilities to tangible net worth
ratio, and a minimum ratio of cash and accounts receivable to current
liabilities. The line of credit may also be used to finance up to $5,000,000 in
commercial letters of credit and standby letters of credit. At October 31, 1996,
no standby letters or commercial letters of credit were outstanding on this line
of credit. Additionally, the loan agreement may be used to enter into spot and
forward foreign exchange contracts.
At October 31, 1996, the Company had no loan outstanding with the bank
compared to $6,670,000 outstanding at October 31, 1995. At January 15, 1997, the
loan balance outstanding was $435,000.
During fiscal 1996, the Company invested approximately $2,500,000 in
personal property
and equipment, primarily for a new show booth, rack and rail equipment, computer
hardware, embroidery machines, and outlet store fixtures and fittings. For
fiscal 1997, the Company has a capital equipment budget of approximately
$1,900,000 primarily
for the acquisition of computer equipment, leasehold improvements for stores,
embroidery equipment and warehouse improvements. Management currently intends to
use leases or equipment financing agreements to finance the purchase of much of
its capital equipment.
If cash from operations and debt financing are either insufficient or not
available, or if working capital requirements are greater than estimated, the
Company may be required to raise additional capital. There can be no assurance
that the Company will continue to successfully raise sufficient working capital
to meet its requirements. Lack of sufficient working capital could have a
material adverse effect upon the Company, its business, and its ability to grow.
Currency Fluctuations
Ashworth U.K., Ltd., a wholly owned subsidiary in England, maintains its
books of account in British pounds. For consolidation purposes, the assets and
liabilities of Ashworth U.K., Ltd., are converted to U.S. dollars at the month
end exchange rate. A translation difference arises for share capital and
retained earnings, which are converted at rates other than the month end rate,
and this amount is reported in the shareholders' equity section of the balance
sheet.
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<PAGE>
Ashworth U.K., Ltd. sells Ashworth product to other countries in the
European Union, largely with sales denominated in the currencies of those other
countries. Fluctuations in the currency rates between the United Kingdom and
those other countries give rise to a loss or gain which is reported in earnings.
The amount in fiscal year 1996 was not material.
All export sales by Ashworth, Inc., are U.S. Dollar denominated, and
ordinarily there is no currency exchange rate problem for the Company. However,
with respect to export sales to Ashworth U.K., Ltd., that subsidiary may be at
risk. The subsidiary maintains its account with Ashworth, Inc., in British
pounds, but owes Ashworth, Inc., in U.S. Dollars. At the end of every accounting
period, the debt is adjusted to pounds by multiplying the indebtedness by the
closing dollar/pound exchange rate to ensure that the account has sufficient
pounds to meet its dollar obligation. This remeasurement is either income or an
expense in the subsidiary's financial statement.
The Company purchases some garments and shoes from off-shore manufacturers
which are U.S. Dollar denominated; consequently, there is no currency exchange
rate problem for the Company in connection with these purchases.
The Company has not used derivative instruments or other arrangements to
hedge against currency fluctuations. However, management may use hedging
arrangements in the future to reduce the Company's exposure to risk with
Ashworth U.K., Ltd.
Inflation.
Management believes that inflation has not had a material effect on the
Company's results of operations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements with respect to the Company are
submitted herewith:
1. Report of Independent Public Accountants, page F1.
2. Consolidated Balance Sheets-October 31, 1996 and 1995, pages F2 and F3.
3. Consolidated Statements of Income for the years ended October 31, 1996,
1995, and 1994, Page F4.
4. Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1996, 1995, and 1994, page F5.
5. Consolidated Statements of Cash Flows for the years ended October 31,
1996, 1995, and 1994, and pages F6 and F7.
6. Notes to Consolidated Financial Statements, pages F8 through F18.
7. Report of Independent Public Accountants on Supplementary Schedule,page
F19.
8. Supplementary Schedule, page F20.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with accountants on
accounting and financial disclosure during the past three fiscal years.
-15-
<PAGE>
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's directors and executive officers are:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Gerald W. Montiel 50 Chairman of the Board of Directors
Randall L. Herrel, Sr. 46 President and Chief Executive Officer
and Director
John L. Ashworth 37 Senior Executive Vice President -
Creative Director and Director
John Newman 60 Vice President - Finance, Treasurer,
Chief Financial Officer, and
Chief Accounting Officer
Mary Montiel 44 Vice President - Manufacturing & Design
Monica M. McKenzie 63 General Counsel and Secretary
Andre P. Gambucci 68 Director
John M. Hanson, Jr. 56 Director
</TABLE>
Richard H. Werschkul, formerly the Company's president and chief executive
officer, resigned effective January 15, 1996, to pursue personal and business
interests. Mr. Montiel was appointed to these positions by the board of
directors, which positions he held until December 8, 1996. Randall L. Herrel,
Sr., joined the Company as president and chief executive officer on December 9,
1996.
The directors are divided into three classes, each class as nearly equal in
number as possible, with an annual election of each class for a term of three
years. The terms of Messrs. Herrel and Hanson expire in 1997, the terms of
Messrs. Ashworth and Gambucci expire in 1998, and Mr. Montiel's term expires in
1999. The directors serve until their terms expire and until their successors
are duly elected and qualified or until their death, resignation or removal. The
executive officers of the Company are elected at the annual meeting of the board
of directors and serve at its discretion.
Business Experience
Gerald W. Montiel is a founder of the Company and has been its chairman of
the board of directors since the inception of the Company in March 1987. He
served as chief executive officer from 1988 to April 1995 and president from the
Company's inception to October 1993 and again from January 15, 1996, to December
8, 1996. Mr. Montiel also served as treasurer from October 1989 to December 1991
and chief financial officer from January 1990 to December 1991.
Randall L. Herrel, Sr. has been a director, president, and chief executive
officer since December 9, 1996. Mr. Herrel served as president and chief
operating officer of Quiksilver, Inc., a sports apparel company in Newport
Beach, California for the past two years. Mr. Herrel joined Quiksilver in
June 1989 and also served at various times as chief financial officer,
treasurer and secretary. Mr. Herrel holds a B.S. degree in Engineering from
Purdue University, an M.S. degree in Engineering from Northrop University and
an M.B.A. from Stanford University.
John L. Ashworth is a founder of the Company and has been a director since
its inception. Mr. Ashworth has served as a vice president since October 1989
and currently serves as senior executive vice president - creative director.
He served as secretary from March 1987 to January 1990.
Andre P. Gambucci has been a director of the Company since June 1991. Mr.
Gambucci was a senior vice president and director of marketing of Acordia of
-16-
<PAGE>
Colorado, a general insurance agency and insurance brokerage firm in Colorado
Springs, Colorado, from 1982 until December 31, 1995, when he retired. He is now
a consultant for Acordia National and special assistant to the president of
American Specialty Services, an insurance company.
John M. Hanson, Jr. has been a director of the Company since April 1994.
Mr. Hanson has been a shareholder and officer of John M. Hanson & Company, a
professional corporation practicing accounting, from 1968 to the present. The
firm has been retained to prepare the Company's tax returns for fiscal 1996.
John Newman has served as chief accounting officer since January 1990 and
vice president-finance, treasurer, and chief financial officer since December
1991. He also served as the company's controller from 1988 to January 1990 and
secretary from January 1990 until May 1993.
Mary Montiel was elected vice president - manufacturing and design in
December 1994. She served as production manager from April 1991 until December
1994. She was president and chief financial officer of Mondav Corporation, an
auto parts supplier, from 1988 to April 1991. Ms. Montiel is the sister of
Gerald Montiel, the Company's chairman of the board.
Monica M. McKenzie has served as general counsel since April 1993 and was
elected to the position of secretary in May 1993. She was formerly a partner of
the Denver, Colorado, law firm of Gorsuch Kirgis L.L.C., the Company's outside
legal counsel.
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires executive
officers, directors, and persons who beneficially own more than ten percent
(10%) of the Company's Common Stock to file initial reports of ownership and
reports of changes in ownership of the Company's securities with the Securities
and Exchange Commission. To the best of the Company's information and belief, no
person beneficially owns more than ten percent of the Company's securities. The
executive officers and directors are required to furnish the Company with
information concerning their ownership of the securities and with copies of such
filings.
Based solely on a review of such information and the copies of the filings
furnished by executive officers and directors to the Company, the Company
believes that all Section 16(a) filing requirements applicable to its executive
officers and directors were complied with during fiscal 1996.
Item 11. EXECUTIVE COMPENSATION.
The following information sets forth the executive compensation of the
Company's chief executive officer and each of the four most highly compensated
executive officers other than the CEO who were serving as executive officers at
the end of the last fiscal year.
-17-
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term All Other
Compensation Compensation
Annual Awards Split 401(k)
Name and Compensation Stock Dollar Savings
Principal Position Year Salary Options Policy Plan
($) (#) ($) ($)
<S> <C> <C> <C> <C> <C>
Gerald W. Montiel 1996 314,483 450,000 996 4,726
Chief Executive 1995 315,065 300,000 1,062 4,011
Officer (from 1994 312,693 0 1,283 3,538
January 16, 1996)
Richard H.
Werschkul (a) 1996 63,705 0 0 810
Chief Executive 1995 242,740 200,000 0 3,088
Office (until 1994 220,462 150,000 0 2,740
January 15, 1996)
John L. Ashworth, Sr. 1996 264,668 125,000 0 2,795
Exec. Vice President- 1995 264,741 260,000 0 3,385
Creative Director 1994 263,514 40,000 0 3,367
A. John Newman 1996 161,230 45,000 0 2,551
Vice President - 1995 160,385 0 0 2,430
Finance 1994 145,173 20,000 0 1,976
Mary Montiel 1996 146,904 60,000 0 1,043
Vice President - 1995 112,693 5,000 0 0
Mfg. & Design 1994 65,077 12,500 0 0
Monica M. McKenzie 1996 127,324 25,000 0 2,010
General Counsel & 1995 125,480 0 0 1,832
Secretary 1994 112,001 12,500 0 1,185
</TABLE>
(a) Upon termination on January 15, 1996, Mr. Werschkul entered into a two-year
non-compete and consulting agreement for which the Company agreed to pay him
$240,000 during the first year.
-18-
<PAGE>
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Potential
Realizable Value
at
Assumed Annual
Rate of Stock
Price
Appreciation
Individual Grants For Option Term
Number of % of
Securities Total
Underlying Options/
Options/ SARS
SARS Granted to Exercise
Granted Employees or Base
(#) in Fiscal Price Expiration
Name Year ($/sh) Date (5%) (10%)
- ---- ------ ---------- ------ ------------- ------- ------
<S> <C> <C> <C> <C> <C>
Gerald W. Montiel 150,000 5.50 01/21/04 335,858 782,692
150,000 6.00 12/31/04 429,710 1,029,230
150,000 35.6 6.50 12/31/95(a) 537,545 1,323,999
John L. Ashworth 125,000 9.9 6.50 12/31/00 175,099 377,081
John Newman 10,000 6.00 12/31/98(b) 6,150 12,600
10,000 6.50 12/31/00 14,008 30,167
10,000 6.50 12/31/01 17,958 39,683
15,000 3.6 6.50 09/17/01 26,937 59,525
Mary Montiel 10,000 6.50 12/31/00 14,008 30,167
25,000 6.50 09/17/01 44,896 99,208
25,000 4.7 6.50 12/31/02(a) 55,266 125,379
Monica M. McKenzie 10,000 6.50 12/31/00 14,008 30,167
15,000 2.0 6.50 09/17/01 26,937 59,525
- -------------------
(a) These options are not exercisable until January 1, 1998.
(b) This option replaced an option to purchase 10,000 shares at $6.00 which expired on 12/31/95.
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Shares FY-End FY-End
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
(#) ($) (#) ($)
<S> <C> <C> <C> <C>
Gerald W. Montiel 50,000 159,500 700,000/400,000 250,000/125,000
Richard H. Werschkul 0 0 275,000/0 87,500/0
John L. Ashworth 75,000 267,375 520,000/200,000 47,500/100,000
John Newman 0 0 85,000/0 10,000/0
Mary Montiel 0 0 55,500/25,000 1,500/0
Monica McKenzie 0 0 50,500/0 4,000/0
</TABLE>
Compensation of Directors
Directors who are not employees of the Company each receive annual
compensation of $10,000 plus $1,000 and expenses for attendance at each board
meeting. Such directors also receive quarterly stock options to purchase shares
of the Company's $.001 par value Common Stock for each quarter during which they
serve as directors and for each committee on which they serve during each
quarter. All directors receive an annual $1,000 apparel allowance. No other
arrangement exists pursuant to which any director of the Company was compensated
during the Company's last fiscal year for any service provided as a director.
Employment Contracts and
Termination of Employment and
Change of Control Arrangements
The Company has executive employment agreements with Gerald W. Montiel,
Randall L. Herrel, Sr., and John L. Ashworth. Under the terms of the agreements
with Messrs. Montiel and Ashworth, the Company may terminate the executive's
employment upon 30 days notice, and the executive may terminate his employment
upon 90 days notice to the Company. The agreement with Mr. Herrel provides for
employment for an initial term of three years through November 30, 1999, with
automatic renewal each year unless either party gives to the other six-month
written notice of non-renewal. The agreements provide that base salary is to be
determined periodically at the discretion of the board of directors on the basis
of merit and the Company's financial success and progress. A bonus is to be paid
to Mr. Herrel on January 15, 1998, based on the Company's earnings per share and
Mr. Herrel's then base salary. If the earnings per share are from $.46 to $.54,
the bonus will be from 15% to 85% of his then base salary. The Company agreed to
pay the executives an annual bonus equal to the premium due on life insurance
policies with a face value of $1,000,000 for Messrs. Montiel and Herrel and
$2,000,000 for Mr. Ashworth. The Company also pays the premium on a split dollar
insurance policy with a face value of $1,000,000 on the life of Mr. Montiel. The
agreements with Messrs. Montiel and Ashworth include noncompete provisions
following termination of employment for which the Company has agreed to pay each
executive compensation based upon a percentage of his then current salary as
consideration for the noncompete agreement. The noncompete period is ten years
with the noncompete consideration to be an amount equal to 100% of the
executive's then current salary for the first year and 40% of such salary for
-20-
<PAGE>
the next nine years. In the event of the executive's death during employment
with the Company, his beneficiary or estate will receive an amount equal to the
noncompete consideration. The Company has purchased term life insurance to
provide the funds in such event. The agreement with Mr. Herrel includes
severance payments upon termination of employment under specific circumstances,
such payments ranging from one-half to two times his then annual base salary.
The Company has key person life insurance payable to the Company on the
lives of Messrs. Montiel and Ashworth in the amount of $1,000,000 and $300,000,
respectively.
STOCK OPTION PLANS
Amended and Restated Nonqualified Stock Option Plan
In August 1987 the Company adopted a nonqualified stock option plan which
was subsequently amended (as amended to date, the "Plan"). The Company's board
of directors or any committee as the board of directors may designate from time
to time (reference hereafter to the "Committee" includes either the board or its
designated committee) administers the Plan and selects the persons to whom
options are granted.
The Company has reserved 5,700,000 shares of Common Stock for issuance upon
exercise of options granted under the Plan, all of which shares have been
registered pursuant to the Securities Act and, upon issuance, will be freely
tradable without restriction, except for shares held by an "affiliate" of the
Company. Under the Plan, as of December 31, 1996, options to purchase 1,439,145
shares were outstanding, options to purchase 1,695,500 shares had been
exercised, and 2,565,355 shares were available for options to be granted at a
future date. Of the outstanding options under the Plan, options to purchase
additional shares were exercisable or will become exercisable in the fiscal
years and at the weighted average exercise prices indicated below:
<TABLE>
<CAPTION>
No. Of Exercisable as of Weighted Average
Options December 31 Exercise Price
<S> <C> <C> <C>
1,237,145 1996 $ 7.59
74,500 1997 $ 8.75
62,500 1998 $ 9.18
65,000 1999 $ 7.67
---------
1,439,145
</TABLE>
Founders' Nonqualified Stock Option Plan
In November 1992 the Company adopted a Founders' nonqualified stock
option plan (the "Founders' Plan") to provide a means for recognizing and
rewarding officers, directors, consultants and advisors of the Company who have
played a substantial role in the founding or early development of the Company.
The Founders' Plan is administered by a committee of directors appointed by the
board of directors (the "Compensation Committee") which is presently comprised
of the Company's two outside directors. The Compensation Committee has the sole
and absolute authority and discretion to interpret the Founders' Plan and to
prescribe, amend and rescind rules and regulations relating to the Founders'
Plan. The Committee may grant options at less than the fair market value of the
stock on the date of grant.
-21-
<PAGE>
The Company has reserved 1,000,000 shares of Common Stock for issuance
upon exercise of options granted under the Plan, all of which shares have been
registered pursuant to the Securities Act and, upon issuance, will be freely
tradable without restriction, except for shares held by an "affiliate" of the
Company.
Under the Plan, as of December 31, 1996, options to purchase 535,000
shares were outstanding, options to purchase 464,000 shares had been exercised,
and 1,000 shares were available for options to be granted at a future date. All
of the outstanding options are currently exercisable at a weighted average
exercise price of $8.41
Incentive Stock Option Plan
The Company adopted the Incentive Stock Option Plan in May 1993
following stockholder approval, and the Plan was subsequently amended (as
amended, the ISOP). The Company's board of directors or any committee as the
board of directors may designate from time to time (reference hereafter to the
"Committee" includes either the board or its designated committee) administers
the ISOP. The Committee selects the persons to whom the options are granted from
among the Company's full-time employees who are regular salaried officers or key
employees of the Company and certain other persons in connection with offers of
employment. Any options granted under the ISOP to an employee during a calendar
year in excess of $100,000 of aggregate fair market value (determined at the
time the option is granted) will not qualify as incentive stock options under
the ISOP.
The grant or exercise of an incentive stock option (ISO) under the ISOP
is not taxable to the employee. The employee generally will be taxed when and if
the stock received on exercise of the ISO is sold at a gain. In order to receive
this tax treatment under the Internal Revenue Code, certain provisions of the
Plan were required to be approved by the stockholders, the options must be
granted within 10 years of the date of the Plan, an option by its terms must be
exercisable only within 10 years of the date it is granted (an option granted to
an employee who owns more than 10% of the voting power or value of the Company's
stock must be exercisable within five years of the date it is granted), and the
exercise price must equal or exceed the fair market value of the Company's
Common Stock on the date of the grant (the exercise price of options granted to
employees who own more than 10% of the voting power or value of the Company's
stock must be at least 110% of the fair market value on the grant date). Any
gain on the sale of shares received upon exercise of an option will be treated
as capital gain if the optionee does not dispose of the shares within two years
from the date the option was granted and one year from the date the option is
exercised. If the optionee does not meet the holding requirements, any gain on
the sale will be treated as ordinary income.
The Company has reserved 3,000,000 shares of Common Stock for issuance
upon exercise of options granted under the Plan, all of which shares have been
registered pursuant to the Securities Act and, upon issuance, will be freely
tradable without restriction, except for shares held by an "affiliate" of the
Company.
Under the ISOP, as of December 31, 1996, options to purchase 2,318,792
shares were outstanding, 7,000 options to purchase shares had been exercised,
and 674,208 shares were available for options to be granted at a future date. Of
the outstanding options under the Plan, options to purchase additional shares
were exercisable or will become exercisable in the fiscal years and at the
weighted average exercise prices indicated below:
-22-
<PAGE>
<TABLE>
<CAPTION>
No. Of Exercisable as of Weighted Average
Options December 31, Exercise Price
<S> <C> <C> <C>
1,365,792 1996 $ 6.89
456,750 1997 $ 6.07
296,250 1998 $ 6.42
100,000 1999 $ 6.00
100,000 2000 $ 6.00
---------
2,318,792
=========
</TABLE>
Options granted under the above described stock option plans may not be
transferred by the optionee other than by will or the laws of descent and
distribution, pursuant to a qualified domestic relations order as defined by the
Internal Revenue Code, or, at the discretion of the Committee, to immediate
family members or trusts, provided, however, incentive stock options are not
transferable other than by will or the laws of descent and distribution. EaTch
option is exercisable during the lifetime of the optionee only by such optionee
or by his or her guardian or legal representative. An optionee must exercise the
options within thirty days after the date of termination of employment
disability, unless the option is extended by the Committee for an additional
period. Options exercised more than three months after termination of employment
(12 months in the case of a disabled employee) do not qualify as incentive stock
options. This requirement is waived in the case of the death of the optionee.
The Committee may in its discretion permit options to be exercised for a period
not to exceed the option's stated expiration date. If an optionee dies while
still employed or engaged by the Company or at any time prior to the expiration
or termination of his or her option, the option may be exercised within one year
after death or at such later date as the Committee may specify. Options held by
persons whose employment is terminated because of retirement or disability are
fully exercisable for a period of twelve months after the date of such
termination, unless either the option or the ISOP provides for earlier
termination. In no event may an option be exercisable after expiration of the
term of the option.
401(k) PLAN
The Company adopted a defined contribution savings plan (the "401(k)
plan") to provide retirement income to employees of the Company effective
January 1, 1990. The 401(k) Plan is intended to be qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended. The 401(k) Plan covers
all employees who are at least 21 and have been employed by the Company for at
least six months. It is funded by voluntary pre-tax contributions from employees
up to a maximum amount equal to 15% of annual compensation and by 50% matching
contributions by the Company up to 3% of an employee's annual compensation.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number and percentage of 12,179,626
issued and outstanding shares of the Company's $.001 par value Common Stock
owned beneficially, as of January 8, 1997 by (1) any person who is known to the
Company to be, or to claim to be, the beneficial owner of more than 5% of such
Common Stock, (2) by each of the directors, (3) each of the executive officers,
and (4) all directors and officers as a group. Each person has sole voting power
and sole investment powers with respect to the shares. Information as to
beneficial ownership is based upon statements furnished to the Company by such
persons.
-23-
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Owned Percent
Name Shares Options(1)(2) Total Owned(3)
(#) (#) (#) (%)
<S> <C> <C> <C> <C>
Gerald W. Montiel 50,840 850,000 900,840 6.9
Randall L. Herrel 0 0 0 0
John L. Ashworth 98,109 520,000 618,109 4.9
A. John Newman -0- 85,000 85,000 *
Mary Montiel -0- 55,500 55,500 *
Monica M. McKenzie -0- 50,500 50,500 *
Andre P. Gambucci 67,500 37,500 105,000 *
John M. Hanson, Jr. -0- 27,500 27,500 *
All executive officers
and directors as a
group (8 persons) 216,449 1,626,000 1,842,449 13.4
Fred Couples 543,000 700,000 1,243,000 9.7
</TABLE>
* Less than one percent.
(1) Represents shares of Common Stock which may be acquired pursuant to
presently exercisable stock options, including stock options exercisable
within 60 days of January 15, 1997.
(2) Only the below indicated options have exercise prices which are less than
the market price of the Company's Common Stock on January 8, 1997
($6.50):
Mr. Montiel 500,000
Mr. Herrel 0
Mr. Ashworth 95,000
Mr. Newman 20,000
Ms. Montiel 3,000
Ms. McKenzie 8,000
Mr. Gambucci 2,500
Mr. Hanson 2,500
Mr. Couples 150,000
(3) For the purpose of computing the percentage of outstanding shares owned by
each of the above persons, the shares issuable pursuant to presently
exercisable stock options held by such person are deemed to be outstanding
nd have been added to the shares actually issued and outstanding, at
January 8, 1997, pursuant to Rule 13d-3(d)(1) of the Securities Exchange
Act of 1934. Such options are not deemed to be outstanding for the purpose
of computing the percentage owned by any other person, except for all
officers and directors as a group.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
John L. Ashworth, the Company's senior executive vice president-creative
director, was extended a loan by the Company on May 1, 1995 in connection with
the exercise of an option expiring May 1, 1995. The full recourse loan was in
the principal amount of $306,000 and bore interest at a variable annual rate
based upon the Bank of America prime rate on the 1st day of each month. Interest
was payable in quarterly installments. The principal was paid in full on April
12, 1996.
Mary Montiel, sister of Mr. Montiel, is an executive officer and employee
of the Company. Her compensation is set forth above under Executive
Compensation. She is currently receiving an annual salary of $160,000. Ms.
Montiel has been an employee of the Company serving in various positions since
April 16, 1992. She served as production manager from April 1992 until December
1994 and vice president of manufacturing and design since that date.
-24-
<PAGE>
Carol Kettela, sister of Jerry Montiel and Mary Montiel, is an employee
of the Company, presently serving as human resources manager. In the year ended
October 31, 1996, she had earned a salary of $61,143 and is currently receiving
an annual salary of $63,000. Ms. Kettela has been an employee of the Company
since April 7, 1992, initially in the position of administrative assistant to
the chief executive officer and investor relations. She was appointed to the
position of human resources manager in January 1996.
David Kettela, brother-in-law of Mr. Montiel and husband of Carol
Kettela, is an employee of the Company, presently serving as operations manager
of the Outlet Stores Division. In the year ended October 31, 1996, he had earned
a salary of $68,106 and is currently receiving an annual salary of $72,500. Mr.
Kettela has been an employee of the Company serving in various positions since
January 25, 1993. He was appointed the operations manager of the Outlet Stores
Division in March 28, 1994.
Michelle Zafiropoulos, daughter of Gerald W. Montiel, is an employee in
the Company's Design and Product Development Department as a design manager. In
the year ended October 31, 1996, she had earned a salary of $61,067 and is
currently receiving an annual salary of $72,500. Ms. Zafiropoulos has been an
employee of the Company since March 18, 1991, except for a brief period from
April 28, 1995 to January 1, 1996
Hank Ashworth, brother of Mr. Ashworth, is a sales representative of the
Company. During the fiscal year ended October 31, 1996, he was paid sales
commissions in the amount of $69,764. Mr. Ashworth also received severance pay
of $32,533 for September 18, 1995 through January 31, 1996. He was national
sales manager for the Ashworth core business from April 1994 through October
1996.
Laura Gambucci, daughter of Mr. Gambucci, is an employee in the Company's
Design and Product Development Department as a design manager. In the year ended
October 31, 1996, she earned a salary of $84,646 and is currently receiving an
annual salary of $84,000. Ms. Gambucci has been an employee of the Company since
November 6, 1989.
Eric Montiel, son of Gerald W. Montiel, is an employee of the Company,
presently serving as excess resource materials manager. In the year ended
October 31, 1996, he had earned a salary of $44,183 and is currently receiving
an annual salary of $62,500. Eric Montiel has been an employee or sales
representative of the Company from time to time since May 1991, his most recent
employment period commencing January 1996.
The Company has also entered into a promotion agreement with Fred
Couples, who owns of record or beneficially more than 5% of the Company's Common
Stock. The agreement requires Mr. Couples' exclusive endorsement and promotion
of Ashworth products during his lifetime. The Company has agreed to compensate
Mr. Couples for such services, the present value of which compensation is
approximately $5,600,000. In addition, the Company has granted to Mr. Couples
the right to receive options to purchase the Company's Common Stock upon his
performance of specified services, including his participation in PGA tourna
ments. The exercise price of the options will be the fair market value of the
Company's Common Stock at the time the options are granted, and the options will
be exercisable for a period of seven years. The Company has also made certain
price guaranties with respect to the options.
-25-
<PAGE>
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements
Report of independent public accountants
Consolidated Balance Sheets - October 31, 1996 and 1995
Consolidated Statements of Income for the years ended October 31, 1996,
1995, and 1994
Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended October 31,
1996, 1995, and 1994
Notes to Consolidated Financial Statements - October 31, 1996, 1995, and
1994
2. Financial Statement Schedules
Report of independent public accountants on supplementary schedules
Schedule II - Valuation and Qualifying Accounts
3. Exhibits.
See Item (c) below.
(b) Report on Form 8-K
No Forms 8-K were filed during the last quarter of the fiscal year ended
October 31, 1996.
(c) Exhibits
3(a) Certificate of Incorporation as filed March 19, 1987 with the Secretary
of State of Delaware, Amendment to Certificate of Incorporation as filed
August 3, 1987 and Amendment to Certificate of Incorporation as filed
April 26, 1991 (filed as Exhibit 3(a) to Registrant's Registration
Statement dated February 21, 1992 (File No.33-45078)) and incorporated
herein by reference) and Amendment to Certificate of Incorporation as
filed April 6, 1995 (filed as Exhibit 3(a) to the Registrant's Form 10-K
for fiscal year ended October 31, 1994 (File No. 0-18553), and
incorporated herein by reference)
3(b) Bylaws of the Registrant as adopted by its board of directors on March
19, 1987, and amended February 13, 1991, October 15, 1993, and November
30, 1993 (filed as Exhibit 3(b) to Registrant's Form 10-K for the
fiscal year ended October 31, 1993 (File No. 0-18553) and
incorporated herein by reference).
4(a) Specimen certificate for Common Stock, par value $.001, of the
Registrant (filed as Exhibit 4(a) to Registrant's Registration
Statement dated November 4, 1987 (File No.33-16714-D)) and incorporated
herein by reference.
4(b)(1) Specimen certificate for Options granted under the Amended and Restated
Nonqualified Stock Option Plan dated March 12, 1992 (filed as Exhibit
4(b) to Registrant's Form 10-K for the fiscal year ended October 31,
1993 (File No. 0-18553) and incorporated herein by reference).
-26-
<PAGE>
4(b)(2) Specimen certificate for Options granted under the Founders Stock
Option Plan dated November 6, 1992 (filed as Exhibit 4(b)(2) to
Registrant's Form 10-K for the fiscal year ended October 31, 1993 (File
No. 0-18553) and incorporated
herein by reference)..
4(c) Specimen certificate for Options granted under the Incentive Stock
Option Plan dated June 15, 1993 (filed as Exhibit 4(c) to Registrant's
Form 10-K for the fiscal year ended October 31, 1993 (File No. 0-18553)
and incorporated herein by reference).
10(r)(2) Business Loan Agreement dated December 9, 1996, between the Registrant
and Bank of America, expiring March 1, 1999. Under the agreement, the
Bank provides the Company with a revolving line of credit of up to
$20,000,000 collateralized by most of the Company's assets.
10(r)(3) Foreign Exchange Agreement dated December 9, 1996, between the
Registrant and Bank of America, expiring March 1, 1999. Under the
agreement, the Bank provides the Company with a spot and forward
foreign exchange contract up to a maximum of $2,500,000.
11 Schedule computing net income per common share.
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
-27-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Ashworth, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of ASHWORTH, INC.,
(a Delaware corporation) and subsidiaries as of October 31, 1996 and 1995, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended October 31, 1996. 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 generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Ashworth, Inc. and subsidiaries
as of October 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended October 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
December 13, 1996
F-1
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-OCTOBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,953,918 $ 1,613,029
Accounts receivable-
Trade, net of allowance for
doubtful accounts
of $480,000 and $767,000 in
1996 and 1995, respectively 8,835,663 10,040,200
Other 877,471 1,133,771
Inventories 24,729,179 27,845,721
Income tax refund receivable 1,769,119 1,239,648
Other current assets 1,815,128 1,650,792
Deferred income tax benefit 1,755,216 1,684,776
----------- -----------
Total current assets 41,735,694 45,207,937
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 1,200,000 1,200,000
Buildings and improvements 2,726,534 2,714,357
Production equipment 8,408,622 7,272,234
Furniture and equipment 6,836,164 5,473,237
Leasehold improvements 680,338 680,426
----------- -----------
19,851,658 17,340,254
Less--Accumulated depreciation and
amortization 7,657,905 5,571,001
----------- -----------
12,193,753 11,769,253
----------- -----------
OTHER ASSETS 982,714 1,094,834
----------- -----------
$54,912,161 $58,072,024
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-OCTOBER 31, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
----------- -------
CURRENT LIABILITIES:
<S> <C> <C>
Line of credit $ - $ 6,670,000
Current portion of long-term debt 1,512,051 1,557,006
Accounts payable 5,969,495 5,865,878
Accrued liabilities-
Salaries and commissions 965,465 972,094
Endorsement fees 731,608 318,996
Other 973,872 607,861
----------- -----------
Total current liabilities 10,152,491 15,991,835
----------- -----------
LONG-TERM DEBT, net of current portion 5,307,284 5,195,434
----------- -----------
DEFERRED INCOME TAX LIABILITY 585,815 494,747
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, authorized--50,000,000
shares of $.001 par value; issued
and outstanding-- 12,162,626 shares
and 11,901,626 shares at October 31,
1996 and 1995, respectively 12,163 11,902
Capital in excess of par value 24,217,654 23,242,390
Retained earnings 14,699,461 13,296,418
Deferred compensation (109,954) (160,702)
Cumulative translation adjustment 47,247 -
----------- -----------
38,866,571 36,390,008
----------- -----------
$54,912,161 $58,072,024
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -------
<S> <C> <C> <C>
NET SALES $75,412,847 $74,524,311 $60,839,179
COST OF GOODS SOLD 48,017,486 49,498,975 36,941,376
----------- ----------- -----------
Gross profit 27,395,361 25,025,336 23,897,803
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 24,086,780 21,521,662 15,525,021
----------- ----------- -----------
Income from operations 3,308,581 3,503,674 8,372,782
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 35,013 62,538 85,841
Interest expense (1,151,693) (1,050,838) (614,494)
Other income (expense) 168,526 (99,678) 215,567
----------- ----------- -----------
(948,154) (1,087,978) (313,086)
----------- ----------- -----------
Income before provision for
income taxes 2,360,427 2,415,696 8,059,696
PROVISION FOR INCOME TAXES 957,384 1,015,114 3,199,340
----------- ----------- -----------
Net income $ 1,403,043 $ 1,400,582 $ 4,860,356
=========== =========== ===========
NET INCOME PER COMMON AND
EQUIVALENT SHARE $ .12 $ .12 $ .40
=========== =========== ===========
WEIGHTED AVERAGE COMMON AND
EQUIVALENT SHARES OUTSTANDING 12,098,273 12,111,633 12,223,721
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Cumulative
Trans-
Common Stock Capital in Deferred lations
------------ Excess of Retained Compen- Adjust-
Shares Amount Par Value Earnings sation ment Total
------- ------ --------- -------- -------- ---- --------
BALANCE,
October 31,
<C> <C> <C> <C> <C> <C> <C> <C>
1993 11,296,229 $11,296 $19,152,416 $7,179,635 $ (293,275) $ - $26,050,072
Options
exercised,
including
stock option
tax benefit 277,739 278 1,928,005 - - - 1,928,283
Stock for
services 500 1 5,437 - (5,438) - -
Amortization
of deferred
compensation - - - - 87,263 - 87,263
Net income - - - 4,860,356 - - 4,860,356
---------- ------- ---------- ---------- ---------- ----- ----------
BALANCE,
October 31,
1994 11,574,468 11,575 21,085,858 12,039,991 $ (211,450) - $32,925,974
Options
exercised,
including
stock option
tax benefit 374,761 375 2,434,941 - - - 2,435,316
Treasury Stock
acquired and
retired (47,603) (48) (278,409) (144,155) - - (422,612)
Amortization
of deferred
compensation - - - - 50,748 - 50,748
Net income - - - 1,400,582 - - 1,400,582
---------- ------- ---------- ---------- ---------- ----- ----------
BALANCE,
October 31,
1995 11,901,626 11,902 $23,242,390 13,296,418 (160,702) - $36,390,008
Options
exercised,
including
stock option
tax benefit 261,000 261 975,264 - - - 975,525
Amortization
of deferred
compensation - - - - 50,748 - 50,748
Net income - - - 1,403,043 - - 1,403,043
Translation
adjustment - - - - - 47,247 47,247
---------- ------- ---------- ---------- ---------- ----- ------
BALANCE,
October 31,
1996 12,162,626 $12,163 $24,217,654 $14,699,461 $(109,954) $47,247 $38,866,571
F-5
<PAGE>
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Cash received from customers $ 76,619,682 $ 72,215,663 $ 57,191,522
Cash paid to suppliers and employees (66,013,018) (78,166,721) (53,323,129)
Interest received 49,479 50,931 88,804
Interest paid (1,151,694) (1,050,838) (620,883)
Income taxes paid (1,037,924) (2,775,861) (3,835,966)
------------ ------------ ------------
Net cash provided by (used in)
operating activities 8,466,525 (9,726,826) (499,652)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and
equipment (2,547,304) (2,129,072) (6,767,392)
Proceeds from sale of property, plant
and equipment 2,001 2,850 -
Translation gain 47,247 - -
------------ ------------ ------------
Net cash used in investing
activities (2,498,056) (2,126,222) (6,767,392)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease
obligations (667,395) (718,783) (648,185)
Borrowings on line of credit 21,755,000 34,670,000 8,445,000
Payments on line of credit (28,425,000) (28,000,000) (8,445,000)
Borrowings on notes payable and
long-term debt 1,930,013 944,586 4,170,190
Principal payments on notes payable
and long-term debt (1,195,723) (786,674) (539,777)
Proceeds from issuance of common stock 975,525 2,435,316 1,928,283
Treasury stock acquired - (422,612) -
------------ ------------ ------------
Net cash (used in) provided
by financing activities (5,627,580) 8,121,833 4,910,511
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 340,889 (3,731,215) (2,356,533)
CASH AND CASH EQUIVALENTS, beginning
of year 1,613,029 5,344,244 7,700,777
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 1,953,918 $ 1,613,029 $ 5,344,244
============ ============ ============
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ --------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
<S> <C> <C> <C>
Net income $1,403,043 $ 1,400,582 $ 4,860,356
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities-
Amortization of deferred
compensation 50,748 50,748 87,263
Depreciation and amortization 2,303,459 2,513,760 1,868,103
Loss on disposal of
property, plant and equipment 17,237 33,181 41,780
Provision for doubtful accounts
and sales returns 64,000 557,756 101,272
Decrease (increase) in accounts
receivable 1,396,836 (2,327,613) (3,670,229)
Decrease (increase) in inventories 3,116,542 (8,954,658) (6,559,074)
Increase in other current assets (164,335) (746,295) (331,743)
Increase in deferred income
tax benefit (70,440) (1,240,804) (153,939)
Increase in other assets (87,773) (484,493) (545,235)
Increase in income tax
refund receivable (529,471) (1,239,648) -
Increase (decrease) in accounts
payable 103,617 (171,651) 3,442,435
Decrease in accrued
income taxes - (24,364) (103,386)
Increase in accrued liabilities 771,994 786,676 306,577
Increase in deferred income
tax liability 91,068 119,997 156,168
---------- ----------- -----------
Total adjustments 7,063,482 (11,127,408) (5,360,008)
---------- ----------- -----------
Net cash provided by (used in)
operating activities $8,466,525 $(9,726,826) $ (499,652)
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996, 1995 AND 1994
1. The Company and Summary of Significant Accounting Policies
a. Business
Ashworth, Inc. and subsidiaries (collectively referred to as the
"Company") designs, markets, and distributes golf apparel, headwear, and
footwear. The Company's operations are located primarily in the western
part of the United States and the United Kingdom.
The Company sells its products primarily on credit to golf course pro shops,
country clubs, resorts, department stores, and retail outlet stores worldwide.
The Company had aggregate foreign sales in Europe, Canada, Mexico, Japan,
Singapore, United Arab Emirates, Australia, Hong Kong, Puerto Rico, Taiwan,
South Africa, Guam and South Korea of approximately $19,400,000, $18,178,000 and
$12,095,000 in the years ended October 31, 1996, 1995 and 1994, respectively.
b. Use of Estimates in the Preparation of Financial Statements
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 and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
c. Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
Cost includes materials, labor and manufacturing overhead.
Below is a summary of the components of inventory at October 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- --------
<S> <C> <C>
Raw materials $ 3,258,555 $ 4,317,017
Work in process 1,937,069 2,839,828
Finished products 19,533,555 20,688,876
----------- -----------
$24,729,179 $27,845,721
=========== ===========
</TABLE>
F-9
<PAGE>
d. Depreciation and Amortization
Depreciation and amortization have been provided using straight-line and
accelerated methods over the following estimated useful lives:
Buildings and improvements 20 to 30 years
Production equipment 5 to 12 years
Furniture and equipment 5 to 7 years
Leasehold improvements Life of lease
All maintenance and repair costs are charged to operations as incurred. When
assets are sold or otherwise disposed of, the costs and accumulated depreciation
or amortization are removed from the accounts and any resulting gain or loss is
reflected in operations.
e. Organization Costs
Organization and trademark costs, which are included in other non-current
assets, are capitalized and amortized over periods ranging from two to five
years.
f. Advertising Expenses
Advertising costs, which consist primarily of product advertising costs, are
expensed in the period the costs are incurred. Advertising expenses for the
years ended October 31, 1996, 1995 and 1994 were $434,952, $532,559 and
$379,564, respectively.
g. Income Per Common and Equivalent Share
Income per common share amounts are computed based on the weighted average
number of common shares outstanding during the year, including common stock
equivalents resulting from dilutive stock options.
h. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
i. Income Taxes
The Company accounts for income taxes in accordance with the Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes." This
statement requires that income taxes be accounted for using the liability
method.
j. Foreign Currency
The Company's primary functional currency is the U.S. dollar. Assets and
liabilities of the Company denominated in foreign currencies are translated at
the rate of exchange at the balance sheet date, while revenues and expenses are
translated using the average exchange rate. Gains and losses on foreign currency
transactions are recognized as incurred. Gains and losses on remeasurement of
transactions denominated in currency other than the reporting currency of
individual subsidiaries are recognized at each balance sheet date. Cumulative
translation adjustments resulting from the translation of the financial
statements of foreign subsidiaries are included as a separate component of
stockholers' equity and have not been material prior to October 31,
F-10
<PAGE>
1996.
k. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all of its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
l. Postretirement and Postemployment Benefits
The Company does not provide postretirement or postemployment benefits
to employees. Accordingly, SFAS No. 106, "Employers' Accounting for
Postretirement Benefits other than Pensions" and SFAS No. 112
"Employers' Accounting for Postemployment Benefits" do not impact the
Company's consolidated financial statements.
m. Fair Value of Financial Instruments
Based on borrowing rates currently available to the Company for bank loans with
similar terms and maturities, the fair value of the Company's long-term debt
approximates the carrying value. Furthermore, the carrying value of all other
financial instruments potentially subject to valuation risk (principally
consisting of cash and cash equivalents, accounts receivable and accounts
payable) also approximate fair value.
n. Impact of New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used to be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable based on the estimated future cash flows
(undiscounted and without interest charges). SFAS 121 also requires that
long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less costs to sell. The
Company adopted SFAS 121 in the current year. The impact of adoption was not
material to the financial statements.
In October 1995, the Financial Accounting Standards Board issue SFAS 123
"Accounting for Stock-Based Compensation." Under SFAS 123, companies have the
option to implement a fair value-based accounting method or continue to account
for employee stock options and stock purchase plans using the intrinsic
value-based method of accounting as prescribed by Accounting Principles Board
(APB) Opinion No. 25 "Accounting for Stock Issued to Employees." Entities
electing to remain under APB Opinion No. 25 must make pro-forma disclosures of
net income or loss and earnings per share as if the fair value-based method of
accounting defined in SFAS 123 had been applied. SFAS 123 is effective for
financial statements for fiscal years beginning after December 15, 1995. The
Company has tentatively determined it will continue to account for stock options
under APB Opinion No. 25 and will adopt this new standard effective October 31,
1997.
F-11
<PAGE>
o. Reclassifications
Certain reclassifications have been made to certain prior year balances in order
to conform with current year presentation.
2. Equipment Under Capital Lease
During the years ended October 31, 1995 and 1994, the Company acquired $94,307
and $277,720, respectively, of various equipment under capital leases. Future
minimum lease payments are as follows:
Year Ended
October 31:
1997 $480,414
1998 89,494
1999 17,094
--------
Total future minimum payments 587,002
Less--Amount representing interest 28,035
--------
Present value of future minimum
capital lease payments (Note 4) $558,967
========
At October 31, 1996 and 1995, the accompanying consolidated balance sheets
include the following equipment under capital leases:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Production equipment $1,619,772 $3,129,872
Furniture and equipment 351,449 431,640
---------- ----------
1,971,221 3,561,512
Less--Accumulated amortization 963,556 1,401,653
---------- ----------
$1,007,665 $2,159,859
========== ==========
</TABLE>
3. Line of Credit Agreement
The Company has a $20 million working capital line of credit agreement with a
bank which expires on March 1, 1999 and is collateralized by substantially all
assets of the Company. The interest rate on borrowings is at the bank's
reference rate which was 8.25 percent at October 31, 1996. The line of credit
agreement contains certain financial covenants, the most restrictive of which
require the Company to maintain, as defined, a minimum tangible net worth, a
maximum debt-to-equity ratio and a maximum ratio of cash and accounts receivable
to current liabilities. The line of credit agreement also limits the purchase of
capital equipment and requires that the Company have no loss for two consecutive
quarters. The line of credit may also be used to finance up to $5 million in
commercial letters of credit and standby letters of credit. At October 31, 1996,
no borrowings or commercial letters of credit were outstanding on this line of
credit.
F-12
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
Additional information for years ended October 31, 1996, 1995 and 1994, is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ------
<S> <C> <C> <C>
Interest rate at year-end 8.25% 8.75% 8.25%
Weighted average interest rate
during the year 8.40% 8.90% 6.80%
Maximum amount outstanding $12,195,000 $10,775,000 $4,195,000
Average amount outstanding $ 6,430,000 $ 5,130,000 $ 610,000
</TABLE>
4. Long-Term Debt
Amounts outstanding under long-term debt agreements at October 31, 1996 and
1995, consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -------
Installment notes bearing interest ranging from 7.3 to 8.7 percent, with
due dates through February 2001
<S> <C> <C>
collateralized by various equipment $3,529,413 $2,771,720
Notepayable to a bank, bearing interest at 8.0 percent, payable in
monthly principal and interest payments of $20,245 through November
2000 with a balloon payment of approximately $2.6 million payable on
November 30, 2000 collateralized by land and
buildings 2,730,955 2,754,357
Capital lease obligations (Note 2) 558,967 1,226,363
---------- ----------
6,819,335 6,752,440
Less--Current portion 1,512,051 1,557,006
---------- ----------
Long-term debt $5,307,284 $5,195,434
========== ==========
</TABLE>
Future maturities of long-term debt at October 31, 1996, are as follows:
<TABLE>
<CAPTION>
Year Ended
October 31:
<S> <C> <C>
1997 $1,512,051
1998 1,023,542
1999 904,330
2000 649,409
2001 2,730,003
----------
$6,819,335
==========
</TABLE>
F-13
<PAGE>
5. Employees' 401(k) Plan
The Company maintains a retirement plan covering substantially all employees.
Company contributions, which are voluntary and at the discretion of the
Company's board of directors, are currently being made at 50 percent of the
amount the employee contributes, up to three percent of compensation. The
Company's expense for the years ended October 31, 1996, 1995 and 1994, was
$107,004, $113,709 and $79,020, respectively.
6. Stockholders' Equity
a. Common Stock Options
The Company maintains several nonqualified and incentive stock option plans. The
plans (as amended) provide for the Compensation Committee or such other
committee that the Company's board of directors may appoint to administer the
plans. The plans provide for an aggregate reservation of 9,700,000 shares of
common stock for issuance upon the exercise of granted options. As of October
31, 1996, the Company had 4,334,437 options outstanding under the above plans to
purchase common stock at prices ranging from $4.50 to $11.63 with expiration
dates between November 1996 and December 2006. A total of 3,215,063 options
remained available for grant, and 1,139,500 options with exercise prices ranging
from $6.00 to $11.00 were not exercisable at October 31, 1996.
The following is a summary of common stock option activity:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -------
Outstanding, beginning
<S> <C> <C> <C>
of year 3,347,437 2,680,761 1,935,500
Granted 2,306,986 1,076,937 1,025,000
Exercised (261,000) (374,761) (277,739)
Expired (1,058,986) (35,500) (2,000)
---------- ---------- ----------
Outstanding, end of year 4,334,437 3,347,437 2,680,761
========== ========== ==========
</TABLE>
b. Common Stock for Services
In January 1993, the Company entered into an agreement with a PGA professional
to endorse the Company's product from January 1, 1993 through December 31, 1998.
Upon meeting certain annual obligations, the PGA professional will be issued
7,000 shares of the Company's common stock at the end of each year under the
agreement. If the market value of the 7,000 shares of common stock does not
reach and maintain at least $14.29 per share for at least five days during each
agreement year, the PGA professional will be entitled to receive cash per share
equal to the difference between $14.29 and the highest closing market price of
the Company's common stock for any five days for that year. The Company incurred
approximately $48,000, $22,000 and $10,000 in charges related to the difference
in stock prices in 1996, 1995 and 1994, respectively.
F-14
<PAGE>
c. Deferred Compensation
During fiscal 1993, common stock was issued to a golf professional for future
services to the Company for a total value of $304,500. The service arrangements
cover a six year period and the value of the stock is being amortized over this
period. The unamortized portion of the stock is reported as a reduction in
stockholders' equity and the remainder will be amortized to operating expenses
through fiscal 1998. Additionally, during fiscal 1993, the Company issued stock
options to a golf professional and an outside consultant for current and future
services to the Company for a total value of $125,725. This compensation was
amortized over the period of the service agreement of twelve months during 1993
and 1994.
7. Operating Leases
The Company leases certain production, warehouse and outlet store facilities
under operating leases. These leases expire in various fiscal years through
January 2008. Rent expense for the years ended October 31, 1996, 1995 and 1994,
was $1,288,560, $757,438 and $554,795 respectively. Future minimum rental
payments are as follows:
Year Ended
October 31:
1997 $1,124,272
1998 1,105,587
1999 1,065,309
2000 1,029,200
2001 502,302
Thereafter 2,534,427
----------
$7,361,097
==========
8. Commitments and Contingencies
a. Promotion Agreements with PGA Professionals and a Television Personality
The Company has promotional agreements with several PGA professionals and a
Television Personality. Under the terms of these agreements, the Company is
obligated to pay cash compensation and to issue options (at fair market value)
to purchase shares of the Company's common stock. The aggregate annual
compensation under these agreements totals $782,000 payable in 1997, $744,500
payable in 1998, $665,333 payable in 1999, $657,000 payable in the years 2000
through 2010 and $547,500 payable in 2011. The number of options granted to
purchase shares of the Company's common stock will vest as follows: 209,500 in
1997, 217,500 in 1998, 185,000 in 1999 and 150,000 per year from years 2000
through 2011. The majority of these stock options were granted on the
understanding that the market value of the Company's common stock will increase
to certain predetermined minimum levels during certain time periods, as defined
under the various agreements. If the market value of the Company's common stock
does not increase to these predetermined minimum levels, the Company is
obligated to pay additional cash compensation to these option holders.
Obligations under this provision, if any, are accrued and charged to operations
during the period in which they arise. The Company incurred approximately
$546,000, $253,000 and $57,000 in charges related to the difference in stock
prices in 1996, 1995 and 1994, respectively.
F-15
<PAGE>
b. Executive Employment Agreements
The Company entered into employment agreements with its key executives,
effective January 1, 1995. The agreements specify the amount of annual
compensation each executive is to receive and also contain a noncompete
arrangement. These noncompete arrangements (which if based upon current salary
levels would aggregate approximately $2,587,500) are based upon a percentage of
the executives' then current salary, as defined, and are in effect for the term
of the agreements and for a period of ten years after termination of employment.
The present value of the estimated future cash payments to be made is accrued
and charged to operations over the periods benefited. In 1996 and 1995, $40,504
and $37,503, respectively, was accrued and charged to operations for existing
executives and is reflected in other accrued liabilities in the balance sheet.
c. Legal Proceedings
The Company is party to claims and litigation proceedings arising in the normal
course of business. Although the legal responsibility and financial impact with
respect to such claims and litigation cannot presently be ascertained, the
Company does not believe that these matters will result in the payment by the
Company of monetary damages, net of any applicable insurance proceeds, that, in
the aggregate, would be material in relation to the consolidated financial
position of the Company. It is reasonably possible that the reserves provided by
the Company with respect to such claims and litigation could change in the near
term.
9. Related-Party Transactions
At October 31, 1995, the Company had a note receivable from an officer for
$320,238. During 1996, the entire balance of the note was collected.
At October 31, 1996, the Company has a note receivable from a former officer for
$50,000 which is included in other assets on the balance sheet. Principal
payments begin December 1997 and continue until maturity at May 1999.
10. Income Taxes
The provision for income taxes for the years ended October 31, 1996, 1995 and
1994, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ---------- ---------
Current provision:
<S> <C> <C> <C>
Federal $697,134 $1,625,392 $2,475,245
State 239,622 510,529 721,866
-------- ---------- ----------
Total 936,756 2,135,921 3,197,111
-------- ---------- ----------
Deferred provision (benefit):
Federal 17,337 (856,889) 1,863
State 3,291 (263,918) 366
-------- ---------- ----------
Total 20,628 (1,120,807) 2,229
-------- ---------- ----------
$957,384 $1,015,114 $3,199,340
======== ========== ==========
</TABLE>
F-16
<PAGE>
The components of the Company's deferred income tax provision (benefit) for the
years ended October 31, 1996, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ------------ ---------
<S> <C> <C> <C>
Depreciation $ 91,068 $ 119,997 $156,168
Allowance for doubtful accounts 127,163 (197,607) (7,261)
Inventory reserves (120,443) (818,252) (58,203)
Other non-deductible accruals (66,205) (232,463) (51,890)
Other deductible capitalized costs (10,955) 7,518 (36,585)
--------- ----------- --------
$ 20,628 $(1,120,807) $ 2,229
========= =========== ========
</TABLE>
The components of the Company's deferred income tax benefit and liability as of
October 31, 1996 and 1995 are as follows:
1996 1995
Current deferred income tax benefit:
Allowance for doubtful accounts $ 125,653 $ 252,816
Inventory reserves 1,229,710 1,109,267
Other non-deductible accruals 428,641 362,436
Other deductible capitalized costs (28,788) (39,743)
---------- ----------
$1,755,216 $1,684,776
========== ==========
Long-term deferred income tax liability:
Depreciation $ (585,815) $ (494,747)
========== ==========
The Company has recorded a net consolidated deferred income tax asset of
approximately $1.2 million. The realization of this net asset may be dependent
upon the Company's ability to generate sufficient taxable income in future
years. Although realization is not assured, management believes it is more
likely than not that the net deferred income tax asset will be realized. The
amount of the net deferred income tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income are
reduced or if tax rates are lowered.
F-17
<PAGE>
A reconciliation of the provision for income taxes at the statutory rate to the
Company's effective rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------- --------------- ------------------
Amount Percent Amount Percent Amount Percent
Computed tax at
the expected
<S> <C> <C> <C> <C> <C> <C>
statutory rate $802,545 34.0% $821,337 34.0% $2,740,296 34.0%
State income tax,
net of federal
tax benefits 143,986 6.1 147,357 6.1 491,641 6.1
Non-deductible
expenses 46,034 2.0 42,190 1.7 15,601 0.2
Foreign sales
corporation
tax benefit (53,981) (2.3) (60,087) (2.5) (48,198) (0.6)
Other 18,800 0.8 64,317 2.7 - -
-------- ----- -------- ----- --------- ----
Income tax
provision $957,384 40.6% $1,015,114 42.0% $3,199,340 39.7%
======== ====== ========== ====== ========== ======
</TABLE>
11. Statement of Cash Flows, Noncash Transactions
The Company completed the following noncash transactions which are not reflected
in the statement of cash flows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -------
Capital lease equipment
acquired and related
<S> <C> <C> <C>
capital lease obligations $ - $ 94,307 $ 277,720
Common stock issued in payment for
services, including deferred
compensation - - 5,438
</TABLE>
12. Results by Quarter (Unaudited)
The unaudited results by quarter for the years ended October 31, 1996 and 1995
are shown below:
<TABLE>
<CAPTION>
Year Ended First Second Third Fourth
October 31, 1996 Quarter Quarter Quarter Quarter
---------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $17,069,864 $26,355,684 $17,883,768 $14,103,531
Gross profit 6,600,711 10,955,138 6,692,647 3,146,865
Net income 834,063 2,517,185 198,200 (2,146,405)
Net income per common
and equivalent
share .07 .21 .02 (.18)
Weighted average common
and equivalent
shares outstanding 11,958,206 12,232,755 12,154,206 12,063,050
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
Year Ended First Second Third Fourth
October 31, 1996 Quarter Quarter Quarter Quarter
---------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $14,590,696 $26,438,854 $20,385,985 $13,108,776
Gross profit 5,497,664 9,035,266 7,621,185 2,871,221
Net income 805,931 1,810,137 808,217 (2,023,703)
Net income per common
and equivalent share .07 .15 .07 (.17)
Weighted average common
and equivalent
shares outstanding 12,020,191 12,187,819 12,235,566 11,882,143
</TABLE>
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Ashworth, Inc. and subsidiaries:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Ashworth, Inc. and subsidiaries'
annual report to shareholders included in this Form 10-K, and have issued our
report thereon dated December 13, 1996. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed in
the index of consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California
December 13, 1996
F-20
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
---------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Year Expenses Accounts Deductions of Year
FOR THE YEAR ENDED
OCTOBER 31, 1994:
Allowance for
doubtful
<S> <C> <C> <C> <C> <C>
accounts $215,000 $101,000 $ - $ 61,000 $255,000
======== ======== ======== ======== ========
FOR THE YEAR ENDED
OCTOBER 31, 1995:
Allowance for
doubtful
accounts $255,000 $558,000 $ - $ 46,000 $767,000
======== ======== ======== ======== ========
FOR THE YEAR ENDED
OCTOBER 31, 1996:
Allowance for
doubtful
accounts $767,000 $64,000 $ - $351,000 $480,000
======== ======== ======== ======== ========
</TABLE>
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
Date: January 27, 1997 BY: /s/ Randall L. Herrel, Sr.
--------------------------
Randall L. Herrel, Sr.
Chief Executive Officer
Pursuant to the requirements of 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Gerald W. Montiel Chairman of the Board January 27, 1997
- --------------------------
Gerald W. Montiel
/s/ Randall L. Herrel, Sr. President and January 27, 1997
- --------------------------
Randall L. Herrel, Sr. Chief Executive Officer
(Principal Executive Officer)
/s/ John L. Ashworth Sr. Executive Vice President January 27, 1997
- --------------------------
John L. Ashworth and Director
/s/ A. John Newman Vice President - Finance, January 27, 1997
- --------------------------
A. John Newman Treasurer, Chief Financial
Officer (Principal Financial
and Accounting Officer)
/s/ Andre P. Gambucci Director January 27, 1997
- --------------------------
Andre P. Gambucci
/s/ John M. Hanson, Jr. Director January 27, 1997
- --------------------------
John M. Hanson, Jr.
</TABLE>
<PAGE>
BUSINESS LOAN AGREEMENT
This Agreement dated as of December 9, 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").
1. [FACILITY NO. 1: ]LINE OF CREDIT AMOUNT AND TERMS
1.1 Line of Credit Amount.
(a) During the availability period described below, the Bank will provide a
line
of credit (the "Facility No. 1") to the Borrowers. The amount of the line of
credit
(the "[Facility No. 1 ]Commitment") is Twenty Million Dollars
($20,000,000).
(b) This is a revolving line of credit[ with a within line facilit[y] for
[letters of credit]. During the availability period, the Borrowers may repay
principal amounts and reborrow them.
(c) Each advance must be for at least Five Thousand Dollars ($5,000), or
for the
amount of the remaining available line
of credit, if less.
(d) 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 reimbursed,] to
exceed the
[Facility No. 1 ]Commitment.
1.2 Availability Period.The line of credit is available between the date of this
Agreement and March 1, 1999 (the
"Facility No. 1 Expiration Date") unless any Borrower is in default.
1.3 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.
1.4 Repayment Terms.
(a) The Borrowers will pay interest on January 1, 1997, and then monthly
thereafter until payment in full of any
principal outstanding under this line of credit.
<PAGE>
(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 Facility No. 1 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 Facility
No. 1 Expiration Date.]
1.5 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 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 [first] day of every [month]
and on the last day of each interest period, and on the first 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.
1.6 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 plus 1.625
percentage points.
(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 30[ ]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).
<PAGE>
(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
date for the amount prepaid, if earlier).
1.7 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 [plus 1.625 percentage points.]
Designation of an Offshore Rate portion is subject to the following
requirements:
(a) 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].[Offices may choose a time period less 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.
(b) Each Offshore Rate portion will be for an amount not less than Five
Hundred Thousand Dollars ($500,000).
(c) The "Offshore Rate" means the interest rate determined by the following
formula, rounded upward to the nearest
1/100 of one percent. (All amounts in the calculation will be determined by the
Bank as of the first day of the
interest period.)
Offshore Rate = Grand Cayman Rate
(1.00 - Reserve Percentage)
Where,
(i) "Grand Cayman Rate" means the interest rate (rounded upward to the
nearest 1/16th of one
percent) at which the Bank's Grand Cayman Branch, Grand Cayman, British West
Indies, would offer U.S.
dollar deposits for the applicable interest period to other major banks in
the offshore dollar inter-bank
market.
(ii) "Reserve Percentage" means the total of the maximum reserve
<PAGE>
percentages for determining the
reserves to be maintained by member banks of the Federal Reserve System for
Eurocurrency Liabilities, as
defined in the Federal Reserve Board Regulation D, rounded upward to
the nearest 1/100 of one percent.
The percentage will be expressed as a decimal, and will include, but not be
limited to, marginal,
emergency, supplemental, special, and other reserve percentages.
(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.
1.8 Letters of Credit. This line of credit may be used for financing:
(i) commercial letter[s] of credit with a maximum maturity of 365 days
but not to extend beyond the
Facility No. 1 Expiration Date. [Each] commercial letter of credit will
require drafts payable at sight.
(ii)standby letter[s] of credit with a maximum maturity of [365 days
but not to extend beyond the
Facility No. 1 Expiration Date.]
[(iii) The amount of letter[s] of credit outstanding at any one time,
(including amounts drawn on letters of
credit and not yet reimbursed), may not exceed Five Million Dollars
($5,000,000).]
<PAGE>
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. [FACILITY NO. 2: ]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 Two Million Five
Hundred Thousand U.S. Dollars
(U.S. $2,500,000). 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 Borrower has
already compensated the Bank. The availability period is from the date of this
Agreement through March 1, 1999
(the "Facility No. 2 Expiration Date").
(b) The Bank shall not be required to make any U.S. Dollar or foreign
currency settlement payment to the Borrower
until the Bank receives evidence satisfactory to it that the Borrower has paid
the Bank at least 2 Banking Days
prior to the settlement date all of the Borrower's U.S. Dollar and foreign
currency settlement payments. The Bank
shall not be liable for interest or other damages caused by any such failure to
pay or deliver or any such delay in
payment or delivery.
(c) The Borrower 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.
<PAGE>
(e) No foreign exchange contracts will mature no later than 180 days
beyond the
[Facility No. 2] Expiration Date[, and in
addition no foreign exchange contract shall have a tenor longer than 240
days].
(f) The Borrower 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 the Borrower as a result of the
Borrower's foreign exchange trading. The Borrower will enter into each foreign
exchange contract in reliance only
upon the Borrower's own judgment. The Borrower acknowledges that in entering
into foreign exchange contracts
with the Borrower, the Bank is not acting as a fiduciary. The Borrower
understands that neither the Bank nor the
Borrower has any obligation to enter into any particular foreign exchange
contract with the other.
(g) The Borrower hereby requests the Bank to rely upon and execute the
Borrower's telephonic instructions regarding
foreign exchange contracts, and the Borrower 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. The
Borrower 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) The Borrower agrees to promptly review all confirmations sent to the
Borrower by the Bank. The Borrower
understands that these confirmations are not legal contracts but only evidence
of the valid and binding oral contract
which the Borrower has already entered into with the Bank. The Borrower 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 the Borrower believes 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) The Borrower agrees that the Bank may electronically record all
telephonic
conversations with the Borrower
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. The Borrower 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 Facility No. 1 of this Agreement. The amount
will bear interest and be due as
<PAGE>
described elsewhere in this Agreement. The Borrower hereby authorizes the Bank
to debit the Borrower's account
with the Bank for payments due from the Borrower's to the Bank with respect
to any foreign exchange contract.
[The Borrower 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, [or if the
Borrower's aggregate realized or unrealized mark-to-market losses on foreign
exchange contracts exceed Three Hundred Seventy Five Thousand Dollars ($375,000)
(the "Revaluation Limit"),] the Bank may:
(1) Suspend performance of its obligations to the Borrower under any
foreign exchange contract;
(2) Declare all foreign exchange contracts, interest and any other
amounts which are payable by the
Borrower to the Bank immediately due and payable; and
(3) Without notice to the Borrower, close out any or all foreign
exchange contracts or positions of
the Borrower 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 the Borrower. The Borrower shall be liable for any
amounts owing to the Bank after
exercise of any such rights and remedies.
(l) The Borrower and the Bank are also parties to an International Foreign
Exchange Master Agreement dated DECEMBER 9, 1996, (as amended, modified or
renewed, the "IFEMA"). All foreign
exchange transactions entered into between the Borrower and the Bank shall be
subject to the provisions of this
Agreement and the IFEMA. In the event of any conflict or inconsistency between
the provisions of this Agreement
and the provisions of the IFEMA, the provisions of the IFEMA shall control. The
occurrence of an Event of
Default under the IFEMA shall also constitute a default under this Agreement.]
3. [FEES AND ]EXPENSES
3.1 Unused Commitment Fee (Facility No. 1). The Borrowers agree to pay a fee
on any difference between the [Facility No. 1]Commitment 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.
The fee will be calculated [on a
calendar quarter basis. ]The fee is due [10] days from the Bank's billing
date for
each such period. []
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, and documentation fees.
<PAGE>
(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 defined in
security agreement(s) executed by such Borrowers. [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) Machinery and 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.
<PAGE>
(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 individual signer(s) of this Agreement or a person
or persons authorized[ in writing] by
any one of the signer(s) of the Agreement.
(b) Advances will be deposited in and repayments will be withdrawn from
[Borrower
1's][ account number 14503-50974,
or such other] 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.
5.4 Direct Debit (Pre-Billing).
(a) The Borrowers agree that the Bank will debit [Borrower 1's] deposit
account number 14503-50974, or such other]
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
utstanding 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
sufficient funds in the Designated Account on the date the Bank enters any debit
<PAGE>
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 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 it has paid the taxes by giving the Bank official
tax receipts (or notarized copies) 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 per annum which is 2.00 percentage point[s]
higher than the rate of interest otherwise provided under this Agreement. This
will not constitute a waiver of any event of default.
6. CONDITIONS
<PAGE>
[The Bank must receive the following items, in form and content acceptable 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 Subordination Agreements. Uniform Commercial Code Subordination Agreements
in favor of the Bank signed by AI.
6.6 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 financial
statement dated as of September 30, 1996, is:
<PAGE>
(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.
[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 that of any Borrower's business, or would
impair any Borrower's 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[, except those which have been approved by the Bank in
writing].
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.
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 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 (Facility No. 1). To use the proceeds of the Facility No.
1 only for general corporate purposes and
financing of 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:
<PAGE>
(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 together with a management letter.][ The statements shall be prepared
on a [consolidated ][and ][consolidating] basis.]
(b) Within 60 days of the Borrowers' fiscal year end, the Borrowers' annual
projections on a consolidated and
consolidating basis.
(c) Within 45 days of the period's end, [the Borrowers' ][quarterly]
financial statements.[ These financial statements may be
Borrower prepared.][ The statements shall be prepared on a [consolidated ][and
][consolidating] basis.]
(d) Within 45 days after each quarter end, a compliance certificate in form
and content acceptable to the Bank signed by
a Borrower's Chief Financial Officer or designated officer.
(e) 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.
(f) Within 45 days after the end of each quarter, (i) statements
showing an aging[] of each Borrower's accounts
receivable, (ii) statements showing an aging of each Borrower's accounts
payable,
and (iii) each Borrower's
inventory listing, which must include a description of the inventory, its
location
and cost, and such other
information as the Bank may require.
8.3 Quick Ratio. [With respect to the Borrowers on a consolidated basis, ]
to maintain
a ratio of quick assets to current
liabilities of at least [the amounts indicated for each period specified below:
Period Ratio
During the period November 1 0.60:1.00
through January 31 of each fiscal year
During the period February 1 1.00:1.00
through October 31 of each fiscal year
"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. [With respect to the Borrowers on a consolidated
basis, ]to
maintain tangible net worth equal
to at least the sum of the following:
(a) Thirty Eight Million Dollars ($38,000,000); plus
(b) the sum of 50% of net income after income taxes (without subtracting
losses)
earned in each quarterly accounting
period commencing the fiscal period ending January 31, 1997; plus
(c) the net proceeds from any equity securities issued after the date of
this
Agreement; plus
<PAGE>
(d) any increase in stockholders' equity resulting from the conversion of
debt securities to equity securities after the date
of this Agreement.
"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. [With respect to the Borrowers on
a consolidated basis, ]to maintain a
ratio of total liabilities to tangible net worth not exceeding [1.25:1.00.]
"Total liabilities" means the sum of current liabilities plus long term
liabilities.
8.6 Debt Service Coverage Ratio. [With respect to the Borrowers on a
consolidated
basis], to maintain a debt service
coverage ratio of at least [1.25:1.00.]
"Debt service coverage ratio" means the ratio of EBITDA to the sum of the
current portion of long term debt plus interest expense. "EBITDA" is defined as
net income from operations and investments, before taxes, plus interest expense,
depreciation, amortization and other non-cash charges.[ 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. The current portion of long
term debt will be measured as of the last day of the preceding fiscal year.]
8.7 Limitations on Losses. [With respect to the Borrowers on a consolidated
basis],
not to incur a net loss after taxes and
extraordinary items in any two (2) consecutive quarterly accounting periods.]
8.8 Other Debts. Not to have outstanding or incur any direct or contingent debts
(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
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.
(e) Additional debts[ and lease obligations] for the acquisition of fixed
or
capital assets, to the extent permitted elsewhere
in this Agreement.
(f) Additional debts[ and lease obligations] [of Borrowers] for the
acquisition
of real property for business purposes which[]
do not exceed a total principal amount of Ten Million Five Hundred Thousand
Dollars ($10,500,000) outstanding at
any one time.
<PAGE>
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 fixed or capital assets
acquired [by the Borrowers or any one of
them], to the extent permitted elsewhere in this Agreement.
(e) Additional liens against real property of [the Borrowers or any one of
them]
which secure obligations in a total
principal amount not exceeding Ten Million Five Hundred Thousand Dollars
($10,500,000).
8.10 Capital Expenditures. [With respect to the Borrowers on a consolidated
basis], not to spend or incur obligations[
(including the total amount of any capital leases)] for more than Three Million
Five
Hundred Thousand Dollars ($3,500,000)
in any single fiscal year to acquire fixed or capital assets or spend more than
Fourteen Million Dollars ($14,000,000) in aggregate to acquire real estate (land
and building) for company use.
8.11 Dividends. (i) Not to declare or pay any dividends on any of [the
Borrowers'] shares except dividends payable in capital stock of [the Borrowers.]
(ii) Not to purchase, redeem or otherwise acquire for value any of [the
Borrowers'] shares, or create any sinking fund in relation thereto, for an
amount not to exceed Three Million Five Hundred Thousand Dollars ($3,500,000) in
aggregate during the tenor of this Agreement but in no event exceed an amount
equal to 50% of the Borrowers' consolidated net income after taxes, on a
cumulative basis, for each fiscal quarter during calendar year 1997.
8.12 Advance Limitation Period (Facility No. 1). Not to permit the total
principal
amount outstanding on Facility
No. 1 to exceed Five Million Dollars ($5,000,000) for a period of at least 30
consecutive days [in each fiscal year. For the
purposes of this paragraph, principal amount outstanding does not include
undrawn
amounts of outstanding letters of credit.]
8.13 Loans to Officers. Not to make any loans, advances or other extensions
of credit to any Borrower's executives,
officers, or directors or shareholders (or any relatives of any of the
foregoing) for
more than Five Hundred Thousand Dollars
($500,000) in any single fiscal year.
8.14 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 the Borrowers in the
aggregate (or any guarantor).
(b) any substantial dispute between any Borrower (or any guarantor) and any
government authority.
<PAGE>
(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;
(f) any reduction in or impairment of any Borrower's supply or projected
supply
of[ irrigation] water.
8.15 Books and Records. To maintain adequate books and records.
8.16 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
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.
8.17 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.
8.18 Preservation of Rights. To maintain and preserve all rights, privileges,
and
franchises each Borrower now has.
8.19 Maintenance of Properties. To make any repairs, renewals, or
replacements to
keep each Borrower's properties in
good working condition.
8.20 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.
8.21 Cooperation. To take any action requested by the Bank to carry out the
intent of this Agreement.
8.22 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
business it is in.]
(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.
8.23 Additional Negative Covenants. Not to, without the Bank's written consent:
<PAGE>
(a) engage in any business activities substantially different from
Borrowers' or any Borrower's present business.
(b) liquidate or dissolve 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 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.
9. HAZARDOUS WASTE INDEMNIFICATION
The Borrowers will indemnify and hold harmless the Bank from any loss or
liability directly or indirectly arising out of the use, generation,
manufacture, production, storage, release, threatened release, discharge,
disposal or presence of a hazardous substance. This indemnity will apply whether
the hazardous substance is on, under or about the Borrowers' or any Borrower's
property or operations or property leased to the Borrowers or any Borrower. The
indemnity includes but is not limited to attorneys' fees (including the
reasonable estimate of the allocated cost of in-house counsel and staff). The
indemnity extends to the Bank, its parent, subsidiaries and all of their
directors, officers, employees, agents, successors, attorneys and assigns.
"Hazardous substances" means any substance, material or waste that is or becomes
designated or regulated as "toxic," "hazardous," "pollutant," or "contaminant"
or a similar designation or regulation under any federal, state or local law
(whether under common law, statute, regulation or otherwise) or judicial or
administrative interpretation of such, including without limitation petroleum or
natural gas. This indemnity will survive repayment of the Borrower's obligations
to the Bank..
10. 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 become due
immediately.
10.1 Failure to Pay. Any Borrower fails to make a payment under this Agreement[
when due.]
10.2 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.
<PAGE>
10.3 False Information. Any Borrower has given the Bank false or misleading
information or representations.
10.4 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.
10.5 Receivers. A receiver or similar official is appointed for any Borrower's
(or any guarantor's) business, or the
business is terminated.
10.6 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.
10.7 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.
10.8 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.
10.9 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.
10.10 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.
10.11 Default under Related Documents. Any guaranty, subordination agreement,
security agreement, or other
document required by this Agreement is violated or no longer in effect.
10.12 Other Bank Agreements. Any Borrower (or any guarantor) fails to meet 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.
10.13 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.
11. ENFORCING THIS AGREEMENT; MISCELLANEOUS
11.1 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.
11.2 California Law. This Agreement is governed by California law.
<PAGE>
11.3 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.
11.4 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 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 toarbitration, 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 both parties do not consent to
arbitration, the controversy or claim will be settled as follows:
<PAGE>
(i) The Borrowers and the Bank will designate a referee (or a panel of
referees) selected under theauspices 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 judgmentin 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 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.
11.5 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.
11.6 Administration Costs. The Borrowers shall pay the Bank for all reasonable
costs incurred by the Bank in connection with administering this Agreement.
11.7 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
in-house counsel.
<PAGE>
11.8 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 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.
11.9 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; and
(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.
11.10 Notices. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
<PAGE>
signature page of this Agreement, or to such other addresses as the Bank and the
Borrowers may specify from time to time in writing.
11.11 Headings. Article and paragraph headings are for reference only and shall
not affect the interpretation or meaning of any provisions of this Agreement.
11.12 Counterparts. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate counterparts
each of which, when so executed, shall be deemed an original but all such
counterparts shall constitute but one and the same agreement.
11.13 Prior Agreement Superseded. This Agreement supersedes the Business Loan
Agreement (Receivables and Inventory) entered into as of March 18, 1996, between
the Bank and the Borrowers, 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 Ashworth, Inc.
National Trust and Savings Association
S/ Patrick Loughlin /s/ G. W. Montiel
by: Patrick Loughlin By:
Title: Vice President Title
Ashworth Store I, Inc.
x G. W. Montiel
Ashworth Store II, Inc.
X G. W. Montiel
Ashworth International, Inc.
X G. W. Montiel
Ashworth U.K., Ltd.
X G. W. Montiel
Address where notices to the Bank Address where notices to the Borrowers
are to be sent: are to be sent:
San Diego RCBO #1450 2791 Loker Avenue West 450 B Street Suite 100 Carlsbad, CA
92008 San Diego, CA 92101
EXHIBIT 10(r)(2)
<PAGE>
INTERNATIONAL FOREIGN EXCHANGE MASTER AGREEMENT
MASTER AGREEMENT dated as of December 9, 1996, by and between BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION ("BofA"), a national banking association
and its subsidiaries and related entities set forth in Part II of the Schedule,
and ASHWORTH, INC., a Delaware corporation.
SECTION 1. DEFINITIONS.
Unless otherwise required by the context, the following terms shall have the
following meanings in the Agreement:
"Agreement" has the meaning given to it in Section 2.2.
"Base Currency" means as to a Party the Currency agreed as such in relation to
it in Part VIII of the Schedule hereto.
"Base Currency Rate" means as to a Party and any amount the cost (expressed as a
percentage rate per annum) at which that Party would be able to fund that amount
from such sources and for such periods as it may in its reasonable discretion
from time to time decide, as determined in good faith by it.
"Business Day" means (i) a day which is a Local Banking Day for the applicable
Designated Office of both Parties, or (ii) solely in relation to delivery of a
Currency, a day which is a Local Banking Day in relation to that Currency.
"Close-Out Amount" has the meaning given to it in Section 5.1.
"Close-Out Date" means a day on which, pursuant to the provisions of Section
5.1, the Non-Defaulting Party closes out and liquidates Currency Obligations or
such a closeout and liquidation occurs automatically.
"Closing Gain" means, as to the Non-Defaulting Party, the difference described
as such in relation to a particular Value Date under the provisions of Section
5.1.
"Closing Loss" means, as to the Non-Defaulting Party, the difference described
as such in relation to a particular Value Date under the provisions of Section
5.1.
"Confirmation" means a writing (including telex, facsimile or other electronic
means from which it is possible to produce a hard copy) evidencing an FX
Transaction governed by the Agreement which shall specify (i) the Parties
thereto and their Designated Offices through which they are respectively acting,
(ii) the amounts of the Currencies being bought or sold and by which Party,
(iii) the Value Date, and (iv) any other term generally included in such a
writing in accordance with the practice of the relevant foreign exchange market.
"Credit Support Document" means, as to a Party (the "first Party"), a guaranty,
hypothecation agreement, margin or security agreement or document, or any other
document containing an obligation of a third party ("Credit Support Provider")
or of the first Party in favor of the other Party supporting any obligations of
the first Party hereunder.
"Credit Support Provider" has the meaning given to it in the definition of
Credit
Support Document.
"Currency" means money denominated in the lawful currency of any country or the
ECU.
"Currency Obligation" means any obligation of a Party to deliver a Currency
pursuant
<PAGE>
to an FX Trans-action governed by the Agreement, or pursuant to the application
of
Sections 3.3(a) or 3.3(b).
"Custodian" has the meaning given to it in the definition of Event of Default.
"Defaulting Party" has the meaning given to it in the definition of Event of
Default.
"Designated Office(s)" means, as to a Party, the office(s) specified in Part II
of the Schedule hereto, as such Schedule may be modified from time to time by
agreement of the Parties.
"Effective Date" means the date of this Master Agreement.
"Event of Default" means the occurrence of any of the following with respect to
a Party (the "Defaulting Party", the other Party being the "Non Defaulting
Party"):
(i) the Defaulting Party shall default in any payment under the Agreement to the
Non- Defaulting Party with respect to any sum when due under any Currency
Obligation or pursuant to the Agreement and such failure shall continue for two
(2) Business Days after written notice of non payment given by the Non
Defaulting Party to the Defaulting Party;
(ii) the Defaulting Party shall commence a voluntary case or other proceeding
seeking liquidation, reorganization or other similar relief with respect to
itself or to its debts under any bankruptcy, insolvency or similar law, or
seeking the appointment of a trustee, receiver, liquidator, conservator,
administrator, custodian or other similar official (each, a "Custodian") of it
or any substantial part of its assets; or shall take any corporate action to
authorize any of the foregoing;
(iii) an involuntary case or other proceeding shall be commenced against the
Defaulting Party seeking liquidation, reorganization or other similar relief
with respect to it or its debts under any bankruptcy, insolvency or similar law
or seeking the appointment of a Custodian of it or any substantial part of its
assets, and such involuntary case or other proceeding is not dismissed within
five (5) days of its institution or presentation;
(iv) the Defaulting Party is bankrupt or insolvent, as defined under any
bankruptcy
or insolvency law applicable to such Party;
(v) the Defaulting Party shall otherwise be unable to pay its debts as they
become
due;
(vi) the Defaulting Party or any Custodian acting on behalf of the Defaulting
Party shall disaffirm, disclaim or repudiate any Currency Obligation;
(vii) (a) any representation or warranty made or deemed made by the Defaulting
Party pursuant to the Agreement or pursuant to any Credit Support Document shall
prove to have been false or misleading in any material respect as at the time it
was made or given and one (1) Business Day has elapsed after the Non Defaulting
Party has given the Defaulting Party written notice thereof, or (b) the
Defaulting Party fails to perform or comply with any obligation assumed by it
under the Agreement (other than an obligation to make payment of the kind
referred to in Clause (i) of this definition of Event of Default), and such
failure is continuing thirty (30) days after the Non Defaulting Party has given
the Defaulting Party written notice thereof;
(viii) the Defaulting Party consolidates or amalgamates with or merges into or
transfers all or substantially all its assets to another entity and (a) the
creditworthiness of the resulting, surviving or transferee entity is materially
weaker than that of the Defaulting Party prior to such action, or (b) at the
time of such consolidation, amalgamation, merger or transfer the resulting,
surviving or transferee entity fails to assume all of the obligations of the
Defaulting Party under the
<PAGE>
Agreement by operation of law or pursuant to an agreement satisfactory to the
Non
Defaulting Party;
(ix) by reason of any default, or event of default or other similar condition or
event, any Specified Indebtedness (being Specified Indebtedness of an amount
which, when expressed in the Currency of the Threshold Amount, is in aggregate
equal to or in excess of the Threshold Amount) of the Defaulting Party or any
Credit Support Provider in relation to it: (a) is not paid on the due date
therefor and remains unpaid after any applicable grace period has elapsed, or
(b) becomes, or becomes capable at any time of being declared, due and payable
under agreements or instruments evidencing such Specified Indebtedness before it
would otherwise have been due and payable;
(x) the Defaulting Party is in breach of or default under any Specified
Transaction and any applicable grace period has elapsed, and there occurs any
liquidation or early termination of, or acceleration of obligations under that
Specified Transaction or the Defaulting Party (or any Custodian on its behalf)
disaffirms, disclaims or repudiates the whole or any part of a Specified
Transaction; or
(xi) (a) any Credit Support Provider in relation to the Defaulting Party or the
Defaulting Party itself fails to comply with or perform any agreement or
obligation to be complied with or performed by it in accordance with the
applicable Credit Support Document and such failure is continuing after any
applicable grace period has elapsed; (b) any Credit Support Document relating to
the Defaulting Party expires or ceases to be in full force and effect prior to
the satisfaction of all obligations of the Defaulting Party under the Agreement,
unless otherwise agreed in writing by the Non Defaulting Party; (c) the
Defaulting Party or its Credit Support Provider (or, in either case, any
Custodian acting on its behalf) disaffirms, disclaims or repudiates, in whole or
in part, or challenges the validity of, the Credit Support Document; (d) any
representation or warranty made or deemed made by any Credit Support Provider
pursuant to any Credit Support Document shall prove to have been false or
misleading in any material respect as at the time it was made or given or deemed
made or given and one (1) Business Day has elapsed after the Non Defaulting
Party has given the Defaulting Party written notice thereof; or (e) any event
set out in (ii) to (vi) or (viii) to (x) above occurs in respect of the Credit
Support Provider.
"FX Transaction" means any transaction between the Parties for the purchase by
one Party of an agreed amount in one Currency against the sale by it to the
other of an agreed amount in another Currency both such amounts being
deliverable on the same Value Date, and in respect of which transaction the
Parties have agreed (whether orally, electronically or in writing): the
Currencies involved, the amounts of such Currencies to be purchased and sold,
which Party will purchase which Currency and the Value Date.
"Local Banking Day" means (i) for any Currency, a day on which commercial banks
effect deliveries of that Currency in accordance with the market practice of the
relevant foreign exchange market, and (ii) for any Party, a day in the location
of the applicable Designated Office of such Party on which commercial banks in
that location are not authorized or required by law to close.
"Master Agreement" means the terms and conditions set forth in this master
agreement.
"Matched Pair Novation Netting Office(s)" means in respect of a Party the
Designated Office(s) specified in Part V of the Schedule, as such Schedule may
be modified from time to time by agreement of the Parties.
"Non-Defaulting Party" has the meaning given to it in the definition of Event of
Default.
"Novation Netting Office(s)" means in respect of a Party the Designated
Office(s) specified in Part IV of the Schedule, as such Schedule may be modified
from time to time by agreement of the Parties.
<PAGE>
"Parties" means the parties to the Agreement and shall include their successors
and permitted assigns (but without prejudice to the application of Clause (viii)
of the definition of Event of Default); and the term "Party" shall mean
whichever of the Parties is appropriate in the context in which such expression
may be used.
"Proceedings" means any suit, action or other proceedings relating to the
Agreement.
"Settlement Netting Office(s)" means, in respect of a Party, the Designated
Office(s) specified in Part III of the Schedule, as such Schedule may be
modified from time to time by agreement of the Parties.
"Specified Indebtedness" means any obligation (whether present or future,
contingent or otherwise, as principal or surety or otherwise) in respect of
borrowed money, other than in respect of deposits received.
"Specified Transaction" means any transaction (including an agreement with
respect thereto) between one Party to the Agreement (or any Credit Support
Provider of such Party) and the other Party to the Agreement (or any Credit
Support Provider of such Party) which is a rate swap transaction, basis swap,
forward rate transaction, commodity swap, commodity option, equity or equity
linked swap, equity or equity index option, bond option, interest rate option,
foreign exchange transaction, cap transaction, floor transaction, collar
transaction, currency swap transaction, cross-currency rate swap transaction,
currency option or any other similar transaction (including any option with
respect to any of these transactions) or any combination of any of the forgoing
transactions.
"Split Settlement" has the meaning given to it in the definition of Value Date.
"Threshold Amount" means the amount specified as such for each Party in Part IX
of the Schedule.
"Value Date" means, with respect to any FX Transaction, the Business Day (or
where market practice in the relevant foreign exchange market in relation to the
two Currencies involved provides for delivery of one Currency on one date which
is a Local Banking Day in relation to that Currency but not to the other
Currency and for delivery of the other Currency on the next Local Banking Day in
relation to that other Currency ("Split Settlement") the two Local Banking Days
in accordance with that market practice) agreed by the Parties for delivery of
the Currencies to be purchased and sold pursuant to such FX Transaction, and,
with respect to any Currency Obligation, the Business Day (or, in the case of
Split Settlement, Local Banking Day) upon which the obligation to deliver
Currency pursuant to such Currency Obligation is to be performed.
SECTION 2. FX TRANSACTIONS.
2.1 Scope of the Agreement. (a) Unless otherwise agreed in writing by the
Parties, each FX Transaction entered into between two Designated Offices of the
Parties on or after the Effective Date shall be governed by the Agreement. (b)
All FX Transactions between any two Designated Offices of the Parties
outstanding on the Effective Date which are identified on Part I of the Schedule
shall be FX Transactions governed by the Agreement and every obligation of the
Parties thereunder to deliver a Currency shall be a Currency Obligation under
the Agreement.
2.2 Single Agreement. This Master Agreement, the particular terms agreed between
the Parties in relation to each and every FX Transaction governed by this Master
Agreement (and, insofar as such terms are recorded in a Confirmation, each such
Confirmation), the Schedule to this Master Agreement and all amendments to any
of such items shall together form the agreement between the Parties (the
"Agreement") and shall together constitute a single agreement between the
Parties. The Parties acknowledge that all FX Transactions governed by the
Agreement are entered into in reliance upon the fact
<PAGE>
that all items constitute a single agreement between the Parties.
2.3 Confirmations. FX Transactions governed by the Agreement shall be promptly
confirmed by the Parties by Confirmations exchanged by mail, telex, facsimile or
other electronic means. The failure by a Party to issue a Confirmation shall not
prejudice or invalidate the terms of any FX Transaction governed by the
Agreement.
SECTION 3. SETTLEMENT AND NETTING.
3.1 Settlement. Subject to Section 3.2, each Party shall deliver to the other
Party the amount of the Currency to be delivered by it under each Currency
Obligation on the Value Date for such Currency Obligation.
3.2 Net Settlement/Payment Netting. If on any Value Date more than one delivery
of a particular Currency is to be made between a pair of Settlement Netting
Offices, then each Party shall aggregate the amounts of such Currency
deliverable by it and only the difference between these aggregate amounts shall
be delivered by the Party owing the larger aggregate amount to the other Party,
and, if the aggregate amounts are equal, no delivery of the Currency shall be
made.
3.3 Novation Netting.
(a) By Currency. If the Parties enter into an FX Transaction governed by the
Agreement through a pair of Novation Netting Offices giving rise to a Currency
Obligation for the same Value Date and in the same Currency as a then existing
Currency Obligation between the same pair of Novation Netting Offices, then
immediately upon entering into such FX Transaction, each such Currency
Obligation shall automatically and without further action be individually
cancelled and simultaneously replaced by a new Currency Obligation for such
Value Date determined as follows: the amounts of such Currency that would
otherwise have been deliverable by each Party on such Value Date shall be
aggregated and the Party with the larger aggregate amount shall have a new
Currency Obligation to deliver to the other Party the amount of such Currency by
which its aggregate amount exceeds the other Party's aggregate amount, provided
that if the aggregate amounts are equal, no new Currency Obligation shall arise.
This Clause (a) shall not affect any other Currency Obligation of a Party to
deliver any different Currency on the same Value Date.
(b) By Matched Pair. If the Parties enter into an FX Transaction governed by the
Agreement between a pair of Matched Pair Novation Netting Offices then the
provisions of Section 3.3(a) shall apply only in respect of Currency Obligations
arising by virtue of FX Transactions governed by the Agreement entered into
between such pair of Matched Pair Novation Netting Offices and involving the
same pair of Currencies and the same Value Date.
3.4 General.
(a) Inapplicability of Sections 3.2 and 3.3. The provisions of Sections 3.2 and
3.3 shall not apply if a Close Out Date has occurred or an involuntary case or
other proceeding of the kind described in Clause (iii) of the definition of
Event of Default has occurred without being dismissed in relation to either
Party.
(b) Failure to Record. The provisions of Section 3.3 shall apply notwithstanding
that either Party may fail to record the new Currency Obligations in its books.
(c) Cutoff Date and Time. The provisions of Section 3.3 are subject to any
cut-off date and cut-off time agreed between the applicable Novation Netting
Offices and Matched Pair Novation Netting Offices of the Parties.
SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS.
<PAGE>
4.1 Representations and Warranties. Each Party represents and warrants to the
other Party as of the date of the Agreement and as of the date of each FX
Transaction governed by the Agreement that: (i) it has authority to enter into
the Agreement and such FX Transaction; (ii) the persons executing the Agreement
and entering into such FX Transaction have been duly authorized to do so; (iii)
the Agreement and the Currency Obligations created under the Agreement are
binding upon it and enforceable against it in accordance with their terms
(subject to applicable principles of equity) and do not and will not violate the
terms of any agreements to which such Party is bound; (iv) no Event of Default
has occurred and is continuing with respect to it; and (v) it acts as principal
in entering into each and every FX Transaction governed by the Agreement.
4.2 Covenants. Each Party covenants to the other Party that: (i) it will at all
times obtain and comply with the terms of and do all that is necessary to
maintain in full force and effect all authorizations, approvals, licenses and
consents required to enable it to lawfully perform its obligations under the
Agreement; and (ii) it will promptly notify the other Party of the occurrence of
any Event of Default with respect to itself or any Credit Support Provider in
relation to it.
SECTION 5. CLOSE OUT AND LIQUIDATION.
5.1 Circumstances of Close-Out and Liquidation. If an Event of Default has
occurred and is continuing, then the Non Defaulting Party shall have the right
to close out and liquidate in the manner described below all, but not less than
all, outstanding Currency Obligations (except to the extent that in the good
faith opinion of the Non Defaulting Party certain of such Currency Obligations
may not be closed-out and liquidated under applicable law), by notice to the
Defaulting Party. If "Automatic Termination" is specified as applying to a Party
in Part VI of the Schedule, then, in the case of an Event of Default specified
in Clauses (ii) or (iii) of the definition thereof with respect to such Party,
such close-out and liquidation shall be automatic as to all outstanding Currency
Obligations. Where such close out and liquidation is to be effected, it shall be
effected by:
(i) closing out each outstanding Currency Obligation (including any Currency
Obligation which has not been performed and in respect of which the Value Date
is on or precedes the Close-Out Date) so that each such Currency Obligation is
cancelled and the Non Defaulting Party shall calculate in good faith with
respect to each such cancelled Currency Obligation, the Closing Gain or, as
appropriate, the Closing Loss, as follows: (x) for each Currency Obligation in a
Currency other than the Non-Defaulting Party's Base Currency calculate a
"Close-Out Amount" by converting:
(A)
in the case of a Currency Obligation whose Value Date is the same as or is later
than the Close-Out Date, the amount of such Currency Obligation; or
(B)
in the case of a Currency Obligation whose Value Date precedes the Close-Out
Date, the amount of such Currency Obligation increased, to the extent permitted
by applicable law, by adding interest thereto from the Value Date to the
Close-Out Date at the rate representing the cost (expressed as a percentage rate
per annum) at which the Non- Defaulting Party would have been able, on such
Value Date, to fund the amount of such Currency Obligation for the period from
the Value Date to the Close-Out Date
into such Base Currency at the rate of exchange at which the Non-Defaulting
Party can buy or sell, as appropriate, such Base Currency with or against the
Currency of such Currency Obligation for delivery on the Value Date of that
Currency Obligation, or if such Value Date precedes the Close-Out Date, for
delivery on the Close-Out Date; and
(y) determine in relation to each Value Date: (A) the sum of all Close-Out
Amounts
<PAGE>
relating to Currency Obligations under which, and of all Currency Obligations in
the Non-Defaulting Party's Base Currency under which, the Non-Defaulting Party
would otherwise have been obliged to deliver the relevant amount to the
Defaulting Party on that Value Date, adding (to the extent permitted by
applicable law), in the case of a Currency Obligation in the Non-Defaulting
Party's Base Currency whose Value Date precedes the Close-Out Date, interest for
the period from the Value Date to the CloseOut Date at the Non-Defaulting
Party's Base Currency Rate as at such Value Date for such period; and (B) the
sum of all Close-Out Amounts relating to Currency Obligations under which, and
of all Currency Obligations in the Non-Defaulting Party's Base Currency under
which, the Non-Defaulting Party would otherwise have been entitled to receive
the relevant amount on that Value Date, adding (to the extent permitted by
applicable law), in the case of a Currency Obligation in the Non-Defaulting
Party's Base Currency whose Value Date precedes the Close-Out Date, interest for
the period from the Value Date to the Close-Out Date at the Non-Defaulting
Party's Base Currency Rate as at such Value Date for such period;
(z) if the sum determined under (y)(A) is greater than the sum determined under
(y)(B), the difference shall be the Closing Loss for such Value Date; if the sum
determined under (y)(A) is less than the sum determined under (y)(B), the
difference shall be the Closing Gain for such Value Date;
(ii) to the extent permitted by applicable law, adjusting the Closing Gain or
Closing Loss for each Value Date falling after the Close-Out Date to present
value by discounting the Closing Gain or Closing Loss from the Value Date to the
Close Out Date, at the Non Defaulting Party's Base Currency Rate, or at such
other rate as may be prescribed by applicable law;
(iii) aggregating the following amounts so that all such amounts are netted into
a single liquidated amount payable by or to the Non Defaulting Party: (x) the
sum of the Closing Gains for all Value Dates (discounted to present value, where
appropriate, in accordance with the provisions of Clause (ii) of this Section
5.1) (which for the purposes of this aggregation shall be a positive figure) and
(y) the sum of the Closing Losses for all Value Dates (discounted to present
value, where appropriate, in accordance with the provisions of Clause (ii) of
this Section 5.1) (which for the purposes of the aggregation shall be a negative
figure); and
(iv) if the resulting net amount is positive, it shall be payable by the
Defaulting Party to the Non Defaulting Party, and if it is negative, then the
absolute value of such amount shall be payable by the Non Defaulting Party to
the Defaulting Party.
5.2 Calculation of Interest. Any addition of interest or discounting required
under Clause (i) or (ii) of Section 5.1 shall be calculated on the basis of the
actual number of days elapsed and of a year of such number of days as is
customary for transactions involving the relevant Currency in the relevant
foreign exchange market.
5.3 Other FX Transactions. Where close-out and liquidation occurs in accordance
with Section 5.1, the Non Defaulting Party shall also be entitled to close-out
and liquidate, to the extent permitted by applicable law, any other FX
Transactions entered into between the Parties which are then outstanding in
accordance with the provisions of Section 5.1, as if each obligation of a Party
to deliver a Currency thereunder were a Currency Obligation.
5.4 Payment and Late Interest. The amount payable by one Party to the other
Party pursuant to the provisions of Sections 5.1 and 5.3 shall be paid by the
close of business on the Business Day following such close out and liquidation
(converted as required by applicable law into any other Currency, any costs of
such conversion to be borne by, and deducted from any payment to, the Defaulting
Party). To the extent permitted by applicable law, any amounts required to be
paid under Sections 5.1 or 5.3 and not paid on the due date therefor, shall bear
interest at the Non-Defaulting Party's Base Currency Rate plus 1% per annum (or,
if conversion is required by applicable law into some other Currency, either (x)
the average rate at which
<PAGE>
overnight deposits in such other Currency are offered by major banks in the
London interbank market as of 11:00 a.m. (London time) plus 1% per annum or (y)
such other rate as may be prescribed by such applicable law) for each day for
which such amount remains unpaid.
5.5 Suspension of Obligations. Without prejudice to the foregoing, so long as a
Party shall be in default in payment or performance to the Non Defaulting Party
under the Agreement and so long as the Non Defaulting Party has not exercised
its rights under Section 5.1, the Non Defaulting Party may, at its election and
without penalty, suspend its obligation to perform under the Agreement.
5.6 Expenses. The Defaulting Party shall reimburse the Non Defaulting Party in
respect of all out of pocket expenses incurred by the Non Defaulting Party
(including fees and disbursements of counsel, including attorneys who may be
employees of the Non Defaulting Party) in connection with any reasonable
collection or other enforcement proceedings related to the payments required
under this Section 5.
5.7 Reasonable Pre-Estimate. The Parties agree that the amounts recoverable
under this Section 5 are a reasonable pre estimate of loss and not a penalty.
Such amounts are payable for the loss of bargain and the loss of protection
against future risks and, except as otherwise provided in the Agreement, neither
Party will be entitled to recover any additional damages as a consequence of
such losses.
5.8 No Limitation of Other Rights; Set-Off. The Non Defaulting Party's rights
under this Section 5 shall be in addition to, and not in limitation or exclusion
of, any other rights which the Non Defaulting Party may have (whether by
agreement, operation of law or otherwise). To the extent not prohibited by
applicable law, the Non Defaulting Party shall have a general right of set off
with respect to all amounts owed by each Party to the other Party, whether due
and payable or not due and payable (provided that any amount not due and payable
at the time of such set-off shall, if appropriate, be discounted to present
value in a commercially reasonable manner by the Non-Defaulting Party). The Non
Defaulting Party's rights under this Section 5.8 are subject to Section 5.7.
SECTION 6. ILLEGALITY, IMPOSSIBILITY AND FORCE MAJEURE.
If either Party is prevented from or hindered or delayed by reason of force
majeure or act of State in the delivery or receipt of any Currency in respect of
a Currency Obligation or if it becomes or, in the good faith judgment of one of
the Parties, may become unlawful or impossible for either Party to deliver or
receive any Currency which is the subject of a Currency Obligation, then either
Party may, by notice to the other Party, require the close-out and liquidation
of each affected Currency Obligation in accordance with the provisions of
Sections 5.1, 5.2 and 5.4 and, for the purposes of enabling the calculations
prescribed by Sections 5.1, 5.2 and 5.4 to be effected, the Party unaffected by
such force majeure, act of State, illegality or impossibility (or if both
Parties are so affected, whichever Party gave the relevant notice) shall effect
the relevant calculations as if it were the Non-Defaulting Party. Nothing in
this Section 6 shall be taken as indicating that the Party treated as the
Defaulting Party for the purposes of calculations required hereby has committed
any breach or default.
SECTION 7. PARTIES TO RELY ON THEIR OWN EXPERTISE.
Each Party shall enter into each FX Transaction governed by the Agreement in
reliance only upon its own judgment. Neither Party holds itself out as advising,
or any of its employees or agents as having the authority to advise, the other
Party as to whether or not it should enter into any such FX Transaction or as to
any subsequent actions relating thereto or on any other commercial matters
concerned with any FX Transaction governed by the Agreement, and neither Party
shall have any responsibility or
<PAGE>
liability whatsoever in respect of any advice of this nature given, or views
expressed, by it or any of such persons to the other Party, whether or not such
advice is given or such views are expressed at the request of the other Party.
SECTION 8. MISCELLANEOUS.
8.1 Currency Indemnity. The receipt or recovery by either Party (the "first
Party") of any amount in respect of an obligation of the other Party (the
"second Party") in a Currency other than that in which such amount was due,
whether pursuant to a judgment of any court or pursuant to Section 5 or 6, shall
discharge such obligation only to the extent that on the first day on which the
first Party is open for business immediately following such receipt, the first
Party shall be able, in accordance with normal banking practice, to purchase the
Currency in which such amount was due with the Currency received. If the amount
so purchasable shall be less than the original amount of the Currency in which
such amount was due, the second Party shall, as a separate obligation and
notwithstanding any judgment of any court, indemnify the first Party against any
loss sustained by it. The second Party shall in any event indemnify the first
Party against any costs incurred by it in making any such purchase of Currency.
8.2 Assignments. Neither Party may assign, transfer or charge, or purport to
assign, transfer or charge, its rights or its obligations under the Agreement or
any interest therein without the prior written consent of the other Party, and
any purported assignment, transfer or charge in violation of this Section 8.2
shall be void.
8.3 Telephonic Recording. The Parties agree that each may electronically record
all telephonic conversations between them and that any such tape recordings may
be submitted in evidence in any Proceedings relating to the Agreement. In the
event of any dispute between the Parties as to the terms of an FX Transaction
governed by the Agreement or the Currency Obligations thereby created, the
Parties may use electronic recordings between the persons who entered into such
FX Transaction as the preferred evidence of the terms of such FX Transaction,
notwithstanding the existence of any writing to the contrary.
8.4 No Obligation. Neither Party to this Agreement shall be required to enter
into
any FX Transaction with the other.
8.5 Notices. Unless otherwise agreed, all notices, instructions and other
communications to be given to a Party under the Agreement shall be given to the
address, telex (if confirmed by the appropriate answerback), facsimile
(confirmed if requested) or telephone number and to the individual or department
specified by such Party in Part VII of the Schedule attached hereto. Unless
otherwise specified, any notice, instruction or other communication given in
accordance with this Section 8.5 shall be effective upon receipt.
8.6 Termination. Each of the Parties hereto may terminate this Agreement at any
time by seven days' prior written notice to the other Party delivered as
prescribed above, and termination shall be effective at the end of such seventh
day; provided, however, that any such termination shall not affect any
outstanding Currency Obligations, and the provisions of the Agreement shall
continue to apply until all the obligations of each Party to the other under the
Agreement have been fully performed.
8.7 Severability. In the event any one or more of the provisions contained in
the Agreement should be held invalid, illegal or unenforceable in any respect
under the law of any jurisdiction, the validity, legality and enforceability of
the remaining provisions under the law of such jurisdiction, and the validity,
legality and enforceability of such and any other provisions under the law of
any other jurisdiction, shall not in any way be affected or impaired thereby.
<PAGE>
8.8 Waiver. No indulgence or concession granted by a Party and no omission or
delay on the part of a Party in exercising any right, power or privilege under
the Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, power or privilege preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
8.9 Master Agreement. Where one of the Parties to the Agreement is domiciled
in the
United States, the Parties intend that the Agreement shall be a master
agreement, as
defined in 11 U.S.C. Section 101(53B)(C) and 12 U.S.C. Section 1821
(e)(8)(D)(vii).
8.10 Time of Essence. Time shall be of the essence in the Agreement.
8.11 Headings. Headings in the Agreement are for ease of reference only.
8.12 Wire Transfers. Every payment or delivery of Currency to be made by a Party
under the Agreement shall be made by wire transfer, or its equivalent, of same
day (or immediately available) and freely transferable funds to the bank account
designated by the other Party for such purposes.
8.13 Adequate Assurances. If the Parties have so agreed in Part X of the
Schedule, the failure by a Party ("first Party") to give adequate assurances of
its ability to perform any of its obligations under the Agreement within two (2)
Business Days of a written request to do so when the other Party ("second
Party") has reasonable grounds for insecurity shall be an Event of Default under
the Agreement, in which case during the pendency of a reasonable request by the
second Party to the first Party for adequate assurances of the first Party's
ability to perform its obligations under the Agreement, the second Party may, at
its election and without penalty, suspend its obligations under the Agreement.
8.14 FDICIA Representation. If the Parties have so agreed in Part XI of the
Schedule, each Party represents and warrants to the other Party that it is a
financial institution under the provisions of Title IV of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), and the Parties agree
that this Agreement shall be a netting contract, as defined in FDICIA, and each
receipt or payment or delivery obligation under the Agreement shall be a covered
contractual payment entitlement or covered contractual payment obligation,
respectively, as defined in and subject to FDICIA.
8.15 Confirmation Procedures. In relation to Confirmations, unless either Party
objects to the terms contained in any Confirmation within three (3) Business
Days of receipt thereof, or such shorter time as may be appropriate given the
Value Date of the FX Transaction, the terms of such Confirmation shall be deemed
correct and accepted absent manifest error, unless a corrected Confirmation is
sent by a Party within such three Business Days, or shorter period, as
appropriate, in which case the Party receiving such corrected Confirmation shall
have three (3) Business Days, or shorter period, as appropriate, after receipt
thereof to object to the terms contained in such corrected Confirmation. In the
event of any conflict between the terms of a Confirmation and this Master
Agreement, the terms of this Master Agreement shall prevail, and the
Confirmation shall not modify the terms of this Master Agreement.
8.16 Amendments. No amendment, modification or waiver of the Agreement will be
effective unless in writing executed by each of the Parties.
SECTION 9. LAW AND JURISDICTION.
9.1 Governing Law. The Agreement shall be governed by and construed in
accordance
with the laws of the State of New York without giving effect to conflict of laws
provisions.
<PAGE>
9.2 Consent to Jurisdiction. With respect to any Proceedings, each Party
irrevocably (i) submits to the non-exclusive jurisdiction of the courts of the
State of New York and the United States District Court located in the Borough of
Manhattan in New York City, and (ii) waives any objection which it may have at
any time to the laying of venue of any Proceedings brought in any such court,
waives any claim that such Proceedings have been brought in an inconvenient
forum and further waives the right to object, with respect to such Proceedings,
that such court does not have jurisdiction over such Party. Nothing in the
Agreement precludes either party from bringing Proceedings in any other
jurisdiction nor will the bringing of Proceedings in any one or more
jurisdictions preclude the bringing of Proceedings in any other jurisdiction.
9.3 Waiver of Immunities. Each Party irrevocably waives to the fullest extent
permitted by applicable law, with respect to itself and its revenues and assets
(irrespective of their use or intended use) all immunity on the grounds of
sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any
courts, (iii) relief by way of injunction, order for specific performance or for
recovery of property, (iv) attachment of its assets (whether before or after
judgment) and (v) execution or enforcement of any judgment to which it or its
revenues or assets might otherwise be entitled in any Proceedings in the courts
of any jurisdiction, and irrevocably agrees to the extent permitted by
applicable law that it will not claim any such immunity in any Proceedings. Each
Party consents generally in respect of any Proceedings to the giving of any
relief or the issue of any process in connection with such Proceedings,
including, without limitation, the making, enforcement or execution against any
property whatsoever of any order or judgment which may be made or given in such
Proceedings.
9.4 Waiver of Jury Trial. Each Party hereby irrevocably waives any and all
right to
trial by jury in any Proceedings.
IN WITNESS WHEREOF, the Parties have caused the Agreement to be duly executed by
their respective authorized officers as of the date first written above.
ASHWORTH, INC.
By:\s\ Gerald W. Montiel
Name: Gerald W. Montiel
Title: Chairman
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:_________________________
Name:_______________________
Title:______________________
BofA Subsidiaries and Related Entities
BANK OF AMERICA CANADA
By:_________________________
Name:_______________________
Title:______________________
BANK OF AMERICA, S.A.
By:_________________________
Name:_______________________
Title:______________________
<PAGE>
SCHEDULE TO INTERNATIONAL FOREIGN EXCHANGE MASTER AGREEMENT BETWEEN
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BofA") AND ITS
SUBSIDIARIES AND RELATED ENTITIES AND ASHWORTH, INC. ("Customer")
DATED DECEMBER 9, 1996
Part I:
Scope of Agreement
The Agreement shall apply to all FX Transactions outstanding between any two
Designated Offices of the Parties on the Effective Date.
This Master Agreement has been signed by multiple parties; namely, BofA and each
of its subsidiaries and related entities identified below and Customer (each a
"Signer"). The Signers have signed one document for administrative convenience
and to avoid a multiplicity of documents. Notwithstanding any other provision of
this Master Agreement, the Signers expressly intend that this document will
function and be construed as if each of BofA and its subsidiaries and related
entities identified below had signed a separate bilateral Master Agreement with
Customer.
Except as may be specifically agreed in writing, each Signer shall be liable
only for its own obligations and no Signer shall be a guarantor of or jointly
liable for the obligations of another Signer.
Part II:
Designated Offices
Each of the following shall be a Designated Office for BofA:
BofA Branches and Offices:
UNITED STATES San Francisco Head Office 555 California Street San Francisco,
California 94104 United States UNITED KINGDOM London Branch Bank of America
House 1 Alie Street London E1 8DE England UNITED STATES Los Angeles Office 300
South Grand 19th Floor Los Angeles, California 90071 United States UNITED STATES
New York Office 40 East 52nd Street Fifth Floor New York, New York 10022 United
States AUSTRALIA Sydney Branch.135 King Street Bank of America Centre Sydney ,
NSW 2000 Australia AUSTRALIA Melbourne Branch.525 Collins Street 37th Floor
Rialto South tower Melbourne , VIC 3000 Australia ARGENTINA Buenos Aires Branch
537 25 de Mayo Street Buenos Aires, 1002 Argentina BELGIUM Brussels Corporate
Office Avenue Louise 480 Brussels Belgium FRANCE Paris Branch 43/47 Avenue de la
Grand Armeef-75782 Paris, Cedex 16,France GERMANY Frankfurt Branch Ulmenstrasse
30P.O. Box 110243 Frankfurt Germany GREECE Athens Branch 39 Panepistimiou Street
P.O. Box 630 Athens Greece HONG KONG Hong Kong Branch Bank of America Tower,
23rd Floor 12 Harcourt Road G.P.O. Box 472 Hong Kong INDIA Bombay Branch Express
Towers, Nariman Point P.O. Box 10080 Bombay 400-021 India INDIA Calcutta Branch
8 India Exchange Place P.O. Box 518 Calcutta 700-001 India INDIA Madras Branch
748 Anna Salai Road P.O. Box 340 Madras 600-002 India INDIA New Delhi BranchDCM
Building 15 Barakhamba Road P.O. Box 735 New Delhi 110-001 India INDONESIA
Jakarta Branch J1 Medan Merdeka Selatan No. 17P.O. Box 1195 Jakarta 10011
Indonesia IRELAND Dublin Branch Russell Court St. Stephen's Green Dublin 2
Republic of Ireland ITALY Milan Branch Corso Matteotti 10 Milano 20121 Italy
JAPAN Tokyo Branch ARK Mori Building, 34th Floor 12-32 Akasaka, 1-chome,
Minato-ku
<PAGE>
Tokyo 107 Japan
KOREA Seoul Branch Hyonam Building 1 Changkyo-Dong, Chung-ku C.P.O. Box 3026
Seoul South Korea NETHERLANDS Amsterdam Branch Herengracht 4691017 BS Amsterdam
The Netherlands PAKISTAN Islamabad Branch Awan Arcade/1-B/Blue Area Islamabad
Pakistan PHILIPPINES Manila Branch BA- Lepanto Building 8747 Paseo de Roxas P.O.
Box 571 Makati, Metro Manila D-708 Philippines SINGAPORE Singapore Branch 78
Shenton Way #19-00P.O. Box 079120 Singapore 0207 Singapore SWITZERLAND Zurich
Branch Giesshubel strasse 45 P.O. Box 8027CH-8045 Zurich Switzerland TAIWAN
Taipei Branch 205 Tun Hwa North Road Taipei 105 Taiwan THAILAND Bangkok Branch
2/2 Wireless Road G.P.O. Box 158 Bangkok 10330 Thailand
BofA Subsidiaries and Related Entities:
BANK OF AMERICA CANADA Bank of America Canada Montreal Corporate Services 1250
Rene Levesque/4355 Montreal Canada BANK OF AMERICA CANADA Bank of America
Canada, Calgary 855 2nd Street SW/1900 Calgary Canada BANK OF AMERICA CANADA
Bank of America Canada, Head Office Simcoe Place 200 Front
Street West, Suite 2700 Toronto, Ontario, Canada M5V3L2
BANK OF AMERICA CANADA Bank of America Canada, Vancouver Corporate Services
Office 1055 Dunsmuir Street #574 P.O. Box 49295 Vancouver Canada BANK OF AMERICA
CANADA Foreign Currency Services Simcoe Place 200 Front Street West, Suite 2700
Toronto, Ontario, Canada M5V3L2 BANK OF AMERICA CANADA Foreign Currency Services
- - New York- Corporate and Institutional Sales 335 Madison Avenue/Mezzanine New
York, New York 10164 United States BANK OF AMERICA, S.A.Bank of America
S.A.-Madrid Branch Calle Del Capitan Haya 1 Madrid Spain
Customer Offices:
Ashworth, Inc.
2791 Loker Avenue--West
Carlsbad, California 92008
Part III:
Settlement Netting Offices
Net settlement provisions of Section 3.2 shall apply to the following Settlement
Netting Offices:
None
Part IV:
Novation Netting Offices
Netting by novation provisions of Section 3.3(a) shall apply to the following
Novation Netting Offices and shall apply to all FX Transactions:
None
Part V:
Matched Pair Novation Netting Offices
<PAGE>
Matched pair netting by novation provisions of Section 3.3(b) shall apply to the
following Matched Pair Novation Netting Offices and shall apply to all FX
Transactions:
None
Part VI:
Automatic Termination
The "Automatic Termination" provision in Section 5.1 shall not apply to BofA and
its subsidiaries and related entities and Customer.
Part VII:
Notices
For BofA and its subsidiaries and related entities:
Bank of America National Trust and Savings Association
1850 Gateway Blvd.
Concord, California 94520
Telex and Answerback: 6734148 BASFX
Facsimile Number: (510) 675-7218
Telephone Number: (510) 675-7061
SWIFT: BOFAUS6S
Attention: Foreign Exchange Operations #5554
For Customer:
Name:
Ashworth, Inc.
Address:
2791 Loker Avenue--West
Carlsbad, California 92008
Telex and Answerback:
Facsimile Number: (619) 438-6610
Telephone Number: (619) 929-6101 or (619) 438-6610
SWIFT ID Number:
Attention: Mr. John Newman, Chief Financial Officer
Part VIII:
Base Currency
For BofA and its subsidiaries and related entities: United States Dollars
For Customer: United States Dollars
Part IX:
Threshold Amount
Shareholders' Equity means with respect to an entity, at any time, the sum (as
shown in the most recent annual audited financial statements of such entity) of
(i) its capital stock (including preferred stock) outstanding, taken at par
value, (ii) its capital surplus and (iii) its retained earnings, minus (iv)
treasury stock, each to be determined in accordance with generally accepted
accounting principles.
Threshold Amount means (i) with respect to the Customer, two percent (2%) of its
Shareholders' Equity and, (ii) with respect to BofA and its subsidiaries and
related entities, two percent (2%) of the Shareholders Equity of BankAmerica
Corporation.
Part X:
Adequate Assurances. The provisions of Section 8.13 shall apply to the
Agreement.
<PAGE>
Part XI:
FDICIA Representation. The provisions of Section 8.14 shall apply to the
Agreement with respect to BofA.
Part XII:
Cash Before Delivery.
The Parties hereby agree to delete Section 3.1 of the Agreement and replace such
section with the following section: "3.1 Settlement. Settlement of all FX
Transactions between Customer and BofA will be on a cash before delivery basis.
For each FX Transaction, Customer shall pay Customer's settlement payment to
BofA at least one (1) business day before the value date of such FX Transaction.
Payment shall be in the form of immediately available funds. If Customer has an
account with BofA, Customer hereby authorizes BofA to debit such account for the
amount of Customer's settlement payment on or after the date one (1) business
day before the value date. In the event Customer's settlement payment is not in
U.S. Dollars and Customer pays such payment to a foreign correspondent bank of
BofA ("Correspondent Bank"), it shall be Customer's responsibility to ensure
that at least one (1) business day before the value date such Correspondent Bank
notifies BofA of its receipt from Customer of Customer's settlement payment.
Provided that no Event of Default has occurred with respect to Customer and BofA
has received Customer's settlement payment (or a Correspondent Bank has received
such settlement payment and has notified BofA of such receipt), then on the
value date BofA shall pay BofA's settlement payment to Customer. Customer's
failure (I) to pay Customer's settlement payment to BofA at least one (1)
business day before the value date, (ii) in the case where Customer has an
account with BofA and BofA debits such account for the amount of Customer's
settlement payment, to have sufficient collected funds in such account to
satisfy the debit, or (iii) to ensure that any Correspondent Bank properly
notifies BofA of its receipt from Customer of Customer's settlement payment,
shall permit BofA to suspend its obligation to delivery BofA's settlement
payment to Customer and shall constitute an Event of Default under the
Agreement.
The Parties hereby agree to amend the first sentence of the definition of Event
of Default in Section 1 so that it reads as follows: "Event of Default means the
occurrence of any of the following with respect to a Party (the "Defaulting
Party", the other Party being the "Non-Defaulting Party") or the occurrence of
(i), (ii), or (iii) of Section 3.1 of the Agreement, as amended above.
Part XIII:
Credit Support Provider.
Credit Support Provider means in relation to Party A:
Ashworth Store I, Inc.
Ashworth Store II, Inc.
Ashworth International, Inc.
Ashworth U.K., Ltd.
Credit Support Provider means in relation to Party B:
Not Applicable
Part XIX:
Credit Support Documents.
Party A agrees that the security interest in collateral granted to Party B under
the Credit Support Documents shall secure the obligations of Party A under this
Agreement. Credit Support Documents include, but are not limited to, the
following documents:
(i) Security Agreement (Receivables, Inventory and Equipment) dated as of
October
27, 1995, made by Ashworth, Inc. in favor of Bank of America National Trust and
Savings Association.
<PAGE>
(ii) Security Agreement (Receivables, Inventory and Equipment) dated as of
March 18,
1996, made by Ashworth Store I, Inc. in favor of Bank of America National
Trust and
Savings Association.
(iii) Security Agreement (Receivables, Inventory and Equipment) dated as of
March 18,
1996, made by Ashworth Store II, Inc. in favor of Bank of America National
Trust and
Savings Association.
(iv) Each other document securing the Business Loan Agreement dated as of
___________, among Bank of America National Trust and Savings Association,
Ashworth, Inc., Ashworth Store I, Inc., Ashworth Store II, Inc., Ashworth
International, Inc., and Ashworth U.K., Ltd.
(x) Each amendment, supplement, modification, renewal, replacement,
consolidation, substitution and extension to the foregoing.
Part XX:
Authorized Persons; Miscellaneous.
The persons named below are authorized to enter into FX Transactions on behalf
of Customer:
Name Title
Gerald W. Montiel Chairman
Randall L. Herrell President and Chief Executive Officer
John Newman Chief Financial Officer
In addition to being authorized to enter into oral or written FX Transactions,
the persons named above are also authorized on behalf of Customer to amend,
renew or extend such FX Transactions, deposit margin and other collateral with
BofA as security for such FX Transactions, and enter into other agreements which
relate to such FX Transactions, including but not limited to master agreements,
margin agreements, netting agreements and security agreements. Customer has
authorized each of these persons to determine the character, amount, timing and
purpose of FX Transactions.
The persons named below are authorized to execute confirmations of FX
Transactions on behalf of Customer:
Name Title Signature
Gerald W. Montiel Chairman /s/Gerald W. Montiel
Randall L. Herrell President and Chief /s/Randall L. Herrel
Executive Officer
John Newman Chief Financial Officer /a/John Newman
Customer will notify BofA in writing of any changes to the above lists;
provided, however, that in the absence of written notice BofA may assume that
persons who BofA reasonably believes hold the titles shown above or who BofA
reasonably believes replace or succeed to the positions held by persons named
above are authorized to act on behalf of Customer.
Customer will deliver to BofA as soon as they are available copies of Customer's
audited annual financial statements and unaudited quarterly financial
statements. Upon BofA's oral or written request from time to time, Customer will
deliver promptly to BofA such other information relating to the business and
financial condition of Customer as BofA may reasonably request.
<PAGE>
Customer represents and warrants to BofA as of the date hereof and as of the
date of each FX Transaction that Customer's total assets exceed $10,000,000.
EXHIBIT 10(r)(3)
<PAGE>
ASHWORTH, INC. AND SUBSIDIARIES
SCHEDULE COMPUTING NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Year Ended October 31
------------------------------
1996 1995 1994
---- ---- ----
PRIMARY:
<S> <C> <C> <C>
Net Income $ 1,403,043 $ 1,400,582 $ 4,860,356
=========== =========== ===========
Weighted average number of common and equivalent shares outstanding:
Common stock 12,024,530 11,775,602 11,457,661
Common stock equivalent shares 73,743 336,031 766,060
----------- ----------- -----------
12,098,273 12,111,633 12,223,721
=========== =========== ===========
Net income per common share $ .12 $ .12 $ .40
=========== =========== ===========
FULLY DILUTED:
Net income $ 1,403,043 $ 1,400,582 $ 4,860,356
=========== =========== ===========
</TABLE>
Weighted average number of common and equivalent shares outstanding:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Common stock 12,024,530 11,775,602 11,457,661
Common stock equivalent shares 159,830 535,123 795,309
----------- ----------- -----------
12,184,360 12,310,725 12,252,970
=========== =========== ===========
Net income per common share $ .12 $ .11 $ .40
=========== ========== ===========
</TABLE>
EXHIBIT 11
<PAGE>
SUBSIDIARIES OF ASHWORTH, INC.
Ashworth Store I, Inc., a Delaware corporation Ashworth Store II, Inc., a
Delaware corporation Ashworth Store III, Inc., a Delaware corporation (inactive)
The Hat Factory, Inc., a Delaware corporation (inactive)
Ashworth International, Inc., a U.S. Virgin Islands corporation
Ashworth U.K., Ltd., a United Kingdom corporation
Ashworth Inc., et Cie, a Luxembourg partnership
EXHIBIT 21
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this form 10-K, into the Company's previously
filed Registration Statement Files No. 33-35516, No. 33-41455, No. 33-47502,
No. 33-54206, No. 33-66040 and No. 33-92580.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Orange County, California
December 13, 1996
EXHIBIT 23
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CAPTION>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-START> Nov-01-1995
<PERIOD-END> Oct-31-1996
<CASH> 1,953,918
<SECURITIES> 0
<RECEIVABLES> 10,193,134
<ALLOWANCES> 480,000
<INVENTORY> 24,729,179
<CURRENT-ASSETS> 41,735,694
<PP&E> 19,851,658
<DEPRECIATION> 7,657,905
<TOTAL-ASSETS> 54,912,161
<CURRENT-LIABILITIES> 10,152,491
<BONDS> 5,307,284
<COMMON> 12,163
0
0
<OTHER-SE> 38,854,408
<TOTAL-LIABILITY-AND-EQUITY> 54,912,161
<SALES> 75,412,847
<TOTAL-REVENUES> 75,412,847
<CGS> 48,017,486
<TOTAL-COSTS> 72,104,266
<OTHER-EXPENSES> (168,526)
<LOSS-PROVISION> 64,008
<INTEREST-EXPENSE> 1,116,680
<INCOME-PRETAX> 2,360,427
<INCOME-TAX> 957,384
<INCOME-CONTINUING> 1,403,043
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,403,043
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
<PAGE>
</TABLE>
