SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
---------------------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0 - 22230
ROYAL GRIP, INC.
----------------
Nevada 86-0615648
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS employer identification number)
incorporation)
444 West Geneva Drive
Tempe, Arizona 85282
(602) 829-9000
---------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
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 shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date (August 9, 1996).
Common stock, $.001 par value: 2,734,678
- --------------------------------------------------------------------------------
<PAGE>
ROYAL GRIP, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets- 3
June 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Operations- 4
Three Months and Six Months Ended
June 30, 1996 and June 30, 1995
Condensed Consolidated Statements of Cash Flows- 5
Six Months Ended
June 30, 1996 and June 30, 1995
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
EXHIBITS
11 Computation of Net Loss Per Share 14
</TABLE>
<PAGE>
Part I ROYAL GRIP, INC. AND SUBSIDIARY
Item 1
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 30,987 $ 413,345
Trade accounts receivable (net of allowance for
doubtful accounts of $337,740 and $227,070
as of June 30, 1996 and December 31, 1995,
respectively) 2,912,868 1,864,012
Income tax refund receivable -- 101,139
Inventories 1,467,959 1,720,296
Prepaid expenses and other current assets 47,253 144,828
------------ ------------
Total current assets 4,459,067 4,243,620
------------ ------------
Property and equipment, net 5,285,485 6,258,292
Intangible assets, net 1,011,551 1,083,240
Other assets 56,375 58,675
------------ ------------
$ 10,812,478 $ 11,643,827
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 425,000 $ --
Current portion of long-term debt and capital leases 121,766 136,643
Accounts payable and accrued expenses 1,625,992 1,671,626
------------ ------------
Total current liabilities 2,172,758 1,808,269
------------ ------------
Long-term debt and capital leases, less current portion 95,610 161,422
Stockholders' equity:
Preferred stock, par value $.001 per share
Authorized 5,000,000 shares; none issued
Common stock, par value $.001 per share
Authorized 15,000,000 shares; issued and
outstanding 2,734,678 shares at June 30, 1996
and at December 31, 1995 2,735 2,735
Additional paid-in capital 12,213,792 12,199,288
Retained earnings (deficit) (3,672,417) (2,527,887)
------------ ------------
Total stockholders' equity 8,544,110 9,674,136
------------ ------------
$ 10,812,478 $ 11,643,827
============ ============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
ROYAL GRIP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 5,094,490 $ 4,978,905 $ 9,452,111 $ 9,462,982
Cost of goods sold 3,953,154 3,656,724 7,192,700 6,708,682
----------- ----------- ----------- -----------
Gross profit 1,141,336 1,322,181 2,259,411 2,754,300
Selling, general and administrative expenses 1,703,910 1,861,579 3,375,365 3,893,752
----------- ----------- ----------- -----------
Loss from operations (562,574) (539,398) (1,115,954) (1,139,452)
Other expenses, net (12,709) (12,939) (28,576) (27,288)
----------- ----------- ----------- -----------
Loss before income tax benefit (575,283) (552,337) (1,144,530) (1,166,740)
Income tax benefit -- (54,600) -- (300,000)
----------- ----------- ----------- -----------
Net loss $ (575,283) $ (497,737) $(1,144,530) $ (866,740)
----------- ----------- ----------- -----------
Net loss per share $ (0.21) $ (0.18) $ (0.42) $ (0.32)
=========== =========== =========== ===========
Shares used in net loss per share 2,734,678 2,734,678 2,734,678 2,734,678
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
ROYAL GRIP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,144,530) $ (866,740)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 835,131 987,109
Compensatory stock option grant 14,504 --
Loss on disposition of property and equipment 22,175 6,047
Decrease in deferred income taxes -- (272,000)
Increase in trade accounts receivable (1,048,856) (930,409)
Decrease in income tax refund receivable 101,139 --
Decrease in inventories 252,337 665,910
Decrease in prepaid expenses and other current assets 97,575 19,978
Increase in other assets and intangibles (21,354) (24,974)
Increase (Decrease) in trade accounts payable
and accrued expenses (45,634) 697,394
----------- -----------
Net cash (used) provided by operating activities (937,513) 282,315
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (578,075) (498,849)
Proceeds from sale of property and equipment 788,919 500
----------- -----------
Net cash provided by (used in) investing activities 210,844 (498,349)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations (15,161) (13,685)
Advances on notes payable 26,309 11,863
Principal payments on notes payable (91,837) (83,114)
(Decrease) Increase in revolving line of credit 425,000 (200,000)
----------- -----------
Net cash provided by (used in) financing activities 344,311 (284,936)
----------- -----------
Net decrease in cash (382,358) (500,970)
Cash at beginning of period 413,345 1,193,909
----------- -----------
Cash at end of period $ 30,987 $ 692,939
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
ROYAL GRIP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles, pursuant
to rules and regulations of the Securities and Exchange Commission. In the
opinion of management the accompanying condensed financial statements include
all adjustments (of a normal recurring nature) which are necessary for a fair
presentation of the results for the interim periods presented. Certain
information and footnote disclosures have been condensed or omitted pursuant to
such rules and regulations. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial statements
included in the Company's annual report on Form 10-K for the year ended December
31, 1995, as filed with the Securities and Exchange Commission. Results of
operations in interim periods are not necessarily indicative of results to be
expected for a full year.
(2) Inventories
-----------
Inventories consist of the following:
June 30, December 31,
1996 1995
---------- ------------
Finished goods $ 823,686 $ 1,144,516
Work in process 78,467 188,677
Raw materials 585,806 575,306
---------- ----------
1,487,959 1,908,499
Less reserves 20,000 188,203
---------- ----------
$1,467,959 $1,720,296
========== ==========
6
<PAGE>
(3) Revolving line of credit
------------------------
The Company has a $1.2 million revolving line of credit with a
commercial bank in Phoenix, Arizona. Amounts outstanding bear interest at the
bank's prime rate plus 1/2% which was 8.75% on June 30, 1996. Interest is
payable monthly and principal balances are due when the line expires on May 30,
1997. At June 30, 1996, $425,000 was outstanding on the line. The revolving line
of credit agreement contains debt covenants for which the Company was in
compliance at June 30,1996.
(4) Deferred Income Taxes
---------------------
The Company accounts for income taxes under the asset and liability
method of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes."
No tax benefit is recognized in the second quarter of 1996 due to a
100% valuation allowance related to the net operating loss carry-forward
deferred tax asset. This will have the effect of reducing income tax expense in
future periods in which the net operating loss carry forwards are realized.
(5) Reclassification
----------------
The Condensed Consolidated Statement of Operations for the
three months and six months ended June 30, 1995 reflect a reclassification of
$400,000 from selling, general and administrative expense to cost of goods sold
related to the provision in the second quarter of 1995 in connection with the
bartering transaction.
7
<PAGE>
Part I
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. The Company's Form 10-K, this Form 10-Q,
any other Form 10-Q, any Form 8-K, or any other written or oral statements made
by or on behalf of the Company's current views with respect to future events and
financial performance. These forward looking statements are subject to certain
uncertainties and other factors that could cause actual results to differ
materially from such statements. These uncertainties and other factors include,
but are not limited to, uncertainties relating to economic conditions,
uncertainties relating to customer plans and commitments, uncertainties related
to the Company's cost of raw materials, the competitive environment in which the
Company operates, and changes in the financial markets relating to the Company's
capital structure and cost of capital. The words "believe," "expect,"
"anticipate," "project," and similar expressions identify forward looking
statements, which speak only as of the date the statement was made. The Company
undertakes no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future events, or otherwise.
Introduction
During the quarter, the Company took several actions which it believes
will have a positive impact on future earnings and cash flow. Principal measures
include the elimination of approximately 30 positions, the subleasing of 10,700
square feet at the Company's Tempe, Arizona manufacturing facility following the
consolidation of headwear manufacturing at its Oklahoma City facility, and the
conversion of its UK operations to a distributorship relationship. Also, near
the end of the quarter, Danny Edwards, Chairman and Chief Executive Officer,
voluntarily reduced his salary from $250,000 to $0 as an indication of his
commitment to the Company and to its return to profitability. The financial
impact of these and other decisions were not fully realized in this quarter but
are expected to take full effect beginning in the third quarter. The Company
believes that these and other measures will continue to help improve operations
with a goal of returning to profitability during 1997.
8
<PAGE>
Results of Operations
The following table sets forth for the periods indicated the percentage
of net sales represented by each line item in the Company's statements of
operations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 77.6 73.4 76.1 71.0
----- ----- ----- -----
Gross profit 22.4 26.6 23.9 29.0
Selling, general and administrative expenses 33.4 37.4 35.7 41.1
----- ----- ----- -----
Loss from operations (11.0) (10.8) (11.8) (12.1)
Other expense net (0.3) (0.3) (0.3) (0.3)
----- ----- ----- -----
Loss before income tax benefit (11.3) (11.1) (12.1) (12.4)
Income tax benefit (0.0) (1.1) -- (3.2)
----- ----- ----- -----
Net loss (11.3%) (10.0%) (12.1%) (9.2%)
===== ===== ===== =====
</TABLE>
Net Sales. Net sales for the three months ended June 30, 1996 were $5.1
million, an increase of 2.0% over net sales of $5.0 million for the
corresponding period in the prior year. For the first six months of 1996, net
sales were $9.5 million, the same as a year ago. The increase in net sales for
the second quarter of 1996 from the same period of the prior year is largely
attributable to an increase in headwear sales of $397,000. Net sales of grips
during the quarter were down by $272,000, compared to the same quarter last year
due to decreased sales to the Company's Japanese distributor of $302,000. The
Company believes that the lower sales in Japan are due to increased competition
and delays in delivery of the cord grip from the Company's outside supplier.
Although net sales for the first six months of 1996 and 1995 were the same,
sales of headwear increased by $785,000 while grip sales were down by $774,000.
Gross Profit. Gross profit decreased to $1.1 million in the second
quarter of 1996, down from $1.3 million in the second quarter of 1995. As a
percentage of net sales, gross profit
9
<PAGE>
decreased to 22.4% from 26.6%. The decline in gross profit and the gross profit
percentage primarily was attributable to increased lower margin headwear sales
as a percentage of total sales. During the second quarter, the margin on
headwear sales decreased by 13.2 percentage points compared to the same quarter
last year due to a negative adjustment of approximately $150,000 to inventory as
a result of the implementation of new inventory and audit procedures. The margin
on grip sales increased by 2.4 percentage points compared to the same quarter
last year primarily because the results in 1995 included a $400,000 charge to
cost of goods sold related to an allowance recorded for a barter transaction
which was entered into in the first quarter of 1995. For the six month period
ended June 30, 1996, gross profit was $2.3 million compared to $2.8 million for
the corresponding period in 1995. As a percentage of net sales, gross margins
declined to 23.9% from 29%. The decline in gross profit and gross profit
percentage primarily was attributable to increased lower margin headwear sales
as a percentage of total sales.
Selling, General and Administrative. Selling, general and
administrative expenses decreased to $1.7 million in the second quarter of 1996
from $1.9 million in the comparable period of 1995. Selling, general and
administrative expenses decreased primarily due to a reduction in advertising
and promotion expenses of $312,000.
For the six month period ended June 30, selling, general and
administrative expenses decreased to $3.4 million in 1996 from $3.9 million in
1995. The decrease in selling, general and administrative expenses is primarily
due to a reduction in advertising and promotion expenses of $469,000.
Other Income (Expense). Other expense was $13,000 in the second quarter
of 1996 compared to other expense of $13,000 in the same period of 1995. Other
expense in 1996 and 1995 resulted primarily from interest expense incurred on
long term obligations and a revolving line of credit. Other expense was $29,000
in the first six months of 1996 compared to $27,000 in
10
<PAGE>
the same period of 1995. This expense resulted primarily from interest expense
on long term obligations and a revolving line of credit.
Liquidity and Capital Resources
During the six months ended June 30, 1996, the Company used $937,513 to
fund operating activities, reflecting a significant build up in trade
receivables. The Company attributes this increase to the seasonality of its
sales of golf grips. For the comparable period of 1995, operations generated
positive cash flow of $282,315. Cash and cash equivalents decreased from
$413,345 at December 31, 1995 to $30,987 at June 30, 1996.
The Company funded its shortfall in cash from operations primarily
through the sale of property and equipment which generated $789,000 in proceeds,
and from borrowings under the Company's line of credit. Borrowings totaled
$425,000 at June 30, 1996, as compared to $0 at December 31, 1995. As of August
8, 1996, the Company had $275,000 outstanding on its credit line.
The Company's line of credit was renewed during the second quarter,
with the expiration date extended through May 1997. Under this facility, the
Company may borrow up to $1.2 million. Borrowings under the line of credit are
subject to a number of conditions, including compliance with covenants relating
to the Company's current ratio, tangible net worth, working capital and ratio of
total liabilities to tangible net worth. The Company was in compliance with
these ratios as of June 30, 1996.
The Company believes its available borrowings and expected cash flows
from operations will satisfy its working capital needs for the foreseeable
future. However, if operations were to deteriorate further, or the Company were
unable to borrow under its line of credit, the Company would need to seek
alternative sources of financing for its operations. There can be no assurance
that such sources would be available.
11
<PAGE>
Part II
Other Information
Item 6. (a)-1 Exhibit 10.14 - Line of Credit Facility with
Biltmore Investors Bank, dated May 30, 1996 (attached).
(a)-2 Exhibit 11 - Computation of Net Loss
Per Share (attached).
(b) No reports on Form 8-K have been filed during the
quarter for which this report is filed.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ROYAL GRIP, INC.
Date: August 12, 1996 By: /s/ Thomas A. Schneider
------------------------
Thomas A. Schneider
Vice President - Finance
(Principal Financial and
Accounting Officer)
13
BUSINESS LOAN AGREEMENT
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C>
$1,200,000.00 05-30-1997 22098 96 0013140 07807
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: ROYAL GRIP, INC. Lender: BILTMORE INVESTORS BANK, N.A.
444 W. GENEVA DRIVE PHOENIX DIVISION
TEMPE, AZ 85282 2425 E. CAMELBACK ROAD
PHOENIX, AZ 85016
===============================================================================
THIS BUSINESS LOAN AGREEMENT between ROYAL GRIP, INC. ("Borrower") and BILTMORE
INVESTORS BANK, N.A. ("Lender") is made and executed on the following terms and
conditions. All such loans and financial accommodations, together with all
future loans and financial accommodations from Lender to Borrower, are referred
to in this Agreement individually as the "Loan" and collectively as the "Loans."
Borrower understands and agrees that: (a) in granting, renewing, or extending
any Loan, Lender is relying upon Borrower's representations, warranties, and
agreements, as set forth in this Agreement; (b) the granting, renewing, or
extending of any Loan by Lender at all times shall be subject to Lender's sole
judgment and discretion; and (C) all such Loans shall be and shall remain
subject to the following terms and conditions of this Agreement.
TERM. This Agreement shall be effective as of May 30, 1996, and shall continue
thereafter until all indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to
time, together with all exhibits and schedules attached to this
Business Loan Agreement from time to time.
Borrower. The word "Borrower" means ROYAL GRIP, INC.. The word
"Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.
Collateral. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan,
whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted
in the form of a security interest, mortgage, deed of trust,
assignment, pledge, chattel mortgage, chattel trust, factor's lien,
equipment trust, conditional sale, trust receipt lien, charge, lien or
title retention contract, lease or consignment intended as a security
device, or any other security or lien interest whatsoever, whether
created by law, contract, or otherwise.
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
Event of Default. The words "Event of Default" means and include
without limitation any of the Events of Default set forth below in the
section titled "EVENTS OF DEFAULT."
Grantor. The word "Grantor" means and includes without limitation each
and all of the persons or entitites granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all
Borrowers granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any indebtedness.
Indebtedness. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well
as all claims by Lender against Borrower, or any one or more of them;
whether now or hereafter exisiting, voluntary or involuntary, due or
not due, absolute or contingent, liquidated or unliquidated; whether
Borrower may be liable individual or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise; whether
recovery upon such indebtedness may be or hereafter may become barred
by any statute of limitations; and whether such indebtedness may be or
hereafter may become otherwise unenforceable.
Lender. The word "Lender" means BILTMORE INVESTORS BANK, N.A., its
successors and assigns.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand
plus Borrower's readily marketable securities.
Loan. The word "Loan" or "Loans" means and includes without limitation
any and all commercial loans and financial accommodations from Lender
to Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to
this Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan
obligations in favor of Lender, as well as any substitute, replacement
or refinancing note or notes therefor.
Related Documents. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the indebtedness.
Security Agreement. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract,
or otherwise, evidencing, governing, representing, or creating a
Security Interest.
Security Interest. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the form
of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factory's lien, equipment trust, conditional
sale, trust receipt, lien or title retention contract, lease or
consignment intended as a security device, or any other security or
lien interest whatsoever, whether created by law, contract, or
otherwise.
SARA. The word "SARA" means the Superfund Amendments and
Reauthorization Act of 1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written
agreement to indebtedness owed by Borrower to Lender in form and
substance acceptable to Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's
total assets excluding all intangible assets (i.e., goodwill,
trademarks, patents, copyrights, organization expenses, and similar
intangible items, but including leaseholds and leasehold improvements)
less total Debt.
Working Capital. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current
liabilities.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any indebtedness exists:
Organization. Borrower is a corporation which is duly organized,
validity existing, and in good standing under the laws of the State of
Arizona and is validly existing and in good standing in all states in
which Borrower is doing business. Borrower has the full power and
authority to own its properties and to transact the businesses in which
it is presently engaged or presently proposes to engage. Borrower also
is duly qualified as a foreign corporation and is in good standing in
all states in which the failure to so qualify would have a material
adverse effect on its businesses or financial condition.
Authorization. The execution, delivery, and performance of this
Agreement and all related Documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duly authorized
by all necessary action by Borrower; do not require the consent or
approval of any other person, regulatory authority or governmental
body; and do not conflict with, result in a violation of, or constitute
a default under (a) any provision of its articles of incorporation or
organization, or bylaws, or any agreement or other instrument binding
upon borrower or (b) any law, governmental regulation, court decree, or
order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition a
of the date of the statement, and there has been no material adverse
change in Borrower's financial condition subsequent to the date of the
most recent financial statement supplied to Lender. Borrower has no
material contingent obligations except as disclosed in such financial
statements
Legal Effect. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered
will constitute, legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective terms.
Properties. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender
and as accepted by Lender, and except for property tax liens for taxes
not presently due and payable, Borrower owns and has good title to all
of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements
relating to such properties. All of Borrower's properties are titled in
Borrower's legal name, and Borrower has not used, or filed a financing
statement under, any other name for at least the last five (5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used in
this Agreement, shall have the same means as set forth in the "CERCLA,"
"SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section
1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901, et seq., or other applicable state or Federal laws,
rules, or regulations adopted pursuant to any of the foregoing. Except
as disclosed to and acknowledged by Lender in writing, Borrower
represents and warrants that: (a) During the period of Borrower's
ownership of the properties, there has been no use, generation,
manufacture, storage, treatment, disposal, release or threatened
release of any hazardous waste or substance by any person on, under,
about or from any of the properties. (b) Borrower has no knowledge of,
or reason to believe that there has been (i) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened
release of any hazardous waste or substance on, under, about or from
the properties by any prior owners or occupants of any of the
properties, or (ii) any actual or threatened litigation or claims of
any kind by any person relating to such matters. (c) neither Borrower
nor any tenant, contractor, agent or other authorized user of any of
the properties shall use, generate, manufacture, store, treat, dispose
of, or release any hazardous waste or substance on, under, about or
from any of the properties; and any such activity shall be conducted in
compliance with all applicable federal, state, and local laws,
regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. Borrower authorizes Lender
and its agents to enter upon the properties to make such inspections
and tests as Lender may deem appropriate to determine compliance of the
properties with this section of the Agreement. Any inspections or tests
made by Lender shall be at Borrower's expense and for Lender's purposes
only and shall not be construed to create any responsibility or
liability on the part of Lender to Borrower or to any other person. The
representations and warranties contained herein as based on Borrower's
due diligence in investigating the properties for hazardous waste and
hazardous substances. Borrower hereby (a) releases and waives any
future claims against Lender for indemnify or contribution in the event
Borrower becomes liable for cleanup or other costs under any such laws,
and (b) agrees to indemnify and hold harmless Lender against any and
all claims, losses, liabilities, damages, penalties, and expenses which
Lender may directly or indirectly sustain or suffer resulting from a
breach of this section of the Agreement or as a consequence of any use,
generation, manufacture, storage, disposal, release or threatened
release occurring prior to Borrower's ownership or interest in the
properties, whether or not the same was or should have been known to
Borrower. The provisions of this Section of the Agreement, including
the obligation to indemnify, shall survive the payment of the
indebtedness and the termination or expiration of this Agreement and
shall not be affected by Lender's acquisition of any interest in any of
the properties, whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation,
administrative proceeding or similar action (including those for unpaid
taxes) against Borrower is pending or threatened, and no other event
has occurred which may materially adversely affect Borrower's financial
condition or properties, other than litigation, claims, or other
events, if any, that have been disclosed to and acknowledged by Lender
in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports
of Borrower that are or were required to be filed, have been filed, and
all taxes, assessments and other governmental charges have been paid in
full, except those presently being or to be contested by Borrower in
good faith in the ordinary course of business and for which adequate
reserves have been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in
writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
interests on or affecting any of the Collateral directly or indirectly
securing repayment of Borrower's Loan and Note, that would be prior or
that may in any way be superior to Lender's Security interests and
rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note
and all of the Related Documents are binding upon Borrower as well as
upon Borrower's successors, representatives and assigns, and are
legally enforceable in accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable
Event nor Prohibited Transaction (as defined In ERISA) has occurred
with respect to any such plan, (ii) Borrower has not withdrawn from any
such plan or initiated steps to do so, (iii) no steps have been taken
to terminate any such plan, and (iv) there are no unfunded liabilities
other than those previously disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of
business, or Borrower's Chief executive office, if Borrower has more
than one place of business, is located at 444 W. GENEVA DRIVE, TEMPE,
AZ 85282. Unless Borrower has designated otherwise in writing this
location is also the office or offices where Borrower keeps its records
concerning the Collateral.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
will be, true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material
fact necessary to make such information not misleading.
Survival of Representations and Warranties. Borrower understands and
agrees that Lender, without independent investigation, is relying upon
the above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations
and warranties shall be continuing in nature and shall remain in full
force and effect until such time as Borrower's indebtedness shall be
paid in full, or until this Agreement shall be terminated in the manner
provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all existing
and all threatened litigation, claims, investigations, administrative
proceedings or similar actions affecting Borrower or any Guarantor
which could materially affect the financial condition of Borrower or
the financial condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent
basis, and permit Lender to examine and audit Borrower's books and
records at all reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but in
no event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended,
audited by a certified public accountant satisfactory to Lender, and,
as soon as available, but in no event later than forty five (45) days
after the end of each fiscal quarter, Borrower's balance sheet and
profit and loss statement for the period ended, prepared and certified
as correct to the best knowledge and belief by Borrower's chief
financial officer or other officer or person acceptable to Lender. All
financial reports required to be provided under this Agreement shall be
prepared in accordance with generally accepted accounting principles,
applied on a consistent basis, and certified by Borrower as being true
and correct.
Additional Information. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and
other reports with respect to Borrower's financial condition and
business operations as Lender may request from time to time.
Financial Covenants and Ratios. Comply with the following
covenants and ratios:
Tangible Net Worth. Maintain a minimum Tangible Net Worth of
not less than $7,250,000.00.
Net Worth Ratio. Maintain a ratio of Total Liabilities to
Tangible Net Worth of less than 1.00 to 1.00.
Working Capital. Maintain Working Capital in excess of
$1,750,000.00.
Current Ratio. Maintain a ratio of Current Assets to Current
Liabilities in excess of 2.00 to 1.00. Except as provided
above, all computations made to determine compliance with the
requirements contained in this paragraph shall be made in
accordance with generally accepted accounting principles,
applied on a consistent basis, and certified by Borrower as
being true and correct.
Insurance. Maintain fire and other risk insurance, public
liability insurance, and such other insurance as Lender may
require with respect to Borrower's properties and operations,
in form, amounts, coverages and with insurance companies
reasonably acceptable to Lender. Borrower, upon request of
Lender, will deliver to Lender from time to time the policies
or certificates of insurance in form satisfactory to Lender,
including stipulations that coverages will not be cancelled or
diminished without at least ten (10) days' prior written
notice to Lender. Each insurance policy also shall include an
endorsement providing that coverage in favor of Lender will
not be impaired in any way by any act, omission or default of
Borrower or any other person. In connection with all policies
covering assets in which Lender holds or is offered a security
interest for the Loans, Borrower will provide Lender with such
loss payable or other endorsements as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports
on each existing insurance policy showing such information as Lender
may reasonably request, including without limitation the following: (a)
the name of the insurer; (b) the risks insured; (c) the amount of the
policy; (d) the properties insured; (e) the then current property
values on the basis of which insurance has been obtained, and the
manner of determining those values; and (f) the expiration date of the
policy. In addition, upon request of Lender (however not more often
than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value
or replacement cost of any Collateral. The cost of such appraisal shall
be paid by Borrower.
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens, of every
kind and nature, imposed upon Borrower or its properties, income, or
profits, prior to the date on which penalties would attach, and all
lawful claims that, if unpaid, might become a lien or charge upon any
of Borrower's properties, income or profits. Provided however, Borrower
will not be required to pay and discharge any such assessment, tax,
charge, levy, lien or claim so long as (a) the legality of the same
shall be contested in good faith by appropriate proceedings, and (b)
Borrower shall have established on its books adequate reserves with
respect to such contested assessment, tax, charge, levy, lien, or claim
in accordance with generally accepted accounting practices. Borrower,
upon demand of Lender, will furnish to Lender evidence of payment of
the assessments, taxes, charges, levies, liens and claims and will
authorize the appropriate governmental official to deliver to Lender at
any time a written statement of any assessments, taxes, charges,
levies, liens and claims against Borrower's properties, income, or
profits.
Performance. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in the Related Documents in
a timely manner, and promptly notify Lender if Borrower learns of the
occurrence of any event which constitutes an Event of Default under
this Agreement or under any of the Related Documents.
Operations. Maintain executive and management personnel with
substantially the same qualifications and experience as the present
executive and management personnel; provide written notice to Lender of
any change in executive and management personnel; conduct its business
affairs in a reasonable and prudent manner and in compliance with all
applicable federal, state and municipal laws, ordinances, rules and
regulations respecting its properties, charters, businesses and
operations, including without limitation, compliance with the Americans
With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee
benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable time
to inspect any and all Collateral for the Loan or Loans or Borrower's
other properties and to examine or audit Borrower's books, accounts,
and records and to make copies and memoranda of Borrower's books,
accounts, and records. If Borrower now or at any time hererafter
maintains any records (including without limitation computer generated
records and computer software programs for the generation of such
records) in the possession of a third party, Borrower, upon request of
Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of
any records it may request, all at Borrower's expense.
Compliance Certificate. Unless waived in writing by Lender, provide
Lender at least annually and at the time of each disbursement of Loan
proceeds with a certificate executed by Borrower's chief financial
officer, or other officer or person acceptable to Lender, certifying
that the representations and warranties set forth in this Agreement are
true and correct as of the date of the certificate and further
certifying that, as of the date of the certificate, no Event of Default
exists under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all
respects with all environmental protection federal, state and local
laws, statutes, regulations and ordinances; not cause or permit to
exist, as a result of an intention or unintentional action or omission
on its part or on the part of any third party, on property owned and/or
occupied by Borrower, any environmental activity where damage may
result to the environment, unless such environmental activity is
pursuant to and in compliance with the conditions of a permit issued by
the appropriate federal, state or local governmental authorities; shall
furnish to Lender promptly and in any event within thirty (30) days
after receipt thereof a copy of any notice, summons, lien, citation,
directive, letter or other communication from any governmental agency
or instrumentality concerning an intentional or unintentional action or
omission on Borrower's part in connection with any environmental
activity whether or not there is damage to the environment and/or other
natural resources.
Additional Assurances. Make, execute and deliver to Lender such
promissory notes, mortgages, deeds of trust, security agreements,
financing statements, instruments, documents and other agreements as
Lender or its attorneys may reasonably request to evidence and secure
the Loans and to perfect all Security interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Capital Expenditures. Make or contract to make capital expenditures,
including leasehold improvements, in any fiscal year in excess of
$500,000.00 or incur liability for rentals of property (including both
real and personal property) in an amount which, together with capital
expenditures, shall in any fiscal year exceed such sum.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) case operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, (c) pay any dividends on Borrower's stock (other than
dividends payable in its stock), provided, however that notwithstanding
the foregoing, but only so long as no Event of Default has occurred and
is continuing or would result from the payment of dividends, if
Borrower is a "Subchapter S Corporation" (as defined in the Internal
Revenue Code of 1986, as amended), Borrower may pay cash dividends on
its stock to its shareholders from time to time in amounts necessary to
enable the shareholders to pay income taxes and make estimated income
tax payments to satisfy their liabilities under federal and state law
which arise solely from their status as Shareholders of a Subchapter S
Corporation because of their ownership of shares of stock of Borrower,
or (d) purchase or retire any of Borrower's outstanding shares or alter
or amend Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any
other enterprise or entity, or (c) incur any obligation as surety or
guarantor other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
ADDITIONAL COVENANTS. Richard Dan Edwards, President and CEO, agrees to retain
management control.
ADDITIONAL NEGATIVE COVENANTS. INDEBTEDNESS AND LIENS. (A) Except for trade debt
incurred in the normal course of business, existing indebtedness, including
capital leases, and indebtedness to Lender contemplated by this Agreement,
create, incur or assume indebtedness for borrowed money, including capital
leases, (b) sell, transfer, mortgage, assign, pledge, lease, grant a security
interest in, or encumber any of Borrower's assets, or (c) sell with recourse any
of Borrower's accounts, except to Lender.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the indebtedness against
any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any
payment when due on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply
with or to perform when due any other term, obligation,
covenant or condition contained in this Agreement or in any of
the Related Documents, or failure of Borrower to comply with
or to perform any other term, obligation, covenant or
condition contained in any other agreement between Lender and
Borrower.
Default in Favor of Third Parties. Should Borrower or any
Grantor default under any loan, extension of credit, security
agreement, purchase or sales agreement, or any other
agreement, in favor of any other creditor or person that may
materially affect any of Borrower's property or Borrower's or
any Grantor's ability to repay the Loans or perform their
respective obligations under this Agreement or any of the
Related Documents.
False Statements. Any warranty, representation or statement
made or furnished to Lender by or on behalf of Borrower or any
Grantor under this Agreement or the Related Documents is false
or misleading in any material respect at the time made or
furnished, or becomes false or misleading at any time
thereafter.
Defective Collateralization. This Agreement or any of the
Related Documents ceases to be in full force and effect
(including failure of any Security Agreement to create a valid
and perfected Security Interest) at any time and for any
reason.
Insolvency. The dissolution of termination of Borrower's
existence as a going business, the insolvency of Borrower, the
appointment of a receiver for any part of Borrower's property,
any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under
any bankruptcy or insolvency laws by or against Borrower.
Creditor of Forfeiture Proceedings. Commencement of
foreclosure or forfeiture proceedings, whether by judicial
proceeding, self-help, repossession or any other method, by
any creditor of Borrower, any creditor of any Grantor against
any collateral securing the indebtedness, or by any
governmental agency. This includes a garnishment, attachment,
or levy on or of any of Borrower's deposit accounts with
Lender. However, this Event of Default shall not apply if
there is a good faith dispute by Borrower or Grantor, as the
case may be, as to the validity or reasonableness of the claim
which is the basis of the creditor or forfeiture proceeding,
and if Borrower or Grantor gives Lender written notice of the
creditor or forfeiture proceeding and furnishes reserves or a
surety bond for the creditor or forfeiture proceeding
satisfactory to Lender.
Events Affecting Guarantor. Any of the preceding events occurs
with respect to any Guarantor of any of the Indebtedness of
any Guarantor dies or becomes incompetent, or revokes or
disputes the validity of, or liability under, any Guaranty of
the Indebtedness. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume
unconditionally the obligations arising under the guaranty in
a manner satisfactory to Lender, and, in doing so, cure the
Event of Default.
Change in Ownership., Any change in ownership of Twenty-five
percent (25%) or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of
payment of performance of the Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
Right to Cure. If any default, other than a Default on
Indebtedness, is curable and if Borrower or Grantor, as the
case may be, has not been given a notice of a similar default
within the preceding twelve (12) months, it may be cured (and
no Event of Default will have occured) if Borrower or Grantor,
as the case may be, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within
fifteen (15 days; or (b) if the cure requires more than
fifteen (15) days, immediately initiates steps which Lender
deems in Lender's sole discretion to be sufficient to cure the
default and thereafter continues and completes all reasonable
and necessary steps sufficient to produce compliance as soon
as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment
to this Agreement shall be effective unless given in writing and signed
by the party or parties sought to be charged or bound by the alteration
or amendment.
Applicable Law. This Agreement has been delivered to Lender and
accepted by Lender in the State of Arizona. If there is a lawsuit,
Borrower agrees upon Lender's request to submit to the jurisdiction of
the courts of MARICOPA County, the State of Arizona. This Agreement
shall be governed by and construed in accordance with the laws of the
State of Arizona.
Caption Headings. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or define
the provisions of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower
under this Agreement shall be joint and several, and all references to
Borrower shall mean each and every Borrower. This means that each of
the Borrowers signing below is responsible for all obligations in this
Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any
other matter relating to the Loan, and Borrower hereby waives any
rights to privacy it may have with respect to such matters. Borrower
additionally waives any and all notices of sale of participation
interests, as well as all notices of an repurchase of such
participation interests. Borrower also agrees that the purchasers of
any such participation interests will be considered as the absolute
owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the
sale of such participation interests. Borrower further waives all
rights of offset or counterclaim that it may have now or later against
Lender or against any purchaser or such a participation interest and
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may
enforce its interests irrespective of any personal claims or defenses
that Borrower may have against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification
and collection of this Agreement or in connection with the Loans made
pursuant to this Agreement. Lender may pay someone else to help collect
the Loans and to enforce this Agreement, and Borrower will pay that
amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses, whether or not
there is a lawsuit, including attorneys' fees for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all
other sums provided by law.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimilie, and shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to be
given at the address shown above. Any party may change its address for
notices under this Agreement by giving formal written notice to the
other parties, specifying that the purpose of the notice is to change
the party's address. To the extent permitted by applicable law, if
there is more than one Borrower, notice of any Borrower will constitute
notice to all Borrowers. For notice purposes, Borrower will keep Lender
informed at all times of Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible,
any such offending provision shall be deemed to be modified to be
within the limits of enforceability or validity; however, if the
offending provision cannot be so modified, it shall be stricken and all
other provisions of this Agreement in all other respects shall remain
valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of
any provisions of this Agreement makes it appropriate, including
without limitation any representation, warranty or covenant, the word
"Borrower" as used herein shall include all subsidiaries and affiliates
of Borrower. Notwithstanding the foregoing however, under no
circumstances shall this Agreement be construed to require Lender to
make any Loan or other financial accommodation to any subsidiary or
affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall
inure to the benefit of Lender, its successors and assigns. Borrower
shall not, however, have the right to assign its rights under this
Agreement or any interest therein, without the prior written consent of
Lender.
Survival. All warranties, representations, and covenants made by
Borrower in this Agreement or in any certificate or other instrument
delivered by Borrower to Lender under this Agreement shall be
considered to have been relied upon by Lender and will survive the
making of the Loan and delivery to Lender of the Related Documents,
regardless of any investigation made by Lender or on Lender's behalf.
Time is of the Essence. Time is of the essence in the performance of
this Agreement.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right
shall operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Agreement shall not prejudice or
constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Borrower, or between Lender and any Grantor, shall
constitute a waiver of any of Lender's rights or of any obligations of
Borrower or of any Grantor as to any future transactions. Whenever the
consent of Lender is required under this Agreement, the granting of
such consent by Lender in any instance shall not constitute continuing
consent in subsequent instances where such consent is required, and in
all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF MAY
30, 1996.
BORROWER:
ROYAL GRIP, INC.
By: /s/Robert Burg By: /s/Thomas A. Schneider
----------------------- -----------------------------------
ROBERT BURG, PRESIDENT THOMAS A. SCHNEIDER, VICE PRESIDENT
LENDER:
BILTMORE INVESTORS BANK, N.A.
By: Signature illegible
-----------------------------------
Authorized Officer
<PAGE>
CHANGE IN TERMS AGREEMENT
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C>
$1,200,000.00 05-30-1997 22098 96 0013140 07807
</TABLE>
Borrower: ROYAL GRIP, INC. Lender: BILTMORE INVESTORS BANK, N.A.
444 W. GENEVA DRIVE PHOENIX DIVISION
TEMPE, AZ 85282 2425 E. CAMELBACK ROAD
PHOENIX, AZ 85016
===============================================================================
Principal Amount: $1,200,000.00 Date of Agreement: May 30, 1996
DESCRIPTION OF EXISTING INDEBTEDNESS. The Promissory Note from Royal Grip, Inc.
to Biltmore Investors Bank dated June 15, 1994, and any and all subsequent
Change in Terms Agreements.
DESCRIPTION OF COLLATERAL. Commercial Security Agreement.
DESCRIPTION OF CHANGE IN TERMS.
1. This Change in Terms Agreement hereby extends the maturity
date to May 30, 1997.
2. This Change in Terms Agreement hereby increases the variable rate of
interest to the Wall Street Journal Prime Rate plus .50%.
3. This Change in Terms Agreement hereby amends the monthly
payment schedule to interest only monthly.
PROMISE TO PAY. ROYAL GRIP, INC. ("Borrower") promises to pay to BILTMORE
INVESTORS BANK, N.A. ("Lender"), or order, in lawful money of the United States
of America, the principal amount of One Million Two Hundred Thousand & 00/100
Dollars ($1,200,000.00) or so much as may be outstanding, together with interest
on the unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on May 30, 1997. In addition, Borrower will pay
regular monthly payments of accrued unpaid interest beginning June 30, 1996, and
all subsequent interest payments are due on the last day of each month after
that. Interest on this Agreement is computed on a 365/360 simple interest basis;
that is, by applying the ratio of the annual interest rate over a year of 360
days, multiplied by the outstanding principal balance, multiplied by the actual
number of days the principal balance is outstanding. Borrower will pay Lender at
Lender's address shown above or at such other place as Lender may designate in
writing. Unless otherwise agreed or required by applicable law, payments will be
applied first to accrued unpaid interest, then to principal, and any remaining
amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to change
from time to time based on changes in an independent index which is the Prime
rate as published in the Wall Street Journal, Western Edition. When a range of
rates has been published, the higher of the rates will be used (the "Index").
The Index is not necessarily the lowest rate charged by Lender on its loans. If
the Index becomes unavailable during the term of the this loan, Lender may
designate a substitute index after notice to Borrower. Lender will tell Borrower
the current index rate upon Borrower's request. Borrower understands that Lender
may make loans based on other rates as well. The interest rate change will not
occur more often than each DAY. The index currently is 8.250% per annum. The
interest rate to be applied to the unpaid principal balance of this Agreement
will be at a rate of 0.500 percentage points over the index, resulting in an
initial rate of 8.750% per annum. NOTICE: Under no circumstances will the
interest rate on this Agreement be more than the maximum rate allowed by
applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Agreement, Borrower understands that Lender is entitled to a minimum
interest charge of $25.00. Other than Borrower's obligation to pay any minimum
interest charge, Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by Lender
in writing, relieve Borrower of Borrower's obligation to continue to make
payments of accrued unpaid interest. Rather, they will reduce the principal
balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the unpaid portion of the regularly scheduled payment.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this
Agreement or any agreement related to this Agreement, or in any other agreement
or loan Borrower has with Lender. (c) Borrower defaults under any loan,
extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay this Note or
perform Borrower's obligations under this Note or any of the Related Documents.
(d) Any representation or statement made or furnished to Lender by Borrower or
on Borrower's behalf is false or misleading in any material respect either now
or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Agreement. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the indebtedness is impaired. (i) Lender
in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Agreement
within the preceding twelve (12) months, it may be cured (and no event of
default will have occurred) if Borrower, after receiving written notice from
Lender demanding cure of such default; (a) cures the default within fifteen (15)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be sufficient
to cure the default and thereafter continues and completes all reasonable and
necessary steps sufficient to produce compliance as soon as reasonably
practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Agreement and all accrued unpaid interest immediately due,
without notice, and then Borrower will pay that amount. Upon default, including
failure to pay upon final maturity, Lender, at its option, may also, if
permitted under applicable law, do one or both of the following: (a) increase
the variable interest rate on this Agreement to 6.500 percentage points over the
index, and (b) add any unpaid accrued interest to principal and such sum will
bear interest therefrom until paid at the rate provided in this Agreement
(including any increased rate). The interest rate will not exceed the maximum
rate permitted by applicable law. Lender may hire or pay someone else to help
collect this Agreement if Borrower does not pay. Borrower also will pay Lender
that amount. This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. If not
prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law. This Agreement has been delivered to
Lender and accepted by Lender in the State of Arizona. If there is a lawsuit,
Borrower agrees upon Lender's request to submit to the jurisdiction of the
courts of MARICOPA County, the State of Arizona. This Agreement shall be
governed by and construed in accordance with the laws of the State of Arizona.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $16.25 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Agreement against any
and all such accounts.
LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances
under this Agreement may be requested either orally or in writing by Borrower or
by an authorized person. Lender may, but need not, require that all oral
requests be confirmed in writing. All communications, instructions, or
directions by telephone or otherwise to Lender are to be directed to Lender's
office shown above. The following party or parties are authorized to request
advances under the line of credit until Lender receives from Borrower at
Lender's address shown above written notice of revocation of their authority:
RICHARD DAN EDWARDS, CEO; ROBERT BURG, PRESIDENT; EARL L. HAINES, SENIOR VICE
PRESIDENT; and THOMAS A. SCHNEIDER, VICE PRESIDENT. Borrower agrees to be liable
for all sums either: (a) advanced in accordance with the instructions of an
authorized person or (b) credited to any of Borrower's accounts with Lender. The
unpaid principal balance owing on this Agreement at any time may be evidenced by
endorsements on this Agreement or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under this
Agreement if: (a) Borrower or any guarantor is in default under the terms of
this Agreement or any agreement that Borrower or any guarantor has with Lender,
including any agreement made in connection with the signing of this Agreement;
(b) Borrower or any guarantor ceases doing business or is insolvent; (c) any
guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
guarantor's guarantee of this Agreement or any other loan with Lender; (d)
Borrower has applied funds provided pursuant to this Agreement for purposes
other than those authorized by Lender; or (e) Lender in good faith deems itself
insecure under this Agreement or any other agreement between Lender and
Borrower.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of
the original obligation or obligations, including all agreements evidenced or
securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lender's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a satisfaction
of the obligation(s). It is the intention of Lender to retain as liable parties
all makers and endorsers of the original obligation(s), including accommodation
parties, unless a party is expressly released by Lender in writing. Any maker or
endorser, including accommodation makers, will not be released by virtue of this
Agreement. If any person who signed the original obligation does not sign this
Agreement below, then all persons signing below acknowledge that this Agreement
is given conditionally, based on the representation to Lender that the
non-signing party consents to the changes and provisions of this Agreement or
otherwise will not be released by it. This waiver applies not only to any
initial extension, modification or release, but also to all such subsequent
actions.
PRIOR NOTE. THE PROMISSORY NOTE FROM ROYAL GRIP, INC. TO LENDER DATED JUNE 15,
1994, AND ANY AND ALL SUBSEQUENT CHANGE IN TERMS AGREEMENTS.
MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing any of its rights
or remedies under this Agreement without losing them. Borrower and any other
person who signs, guarantees or endorses this Agreement, to the extent allowed
by law, waive presentment, demand for payment, protest and notice of dishonor.
Upon any change in the terms of this Agreement, and unless otherwise expressly
stated in writing, no party who signs this Agreement, whether as maker,
guarantor, accommodation maker or endorser, shall be released from liability.
All such parties agree that Lender may renew or extend (repeatedly and for any
length of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender, may
modify this loan without the consent of or notice to anyone other than the party
with whom the modification is made.
EFFECTIVE RATE. Borrower agrees to an effective rate of interest that is the
rate specified in this Note plus any additional rate resulting from any other
charges in the nature of interest paid or to be paid in connection with this
Note.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED
COPY OF THE AGREEMENT.
BORROWER:
ROYAL GRIP, INC.
By: Robert Burg By: Thomas A. Schneider
---------------------- -----------------------------------
ROBERT BURG, PRESIDENT THOMAS A. SCHNEIDER, VICE PRESIDENT
ROYAL GRIP, INC. AND SUBSIDIARY
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (575,283) $ (497,737) $(1,144,530) $ (866,740)
=========== =========== =========== ===========
Weighted Average Shares:
Common shares outstanding 2,734,678 2,734,678 2,734,678 2,734,678
Common equivalent shares issuable upon
exercise of employee stock options -- -- -- --
----------- ----------- ----------- -----------
Shares used in net loss per share 2,734,678 2,734,678 2,734,678 2,734,678
=========== =========== =========== ===========
Net loss per share $ (0.21) $ (0.18) $ (0.42) $ (0.32)
=========== =========== =========== ===========
</TABLE>
EXHIBIT 11
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 30,987
<SECURITIES> 0
<RECEIVABLES> 3,250,608
<ALLOWANCES> 337,740
<INVENTORY> 1,467,959
<CURRENT-ASSETS> 4,459,067
<PP&E> 10,326,078
<DEPRECIATION> 5,040,593
<TOTAL-ASSETS> 10,812,478
<CURRENT-LIABILITIES> 2,172,758
<BONDS> 0
0
0
<COMMON> 2,735
<OTHER-SE> 8,544,110
<TOTAL-LIABILITY-AND-EQUITY> 10,812,478
<SALES> 9,452,111
<TOTAL-REVENUES> 9,452,111
<CGS> 7,192,700
<TOTAL-COSTS> 3,375,365
<OTHER-EXPENSES> 14,098
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,478
<INCOME-PRETAX> (1,144,530)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,144,530)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,144,530)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
</TABLE>
