SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________to _____________.
Commission File Number 0-22230
ROYAL GRIP, INC.
(Exact name of Registrant as specified in its charter)
Nevada 86-0615648
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
444 West Geneva, Tempe, Arizona 85282
(Address of principal executive offices)(Zip Code)
(602) 829-9000
(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:
Title or Class Name of Exchange on which registered
- ----------------------------- ------------------------------------
Common Stock, $.001 par value NASDAQ National Market System
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]
At March 14, 1997, the aggregate market value of Common Stock held by
non-affiliates of the Registrant was approximately $5,030,754.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents
and reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES [ ] NO [ ]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the Registrant's
classes of common equity, as of the latest practicable date: 2,740,928 shares of
Common Stock outstanding on March 14, 1997.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C> <C>
Item 1. Business..................................................................... 3
Executive Officers of the Registrant......................................... 9
Item 2. Property.....................................................................10
Item 3. Legal Proceedings...........................................................10
Item 4. Submission of Matters to a Vote of
Security Holders....................................................10
PART II
Item 5. Market for the Registrant's Common
Equity Securities and Related Stockholder Matters...................11
Item 6. Selected Consolidated Financial Data.........................................14
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations...........................................15
Item 8. Consolidated Financial Statements and
Supplementary Data..................................................25
Item 9. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure............................................49
PART III
Item 10. Directors and Executive Officers
of the Registrant...................................................49
Item 11. Executive Compensation.......................................................50
Item 12. Security Ownership of Certain
Beneficial Owners and Management....................................53
Item 13. Certain Relationships and
Related Transactions................................................54
PART IV
Item 14. Exhibits, Consolidated Financial Statement
Schedule, and Reports on Form 8-K...................................54
SIGNATURES..............................................................................................58
</TABLE>
2
<PAGE>
PART I
ITEM 1 -- BUSINESS
Introduction
Royal Grip, Inc. (with its subsidiary, collectively, the "Company")
designs and distributes golf club grips and designs and manufactures athletic
headwear. In 1989, the Company introduced a rubber wrap golf grip that gained
widespread acceptance in the golf industry and enabled the Company to achieve
brand name recognition. The Company currently offers a wide variety of standard
and custom models, all of which feature a distinctive feel and appearance and
lasting durability.
The Company believes it has established a reputation within the golf
industry for innovation in the design and creation of golf grips. It continually
seeks to improve these products with design and raw material innovations. The
Company has developed distribution channels to several thousand club
professionals, club repair shops, and retail golf outlets, and has established
relationships with several original equipment manufacturers ("OEMs"). The
Company believes that it is a leader in the Japanese market.
In April 1994, the Company acquired Roxxi, Inc. ("Roxxi"), an
Oklahoma-based manufacturer and distributor of high-quality athletic headwear,
which now operates as a wholly-owned subsidiary of the Company. Roxxi's products
are sold through the Company's golf-related sales force as well as Roxxi's own
distribution channels, and enable the Company to offer a wider array of
products.
In December 1996, the Company outsourced all of its production of
non-cord grips to Acushnet Rubber Company, Inc. ("Acushnet"). Although this
arrangement is expected to have positive long-term implications to the Company's
cost structure and to its research and development efforts, the Company incurred
transaction and related costs of approximately $1.4 million in the fourth
quarter of 1996 in connection with the transition of its manufacturing
operations. Further, Acushnet has experienced start-up delays in the production
of grips, which has adversely affected the Company's customer relationships and
results of operations, has impaired the Company's ability to meet its loan
covenants and may make it more difficult for the Company to satisfy lending
covenants in the future.
The Company and Acushnet have recently renegotiated their agreement in
light of Acushnet's production difficulties. In connection with this
renegotiation Acushnet has agreed to provide the Company with a credit of
$400,000 against future purchases of grips, and additonal credits in the event
Acushnet fails to meet future production requirements. These credits may be
reduced depending upon Acushnet's production beyond specified levels or as a
result of the cancellation of stock options granted to Acushnet. The
renegotiated agreement also provides, among other things, for modified future
production and purchase requirements and for termination rights exercisable by
Acushnet. The Company has also recently obtained certain modifications of its
loan covenants that waive past covenant defaults and are intended to better
enable the Company to satisfy such covenants in the future.
In January 1997, the Company entered into a letter of intent to combine
with FM Precision Golf Corporation, a privately held golf club shaft
manufacturer based in Torrington, Connecticut ("FM Precision"). The preliminary
terms of the combination contemplate that the stockholders of FM Precision would
acquire 65% of the resulting company and control the board of directors. The
transaction is subject to a number of conditions, including the completion of
due diligence by both parties, execution of a definitive agreement, the receipt
of an independent fairness opinion, the approval of the board of directors and
stockholders of each of the Company and FM Precision, and other customary
conditions. None of these conditions has yet been satisfied.
The Company was founded and is headed by Professional Golf Association
("PGA") member and Tour professional, Danny Edwards. Mr. Edwards is a five-time
PGA Tour winner, three-time Collegiate All-American, member of the 1973 United
States Walker Cup Team, and winner of the Japanese Masters.
3
<PAGE>
Industry and Market Background
Golf Grip Market. The Company's principal business is the sale of golf
club grips. These grips are sold into the replacement market, which serves those
golfers seeking to replace grips that have become worn and slick due to
prolonged use, as well as to OEMs, who incorporate the Company's grips on their
newly manufactured golf clubs.
In recent years, the Company and other grip manufacturers have begun to
educate golfers and grip suppliers about the performance benefits associated
with periodic grip replacement. In addition, the availability of performance-
enhancing grip products such as those offered by the Company has contributed to
the growth of the replacement market. The Company believes its golf grips
provide golfers with a supple, "tacky" surface that provides enhanced feel and
control over the golf club. The cost of regripping a standard set of golf clubs
is approximately $70 and is relatively modest compared to the initial purchase
price of a set of clubs.
Acceptance of the Company's products by the replacement market has
facilitated its efforts to market golf grips to OEMs. Most golf club
manufacturers obtain some or all of the major components of their golf clubs,
including grips, from independent suppliers that design and manufacture
components to the OEMs' specifications. The Company targets sales of its grips
to manufacturers of premium brand golf clubs who seek to improve the performance
characteristics and the marketability of their clubs. The Company works with
these OEMs to create customized golf grips bearing the manufacturer's
distinctive logo.
Athletic Headwear Market. The market for athletic headwear is
characterized by a broad range of customers, a variety of market niches, and
intense competition. Companies that offer athletic headwear generally compete in
one of two principal markets. Some produce headwear designed for mass sales
through low-priced outlets, such as supermarkets and retail superstores, and
compete almost exclusively on the basis of price, while others offer
high-quality products and compete on the basis of quality, delivery time, and
customer service. Within this latter market segment, in which the Company
competes, there are a variety of marketing niches, including retail sporting
goods stores, which typically consist of regional stores that carry athletic
headwear bearing local team logos; large chain sporting goods stores, which
generally carry a full line of professional and collegiate athletic team caps as
well as caps bearing the logos of various corporations involved in the sports
industry; college bookstores and team sales, in which athletic headwear
manufacturers contract with colleges and their coaches to produce caps bearing
the school logo, which can then be used on the field and sold in the school's
bookstore; team outfitters, which supply local teams, such as high schools or
little league teams, with uniforms and related sports equipment; resorts and
country clubs, which often stock caps bearing their special logos or insignias;
and businesses, which provide custom-designed caps to employees or customers to
promote the organization.
The Company directs its headwear sales efforts primarily to the retail
sporting goods stores, college bookstores and team sales, team outfitters, and
resorts and country clubs segments, although it also addresses the business and
chain store markets.
Products and Product Features
Golf Grips. Many manufacturers produce grips through a compression
molding process in which two grip halves are molded together. Compression
molding leaves a noticeable seam in the grip, which must be removed through a
buffing or grinding process that alters the grip surface and causes it to become
slick over time. By contrast, with the exception of its cord grip models, the
Company's grips are manufactured through an injection molding process using the
Company's proprietary rubber compound. This proprietary compound, when used in
conjunction with injection molding, produces, in the Company's view, a more
durable grip. The Company believes that the raw materials and the production
techniques used in the manufacture of its grips, as well as the innovative
designs of its grips, have made it a leader in the golf grip market.
4
<PAGE>
The Company currently offers a wide variety of standard and customized
grips, including its new Slot Wrap(TM), Royal Wrap(TM) and Slot Wrap Cord(TM)
line of grips, which feature a new rubber compound, the Sandwrap(TM) and Sand
Maximum(TM) line of grips, which are designed to provide enhanced adhesion, and
its cord line of grips, which provide greater adhesion, particularly in very wet
or humid playing conditions, through the addition of a cotton material embedded
in the surface of the grip. The Company also offers men's and ladies' perforated
wrap, men's oversize perforated wrap, men's and junior's smooth wrap, perforated
wrap pistol putter, fine texture putter, fine texture oversize putter, and
Sandmax(TM) putter grips. The Company also manufactures and sells certain
specialty grips, including the Arthrigrip(TM), which is designed for golfers
suffering from arthritis. The Company designs and produces its customized grips
primarily for OEMs, incorporating into each one the particular manufacturer's
distinctive logo, color scheme, and pattern. The majority of the Company's grips
bear the Royal Grip name as part of its program to build brand awareness and
customer loyalty.
Athletic Headwear. The Company produces four different styles of
athletic headwear: authentic and casual baseball caps, golf caps and visors. The
caps and visors are typically made of high quality wool serge or cotton twill,
although the Company does offer fabrics such as brushed giant twill, distressed
cotton, wool plaid, washed denim, sanded cotton, wool flannel and leather suede.
The Company utilizes fine quality materials for other structural components of
the headwear, including sweatbands, visor boards, and covered buttons. The
Company's baseball caps include the authentic model, which features a six-panel,
high crown design, as well as casual models and officials' caps. The golf caps
feature a five-panel design. All of the Company's caps feature a comfortable fit
and durable finish, and are offered in both fitted and adjustable styles and in
a variety of colors and logos.
The Company utilizes computerized embroidering machines to design and
create logos or insignias for its headwear. This technology enables the Company
to meet the needs and product specifications of all types of customers, from
small clubs or teams to major national colleges. The Company sews, embroiders
and assembles its caps and visors at its Oklahoma City facility using raw
materials from outside vendors.
Customers
The Company directed its initial sales efforts on behalf of its golf
grips to the golf pro shops, golf club repair shops, and retail golf equipment
stores that service the replacement grip market. In recent years, however, the
Company has increased its sales to OEMs. The Company provides golf club grips
used on many of Cobra's premium golf club lines, which accounted for 11.7% of
the Company's total net sales in 1996, and all of the grips used on Odyssey's
various mens' putter models. The Company also supplies grips to other OEMs such
as Titleist, Bridgestone, Henry-Griffitts, Mizuno, Tad Moore Golf, and is the
primary vendor for Tommy Armour Golf.
While the Company utilizes its grip sales representatives to market its
golf-related headwear, a separate sales force markets its other headwear
products to schools, sporting goods stores, college bookstores and team
outfitters. The Company currently has agreements to produce baseball caps for
several leading college baseball teams, including Arizona State University, the
University of Oklahoma, and the University of Notre Dame.
Sales and Marketing
Domestic Grip Sales. Sales of golf grips to the domestic replacement
market represented 34.8%, 42.9%, and 39.6% of the Company's total net sales of
grips in 1996, 1995, and 1994, respectively. While many golf grip manufacturers
sell their products to wholesale distributors, who in turn sell to dealers and
other representatives, the Company uses a single-tier distribution strategy in
which its sales representatives sell grips directly to thousands of golf club
professionals and off-course specialty store operators. The Company's sales
force, which includes 16 independent sales representatives and 10 Company sales
representatives, target those domestic replacement market retailers most likely
to promote the Company's grips. They introduce the Company's products, explain
their characteristics and performance advantages, and obtain feedback regarding
the market's acceptance of the Company's and its competitors' products.
5
<PAGE>
The Company's independent sales representatives, who receive training
from the Company's internal sales and marketing staff, cover particular
geographical regions. These representatives are permitted to sell other golf
products, but may not sell competing golf grips or caps.
Grip sales to OEMs accounted for 39.5%, 29.5%, and 30.8% of the
Company's total net sales of grips in 1996, 1995, and 1994, respectively,
reflecting the Company's successful efforts to develop customer relationships
with several major club manufacturers. Typically, the Company commences a
relationship with a club manufacturer by supplying grips for one or a few of its
product lines. Once the Company has established an ongoing relationship with the
OEM, it seeks to expand the relationship to supply grips for additional product
lines.
Domestic Headwear Sales. Sales of headwear accounted for 31.8%, 27.2%,
and 12.2% of total sales in 1996, 1995, and 1994 (the year in which the Company
acquired its Roxxi subsidiary), respectively. The Company utilizes a separate
sales force of approximately 24 independent sales representatives to market its
baseball-style caps to college teams and bookstores and team outfitters, while
marketing its golf-related headwear, which bears each customer's distinctive
colors and logo, through its grip distributors, who have access to the golf
resort and country club market. The Company targets customers with national
reputations and high name recognition in order to increase market awareness of
its products.
International Sales. The Company's international sales, which consist
primarily of sales of grips, accounted for 20.8%, 22.2%, and 26.0% of the
Company's total net sales during 1996, 1995, and 1994, respectively. In recent
years the Company's headwear sales have increased as a percentage of total
sales. The Company utilizes distributors to sell its products in foreign
markets, including the United Kingdom, Japan, Sweden and Canada. In May 1996,
the Company closed its office in England, which supplied the United Kingdom and
Western Europe markets, and converted its operations in those markets to a
distributorship relationship.
Precision Japan, the exclusive distributor of the Company's golf club
grips and athletic headwear in Japan, accounted for 18.9%, 21.4%, and 22.3% of
the Company's total net sales during 1996, 1995, and 1994, respectively. Through
Precision Japan, the Company has established relationships with leading Japanese
OEMs, including Bridgestone, Mizuno, and Daiwa. Precision Japan also markets the
Company's golf-related headwear.
The Company and Precision Japan have entered into a ten-year agreement
expiring in 2001 pursuant to which the Company granted Precision Japan exclusive
distribution rights with respect to the Company's products for Japan and certain
other Far Eastern countries. Precision Japan has the option to renew this
agreement for successive five-year terms. The agreement is terminable by either
party for cause or if they fail to agree upon pricing terms, or by Precision
Japan at any time upon six months' notice to the Company. While the Company
currently enjoys a strong relationship with Precision Japan, the loss of
Precision Japan as a distributor of the Company's products would have a
significant adverse effect on the Company's business.
Advertising and Promotion. The Company advertises its grips in trade
publications and national golf magazines, such as Golf World, Golf Week and Golf
Product News. In addition, as point-of-purchase selling aids, the Company
distributes to its customers various promotional items, such as caps, visors,
grip displays, window stickers, and brochures. At the grass-roots level, the
Company's sales representatives promote its products through a nationwide series
of consumer "Demo Days" at local golf facilities. To further increase sales, the
Company grants promotional incentives to qualified golf professionals to
encourage them to introduce and recommend the Company's grip products to their
customers. The Company also provides its products to PGA Tour professionals at
no charge by supplying the various repair vans that service the professional
tours from week to week.
The Company promotes its headwear products through its various sales
forces and by participating in industry trade shows. The Company believes that
its best promotional opportunities in this area come through supplying caps to
successful college teams, whose use of the Company's headwear influences the
choice of headwear of other potential customers, such as team outfitters and
sporting goods stores.
6
<PAGE>
Manufacturing
Golf Grips. On December 21, 1996, the Company entered into a
Manufacturing and Supply Agreement (the "Acushnet Supply Agreement") with
Acushnet Rubber Company, Inc. ("Acushnet"). On April 4, 1997, the Company and
Acushnet renegotiated certain aspects of their agreement. This agreement, as
amended, makes Acushnet the exclusive supplier of non-cord grips to the Company,
subject to the Company's ability to use other suppliers in the event Acushnet
fails to meet production requirements, and requires that the Company purchase
minimum annual volumes (commencing after January 1, 1999) at fixed prices
specified in the contract. Acushnet is obligated to provide ongoing research and
development with respect to grip compounds, manufacturing processes, and
engineering and quality control support.
The term of the Acushnet Supply Agreement expires on December 21, 2006,
subject to the Company's right to extend the agreement for up to three
additional periods of five years each. The Acushnet Supply Agreement is subject
to termination by either party upon certain material breaches thereof or of the
Equipment Lease described below. Upon termination of the Acushnet Supply
Agreement by the Company arising out of a material breach by Acushnet, the
Company may at its option repurchase any grip manufacturing equipment owned by
Acushnet at fair market value. In addition, the Company may terminate the
Acushnet Supply Agreement at any time upon written notice, and Acushnet may
terminate the agreement upon ten months' prior written notice given on and after
June 30, 1998, and payment by the terminating party to the other party of a
termination fee, which includes the repurchase at prescribed values of the
manufacturing equipment owned by Acushnet, an additional fee of $2,500,000 and
other fees and commitments relating, among other things, to the transition of
production operations.
In connection with the Acushnet Supply Agreement, the Company leased to
Acushnet the Company's specialized manufacturing equipment used in the
production of its non-cord grips, pursuant to a Capital Lease Agreement dated as
of December 21, 1996 (the "Equipment Lease"). Under the Equipment Lease, the
Company granted to Acushnet an option to purchase the Company's manufacturing
equipment. Further, the Equipment Lease terminates on December 31, 2006, at
which time the equipment will be transferred to Acushnet at no further cost.
The Company believes that Acushnet is a leading manufacturer of quality
precision molded rubber components and that the manufacturing alliance with
Acushnet will better enable the Company to focus on the development of its
product innovation, marketing, and customer service and support capabilities.
However, Acushnet has experienced start-up delays in the production of grips
which has adversely affected the Company's customer relationships and results of
operations, has impaired the Company's ability to satisfy its loan covenants and
may make it more difficult for the Company to satisfy lending covenants in the
future. The recent amendments to the Acushnet Supply Agreement provide the
Company with a credit of $400,000 against future grip purchases, and additional
purchase credits in the event Acushnet fails to meet production requirements.
These credits may be reduced depending upon Acushnet's production beyond
specified levels or as a result of its cancellation of stock options granted to
it by the Company. The modified agreement also alters the future production and
purchase requirements of the parties. The Company has also recently obtained
certain modifications of its loan covenants that waive past covenant defaults
and are intended to better enable the Company to satisfy such covenants in the
future. The Company currently uses another third party manufacturer to produce
its cord grips.
All of the Company's grips are designed to Company specifications and
are made of its proprietary rubber compound. Other than the Company's cord
grips, which are compression molded, the Company's golf grips are produced
through an injection manufacturing process in which a viscous compound is
vertically injected into a seamless cavity, producing a finished grip that does
not require buffing or grinding.
In the ordinary course of its manufacturing process, the Company used
various citrus-based, biodegradable solvents and paints. To date, the Company
has not experienced any material environmental compliance problems.
7
<PAGE>
Athletic Headwear. The Company produces headwear primarily at its
Oklahoma City facility. In 1995, the Company decided to consolidate the majority
of its Tempe and Oklahoma City facilities capacities in a newly-leased 30,000
square foot facility in Oklahoma City. The resulting move was targeted at
reducing overhead and improving productivity. In July 1996, the Company
subleased approximately 11,000 square feet of space at its Tempe facility after
the consolidation of headwear production.
Upon receiving a headwear order, the Company works with the customer
to design an appropriate logo or insignia, establish a color scheme, and choose
the appropriate fabrics. The Company's art department creates a hand- drawn
version of the logo that is computerized through the use of a digital scanning
device. Computerized embroidering machines utilize this computer image to stitch
the logo into the appropriate panels of the cap. Company employees then hand sew
the remaining portions of the cap, including the bill and the sweatband. With
each embroidering machine capable of stitching logos on several caps at once,
production time for a "run" of caps averages about 30 minutes.
Product Development
The Company believes that its future growth and success will depend
significantly on its ability to increase market share with its present product
lines while concurrently developing new products and product categories. In this
regard, the Company's sales and other personnel work to conceive new product
opportunities by creating prototypes and masters and by working with the
Company's suppliers and customers to design and produce finished products. New
grip products are tested through the Company's PGA tour representatives and
sales force.
The development of new golf club grips is influenced by the standards
and interpretations promulgated by the United States Golf Association ("USGA").
The Company believes that it must develop products that comply with those
standards even though they apply only to USGA-sanctioned competitive events.
The Company tests its headwear products to ensure that they conform
with Company and customer specifications relating to size and fit. In addition,
the Company utilizes a variety of materials, including sanded cotton, washed
denim, and leather suede, in an attempt to give each hat a distinctive look and
feel, and continues to experiment with new materials.
Competition
The Company's principal competitors in the golf grip market include
Eaton/Golf Pride and Lamkin Corp., with Eaton's Golf Pride division currently
maintaining a majority of the total golf grip market. These companies, as well
as several other grip manufacturers with which the Company competes, have
greater financial, marketing, and other resources than the Company. In addition,
several OEMs that do not currently manufacture premium quality grips could, in
light of their substantial resources, enter into this market segment.
Competition in the grip market is intense.
The golf industry is characterized by widespread imitation of
successful product offerings and, consequently, the commercial success of the
Company's grips has spawned several imitation grip products. These imitation
grips appear cosmetically similar to the Company's grips and are typically
priced lower, which has attracted and may continue to attract consumers and club
manufacturers. The Company, however, believes that such imitation grips do not
deliver the performance and durability of the Company's grips.
The headwear market is large and also extremely competitive. The
Company's principal competitors in the athletic headwear market include Texace
and Imperial in the golf cap segment and Pro-Line, New Era, and DeLong in the
team sports and college bookstore markets. Each of these companies may possess
greater financial, marketing and other resources than the Company.
8
<PAGE>
Proprietary Rights
The Company relies upon patents and trademarks to establish and protect
the Company's proprietary rights in its products and technologies. The Company's
logo and the name "Royal Grip" have been registered as trademarks in the United
States, Japan, and in other foreign countries. In addition, the Company has
filed trademark applications relating to the names and configurations of several
of the Company's products in the United States and in foreign countries,
including Japan. The Company has also obtained design patents on some of its
grips and applied for others that are pending. The Company protects its
proprietary rubber compound and related technologies as trade secrets. Despite
the safeguards undertaken by the Company, there can be no assurance that its
proprietary rights are adequately protected or that competitors will not be able
to produce golf club grips that successfully imitate the Company's designs and
materials without infringing the Company's proprietary rights.
In its headwear business, the Company licenses the trademarks of
several organizations. It also from time to time seeks to trademark various
"catch-phrases" that can be included on or used in connection with its sports
apparel.
Employees
As of March 1, 1997, the Company employed 151 persons on a full-time
basis and 2 persons on a part time basis. In addition, the Company hires
independent consultants and temporary help from time to time. Some of the
Company's employees are highly skilled and the Company's continued success will
depend in part upon its ability to retain these employees. The Company has never
had a work stoppage, no employees are represented by a labor organization, and
the Company considers its employee relations to be good.
Executive Officers of the Registrant
Set forth below is information regarding the names, ages, positions,
and offices with the Company of the executive officers of the Company.
Information regarding directors of the Company is set forth in Item 10 of this
Form 10-K Report.
Danny Edwards, 45, has been Chairman of the Board and Chief Executive
Officer since founding the Company in 1988, and served as President from 1988 to
1994. Mr. Edwards has played on the Professional Golf Association Tour since
1975 and has won five tournaments. Mr. Edwards was a three-time Collegiate
All-American at Oklahoma State University and a member of the 1973 United States
Walker Cup Team. Currently, Mr. Edwards competes annually in three to five PGA
Tour events as well as selected regional tournaments and charity events in order
to maintain his high profile in the golf industry. Mr. Edwards is also a
principal of Danny Edwards Profile Sports ("Profile Sports"), which conducts
corporate golf schools for executives throughout the country. Mr. Edwards'
activities on behalf of Profile Sports occupy approximately 12 days of his
professional time annually and afford him an opportunity to further promote the
Company's products.
Robert G.J. Burg, II, 40, has been the Company's President since
February 1995. Mr. Burg joined the Company in January 1992 as the Regional Sales
Manager for the Western Sales Region and became the Company's Senior Vice
President, Marketing, Sales, and Tour Relations in January 1992, serving in that
capacity until February 1995. For the five years prior to joining the Company,
Mr. Burg was self-employed in the sporting goods industry as a distributor of
sporting goods products, including ski and golf equipment.
Thomas A. Schneider, 37, C.P.A., has been the Company's Vice
President-Finance, since January 1996. Prior to joining the Company, Mr.
Schneider served for five years as the Controller of Karsten Manufacturing
Corp., the maker of Ping golf equipment. He has also served as Controller of
various companies in the real estate and financial services industries.
9
<PAGE>
ITEM 2 - PROPERTY
The Company's principal executive offices and customer service
operations are located in a 51,000 square foot leased facility in Tempe,
Arizona. The Company's lease runs through November 1998. The Company currently
subleases approximately 11,000 square feet of this facility. The Company
recently signed a lease for a 30,000 square foot facility in Oklahoma City which
runs through March 2001. The Company believes that its facilities are in good
condition. Aggregate monthly rental payments for the Company's office and
production facilities are approximately $26,000. Following the outsourcing of
its grip manufacturing operations to Acushnet, the Company intends to either
sublease or negotiate a termination of the lease for the remaining space at its
Tempe, Arizona facility and relocate to a smaller, lower cost facility.
ITEM 3 - LEGAL PROCEEDINGS
The Company is from time to time involved in legal proceedings of a
character normally incident to its business and is not currently a party to any
material pending legal proceedings, other than ordinary routine litigation
incidental to its business. No assurances can be given with respect to the
extent of any such litigation in the future.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security holders
during the fourth quarter of fiscal year 1996.
10
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY
SECURITIES AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the National Association
of Securities Dealers Automated Quotation--National Market System ("The Nasdaq
National Market") since September 23, 1993, under the symbol "GRIP." The
following table sets forth the high and low per share sale prices of the Common
Stock reported on The Nasdaq National Market for the two most recent fiscal
years. The closing price of the Company's Common Stock on The Nasdaq National
Market on March 14, 1997, the latest practicable date prior to the filing of
this Form 10-K, was $3.9375.
Range of Sale Prices
--------------------
High Low
---- ---
Fiscal 1996
- -----------
First Quarter............................... $ 8 1/2 $ 5 1/4
Second Quarter.............................. $ 8 $ 4
Third Quarter............................... $ 5 5/8 $ 3 1/4
Fourth Quarter.............................. $ 4 5/8 $ 1 3/4
Fiscal 1995
- -----------
First Quarter............................... $ 6 3/4 $ 4
Second Quarter.............................. $ 5 1/2 $ 3 1/2
Third Quarter............................... $ 6 1/2 $ 3 1/4
Fourth Quarter.............................. $ 6 3/8 $ 3 3/4
As of March 15, 1997 there were approximately 133 stockholder accounts
of record of the Common Stock. This figure does not reflect beneficial ownership
of shares held in nominee names.
Recent Sales of Unregistered Securities
On December 21, 1996, the Company granted to Acushnet stock options to
purchase 250,000 shares of the Company's Common Stock. The options were granted
as partial consideration for Acushnet's entering into the Acushnet Supply
Agreement. All of the options were immediately vested and exercisable on the
date of grant. The exercise price of 50,000 of the options is $4.00 per share,
the closing sales price of the Company's Common Stock on the date of grant, and
the exercise price of the remaining 200,000 options is $5.00 per share. All
unexercised options expire on December 21, 1999, unless sooner canceled.
Acushnet is entitled to cancel 166,667 of the options and receive compensation
therefor in the form of a reduction of the Company's purchase credits for future
grip purchases, unless Acushnet is then in breach of the agreement or unless
such cancellation will not result in a positive earnings impact for the Company.
In addition, in the event Acushnet terminates the agreement (other than as a
result of a breach by the Company) all then unexercised options will be canceled
and all profits realized or realizable by Acushnet (plus or minus the effect of
certain tax liabilities or tax benefits to Acushnet) related to the sale of
Common Stock acquired upon exercise of options must be paid to the Company as
part of Acushnet's termination fee. Exemption from registration for this
transaction was claimed pursuant to Section 4(2) of the Securities Act of 1933,
as amended, regarding transactions by an issuer not involving any public
offering.
On May 14, 1996, the Company granted to EVEREN Securities, Inc.
("Everen"), the Company's financial consultant, stock options to purchase 30,000
shares of the Company's Common Stock. Such options were granted in connection
with an engagement agreement between the Company and Everen pursuant to which
Everen agreed to provide certain financial advisory and consulting services to
the Company. The exercise price of the options is $6.50 per share. Of the 30,000
options granted to Everen, 3,750 options were vested and exercisable on the date
of grant,
11
<PAGE>
and an additional 3,750 options were vested (and will vest) on the first day of
each three month period commencing July 1, 1996. All options will vest
immediately upon a change in control of the Company. All unexercised options
will expire two years after vesting. Exemption from registration for this
transaction was claimed pursuant to Section 4(2) of the Securities Act of 1933,
as amended, regarding transactions by an issuer not involving any public
offering.
On June 19, 1996, the Company granted 25,000 stock options to a
terminated employee as part of a severance package for such employee. The
exercise price of 12,500 of the options was $8.50 per share and such options
expire on July 14, 2001. The exercise price of the remaining 12,500 options was
$12.25 per share and such options expire on November 23, 2001. All 25,000
options were vested and exercisable on the date of grant. Exemption from
registration for this transaction was claimed pursuant to Section 4(2) of the
Securities Act of 1933, as amended, regarding transactions by an issuer not
involving any public offering.
On March 24, 1996, the Company granted stock options to purchase an
aggregate of 4,500 shares of the Company's Common Stock to the non-employee
members of the Company's Board of Directors. Such options were granted pursuant
to the Company's 1996 Non-Employee Director Stock Option Plan. All of the
options granted to the non-employee directors were vested and exercisable on the
date of grant and the exercise price of the options is $6.375 per share. All
options granted to the non-employee directors expire six years after the grant
date unless sooner terminated, forfeited or surrendered. All unexercised options
will be forfeited 90 days after the holder ceases to be a member of the Board of
Directors, except in the event of the death or disability of the director, in
which case such options will be exercisable for one year after the date that
such director ceases to be a member of the Board. Exemption from registration
for this transaction was claimed pursuant to Section 4(2) of the Securities Act
of 1933, as amended, regarding transactions by an issuer not involving any
public offering.
Factors That May Affect Market Price of Stock
The market price of the Company's Common Stock prevailing from time to
time may be affected by a number of factors, including the factors set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operation-Factors That May Affect Future Operating Results and Financial
Condition" and other factors and conditions mentioned elsewhere in this Form
10-K Report. In addition, the market price and ownership of the Company's Common
Stock are subject to the following risks and uncertainties:
No Cash Dividends
- -----------------
It is the present policy of the Company's Board of Directors to retain
future earnings to finance the growth and development of the Company's business.
Any future dividends will be at the discretion of the Company's Board of
Directors and will depend upon the financial condition, capital requirements,
earnings, and liquidity of the Company as well as other factors the Company's
Board of Directors may deem relevant. Currently, the terms of the Company's loan
agreements with its primary lender prohibit the declaration or payment of
dividends.
Provisions Limiting Changes in Control
- --------------------------------------
The Company's Articles of Incorporation authorize the Company to issue
"blank check" preferred stock, the designation, number, voting powers,
preferences, and rights of which may be fixed or altered from time to time by
the Board of Directors. Accordingly, the Board of Directors has the authority,
without shareholder approval, to issue preferred stock with dividend,
conversion, redemption, liquidation, sinking fund, voting, and other rights
which could adversely affect the voting power and rights of the holders of the
Common Stock. Although the Company has no present intention of issuing any
shares of its authorized preferred stock, there can be no assurance that the
Company will not do so in the future. In addition, the Company's Articles of
Incorporation prohibit a substantial stockholder of the Company from
significantly increasing its interest in the stock or assets of the Company
without the consent of the Board of Directors and/or a super-majority vote of
the stockholders of the Company, prohibit stockholders of the Company from
calling a special meeting, and require that the Board of Directors be divided
into three classes.
12
<PAGE>
These provisions could have the effect of deterring unsolicited takeovers or
delaying or preventing changes in control or management of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then-current market prices. In addition, these provisions
may limit the ability of stockholders to approve transactions that they may deem
to be in their best interests.
Control by Current Stockholders
- -------------------------------
The Company's present officers and directors and certain of their
affiliates beneficially own approximately 38.5% of the outstanding shares of
Common Stock of the Company (exclusive of options to purchase additional shares
of Common Stock). In particular, Danny Edwards, the Company's Chairman and Chief
Executive Officer, owns approximately 38.3% of the outstanding shares of Common
Stock. Such concentration of ownership gives the Company's officers, directors,
and affiliates significant influence over the activities of the Company and over
all matters requiring approval of the stockholders, including, without
limitation, electing or removing members of the Company's Board of Directors,
causing the Company to engage in transactions with affiliated entities, causing
or restricting the sale or merger of the Company, and changing the Company's
dividend policy.
Possible Volatility of Stock Price
- ----------------------------------
The Company believes that factors such as announcements of developments
related to the Company's business, announcements by competitors, quarterly
fluctuations in the Company's financial results, conditions in the golf grip and
athletic headwear industries, changes in the general economy, and other factors
could cause the price of the Company's Common Stock to fluctuate substantially.
In addition, in recent years the stock market in general, and the market for
shares of small capitalization stocks in particular, have experienced extreme
price fluctuations, which have sometimes been unrelated to the operating
performance of affected companies. Such fluctuations could have a material
adverse effect on the market price of the Company's Common Stock.
13
<PAGE>
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and related
Notes and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. The selected consolidated
financial data presented below under the captions "Statement of Operations Data"
and "Balance Sheet Data" for, and as of the end of, each of the years in the
five-year period ended December 31, 1996, are derived from the Company's
consolidated financial statements. The consolidated financial statements as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996, and the independent auditors' reports thereon, are
included elsewhere herein.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................................... $ 16,121 $ 17,373 $13,643 $12,176 $ 9,250
Cost of goods sold............................. 12,325 12,307 8,251 6,357 5,110
-------- -------- ------- ------- -------
Gross profit.......................... 3,796 5,066 5,392 5,819 4,140
Selling, general and administrative expenses... 6,017 7,512 5,301 3,355 2,717
Loss on write-down and disposition of property
and equipment.................... 446 531 29 3 --
Manufacturing outsourcing and acquisition
costs.......................................... 1,053 111 -- -- --
Loss on write-off of intangibles............... 684 -- -- -- --
-------- -------- ------- ------- -------
Income (loss) from operations......... (4,404) (3,088) 62 2,461 1,423
Interest expense............................... 52 63 47 94 236
Other income net............................... 10 19 95 38 3
-------- -------- ------- ------- -------
Income (loss) before income taxes..... (4,446) (3,132) 110 2,405 1,190
Income taxes (benefit)......................... -- (359) 44 315 --
-------- -------- ------- ------- -------
Net income (loss)(1).................. $ (4,446) $ (2,773) $ 66 $ 2,090 $ 1,190
======== ======== ======= ======= =======
Net income (loss)per share............ $ (1.63) $ (1.01) $ .02
======== ======== =======
Pro Forma Statement of Operations Data(2):
Income before income taxes as reported......... $ 2,405 $ 1,190
Special executive compensation expense(2)...... -- 333
------- -------
Pro forma income before
income taxes (1)(2).......... $ 2,405 $ 1,523
======= =======
Pro forma net income(1)(2)..................... $ 1,443 $ 914
======= =======
Pro forma net income per share(3).............. $ .67 $ .51
======= =======
BALANCE SHEET DATA (at period end):
Current assets................................. $ 3,360 $ 4,244 $ 5,402 $ 7,906 $ 1,352
Current liabilities(4)......................... 2,195 1,808 1,546 628 2,555
Total assets................................... 8,495 11,644 14,522 12,810 4,563
Long-term obligations, less current portion.... 679 161 257 78 161
Stockholders' equity .......................... 5,621 9,674 12,447 11,774 1,847
</TABLE>
(1) Net income and pro forma net income for 1992 include a non-recurring
expense of $200,000 consisting of a fee paid to a financial advisor to
cancel an option to purchase Common Stock of the Company. This option
was granted in 1990 in connection with the placement of the convertible
debentures.
(2) Prior to September 23, 1993 (the date of the Company's initial public
offering), the Company elected to be treated as an S Corporation. As an
S Corporation, the Company was not subject to federal (and some state)
14
<PAGE>
income taxes. The pro forma income from operations information has been
computed by adjusting the Company's income from operations, as
reported, to eliminate for the year ended December 31, 1992, special
executive compensation expense in the form of a bonus in the amount of
$333,000 paid to the Company's founder and Chief Executive Officer, in
lieu of an S Corporation dividend, relating to the Company's 1991 net
income. Pro forma net income information also reflects the provision
for income taxes that would have been recorded had the Company been a C
corporation for all periods, assuming an effective tax rate of 40%
(after giving effect to available net operating loss carry forwards in
1991).
(3) Pro forma net income per share includes the weighted average shares
outstanding, shares issued upon conversion of the Company's convertible
debentures, common stock equivalents, and additional shares deemed to
be outstanding. The additional shares deemed to be outstanding
represent the number of shares (at an initial public offering price)
sufficient to fund an S Corporation distribution of $3,000,000 which
was made out of the proceeds of the offering. In calculating pro forma
net income per share, interest expense and amortization of debt
issuance costs net of tax related to the Company's convertible
debentures totaling $23,000 and $99,000 have been added back to pro
forma net income for the years ended December 31, 1993 and 1992,
respectively.
(4) Includes $1,272,000 at December 31, 1992, of principal amount of, and
accrued interest on, debentures that were converted into Common Stock
immediately prior to the Company's initial public offering.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
For 1996, the Company recorded a reduction in net sales of $1.25
million and a net loss of $4.4 million. While the Company's headwear subsidiary
experienced a slight increase in sales, sales in its grip business declined
primarily due to an increase in lower priced OEM sales and a decrease in sales
to the higher margin replacement and Japanese markets. Due to continued losses
in the Company's headwear subsidiary, the Company wrote off intangible assets of
$684,000 in 1996.
In December 1996, the Company outsourced all of its production of
non-cord grips to Acushnet. Although this arrangement is expected to have
positive long-term implications to the Company's cost structure and to its
research and development efforts, the Company incurred transaction and related
costs of approximately $1.4 million in the fourth quarter of 1996 in connection
with the transition of its manufacturing operations. Further, Acushnet has
experienced start-up delays in the production of grips which has adversely
affected the Company's customer relationships and results of operations, has
impaired the Company's ability to meet its loan covenants and may make it more
difficult for the Company to satisfy lending covenants in the future.
The Company and Acushnet have renegotiated their agreement in light of
Acushnet's production difficulties. In connection with this renegotiation
Acushnet has agreed to provide the Company with a credit of $400,000 against
future purchases of grips with possible additional credits in the event Acushnet
does not meet certain production requirements. The credit may be reduced if
Acushnet exceeds production requirements during the balance of 1997 or as a
result of the cancellation of certain stock options granted to Acushnet. The
supply agreement has also been amended to, among other things, alter future
production and purchase requirements and provide for voluntary termination
rights on the part of Acushnet. The Company has also recently obtained certain
modifications of its loan covenants that waive past covenant defaults and are
intended to better enable the Company to satisfy such covenants in the future.
In addition to entering into the Acushnet agreement which establishes
fixed pricing for its grips, the Company implemented a significant cost cutting
program in 1996 which included closing its headwear production facility in
Tempe, subletting approximately 11,000 square feet at its Tempe facility,
converting its United Kingdom operations to a distributorship relationship, and
reducing its management staffing and compensation as well as other general and
administrative costs.
15
<PAGE>
The Company's ability to return to profitability is dependent upon a
number of factors, including the ability of Acushnet to reach appropriate levels
of production, effective cost management, particularly with respect to its
headwear operations, growth in sales, and competitive factors.
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>
Years Ended
December 31
-----------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0%
Cost of Goods Sold................................ 76.5 70.8 60.5
----- ----- -----
Gross profits............................ 23.5 29.2 39.5
Selling, general, and administrative expenses..... 37.3 43.2 38.9
Other operating expenses.......................... 13.5 3.8 0.0
----- ----- -----
Income (loss) from operations............ (27.3) (17.8) 0.6
Interest expense.................................. 0.3 0.4 0.4
Other income (expenses) net....................... 0.1 0.1 0.6
----- ----- -----
Income (loss) before income taxes........ (27.5) (18.1) 0.8
Income taxes (benefit)............................ 0.0 (2.1) 0.3
----- ----- -----
Net income (loss)........................ (27.5)% (16.0)% 0.5%
===== ===== =====
</TABLE>
Fiscal Year Ended December 31, 1996 Versus Fiscal Year Ended December 31, 1995
Net Sales. Net sales for the year ended December 31, 1996 decreased
$1.25 million, or 7.5%, to $16.1 million from $17.4 million in 1995.
Sales of golf grips in the domestic replacement and Japanese markets
decreased by 22.7% and 28.2%, respectively, compared to 1995. OEM sales
increased by 15.9% compared to 1995. This increase in OEM sales is reflective of
new customer relationships with Odyssey Golf and Tommy Armour Golf. The Company
attributes the decrease in Japanese and domestic replacement market sales to
continued price pressure in both markets and a delay in the introduction of a
new line of grips featuring new designs and a new compound. As a result of these
factors, the percentage of sales of golf grips to the domestic replacement
market decreased to 34.8% of total net sales of groups in 1996 from 42.9% in
1995, and grip sales to OEM's increased to 39.5% of total net sales of grips in
1996 from 29.5% in 1995.
Sales of headwear accounted for 31.8% of total net sales in 1996
compared to 27.2% in 1995. This increase on a percentage basis is primarily the
result of decreased grip sales and partially the result of an increase in
headwear sales in 1996 of 8.1% as compared to 1995.
International sales accounted for 20.8% of total net sales of the
Company in 1996, compared to 22.2% in 1995.
16
<PAGE>
Gross Profit. Gross profit decreased $1.3 million, or 25.5%, to $3.8
million in 1996 from $5.1 million in 1995. As a percentage of net sales, gross
margin decreased to 23.5% in 1996 from 29.2% in the previous year. The major
factors contributing to the decrease in gross profit were the increased
percentage of headwear sales (which has lower gross margins) to total sales, the
overall decrease in grip sales which resulted in fixed expenses being spread
over fewer units sold and the significant change in the grip sales mix as
discussed above. Gross profit also was affected by modifications to its pricing
policies directed at maintaining OEM market share and remaining price
competitive in other golf grip markets. For the first two quarters of 1996, the
Company experienced certain quality problems and delivery delays in the
manufacturing of headwear, which contributed to the decrease in gross profit.
The Company believes it has resolved such problems with the consolidation of
headwear manufacturing locations and changes in headwear management. The 1995
gross profit was negatively impacted as a result of the start-up costs of the
headwear production facility in Tempe, changes in sales mix to lower margin
grips, and inventory write-offs and reserves of approximately $588,000.
The Company expects that gross margins will improve in 1997 as a result
of improved efficiencies in the manufacturing process related to the headwear
business and the manufacturing and supply agreement (as amended) between the
Company and Acushnet Rubber Company.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $6.0 million in 1996, or 20.0%, from $7.5
million in 1995. This change was primarily attributable to decreases in
advertising and promotion of $825,000, commissions of $122,000, travel and
entertainment of $62,000 and a reduction of approximately 12 selling and
administrative positions.
Other Operating Expenses. In connection with the Acushnet Supply
Agreement, the Company recorded significant transaction related expenses. The
Company incurred severance expenses of $304,000 and professional and consulting
fees of $246,000. In addition, the Company expensed $359,000 related to options
granted to Acushnet with vesting upon date of grant and expensed $376,000 of
capitalized leasehold improvements related to its corporate facilities which it
plans to vacate in the near term. The Company also accrued $102,000 in rent
expense related to the termination of its lease. In early 1996, the Company
wrote-off approximately $100,000 of leasehold improvements upon the move of the
headwear manufacturing facilities in Oklahoma City. In the fourth quarter of
1996, the Company wrote-off $684,000 of goodwill and covenants not to compete
related to the Roxxi operations as the Company determined that these intangibles
were not recoverable. In 1995, the Company incurred a loss on the write-down of
property and equipment of $531,000 previously used in connection with various
discontinued grip models and other equipment not used in oprations.
Income From Operations. The Company reported a loss from operations of
$4.4 million in 1996 compared to a loss of $3.1 million in 1995. This decrease
in operating income is primarily attributable to the $1.4 million in expenses
associated with the Acushnet transaction, the $684,000 loss on the write-off of
Roxxi intangibles, and reduced sales of $1.3 million. During 1995, the Company
incurred $1.5 million of charges related to the writedown of fixed assets,
inventory and accounts receivable.
Income Taxes. The Company did not record a tax benefit for the loss
generated in 1996 as utilization of such loss in future periods is uncertain.
The Company has a net operating loss carryforward of approximately $4.3 million
which will expire for federal tax purposes in 2014 and for state tax purposes
generally in 2000. The difference between the actual income tax benefit and the
reported benefit by applying the statutory income tax rate consists primarily of
a valuation allowance provided for the deferred tax assets related to the net
operating loss carryforward and other deferred tax assets of $1.3 million at
December 31, 1996. The Company recorded an income tax benefit of $359,000 in
1995 resulting from the carryback of the loss generated in 1995 to prior tax
years.
17
<PAGE>
Fiscal Year Ended December 31, 1995 Versus Fiscal Year Ended December 31, 1994
Net Sales. Net sales for the year ended December 31, 1995 increased
$3.7 million, or 27.3%, to $17.4 million from $13.6 million in 1994.
Sales of golf grips in the domestic replacement and Japanese markets
increased by 13.6% and 13.8%, respectively, compared to 1994. Sales of grips in
the OEM market increased by .6% compared to 1994. OEM sales dollars grew at a
significantly lower rate in 1995 despite the 28.7% increase in OEM unit sales.
This decrease in unit sales prices to OEM's reflects the implementation of
volume pricing policies in 1995. The Company attributes the increase in the
domestic replacement market largely to the introduction in 1995 of the Company's
new sand wrap line of grips. As a result of these factors, the percentage of
sales of golf grips to the domestic replacement market increased to 42.9% of
total net sales of grips in 1995 from 39.6% in 1994, and grip sales to domestic
OEMs decreased to 29.5% of total net sales of grips in 1995 from 30.8% in 1994.
International sales accounted for 22.2% of total net sales of the
Company in 1995, compared to 26.0% in 1994. This decrease is partly attributable
to the increased percentage of headwear sales to total sales, as the Company's
international sales consist largely of sales of grips. Sales of headwear
accounted for 27.2% of total net sales in 1995 compared to 12.2% in 1994. This
significant increase on a percentage basis is partially the result of including
the Company's headwear operations in its results for a full year. The Company
acquired its headwear subsidiary, Roxxi, Inc., on April 8, 1994. Sales of
headwear increased $3.1 million in 1995 reflecting this first full year of
operations, as well as the integration of the headwear sales into the grip sales
force.
Gross Profit. Gross profit decreased $326,000, or 6.0%, to $5.1 million
in 1995 from $5.4 million in 1994. As a percentage of net sales, gross margin
decreased to 29.2% in 1995 from 39.5% in the previous year. The major factors
contributing to the decrease in gross profit were the start-up costs of the
headwear production facility in Tempe, which resulted in inefficiencies related
to the development and training of the labor force, the increased percentage of
headwear sales (which has lower gross margins) to total sales, the effect of
sales of economy grips, which also have lower margins, and the significant
inventory write-offs and reserves referenced above. Gross profit also was
effected by the new pricing policy established for OEM golf grip customers, as
well as other modifications to its pricing policies directed at maintaining OEM
market share and improving sales in other golf grip markets.
The Company determined to eliminate its economy-priced grips from its
product line in the fourth quarter of 1995 and concentrate on its higher
performance grips. As a result, the Company recorded reserves as of December 31,
1995 of $188,000 related to its inventory of economy and other grips.
The Company also recorded a $331,000 inventory write-down in 1995.
During the first quarter of 1995, the Company sold certain selected inventory
items in a bartering transaction to distribute its product internationally in
areas where it did not have a current distribution system. In exchange, the
Company received trade credit rights to be used in the purchase of goods and
services over a three year period. No profit was recorded on the initial
transaction and the rights were to be amortized as they were utilized. Although
a plan of utilization is being pursued by the Company, no trade credit rights
had been used as of December 31, 1995. Due to the uncertainty as to the timing
and extent of the utilization of the trade credit rights, it was determined that
such trade credits should be fully reserved. Any future use of the trade credit
rights within the three year period will be recorded as cost reductions. The
effect of these and other inventory charges, which aggregated $588,000, was a
decrease in gross margins in 1995 of 3.4%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $7.5 million in 1995, or 41.7%, from $5.3
million in 1994. This change was attributable to increases in advertising and
promotion of $658,000, commissions of $243,000 and salaries of $949,000, of
which approximately $210,000 was severance pay relating in part to a realignment
of management.
18
<PAGE>
Other Operating Expenses. In 1995, the Company incurred a loss on the
write-down of property and equipment which had been used in connection with
various types of grips which have been discontinued by the Company.
Income From Operations. The Company had a loss from operations of $3.1
million in 1995 compared to operating income of $62,000 in 1994. This
substantial decrease in operating income is primarily attributable to the $1.9
million operating loss at the Roxxi headwear operation, reflecting the costs
associated with the start-up of the Tempe operations, and the $1.5 million of
one-time charges discussed above. Of these one-time charges, $1.1 million had no
cash impact in 1995 and will have no future impact.
Income Taxes. The Company recorded an income tax benefit of $359,000 in
1995, due to the loss incurred in 1995, compared to a provision of $44,000 in
1994 and $315,000 in 1993. The Company carried the net operating loss back to
September 23, 1993. Prior to this date, the Company had elected to be taxed as
an S Corporation and, therefore, was not subject to federal (and some state)
income taxes. The Company recorded deferred income taxes of $195,000 at this
date for the cumulative temporary differences. After the effect of the
carryback, the Company has a net operating loss carryforward of approximately
$2,991,000 which will expire for federal purposes in 2010 and for state purposes
generally in 2000. The difference between the actual income tax benefit and the
reported benefit by applying the statutory income tax rate consists of a
valuation allowance provided for the deferred tax asset related to the net
operating loss carryforward and other deferred tax assets of $776,000 at
December 31, 1995. The Company has an income tax refund receivable related to
the carryback of $101,000 at December 31, 1995.
Fiscal Year Ended December 31, 1994 Versus Fiscal Year Ended December 31, 1993.
Net Sales. Net sales for the year ended December 31, 1994, increased
$1.5 million, or 12.0%, to $13.6 million from $12.2 million in 1993. Sales of
golf grips in the domestic replacement and OEM markets increased by 13.0% and
7.8%, respectively, compared to 1993. These percentages represented
significantly lower rates of growth than the Company has previously achieved in
those markets. Grip sales in the Japanese market declined by 26.9% from the 1993
total. The weak Japanese economy in this period, which has historically
accounted for approximately one-third of the Company's business, had an adverse
effect on sales in that market.
The Company's 1994 sales figures were also negatively impacted by the
delayed introduction of the Company's new cord grip. Expected to be in full
production by the first quarter of 1994, volume shipments did not begin until
the second quarter of 1994, well into the latter part of what historically has
been the Company's strongest selling period.
The consolidated sales growth was attributable to the additional
revenue provided by the Company's Roxxi, Inc. subsidiary, which the Company
acquired during the second quarter of 1994. Roxxi's fourth quarter 1994 sales
increased 25% over sales in the third quarter.
Gross Profit. Gross profit decreased $427,000, or 7.3%, to $5.4 million
in 1994 from $5.8 million in 1993. As a percentage of net sales, gross margin
also decreased to 39.5% in 1994 from 47.8% in the previous year. This decline in
gross profits and gross margin was attributable to the Company's addition to its
product line of lower margin cap sales from its Roxxi, Inc. subsidiary. In the
fourth quarter of 1994, the Company began operations of its Tempe, Arizona, cap
manufacturing facility. Gross profits were adversely affected by low production
volume, increased training and hiring costs, and other expenditures relating to
the commencement of the new operations. Gross margin also suffered as a result
of the Company's adoption of certain new pricing policies in its grip sales,
including a volume pricing policy for OEM customers in all markets.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased to $5.3 million in 1994, or 58%, from $3.4
million in 1993. This change was attributable to increases in salaries and
19
<PAGE>
related benefits of $1.1 million, professional fees of $370,000, and advertising
and promotion of $268,000. Of the total increase of $1.9 million, $687,000 were
Roxxi expenses, some of which are included in the breakdown above.
Income From Operations. Income from operations decreased $2.4 million
to $62,000 in 1994 from $2.5 million in 1993. This substantial decrease in
operating results was primarily attributable to the losses incurred by the Roxxi
operation, a significant reduction in gross margins on sales to OEMs, and cost
increases to strengthen the Company's selling and marketing programs. In
addition, large one-time expenditures were incurred to move the Company's
administrative and manufacturing operations to a new facility and for
professional fees related to the administration and settlement of legal
proceedings filed against the Company in 1993.
Liquidity and Capital Resources
In recent periods the Company has financed its operations through
internally generated funds and borrowings. The Company used $314,000 in cash to
fund operating activities during 1996. Although the Company experienced a net
loss of $4.4 million in 1996, the cash used from operations was only $314,000
primarily due to the non-cash effect from the write-off of property and
equipment, the increase of allowance for doubtful accounts and inventory
reserves, the expensing of certain stock options granted, and depreciation and
amortization. In 1996, the Company received cash proceeds of $740,000 from the
sale of certain fixed assets. In 1995, operating activities produced $566,000 in
cash. The Company generated cash flow from operating activities although it
experienced a net loss for 1995 primarily due to the effect of the property and
equipment and inventory write-offs, which were primarily non-cash, and
depreciation and amortization.
The Company's Equipment Lease with Acushnet will provide approximately
$450,000 in annual payments to the Company.
At December 31, 1996, the Company had positive working capital of $1.2
million, down from $2.4 million at December 31, 1995. The decrease in working
capital is primarily the result of expenses incurred related to the Acushnet
transaction and a decrease in inventory of $339,000.
In February 1997, the Company entered into a new line of credit
facility and term loan with a commercial bank. These credit arrangements mature
on February 10, 2000 and contain net worth, debt service coverage and minimum
income requirements and prohibit dividend payments and limit capital
expenditures. At December 31, 1996, the Company was in breach of certain
covenants in its prior line of credit, which breaches were waived by the lender
until the Company was able to refinance its line of credit. Due to Acushnet's
start-up delays in the production of grips, the Company's ability to satisfy its
new loan covenants has been impaired, which has caused the Company to obtain a
waiver of any breaches of such covenants and modification of such covenants in
the future. The inability of the Company to meet its current or future loan
covenants could result in an acceleration of its indebtedness or restrict the
Company's access to such loans, which would impair the Company's ability to fund
its operations unless or until the Company secures an alternative source of
funding. There can be no assurance that the Company would be able to secure an
alternative source of funding. See Notes 7 and 17 to Notes to Consolidated
Financial Statements.
Impact of Recently Issued Accounting Standards
In the first quarter of 1996, the Company adopted Financial Accounting
Standards Board Statement of Financial Accounting Standard (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carry amount. SFAS No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. Due to the historical
losses at Roxxi, the Company determined that the intangibles acquired as part of
the Roxxi acquisition were not recoverable and consequently wrote-off $684,000
during 1996.
20
<PAGE>
In 1996, the Company adopted Financial Accounting Standards Board
Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for Stock
Based Compensation, which establishes a fair value method of accounting for
stock-based compensation plans and for transactions in which an entity aquires
goods or services from non-employees in exchange for equity instruments. SFAS
No. 123 encourages, but does not require, companies to record compensation costs
for stock-based employee compensation. The Company has recorded expenses equal
to the fair value of certain stock options granted to non-employees over the
vesting period of the related options. In 1996, the Company recorded expenses of
$394,000 pursuant to SFAS No. 123.
Backlog
Ordinarily, because the Company fills many of its orders within 48
hours after receipt of a purchase order, backlog is insignificant. Although many
of the Company's OEM customers provide the Company with purchase orders weeks or
months prior to the requested date, these orders are generally cancelable
without penalty, as is customary in the industry.
Forward Looking Statements
This Annual Report on Form 10-K contains forward-looking statements.
Additional written or oral forward- looking statements may be made by the
Company from time to time in filings with the Securities and Exchange Commission
or otherwise. The words "believe," "expect," "anticipate," and "project," and
similar expressions identify forward-looking statements, which speak only as of
the date the statement was made. Such forward-looking statements are within the
meaning of that term in Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements may include, but not be limited to, projections of revenues, income
or loss, capital expenditures, plans for future operations, financing needs or
plans, the impact of inflation and plans relating to products or services of the
Company, as well as assumptions relating to the foregoing. 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.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward-looking statements. Statements in this Annual
Report, including the Notes to the Consolidated Financial Statements, in the
Item captioned "Business" and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" describe factors, among others,
that could contribute to or cause such differences. Additional factors that
could cause actual results to differ materially from those expressed in such
forward-looking statements are set forth in "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," in
the Company's Quarterly Reports on Form 10-Q for the periods ended March 31,
June 30, and September 30, 1996, and in the Current Reports on Form 8-K filed by
the Company in 1996, on January 6, 1997, and on February 6, 1997.
21
<PAGE>
Factors That May Affect Future Operating Results and Financial Condition
The Company's future operating results and financial condition are
dependent on a number of factors that the Company must successfully manage in
order to achieve favorable future operating results and financial condition. The
following potential risks and uncertainties, together with those mentioned
elsewhere herein, could affect the Company's future operating result and
financial condition.
Losses from Operations and Decline in Working Capital
- -----------------------------------------------------
The Company's income from operations has decreased significantly in
recent years. The Company attributes these results to a variety of factors,
including a decline in overall grip sales and an increase in lower margin OEM
sales as a percentage of total grip sales, delays in the introduction of certain
new grips, expenses incurred in connection with headwear production, a one-time
charge to earnings related to a barter transaction, expenses incurred resulting
from fixed asset, inventory and accounts receivable write-offs, the write-off of
Roxxi intangible assets, and expenses incurred in connection with the transition
of grip manufacturing to Acushnet. Although the Company has instituted programs
to reduce expenses, there can be no assurance that the Company will not sustain
losses in the future. In addition, the Company's cash and cash equivalents and
working capital have also decreased significantly in recent years. The Company
finances its expenditures, in part, through a $1.75 million revolving line of
credit and a $700,000 term loan. The Company's access to this line of credit and
term loan may be restricted in the event the Company fails to satisfy certain
debt covenants, of which there can be no assurance. The Company recently was in
default of certain loan covenants and obtained waivers and modifications of such
covenants to better enable the Company to satisfy such covenants in the future.
In the event the Company fails to achieve budgeted levels of sales, gross
margins, and expenses, it may require additional funds to finance its
operations. There can be no assurance that the Company will be able to obtain
these funds on terms and conditions acceptable to the Company, if at all.
Use of Third Party Suppliers
- ----------------------------
The Company currently purchases and for an indefinite period of time
intends to purchase its entire supply of grips from two third party suppliers,
including Acushnet, and anticipates that all of its grips may eventually be
supplied by Acushnet. Acushnet has experienced start-up delays in the production
of grips which has adversely affected the Company's customer relationships and
results of operation, impaired the Company's ability to satisfy loan covenants,
and may make it more difficult for the Company to satisfy lending covenants in
the future. Although the Company has modified its agreement with Acushnet and
has obtained modifications and waivers of certain of its loan covenants
resulting from Acushnet's production difficulties, any further delay or
disruption in the supply of grips to the Company would have a material adverse
impact on the Company's business and may cause the Company to be in violation of
its loan covenants. The Company currently has no back-up source of supply or
other contingency plans in the event the Company encounters any disruption or
termination in the supply of its grips, and any transition to alternative
suppliers or the resumption of in-house manufacturing operations by the Company
would result in production delays, the loss of sales and key customers, and
would materially and adversely affect the Company's financial condition and
results of operation. Although the Company believes that it has certain remedies
available to it under its agreement with Acushnet arising out of Acushnet's
production delays, there can be no assurance that the Company would be able to
successfully pursue such remedies or that such remedies would adequately
compensate the Company for any losses incurred by it as a result of Acushnet's
delays.
Competition
- -----------
The overall market for sports equipment and golf grips in particular is
highly competitive. The principal competitors for the Company's golf grip
products include Eaton/Golf Pride and Lamkin Corp., with Eaton's Golf Pride
division currently maintaining a majority of the total golf grip market. In
addition to its major golf grip competitors, several other golf grip
manufacturers with whom the Company competes, as well as several golf club
manufacturers that do not currently manufacture premium quality golf grips but
could enter this market segment, have greater financial, marketing, and other
resources than the Company. In addition, the availability of imitation, less
22
<PAGE>
costly grips manufactured by other companies have attracted and may continue to
attract consumers and club manufacturers.
The athletic headwear industry is characterized by an extremely
competitive and wide-open environment. Many of the Company's competitors in this
industry possess significantly greater financial, marketing, and other resources
than the Company.
Customer Concentration
- ----------------------
The Company's sales of golf grips to OEMs account for a significant
percentage of the Company's total net sales. The Company currently provides golf
club grips used on many of Cobra's premium golf club lines, which accounted for
11.7% of the Company's total net sales in 1996, and all of the grips used on
Odyssey's various mens' putter models. The Company also supplies grips to other
OEMs such as Titleist, Bridgestone, Henry-Griffitts, Mizuno, Tad Moore Golf, and
is the primary vendor for Tommy Armour Golf. A substantial decrease in sales to
any of the Company's major OEM customers would have a material adverse impact
upon the Company's business. Further, there can be no assurance that sales to
OEMs will continue to increase.
Precision Japan, the exclusive Japanese distributor of the Company's
golf grips and athletic headwear, accounted for a substantial portion of the
Company's total net sales over the last three years. The Company and Precision
Japan have entered into a ten-year agreement expiring in 2001 under which
Precision Japan has been granted exclusive distribution rights to the Company's
products for Japan and certain other Far Eastern countries. Precision Japan may
renew this agreement for successive five-year terms. The agreement is terminable
by either party for cause or if they fail to agree upon pricing terms, or by
Precision Japan at any time upon six months notice to the Company. While the
Company currently enjoys a good relationship with Precision Japan, the loss of
Precision Japan as a distributor of the Company's products would have a
significant adverse effect on the Company's business.
International Sales
- -------------------
A large percentage of the Company's total net sales during 1996, 1995,
and 1994 were derived from international sales, which primarily consisted of
sales of golf club grips. The Company uses distributors to sell its products in
foreign markets, including the United Kingdom, Japan, Sweden and Canada. Sales
to Precision Japan, the Company's exclusive distributor for Japan, accounts for
the substantial percentage of the Company's international sales. Precision Japan
has begun to market the Company's athletic headwear products as well, primarily
targeting the golf market. However, the Japanese economy has been relatively
stagnant and the Company's Japanese sales have decreased in recent years. The
Company anticipates that international sales will continue to decrease. In
addition, the Company's international business may be affected by changes in
demand resulting from fluctuations in currency exchange rates, trade
restrictions, duties, general economic conditions and other factors. The Company
seeks to mitigate its direct exposure to exchange rate fluctuations by
transacting most international business in United States dollars.
Development and Introduction of New Products
- --------------------------------------------
The Company believes that its future growth and success will depend
significantly on its ability to increase its market share with its present
product lines while concurrently developing new products and product categories.
The Company will be reliant to a large extent on Acushnet with respect to new
compounds and product innovations. There can be no assurance that the Company
will be able increase its market share with its existing product line or that
the Company's alliance with Acushnet will result in new product offerings or
that any new products introduced will be successful. The development of new golf
club grips is influenced by the standards and interpretations promulgated by the
United States Golf Association ("USGA"). The Company believes that it must
develop products that comply with those standards even though they apply only to
USGA-sanctioned competitive events. Although the Company believes that all of
its grips comply with USGA standards, there can be no assurance that any new
products
23
<PAGE>
will receive USGA approval or that existing USGA standards will not be altered
in ways that adversely affect sales of the Company's products.
Seasonality; Fluctuations in Operating Results
- ----------------------------------------------
Golf is generally considered a warm weather sport. Accordingly, the
Company has historically enjoyed its strongest sales in the first and second
quarters in anticipation of consumer purchases of golf products during the
second and third quarters, the principal selling season for golf equipment. The
increased sales during this period result in a corresponding build up of
receivables. Income from operations is typically lower in the third and fourth
quarters as fixed operating costs are spread over a generally lower sales
volume. In order to minimize the effect of seasonality, the Company builds
product inventories during the third and fourth quarters to allow the Company to
use its production resources more effectively. The timing of orders from OEM
customers and fluctuations in demand due to the sudden popularity or decline in
popularity of specific golf clubs manufactured by customers also may contribute
to quarterly or other periodic fluctuations.
Dependence on Discretionary, Consumer Spending
- ----------------------------------------------
Sales of golf equipment historically have been dependent on
discretionary spending by consumers, which may be adversely affected by general
economic conditions and the popularity of golf in general. A decrease in
consumer spending on golf equipment could have an adverse effect on the
Company's business and operating results.
Protection of Proprietary Rights
- --------------------------------
The Company has obtained design patents on some of its grips, although
it has elected not to pursue patents with respect to its proprietary rubber
compounds and related technologies. The Company also seeks trademark protection
in an effort to establish and protect various proprietary rights. Despite the
safeguards undertaken by the Company, there can be no assurance that its
proprietary rights are adequately protected or that competitors will not be able
to produce products that successfully imitate the Company's designs and
materials without infringing the Company's proprietary rights.
Raw Materials
- -------------
The primary raw material used in the Company's proprietary rubber
formula is ethylene propylene diene monomer ("EPDM"), a petroleum-based product
that is subject to price fluctuations. Prior to entering into the Acushnet
Supply Agreement, the Company acquired EPDM from only one source. Certain
additional components used in the Company's products were available or supplied
by only one source and others were available from limited sources. In the event
the Company's grip suppliers were to experience an unplanned reduction or
interruption in raw material from the suppliers of such materials, the Company's
results of operations would be adversely affected until alternative sources
could be established. Moreover, operating results could be adversely affected by
the receipt of defective raw materials or products, an increase in prices by
suppliers, or the inability to obtain lower prices to respond to competitive
pricing pressures.
Dependence on Chief Executive Officer
- -------------------------------------
The Company's success depends upon the continued efforts of Danny
Edwards, the Company's founder, Chairman, Chief Executive Officer, and
substantial stockholder. Mr. Edwards' standing in the professional golf world
has afforded the Company exceptional opportunities to introduce its products to
both Tour and club professionals, an important factor that was critical to the
Company's early success. Similarly, Mr. Edwards' status as a former winner of
the Japanese Masters tournament enabled the Company to gain an introduction to,
and increase penetration within, the Japanese market. The loss of Mr. Edwards'
services would have a material adverse effect upon the Company's operations. The
Company currently does not have an employment agreement with Mr. Edwards.
24
<PAGE>
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditors' Reports of Ernst & Young LLP and KPMG Peat
Marwick LLP and the Consolidated Financial Statements of the Company as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996, follow:
25
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Royal Grip, Inc.
We have audited the accompanying consolidated balance sheets of Royal Grip, Inc.
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years then ended. Our
audits also included the financial statement schedule listed in the Index at
Item 14(b). These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule 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 1996 and 1995 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Royal Grip, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, on January 1,
1996, the Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of."
/s/ Ernst & Young LLP
Phoenix, Arizona
February 14, 1997,
except as to Notes 12
and 17, as to which
the date is April 11, 1997.
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Royal Grip, Inc:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Royal Grip, Inc. and subsidiaries
("Royal Grip") for the year ended December 31, 1994. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 priciples used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We beleive that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of the operations and the cash
flows of Royal Grip for the year ended December 31, 1994, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Phoenix, Arizona
February 24, 1995
27
<PAGE>
Royal Grip, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 38,099 $ 413,345
Trade accounts receivable (net of allowance for doubtful accounts of
$549,455 in 1996 and $227,070 in 1995) 1,593,554 1,864,012
Income tax refund receivable -- 101,139
Inventories, net 1,381,215 1,720,296
Prepaid expenses 39,628 54,252
Current portion of net investment in lease 214,506 --
Other current assets 92,929 90,576
------------ ------------
Total current assets 3,359,931 4,243,620
Property and equipment, net 1,925,056 6,258,292
Net investment in lease, less current portion 2,907,494 --
Intangibles, net 251,554 1,083,240
Other assets 51,250 58,675
------------ ------------
$ 8,495,285 $ 11,643,827
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit $ 60,000 $ --
Trade accounts payable 829,211 900,501
Accrued payroll and commissions 220,390 236,943
Accrued expenses 878,436 534,182
Current portion of long-term debt and capital leases 207,230 136,643
------------ ------------
Total current liabilities 2,195,267 1,808,269
Long-term debt and capital leases, less current portion 671,054 161,422
Other liabilities 8,147 --
Commitments and contingencies
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; 2,734,678 shares issued and
outstanding in 1996 and 1995 2,735 2,735
Additional paid-in capital 12,592,906 12,199,288
Accumulated deficit (6,974,824) (2,527,887)
------------ ------------
Total stockholders' equity 5,620,817 9,674,136
------------ ------------
$ 8,495,285 $ 11,643,827
============ ============
</TABLE>
See accompanying notes.
28
<PAGE>
Royal Grip, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
------------------ ------------------- ------------------
<S> <C> <C> <C>
Net sales $16,120,617 $17,373,451 $13,643,139
Cost of goods sold 12,324,745 12,307,334 8,251,258
---------------------------------------------------------
Gross profit 3,795,872 5,066,117 5,391,881
Selling, general and administrative expenses 6,016,913 7,512,092 5,300,997
Loss on write-down and disposition of property and
equipment 446,166 530,788 28,710
Manufacturing outsourcing and acquisition costs 1,052,900 110,754 -
Loss on write-off of intangibles 684,329 - -
---------------------------------------------------------
Income (loss) from operations (4,404,436) (3,087,517) 62,174
Other income (expense):
Interest income 11,123 25,524 83,753
Interest expense (52,348) (62,904) (47,010)
Other income (expense), net (1,276) (7,424) 10,711
---------------------------------------------------------
Income (loss) before income tax benefit (expense) (4,446,937) (3,132,321) 109,628
Income tax benefit (expense) - 359,000 (44,000)
---------------------------------------------------------
Net income (loss) $(4,446,937) $(2,773,321) $ 65,628
=========================================================
Net income (loss) per share $ (1.63) $ (1.01) $ .02
=========================================================
Shares used in computation 2,734,678 2,734,678 2,725,229
=========================================================
</TABLE>
See accompanying notes.
29
<PAGE>
Royal Grip, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Retained Total
Common Paid-In Earnings Stockholders'
Stock Capital (Deficit) Equity
<S> <C> <C> <C> <C>
Balances at January 1, 1994 $2,650 $11,591,808 $ 179,806 $11,774,264
Issuance of common stock upon purchase of
subsidiary 85 607,480 - 607,565
Net income - - 65,628 65,628
--------------------------------------------------------------------
Balances at December 31, 1994 2,735 12,199,288 245,434 12,447,457
Net loss - - (2,773,321) (2,773,321)
--------------------------------------------------------------------
Balances at December 31, 1995 2,735 12,199,288 (2,527,887) 9,674,136
Issuance of stock options to nonemployees - 393,618 - 393,618
Net loss - - (4,446,937) (4,446,937)
--------------------------------------------------------------------
Balances at December 31, 1996 $2,735 $12,592,906 $ (6,974,824) $ 5,620,817
====================================================================
</TABLE>
See accompanying notes.
30
<PAGE>
Royal Grip, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31
1996 1995 1994
---------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (4,446,937) $(2,773,321) $ 65,628
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,652,981 1,948,196 1,577,890
Allowance for doubtful accounts 322,385 83,010 54,417
Loss on write-down and disposition of property and
equipment 446,166 530,788 28,710
Loss on write-off of intangibles 684,329 - -
Inventory write-down and reserves 117,827 588,203 -
Issuance of stock options to nonemployees 393,618 - -
Deferred income taxes - (272,000) (58,000)
Changes in operating assets and liabilities:
Trade accounts receivable (51,927) (572,502) (308,385)
Income tax refund receivable 101,139 349,800 (450,939)
Inventories 221,254 (191,713) (900,115)
Prepaids and other current assets 12,271 121,126 (99,785)
Other assets and intangibles (23,561) 37,514 99,389
Trade accounts payable and accrued expenses 256,411 716,762 40,084
---------------- --------------- ---------------
Net cash provided by (used in) operating activities (314,044) 565,863 48,894
Cash flows from investing activities
Purchases of property and equipment (1,449,593) (830,842) (4,073,877)
Proceeds from sale of property and equipment 740,025 34,229 11,650
Payment for purchase of Roxxi, Inc., net of cash acquired - - (317,574)
---------------- --------------- ---------------
Net cash used in investing activities (709,568) (796,613) (4,379,801)
Cash flows from financing activities
Proceeds from issuance of long-term debt 726,309 36,155 -
Repayments on long-term debt and capital leases (146,090) (105,969) (629,878)
Increase in restricted cash - - 40,480
Increase (decrease) in revolving line of credit 60,000 (480,000) 300,000
Increase in other liabilities 8,147 - -
---------------- --------------- ---------------
Net cash provided by (used in) financing activities 648,366 (549,814) (289,398)
---------------- --------------- ---------------
Net decrease in cash and cash equivalents (375,246) (780,564) (4,620,305)
Cash and cash equivalents at beginning of year 413,345 1,193,909 5,814,214
---------------- --------------- ---------------
Cash and cash equivalents at end of year $ 38,099 $ 413,345 $ 1,193,909
================ =============== ===============
</TABLE>
See accompanying notes.
31
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements
December 31, 1996
1. Summary of Significant Accounting Policies
Description of Business
Royal Grip, Inc. (Company) designs and manufactures golf club grips and athletic
headwear. The Company's products are sold throughout the United States as well
as internationally, largely Japan and the United Kingdom. During December 1996,
the Company outsourced the manufacturing of their golf club grips (see Note 12).
Principles of Consolidation
The consolidated financial statements include the financial statements of Royal
Grip, Inc. and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. All of the
companies operate within the sports industry; therefore, no segment information
is provided.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with maturities at the date
of purchase of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of weighted average cost or market.
Intangible Assets
Intangible assets consist of trademarks, covenants not to compete and goodwill
primarily arising from the acquisition of Roxxi, Inc. (Roxxi) (see note 2).
Costs incurred in securing trademark rights are amortized over a 20-year period.
As part of the acquisition of Roxxi, the Company purchased two covenants not to
compete. Covenants not to compete are amortized on a straight- line basis over
the contractual lives which range from two to five years. Goodwill, representing
the excess of the purchase price over the estimated fair value of the net assets
of Roxxi, is
32
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
amortized on a straight-line basis over the period of expected benefit of 15
years. Due to the historical losses of Roxxi, during the fourth quarter of 1996,
the Company assessed the recoverability of Roxxi intangibles based upon expected
future undiscounted cash flows of Roxxi and other relevant information. Based on
this evaluation, the Company determined that the recoverability of goodwill and
covenants not to compete were impaired, and consequently, recorded a loss of
$684,329 to write-off the related assets.
Property and Equipment
Property and equipment is stated at cost or, if acquired under capital lease, at
the lower of the present value of minimum lease payments or fair value at the
inception of the lease.
Depreciation of property and equipment is provided over estimated useful lives
of three to twelve years on the straight-line method. Equipment under capital
leases and leasehold improvements are amortized on the straight-line method over
the shorter of the lease term or the estimated useful life of the asset.
Amortization of capitalized leases is included in depreciation and amortization
expense.
Revenue Recognition
The Company recognizes revenues as of the date merchandise is shipped to its
customers.
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."
Advertising
The Company expenses advertising as incurred. Advertising expense for the years
ended December 31, 1996, 1995 and 1994 approximated $621,000, $1,446,000 and
$788,000, respectively.
Net Income (Loss) Per Share
Net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding, after giving effect to
dilutive stock options in 1994. Stock options were not included in 1996 and 1995
since they were antidilutive.
33
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants to employees in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25).
The Company adopted SFAS No. 123 "Accounting for Stock Based Compensation" in
1996 related to stock options granted to nonemployees. Expense equal to the fair
value of the options granted to nonemployees is recorded over the vesting period
of the related options. The adoption of SFAS No. 123 did not have a material
impact on the consolidated operations of the Company.
Long-Lived Assets
The Company adopted in 1996, SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flow estimated to be generated by these assets are less than the assets'
carrying amounts. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. Due to the historical losses at
Roxxi, the Company determined that the property and equipment and goodwill
acquired as part of the Roxxi acquisition may not be recoverable through the
undiscounted cash flow of the Roxxi operation. The Company's estimate of the
fair value, less selling costs, of the property and equipment exceeded its net
carrying value, and accordingly, no loss was recorded related to the property
and equipment. However, the Company wrote-off the goodwill and covenants not to
compete related to the Roxxi acquisiton.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the
basis that the Company will continue as a going concern. The Company has
incurred successive losses and, in order for the Company to continue as a going
concern, the Company must achieve profitable operations in the near term. If not
successful in achieving profitable operations, the Company could be placed in
default of certain debt covenants which could accelerate the maturity of
outstanding debt balances or restrict the Company's access to the loans. In the
event the Company fails to achieve budgeted levels of sales and expenses, it may
be required to obtain additional funds to finance its operations. There can be
no assurance that the Company will be able to obtain these funds on terms and
conditions acceptable to the Company, if at all.
Management's plans with respect to achieving profitable operations include
outsourcing its golf club grip manufacturing during 1997 (see Note 12) to
Acushnet Rubber Company, Inc. (Acushnet) in order to decrease and fix its grip
manufacturing costs. Acushnet has experienced start-up delays in the production
of grips, which has adversely affected the Company's customer relationships.
Accordingly, the Company is experiencing losses in early 1997 greater than
anticipated. The Company has entered into an agreement with Acushnet whereby
Acushnet will reimburse the Company for amounts which approximate the gross
margin on sales lost as a result of failure to produce sufficient quantities.
34
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
The Company's plans also include cost reductions, improving purchasing
arrangements, new product introductions, and changes to the headwear
manufacturing process. Management has also developed production, sales and
financing plans that call for significant improvements in 1997, including a
significant improvement in net income (loss). Management believes that these
plans, when coupled with available credit facilities, and the improved
operations subsequent to year-end will enable the Company to continue as a going
concern at least through December 31, 1997.
2. Acquisition of Roxxi
On April 12, 1994, the Company completed its acquisition of Roxxi, a
manufacturer of athletic headwear, located in Oklahoma City, Oklahoma.
Operations of Roxxi from that date have been included in the consolidated
financial statements. The purchase price was $1,250,692, consisting of $369,877
in cash, issuance of 84,678 unregistered shares of common stock valued at
$607,565, and issuance of a note payable with a net present value of $273,250
for a covenant not to compete. In addition, the Company granted an option to an
employee of Roxxi to acquire 28,226 shares of common stock at the market value
on the closing date. The acquisition was accounted for as a purchase.
Accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition determined by management estimates, as follows:
Cash $ 52,303
Trade accounts receivable 304,624
Inventories 325,834
Prepaid expenses 18,723
Property and equipment 418,371
Goodwill 641,311
Covenants not to compete 543,250
Other assets 3,841
Revolving line of credit (180,000)
Trade accounts payable (74,683)
Accrued expenses (308,178)
Long-term debt (474,897)
Other liabilities (19,807)
------------
$ 1,250,692
============
35
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements (continued)
2. Acquisition of Roxxi (continued)
The following financial information presents the unaudited pro forma combined
results of the Company for the year ended December 31, 1994 as if the Roxxi
acquisition had occurred at the beginning of the period.
Net sales $14,259,000
Net income 97,000
Earnings per share .04
The above pro forma results give effect to (1) estimated adjustments to net
sales, cost of goods sold, selling, general and administrative expenses,
including amortization of intangibles resulting from the acquisition, and (2)
estimated income tax effects thereon. The pro forma information presented is for
informational purposes only and is not necessarily indicative of future earnings
or of what the earnings actually would have been had the combination been
consummated at the beginning of the period.
3. Intangible Assets
Intangible assets at December 31 consist of the following:
1996 1995
-------------------------------
Goodwill $ - $ 641,311
Covenants not to compete - 543,250
Trademarks and patents 317,958 298,522
-------------------------------
317,958 1,483,083
Less accumulated amortization (66,404) (399,843)
-------------------------------
$ 251,554 $1,083,240
===============================
Amortization of intangibles expense of $178,343, $220,574 and $168,377 was
recorded in 1996, 1995 and 1994, respectively. During the fourth quarter of
1996, the Company wrote off the goodwill and covenants not to compete related to
the acquisition of Roxxi aggregating $684,329.
36
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements (continued)
4. Inventories
Inventories consist of the following:
1996 1995
------------------------------------
Finished goods $ 849,769 $1,144,516
Work in process 100,092 188,677
Raw materials 476,354 575,306
------------------------------------
1,426,215 1,908,499
Less reserves (45,000) (188,203)
------------------------------------
$1,381,215 $1,720,296
====================================
During the first quarter of 1995, the Company sold certain inventory in a
bartering transaction in exchange for trade credit rights to be used in the
purchase of goods and services over a three year period. No profit was
recognized on the initial transaction and the rights were to be amortized as
they were utilized. Due to the uncertainty as to the timing and extent of
utilization of the trade credit rights, management recorded a write-down in
expense to cost of goods sold of the trade credit rights of approximately
$331,000 in 1995. No trade credit rights had been used as of December 31, 1996.
During the fourth quarter of 1995, management recorded approximately $188,000 in
expense to cost of goods sold to reserve for certain excess and obsolete
inventory.
5. Property and Equipment
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------
<S> <C> <C>
Machinery and equipment $ 1,406,160 $ 7,894,240
Furniture and fixtures and office equipment 1,391,698 1,023,241
Transportation 73,702 906,833
Leasehold improvements 229,891 863,498
Embroidery tapes 93,518 93,177
-----------------------------------------
3,194,969 10,780,989
Less accumulated depreciation and amortization (1,269,913) (4,522,697)
-----------------------------------------
Property and equipment, net $ 1,925,056 $ 6,258,292
=========================================
</TABLE>
Depreciation expense of $1,474,638, $1,727,622 and $1,409,513 was recorded in
1996, 1995 and 1994, respectively.
37
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements (continued)
6. Investment in Lease
The Company is the lessor of certain manufacturing equipment under a capital
lease agreement expiring in December 2006, which transfers ownership of the
equipment to the lessee at the end of the lease term (see Note 12).
The Company's net investment in the direct financing lease at December 31, 1996
consists of:
Minimum lease payments receivable $ 4,508,385
Unearned income (1,386,385)
------------------
3,122,000
Less current portion (214,506)
------------------
$2,907,494
==================
At December 31, 1996, future minimum lease payments receivable under the direct
financing lease are as follows:
1997 $ 450,838
1998 450,838
1999 450,838
2000 450,838
2001 450,838
Thereafter 2,254,195
------------------
$4,508,385
==================
7. Line of Credit, Long-Term Debt and Capital Leases
At December 31, 1996, the Company was in default of certain covenants on its
existing $1,200,000 line of credit which were waived by the bank. In February
1997, the Company refinanced the outstanding balance of $760,000 through $60,000
in advances under a new $1,750,000 revolving line of credit and $700,000 of
advances under a new $700,000 term note agreement with a bank. The new line of
credit and term loan require payment of monthly interest at the bank's interest
rate (prime) plus 1.75 percent. Should the Company attain certain stipulated net
income levels as defined in the agreement, the interest rate shall be payable
monthly at prime plus 1.00 percent. The term loan requires monthly principal
payments of $12,000 beginning March 1997. The line of credit and term loan
mature in February 2000. The $700,000 outstanding at December 31, 1996 under the
prior line of credit, which was due to mature in 1997, and refinanced with the
new term loan, has been classified as long-term debt in the Company's
consolidated balance sheet.
38
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements (continued)
7. Line of Credit, Long-Term Debt and Capital Leases (continued)
The new line of credit allows the Company to borrow an amount up to $1,750,000,
but restricts the borrowings based on certain receivable and inventory levels.
As of the date of the refinancing, approximately $950,000 was available for
borrowings under the terms of its new line of credit based upon available
collateral. The line of credit and term loan are collateralized by substantially
all of the Company's assets and contain certain covenants, the more restrictive
of which prohibit the payment of dividends, limit capital expenditures, and
require the Company to comply with certain financial ratios. The Company must
maintain a debt service coverage ratio of 1.0 to 1.0 for each quarter commencing
June 30, 1997 and 1.25 to 1.00 for each quarter commencing December 31, 1997,
and thereafter. The Company has a covenant to maintain a minimum net worth of
$6,300,000 at December 31, 1996, and net worth can not decrease by more than
$300,000 for the quarter ending March 31, 1997; increase less than $400,000 for
the quarter ending June 30, 1997; increase less than $150,000 for the quarter
ending September 30, 1996; decrease more than $250,000 for the quarter ending
December 31, 1997; and increase less than $300,000 for each fiscal year
thereafter. The Company also has net income covenants which correlate to the net
worth covenants described above, and beginning in April 1997, the Company can
not have a loss in excess of $100,000 in any one month. The Company was in
default of its net worth covenant at December 31, 1996 and received a waiver
from the bank. See Note 17 regarding the modification to this covenant. The
weighted average interest rates on short-term borrowings as of December 31, 1996
and 1995 were approximately 8.75 percent and 8.50 percent, respectively.
Long-term debt and capital leases consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------------------------------------
<S> <C> <C>
Amounts payable under line of credit with a commercial bank, refinanced
subsequent to December 31, 1996 through a term loan (see above).
$ 700,000 $ -
Note payable to a former employee of the Company, $330,000 face value,
discounted at a rate of 8 percent interest, payable in four annual principal
and interest installments of $82,500, maturing April 1998.
155,947 225,367
Capital lease obligations, paid in full in 1996. - 50,011
Other 22,337 22,687
------------------------------------
878,284 298,065
Less current portion (207,230) (136,643)
------------------------------------
$ 671,054 $ 161,422
====================================
</TABLE>
39
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements (continued)
7. Line of Credit, Long-Term Debt and Capital Leases (continued)
At December 31, 1996, the maturities of long-term debt are as follows:
1997 $207,230
1998 222,626
1999 149,673
2000 298,211
2001 544
---------------
$878,284
===============
8. Income Taxes
Income tax expense (benefit) consists of the following for the years ended
December 31:
1996 1995 1994
-------------------------------------------------
Current:
Federal $ - $ (87,000) $102,000
State - - -
-------------------------------------------------
- (87,000) 102,000
Deferred:
Federal - (186,000) (68,000)
State - (86,000) 10,000
-------------------------------------------------
- (272,000) (58,000)
-------------------------------------------------
$ - $(359,000) $ 44,000
=================================================
Income tax expense (benefit) differs from amounts computed by applying the U.S.
federal income tax rate of 35 percent to income (loss) before income taxes as a
result of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $ (1,556,000) $(1,096,000) $ 38,000
Graduated surtax exemptions 44,000 31,000 (12,000)
State income taxes (benefit), net of federal benefit - (57,000) 7,000
Increase in valuation allowance 1,270,000 776,000 -
Non deductible goodwill amortization 226,000 17,000 -
Other, net 16,000 (30,000) 11,000
-----------------------------------------------------
$ - $ (359,000) $ 44,000
=====================================================
</TABLE>
40
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31 are
presented below:
1996 1995
------------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 220,000 $ 91,000
Inventory obsolescence reserves 18,000 75,000
Amortization of covenants not to compete 184,000 99,000
Inventory cost capitalization 14,000 20,000
Financial advisor fee 47,000 55,000
Nonemployee stock options 172,000 -
Alternative minimum tax credit - 6,000
Other, net 47,000 8,000
Net operating loss carryforwards 1,716,000 1,196,000
------------------------------------
Gross deferred tax assets 2,418,000 1,550,000
Valuation allowance (2,273,000) (776,000)
------------------------------------
Net deferred tax assets 145,000 774,000
Deferred tax liabilities:
Depreciation (145,000) (774,000)
------------------------------------
Total gross deferred tax liabilities (145,000) (774,000)
------------------------------------
Net deferred tax assets $ - $ -
====================================
The valuation allowance increased $1,497,000 and $776,000 during the years ended
December 31, 1996 and 1995, respectively.
At December 31, 1996, the Company had federal and state net operating loss
carryforwards of approximately $4,290,000. The federal and state net operating
loss carryforwards will begin to expire in 2010 and 2000, respectively, if not
utilized.
41
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements (continued)
9. Leases
The Company leases corporate offices, manufacturing facilities and office
equipment under operating lease agreements expiring through March 2001. The
Company is negotiating to move its corporate facilities in 1997. Minimum annual
rental commitments under noncancelable leases are as follows:
Years ending December 31:
1997 $261,558
1998 245,731
1999 65,472
2000 65,472
2001 15,000
------------------
$653,233
==================
Rental expense under operating leases totaled approximately $312,000, $295,000
and $328,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
10. Significant Customers
Sales to the Company's exclusive Japanese distributor represented 19 percent, 21
percent and 22 percent of net sales for the years ended December 31, 1996, 1995
and 1994, respectively. Additionally, during 1996, 1995 and 1994, sales to one
original equipment manufacturer accounted for 12 percent, 9 percent and 12
percent of net sales, respectively.
International sales represented 21 percent, 22 percent and 26 percent of net
sales for the years ended December 31, 1996, 1995, and 1994, respectively.
11. Supplemental Consolidated Statements of Cash Flows Information
During 1996, 1995, and 1994, the Company paid $52,348, $62,062 and $30,592,
respectively, for interest.
As explained in Note 2, the acquisition of Roxxi was completed, in part, via the
issuance of 84,678 unregistered shares of common stock valued at $607,565 and a
note payable with a face amount of $330,000 and a net present value of $273,250.
As explained in Note 12, the Company recorded a $3,122,000 direct finance lease
receivable as a result of the leasing of certain manufacturing equipment under a
capital lease.
42
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements (continued)
12. Manufacturing and Supply Agreement
On December 21, 1996, the Company entered into a Manufacturing and
Supply Agreement (Acushnet Supply Agreement) with Acushnet. On April 4, 1997,
the Company and Acushnet renegotiated certain aspects of their agreement. This
agreement, as amended, makes Acushnet the exclusive supplier of non-cord grips
to the Company, subject to the Company's ability to use other suppliers in the
event Acushnet fails to meet production requirements, and requires that the
Company purchase minimum annual volumes (commencing after January 1, 1999) at
fixed prices specified in the contract. Acushnet is obligated to provide ongoing
research and development with respect to grip compounds, manufacturing
processes, and engineering and quality control support.
The term of the Acushnet Supply Agreement expires on December 21, 2006,
subject to the Company's right to extend the agreement for up to three
additional periods of five years each. The Acushnet Supply Agreement is subject
to termination by either party upon certain material breaches thereof or of the
equipment lease described below. Upon termination of the Acushnet Supply
Agreement by the Company arising out of a material breach by Acushnet, the
Company may at its option repurchase any grip manufacturing equipment owned by
Acushnet at fair market value. In addition, the Company may terminate the
Acushnet Supply Agreement at any time upon written notice, and Acushnet may
terminate the agreement by providing ten months' prior written notice on and
after June 30, 1998, and payment by the terminating party to the other party of
a termination fee, which includes the repurchase at prescribed values of the
manufacturing equipment owned by Acushnet, an additional fee of $2,500,000 and
other fees and commitments relating, among other things, to the transition of
production operations.
In connection with the Acushnet Supply Agreement, the Company leased to
Acushnet the Company's specialized manufacturing equipment used in the
production of its non-cord grips, pursuant to a capital lease agreement dated as
of December 21, 1996 (Equipment Lease). Under the Equipment Lease, the Company
granted to Acushnet an option to purchase the Company's manufacturing equipment.
Further, the Equipment Lease terminates on December 31, 2006, at which time the
equipment will be transferred to Acushnet at no further cost. As a result, the
Company has recorded a $3,122,000 direct finance lease receivable for the lease
of such equipment receivable in monthly installments of $37,570 including
interest at 7.8 percent and maturing in December 2006 (see Note 6). No gain or
loss was recorded on the transaction.
Acushnet has experienced start-up delays in the production of grips
which has adversely affected the Company's customer relationships and results of
operations, has impaired the Company's ability to satisfy its loan covenants and
may make it more difficult for the Company to satisfy lending covenants in the
future. The recent amendments to the Acushnet Supply Agreement provide the
Company with a credit of $400,000 against future grip purchases and additional
purchase credits in the event Acushnet fails to meet production requirements.
These credits may be reduced depending upon Acushnet's production beyond
specified levels or as a result of its cancellation of stock options granted to
it by the Company. The modified agreement also alters the future production and
purchase requirements of the parties.
As a result of the Acushnet Supply Agreement, the Company incurred
certain additional expenses during the fourth quarter of 1996 including
approximately $304,000 in employee termination benefits, largely paid prior to
December 31, 1996, $246,000 of professional and consulting fees, $478,000 in
projected lease termination and related leasehold improvement costs and $359,000
in stock option costs (see Note 13). Such costs are included in the
manufacturing outsourcing costs and loss on write-down and disposition of
property and equipment line items in the consolidated statements of operations.
Approximately $440,000 of these related costs are unpaid at December 31, 1996.
43
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements (continued)
13. Stock Options
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Employee Stock Options
The Company has a Stock Option Plan (Plan), which provided for options on up to
250,000 shares of the Company's common stock (amended to provide up to 400,000
shares in 1994). These options are available for grant under the Plan to
employees and certain consultants of the Company. Under the terms of the Plan,
the exercise price of the incentive stock options must equal the fair market
value per share of the common stock on the grant date or 110 percent of the fair
market value if the grantee beneficially owns 10 percent or more of the
outstanding stock of the Company. The options vest over varying periods up to
three years and expire in five to eight years.
The Company has a Non-Employee Director Stock Option Plan (Director Option Plan)
with 24,000 shares of common stock reserved for issuance thereunder. Pursuant to
the terms of the Director Option Plan, each non-employee director of the Company
receives a one-time option grant of 3,000 shares. The exercise price is equal to
the fair market value on the date of grant. The options vest over a 3-year term
and expire in five years.
In 1996, the Board of Directors approved an additional Non-Employee Director
Stock Plan (Director Stock Plan) with 30,000 shares of common stock reserved for
issuance thereunder. Pursuant to the terms of the Director Stock Plan, each
non-employee director of the Company receives options to purchase 1,500 shares
of the Company's common stock on the third day following the day upon which the
Company releases its earning report for the previous fiscal year. The exercise
price granted under the Director Stock Plan will be the fair market value of the
common stock on the grant date. The options vest upon the grant date and expire
in six years.
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by SFAS 123 which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of SFAS 123. The
fair value for these options was estimated at the date of
44
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements (continued)
13. Stock Options (continued)
grant using a Black-Scholes option pricing model with the following weighted
average assumptions for 1996: risk-free interest rate of 5.17 percent, dividend
yield of -0- percent, volatility factor of the expected market price of the
Company's common stock of .552 and a weighted-average expected life of the
options of four years. During 1995, no significant employee options were
granted.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. The Company's pro forma
information for the year ended December 31, 1996, follows:
Net loss, as reported $4,446,937
Pro forma compensation expense for stock options:
1996 grants 294,000
------------------
Pro forma net loss $4,740,937
==================
Pro forma loss per share $1.73
==================
Employee stock options granted in 1995 were not material to the operations of
the Company. Because SFAS 123 is applicable only to options granted subsequent
to December 31, 1994, its pro forma effect will not be fully reflected until
approximately 1999.
45
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements (continued)
13. Stock Options (continued)
A summary of stock option activity granted within the plans and related
information for the years ended December 31, 1996, 1995 and 1994 follows:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------------------------
Weighted
Options Average
Available Exercise Exercise Price
for Grant Shares Price Range
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 73,500 200,500 $ 8.50 - $13.48
Shares reserved 150,000 -
Options granted (70,726) 70,726 $ 7.31 - $12.00
Options exercised - -
Options canceled 6,000 (6,000) $ 12.00 - $12.25
-------------------------------------------------------------------------------
Balance at December 31, 1994 158,774 265,226 $ 8.50 - $13.48
Shares reserved - -
Options granted (18,250) 18,250 $ 4.00 - $12.25
Options exercised - -
Options canceled 103,476 (103,476) $ 7.31 - $12.25
-------------------------------------------------------------------------------
Balance at December 31, 1995 244,000 180,000 $ 4.00 - $13.48 $10.13
Shares reserved 30,000 -
Options granted (405,839) 405,839 $ 2.75 - $ 6.50 $3.24
Options exercised - -
Options canceled 219,000 (219,000) $ 5.38 - $13.48 $9.11
-------------------------------------------------------------------------------
Balance at December 31, 1996 87,161 366,839 $ 2.75 - $12.00 $3.65
===============================================================================
</TABLE>
At December 31, 1996 and 1995, options granted within the plans for 298,006 and
145,050 shares were exercisable, respectively, with exercise prices ranging from
$2.75 to $12.00 and $5.25 to $13.48, respectively. The weighted average exercise
price of exercisable options was approximately $3.64 at December 31, 1996. The
weighted-average fair value of options granted during the year ended December
31, 1996 was approximately $1.18. The weighted average remaining contractual
life of options outstanding at December 31, 1996 was approximately 7 years. The
Company recorded in selling, general and administrative expenses approximately
$35,000 in expense for options granted within these plans and vested during the
year ended December 31, 1996.
46
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements (continued)
13. Stock Options (continued)
Other Stock Options
At December 31, 1996 and 1995, the Company has 58,000 and 33,000, respectively,
outstanding options granted to certain former employees in connection with their
severance packages at exercise prices ranging from $8.50 to $12.25 and expiring
between 2001 and 2004. These options replaced options held by the former
employees at their dates of termination. The original options were added back to
the reserved shares available for grant under the Company's stock option plans.
The exercise price granted was equal to the exercise price of the original
option grant and was above the fair value of the Company's stock at the date of
grant of the replacement options, therefore, no compensation expense was
recorded by the Company. Options of 25,000 and 33,000 were granted during the
years ended December 31, 1996 and 1995, respectively. The weighted average
exercise price and fair value of those options granted in 1996 were $12.25 and
$1.40, respectively, at the date of grant. The weighted average exercise price
and remaining contractual life of these outstanding options (100 percent vested)
at December 31, 1996 were $10.63 and 5 years, respectively.
During 1996, the Company granted to Acushnet 50,000 options at $4.00 and 200,000
options at $5.00 to purchase common shares of the Company. The options vested
immediately and expire in 1999. Approximately $359,000 in expense was recorded
as manufacturing outsourcing costs in the consolidated statement of operations
for the year ended December 31, 1996 to reflect the immediate vesting of the
granted options. The fair value for these options was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rate 5.17 percent, dividend yield of -0-
percent, volatility factor of the expected market price of the Company's common
stock of .552 and a weighted average expected life of three years. The weighted
average exercise price and fair value of these options at the date of grant were
$4.80 and $1.44, respectively. The weighted average exercise price and remaining
contractual life of these options outstanding at December 31, 1996 were $4.80
and 3 years, respectively.
14. Related Party Transactions
During 1996 and 1995, the Company paid approximately $24,000 and $53,000,
respectively, in management consulting and other fees to a firm and its
affiliate, having a member who is also a director of the Company. In addition,
the Company paid $34,000 in 1994 to Danny Edwards Profile Sports to hold golf
schools for employees and customers of the Company. The Company's Chief
Executive Officer is a 50 percent owner of Danny Edwards Profile Sports.
15. Financial Instruments
Concentration of Credit Risk
The Company is subject to a concentration of credit risk as a result of sales to
its significant customers including its exclusive Japanese distributor and an
original equipment manufacturer. To reduce its credit risk, the Company requires
letter of credit agreements from its Japanese distributor. The original
equipment manufacturer purchased
47
<PAGE>
Royal Grip, Inc.
Notes to Consolidated Financial Statements (continued)
finished goods throughout the year under normal terms. Bad debt losses have been
considered in establishing allowances for doubtful accounts.
Fair Values
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts receivable, net investment in lease, accounts payable and
long-term debt approximates their fair value at December 31, 1996. The fair
values of long-term debt are estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
16. Benefit Plan
During 1995, the Company adopted a 401(k) Savings Plan (401(k) Plan) covering
substantially all employees who have completed one year of service during which
an employee must work at least 1,000 hours. Under the terms of the 401(k) Plan,
employees may make voluntary contributions up to 15 percent of their
compensation, subject to Internal Revenue Service limitations. The Company does
not make contributions to the Plan. The Company offers, as one of the investment
mediums to the participants, common stock of the Company and has reserved 50,000
shares for issuance under the 401(k) Plan.
17. Subsequent Events
During January 1997, the Company entered into a letter of intent to merge with
an unrelated golf club shaft manufacturing company, FM Precision Golf
Corporation (FMP). The preliminary terms contemplate that the shareholders of
FMP will receive 65 percent of the resulting company, on a fully diluted basis,
and will control the board of directors. The transaction is subject to a number
of conditions, including the completion of due diligence by both parties,
execution of a definitive agreement, and approval by the board of directors and
stockholders of each company.
Should the merger occur, the use of certain tax net operating loss carryforwards
available to the Company may be limited. There can be no assurances as to
whether the merger will occur or if it occurs, the ultimate terms of the merger.
At December 31, 1996 and March 31, 1997, the Company was not in compliance with
its quarterly net income (loss), debt service, and net worth debt covenants and
anticipated not meeting many of its quarterly and monthly covenants during 1997.
The Company obtained an amended bank agreement which waived the net income
(loss), debt service, and net worth covenant defaults and amended the debt
agreement whereby the net income (loss) limits have been modified to a loss of
no more than $1,000,000 for the quarter ending March 31, 1997 and a cumulative
loss of no more than $1,600,000 for the quarter ending June 30, 1997, and for
each month thereafter in 1997. The agreement amended the net worth covenants to
correlate with the net loss covenants above. The quarterly debt service and
monthly loss limit covenants were waived by the bank for 1997. In addition, the
interest rate was amended to the prime rate plus 3.0 percent effective April 1,
1997, subject to change based on the operating results of the Company.
48
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
The disclosure called for by this item has been previously reported in the
Company's 1995 Form 10-K Report.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information Concerning Directors
Information concerning the names, ages, positions with the Company, and the
business experience of the Company's current directors, each of whom has served
continuously since his first election, is set forth below:
Name Age Position Term Expires
- ---- --- -------- ------------
Danny Edwards 45 Chairman of the Board and 1997
Chief Executive Officer
Gardiner Dutton 66 Director 1997
Barry Entous 52 Director 1998
James W. Myers 62 Director 1999
- -------------------------
Danny Edwards has been Chairman of the Board and Chief Executive Officer
since founding the Company in 1988, and served as President from 1988 to 1994.
Mr. Edwards has played on the Professional Golf Association Tour since 1975 and
has won five tournaments. Mr. Edwards was a three-time Collegiate All-American
at Oklahoma State University and a member of the 1973 United States Walker Cup
Team. Currently, Mr. Edwards competes annually in three to five PGA Tour events
as well as selected regional tournaments and charity events in order to maintain
his high profile in the golf industry. Mr. Edwards is also a principal of Danny
Edwards Profile Sports ("Profile Sports"), which conducts corporate golf schools
for executives throughout the country. Mr. Edwards' activities on behalf of
Profile Sports occupy approximately 12 days of his professional time annually
and afford him an opportunity to further promote the Company's products.
Gardiner Dutton has served as a director of the Company since August 1995.
From 1990 to 1995, Mr. Dutton served as President and Chief Executive Officer of
Bowmar Instruments Corp., an electronics manufacturer. From 1980 to 1990, Mr.
Dutton served as Chairman and Chief Executive Officer of Inertia Dynamics, Inc.,
a manufacturer of lawn and garden equipment. Mr. Dutton currently serves on the
board of directors of National Health Enhancement Systems, Inc., a developer of
medical management software and call centers for the health care industry.
Barry Entous has served as a director of the Company since June 1989. Mr.
Entous is a certified public accountant and, since 1977, has been a principal
with Entous & Entous, Inc., an independent accounting firm that provides
personal accounting services to Mr. Edwards. Mr. Entous serves on the Audit
Committee of the Board of Directors.
James W. Myers, has served as a director of the Company since April 1990.
Since January 1996, Mr. Myers has served as President of Myers Management and
Capital Group, Inc., a management consulting firm. From 1986 to 1995, Mr. Myers
was a principal of Myers Craig Vallone Francois, Inc., an investment banking and
management advisory firm he founded in May 1986. Mr. Myers currently serves on
the boards of directors of National Health Enhancement Systems, Inc. and ILX,
Inc.
49
<PAGE>
Information Concerning Executive Officers
Information regarding executive officers of the Company is set forth at the
end of Part I of this Form 10-K Report.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
beneficially own more than 10% of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and the National Association of Securities
Dealers Automated Quotation System. Such reports are filed on Form 3, Form 4,
and Form 5 under the Exchange Act, as appropriate. Officers, directors, and
greater than 10% beneficial owners are required by Exchange Act regulations to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it or
written representations from certain reporting persons that no Form 5 was
required for such person, the Company believes that, during the fiscal year
ended December 31, 1996, all officers, directors, and greater than 10%
beneficial owners complied with the applicable Section 16(a) filing
requirements.
ITEM 11 - EXECUTIVE COMPENSATION
The table below sets forth information concerning the annual and long-term
compensation for services rendered in all capacities to the Company during the
fiscal years ended December 31, 1996, 1995, and 1994, of those persons who were,
at December 31, 1996: (i) the chief executive officer of the Company; and (ii)
the other executive officers of the Company whose annual salary and bonus
exceeded $100,000 (the "Named Executive Officers"):
Summary of Compensation
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ------------
Other Annual Securities
Name and Principal Salary Bonus Compensation Underlying
Position Year ($) ($)(1) ($)(2) Options(#)(3)
- -------------------- ------ ----- ------ -------- -------------
<S> <C> <C> <C> <C> <C>
Danny Edwards 1996 139,108.(4) 0 0 85,100
Chairman of the Board 1995 250,000 0 0 0
of Directors and Chief 1994 250,000 0 0 0
Executive Officer
Robert G.J. Burg, II 1996 154,663 0 0 106,066
President 1995 150,000 0 0 0
1994 120,000 0 0 0
</TABLE>
- --------------
(1) The amounts shown in this column represent bonuses granted pursuant to
the Company's executive bonus program.
(2) Other annual compensation provided to each of the Named Executive
Officers during the periods presented, including moving expenses and
other perquisites, was less than 10% of the respective Named Executive
Officer's total annual salary and bonus.
(3) The amounts shown in this column represent outstanding stock options
originally granted to Messrs. Edwards and Burg pursuant to the
Company's Stock Option Plan that were repriced on November 15, 1996.
(4) During a portion of 1996, Mr. Edwards voluntarily reduced his salary.
50
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth information concerning stock options
granted to the Named Executive Officers by the Company in 1996:
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of Annual Rates of
Securities Percent of Total Stock Price
Underlying Options Granted Appreciation for
Options to Employees in Exercise or Option Term
Granted Fiscal Year Base Price Expiration
Name (#) (%) ($/Sh) Date 5% 10%
------------ ----- ------------- ------ ------------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Danny Edwards(1).............. 4,714 1.6% 2.75 11/15/2001 3,582 7,920
80,386 27.8% 3.03 11/15/2001 38,585 112,540
------ ----- ------ -------
85,100 29.4% 42,168 120,460
====== ===== ====== =======
Robert G.J. Burg, II(2)....... 106,066 36.6% 2.75 11/15/2004 138,947 333,047
</TABLE>
- ---------------------
(1) Prior to November 15, 1996, Mr. Edwards was the holder of vested stock
options to purchase 21,000 shares of the Company's Common Stock at an
exercise price of $12.25 per share, and an additional 24,000 shares at
an exercise price of $13.48 per share. On November 15, 1996, all of
Mr. Edwards' outstanding stock options were canceled and the Company
reissued to Mr. Edwards new stock options to purchase 4,714 shares of
the Company's Common Stock at an exercise price of $2.75 per share
(the market price of the Company's Common Stock on the date of grant),
and an additional 80,386 shares at an exercise price of $3.03 per
share. All of the new stock options were fully vested and exercisable
on the date of grant. All unexercised options expire on November 15,
2001.
(2) Prior to November 15, 1996, Mr. Burg was the holder of vested stock
options to purchase 37,500 shares of the Company's Common Stock at an
exercise price of $8.50 per share. On November 15, 1996, Mr. Burg's
outstanding options were canceled and the Company reissued to Mr. Burg
new options to purchase 106,066 shares of the Company's Common Stock
at an exercise price of $2.75 per share. All of Mr. Burg's new stock
options were fully vested and exercisable on the date of grant. All
unexercised new stock options will expire on November 15, 2004.
Fiscal Year End Option Values
The following table sets forth information concerning the fiscal year
end value of unexercised options held by the Named Executive Officers. The Named
Executive Officers did not exercise any options in 1996.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
Fiscal Year End(#) Fiscal Year End($)(1)
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Danny Edwards................................ 85,100 0 0 0
Robert G.J. Burg, II......................... 106,066 0 0 0
</TABLE>
- ---------------------
(1) Options are considered to be "in-the-money" if the fair market value
of the underlying securities exceeds the exercise price of the options
on a specified date. No values have been reported in these columns
insofar as the exercise price of all options held by the Named
Executive Officers was equal to or greater than the closing price of
the Common Stock at December 31, 1996.
51
<PAGE>
Compensation of Directors
Beginning April 1, 1996, nonemployee members of the Board of Directors
were paid $750 for attendance at, or participation by telephone in, regular or
special Board meetings or meetings of committees of which they are members. Such
directors are also reimbursed for reasonable travel expenses incurred in
connection with attendance at each Board and committee meeting. In addition,
nonemployee directors are eligible to receive annual stock option grants under
the Company's 1996 Nonemployee Director Stock Plan (the "Director Plan").
Mr. James W. Myers, an independent director of the Company, was paid
$1,500 in directors' fees in 1996 for his attendance at meetings of the Board of
Directors and committees thereof. In addition, Myers Management and Capital
Group, Inc., a management consulting firm of which Mr. Myers is a principal, was
paid $24,500 in consulting fees by the Company during 1996. The Company granted
to Mr. Myers stock options to purchase 1,500 shares of the Company's Common
Stock in 1996 pursuant to the Director Plan. Such options have an exercise price
of $6.375 per share.
Mr. Gardiner S. Dutton, an independent director of the Company, was
paid $1,500 in directors' fees in 1996 for his attendance at meetings of the
Board of Directors and committees thereof. The Company granted to Mr. Dutton
stock options to purchase 1,500 shares of the Company's Common Stock in 1996
pursuant to the Director Plan. Such options have an exercise price of $6.375 per
share.
Mr. Barry Entous, an independent director of the Company, was paid
$1,500 in directors' fees in 1996 for his attendance at meetings of the Board of
Directors and committees thereof. The Company granted to Mr. Entous stock
options to purchase 1,500 shares of the Company's Common Stock in 1996 pursuant
to the Director Plan. Such options have an exercise price of $6.375 per share.
Employment Contracts and Termination of Employment Arrangements
The Company was a party to an employment agreement with Mr. Danny
Edwards that expired in August 1996. The Company currently has no employment
agreements with any employees of the Company.
Compensation Committee Interlocks and Insider Participation
Decisions relating to compensation of the Company's executive officers
are made by the independent members of the Board of Directors, none of whom have
any interlocking relationships with the Company. In 1996, the members of the
Board making such determinations were Messrs. Barry Entous, James W. Myers,
Gardiner S. Dutton, and Drew M. Brown, who resigned from the Board in November
1996. All of these directors are and were independent members of the Board of
Directors.
52
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the number and percentage of
outstanding shares of common stock, par value $.001 per share, of the Company
(the "Common Stock") beneficially owned by: (i) each person who is known to the
Company to own beneficially more than 5% of the outstanding Common Stock; (ii)
each director of the Company; (iii) each of the Company's Named Executive
Officers (as defined above); and (iv) all directors and executive officers of
the Company as a group:
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Shares Beneficially Owned(1) Percent Owned(1)
- ------------------------------------ ---------------------------- ----------------
<S> <C> <C>
Danny Edwards(2) 1,133,605 33.8%
Barry Entous(3) 4,500 *
James W. Myers(3) 4,500 *
Gardiner Dutton(5) 3,500 *
Robert G.J. Burg, II(6) 107,066 3.2%
DMB Property Ventures Limited Partnership(7) 414,771 12.4%
Acushnet Rubber Company, Inc. 250,000(8) 7.4%
All directors and executive officers as a group(9) 1,276,171 38.0%
</TABLE>
- -----------------
* Represents less than 1% of the outstanding Common Stock.
(1) This information regarding beneficial ownership of the Common Stock by
certain beneficial owners and management of the Company is as of March
15, 1997. The percent owned calculations are based on the number of
shares of Common Stock outstanding on March 15, 1997, plus, where
appropriate, those shares subject to unexercised options which are
exercisable on March 15, 1997, or within 60 days thereafter. The
persons named in the table, to the Company's knowledge, have sole
voting and sole investment power with respect to all shares of Common
Stock shown as beneficially owned by them, subject to community
property laws where applicable and the information contained in the
footnotes hereunder. Unless otherwise indicated, the address for each
person named in this table is c/o Royal Grip, Inc., 444 West Geneva,
Tempe, Arizona 85282.
(2) The total for Mr. Edwards includes 85,100 shares subject to unexercised
options which are exercisable on March 15, 1997, or within 60 days
thereafter.
(3) The totals for Messrs. Entous and Myers include 9,000 shares subject to
unexercised options which are exercisable on March 15, 1997, or within
60 days thereafter.
(5) The total for Mr. Dutton includes 2,500 shares subject to unexercised
options which are exercisable on March 15, 1997, or within 60 days
thereafter.
(6) The total for Mr. Burg includes 106,066 shares subject to unexercised
options which are exercisable on March 15, 1997, or within 60 days
thereafter.
(7) DMB Property Ventures Limited Partnership, a Delaware limited
partnership ("DMB Property Ventures") is an investment management firm.
The address of DMB Property Ventures is 4201 North 24th Street, Suite
120, Phoenix, Arizona 85016. Mr. Drew M. Brown, a principal of DMB
Property Ventures, was a member of the Board of Directors of the
Company from April 1990 until November 1996.
(8) The total for Acushnet Rubber Company, Inc., a Massachusetts
corporation ("Acushnet"), consists of 250,000 shares of Common Stock
subject to unexercised options which are exercisable on March 15, 1997,
or within 60 days thereafter. Such options were issued to Acushnet
pursuant to the Acushnet Supply Agreement. The address of Acushnet is
744 Belleville Avenue, New Bedford, Massachusetts, 02742-6916.
53
<PAGE>
(9) The total for all directors and executive officers as a group includes
an aggregate of 222,666 shares subject to unexercised options which are
exercisable on March 15, 1996, or within 60 days thereafter.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under an agreement between the Company, DMB Property Ventures, and Mr.
Danny Edwards, DMB Property Ventures has been granted the right to sell its
shares of Common Stock in conjunction with any sale of shares of Common Stock
held by Mr. Edwards (other than into the public market). See "Security Ownership
of Certain Beneficial Owners and Management." In addition, pursuant to the
agreement, the Company agreed to use its best efforts, so long as DMB Property
Ventures beneficially owns at least 10% of the Company's Common Stock, to have
the Board of Directors nominate a designee of DMB Property Ventures,
satisfactory to the Board, for election to the Board of Directors. Mr. Drew M.
Brown, a principal of DMB Property Ventures, served as a director of the Company
until November 1996. DMB Property Ventures currently has no nominees or
representatives serving on the Board of Directors of the Company.
The Company has entered into a Manufacturing and Supply Agreement (as
amended) with Acushnet Rubber Company, Inc., pursuant to which Acushnet will
supply all of the Company's non-cord golf grips, and the Company and Acushnet
have entered into a Capital Lease Agreement pursuant to which the Company has
leased to Acushnet the equipment owned by the Company and previously used in the
Company's in-house manufacturing operations. See "Business - Manufacturing" and
"Security Ownership of Certain Beneficial Owners and Management."
PART IV
ITEM 14 - EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS SCHEDULE, AND REPORTS
ON FORM 8-K
(a) Consolidated Financial Statements.
The following consolidated financial statements of Royal Grip, Inc.
are filed as part of this Form 10-K Report.
<TABLE>
<CAPTION>
Page or
Method of Filing
----------------
<S> <C>
Independent Auditors' Reports Page 26
Consolidated Financial Statements and Notes thereto of Page 28
Royal Grip, Inc., including Consolidated Balance Sheets
as of December 31, 1996 and 1995, and related
Consolidated Statements of Operations, Stockholders'
Equity, and Cash Flows for each of the years
in the three-year period ended December 31, 1996.
</TABLE>
(b) Consolidated Financial Statement Schedule.
The following consolidated financial statement schedule is filed as
a part of this Form 10-K Report.
<TABLE>
<CAPTION>
Page or
Method of Filing
----------------
<S> <C>
Schedule II - Valuation and Qualifying Accounts Filed herewith
</TABLE>
54
<PAGE>
All other schedules have been omitted because they are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
(c) Exhibits.
The following exhibits are filed as part of this Form 10-K Report.
<TABLE>
<CAPTION>
Exhibit Page of
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
3.1 Articles of Incorporation of Registrant Incorporated by reference to
Exhibit 3.1 of the Company's
Form S-1 Registration Statement
No. 33-67256 ("S-1 #33-
67256")
3.2 Bylaws of Registrant Incorporated by reference to
Exhibit 3.2 of S-1 #33-67256
4.1 Form of Certificate for Common Stock Incorporated by reference to
Exhibit 4.1 of S-1 #33-67256
10.1.1 Non-Employee Directors Stock Option Plan Incorporated by reference to
Exhibit 4.1 of the Company's
Form S-8 Registration Statement
No. 33-69212 ("S-8 #33-
69212")
10.1.2 Form of Directors Stock Option Agreement Incorporated by reference to
Exhibit 4.2 of S-8 #33-69212
10.2.1 1993 Stock Option Plan Incorporated by reference to
Exhibit 4.1 of the Company's
Form S-8 Registration Statement
No. 33-69222 ("S-8 #33-
69222")
10.2.2 Form of Incentive Stock Option Agreement Incorporated by reference to
Exhibit 4.3 of S-8 #33-69222
10.2.3 Form of Nonstatutory Stock Option Agreement Incorporated by reference to
Exhibit 4.2 of S-8 #33-69222
10.3 Letter Agreement between Royal Grip, DMB, Richard Incorporated by reference to
Dan Edwards, Drew M. Brown, Mark N. Sklar, Exhibit 10.6 of S-1 #33-67256
Bennett Dorrance, as Trustee for the Bennett Dorrance
Trust, and Harold A. Poling dated August 9, 1993
10.4 Tax Indemnification Agreement between Royal Grip, Incorporated by reference to
Richard Dan Edwards, Drew M. Brown, Mark N. Exhibit 10.7 of S-1 #33-67256
Sklar and Bennett Dorrance, as Trustee for the Bennett
Dorrance Trust, dated August 9, 1993
10.5 Loan Agreement between Royal Grip and Biltmore Incorporated by reference to
Investors Bank in the amount of $500,000 dated July Exhibit 10.9 of S-1 #33-67256
1, 1993, and Promissory Note related thereto
</TABLE>
55
<PAGE>
<TABLE>
<S> <C> <C>
10.6 Promissory Note between Royal Grip and Biltmore Incorporated by reference to
Investors Bank in the amount of $700,000 dated July Exhibit 10.10 of S-1 #33-67256
1, 1993
10.7 Agreement between Royal Grip and Precision Japan Incorporated by reference to
Ltd. dated July 12, 1991 Exhibit 10.11 of S-1 #33-67256
10.8 Employment Agreement between Royal Grip and Incorporated by reference to
Richard Dan Edwards dated August 9, 1993 Exhibit 10.12 of S-1 #33-67256
10.9 Form of Indemnity Agreement for Officers and Incorporated by reference to
Directors Exhibit 10.13 of S-1 #33-67256
10.10 Executive Compensation Plan Incorporated by reference to
Exhibit 10.10 of the Company's
1993 Form 10-K Report
10.11 Merger Agreement by and among Royal Grip; Roxxi, Incorporated by reference to
Inc., a Nevada corporation wholly-owned by Royal Exhibit A to the Company's
Grip; Roxxi, Inc., an Oklahoma corporation, and John Current Report on Form 8-K
Burchfield dated as of April 8, 1994 filed April 12, 1994
10.12 Lease Agreement dated February 22, 1996 with HM Incorporated by reference to
Real Estate L.L.C. for the Company's Oklahoma Exhibit 10.12 of the Company's
City, Oklahoma facility 1995 Form 10-K Report.
10.13 1996 Non-Employee Directors Stock Plan Incorporation by reference to
Exhibit 10.13 of the Company's
1995 Form 10-K Report.
10.14 Loan Agreement with Biltmore Investors Bank in the Incorporated by reference to
amount of $1.2 million, dated June 12, 1995 Exhibit 10.14 of the Company's
1995 Form 10-K Report.
10.15 Business Loan Agreement with Biltmore Investors Incorporated by reference to
Bank, N.A. in the amount of $1.2 million, dated May Exhibit 10.14 of the Company's
30, 1996 Quarterly Report on Form 10-Q
for the Quarter Ended June 30,
1996.
10.16 Manufacturing and Supply Agreement dated December Filed herewith*
21, 1996 with Acushnet Rubber Company, Inc.
10.17 Amendment to Manufacturing and Supply Agreement Filed herewith*
dated April 4, 1997 with Acushnet Rubber Company
10.18 Capital Lease Agreement dated December 21, 1996 Filed herewith
with Acushnet Rubber Company Inc.
10.19 Credit and Security Agreement dated February 10, Filed herewith
1997 with Norwest Business Credit, Inc. for revolving
loan in the amount of $1.7 million and term loan in the
amount of $700,000
10.20 First Amendement to Credit Agreement dated April Filed herewith
11, 1997 with Norwest Business Credit, Inc.
</TABLE>
56
<PAGE>
<TABLE>
<S> <C> <C>
16 Letter re Change in Certifying Accountant Incorporated by reference to the
Company's Current Report on
Form 8-K, filed October 22,
1995
23.1 Independent Auditors' Consent (Ernst & Young LLP) Filed herewith
23.2 Independent Auditors' Report on Schedule and Filed herewith
Consent (KPMG Peat Marwick LLP)
24.1 Power of Attorney for Gardiner Dutton Filed herewith
24.2 Power of Attorney for Barry Entous Filed herewith
24.3 Power of Attorney for James Myers Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
* Confidential treatment sought as to portions thereof
(d) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of the fiscal year ended December 31, 1996.
57
<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 on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 15th
day of April, 1997.
ROYAL GRIP, INC.
a Nevada corporation
By: /s/ Robert G.J. Burg, II
---------------------------------------
Robert G.J. Burg, II -- President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name and Signature Title Date
- ------------------ ----- ----
<S> <C> <C>
/s/ Danny Edwards Chairman of the Board and April 15, 1997
- --------------------------------------- Chief Executive Officer
Danny Edwards (Principal Executive Officer)
/s/ Robert G.J. Burg, II President April 15, 1997
- -----------------------------------------
Robert G.J. Burg, II
/s/ Tom Schneider Vice President - Finance April 15, 1997
- ----------------------------------------- (Principal Financial and
Tom Schneider Accounting Officer)
* Director April 15, 1997
- ----------------------------------------------
Barry Entous
* Director April 15, 1997
- ----------------------------------------------
James W. Myers
* Director April 15, 1997
- ----------------------------------------------
Gardiner Dutton
*By:/s/ Robert G.J. Burg, II
---------------------------
Robert G.J. Burg, II
Attorney-in-Fact
</TABLE>
58
<PAGE>
Schedule II
ROYAL GRIP, INC.
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions Additions
Balance at Charged to Charged to Balances at
Beginning of Costs and Other End of
Period Expenses Accounts Deductions Period
----------------- ------------------ ----------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Reserves and allowances deducted
from assets to which they apply:
Allowances for doubtful accounts:
Year ended December 31, 1996 $ 227,070 $ 322,385 $ -- $ -- $ 549,455
================= ================== ================= ================= ==============
Year ended December 31, 1995 $ 144,060 $ 83,010 $ -- $ -- $ 227,070
================= ================== ================= ================= ==============
Year ended December 31, 1994 $ 117,936 $ 54,417 $ -- $ 28,293 $ 144,060
================= ================== ================= ================= ==============
Inventory reserves:
Year ended December 31, 1996 $ 188,203 $ 117,827 $ -- $ 261,030 $ 45,000
================= ================== ================= ================= ==============
Year ended December 31, 1995 $ -- $ 588,203 $ -- $ 400,000 $ 188,203
================= ================== ================= ================= ==============
Year ended December 31, 1994 $ -- $ -- $ -- $ -- $ --
================= ================== ================= ================= ==============
Deferred Tax Valuation Allowance:
Year ended December 31, 1996 $ 776,000 $ 1,497,000 $ -- $ -- $ 2,273,000
================= ================== ================= ================= ==============
Year ended December 31, 1995 $ -- $ 776,000 $ -- $ -- $ 776,000
================= ================== ================= ================= ==============
Year ended December 31, 1994 $ -- $ -- $ -- $ -- $ --
================= ================== ================= ================= ==============
</TABLE>
*Indicates that confidential
portion has been omitted and
filed separately with the
Securities and Exchange Commission
MANUFACTURING AND SUPPLY AGREEMENT
THIS MANUFACTURING AND SUPPLY AGREEMENT (the "Agreement") is made as of
the 21st day of December, 1996 (the "Effective Date") by and between ROYAL GRIP,
INC., a Nevada corporation ("Purchaser"), having its principal executive offices
at 444 West Geneva, Tempe, Arizona 85282, and ACUSHNET RUBBER COMPANY, INC., a
Massachusetts corporation, ("Vendor"), having its principal executive offices at
744 Belleville Avenue, New Bedford, Massachusetts 02742-6916.
RECITALS
A. Under this Agreement Vendor will become the exclusive supplier of
non-cord golf grips ("Grips") to Purchaser and it is intended will become the
exclusive supplier of cord grips to Purchaser.
B. Vendor is willing to supply Grips to Purchaser and Purchaser is
willing to purchase Grips from Vendor upon the terms and conditions hereinafter
set forth.
C. As of the date hereof, Purchaser and Vendor are also entering into a
capital lease agreement (the "Lease Agreement") pursuant to which Vendor will
lease from Purchaser manufacturing equipment useful in producing Grips.
D. This Agreement and the Lease Agreement have been negotiated by
Purchaser and Vendor at arm's length and in good faith for the purpose of
achieving the parties' commercial expectations.
NOW, THEREFORE, in consideration of the covenants and mutual agreements
set forth herein and in the Lease Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
in reliance upon the representations and warranties contained herein, the
parties agree as follows:
ARTICLE I
SUPPLY AND PURCHASE OF GRIPS
1.1 Supply and Purchase of Grips.
(a) During the term hereof, Purchaser shall purchase Grips from Vendor
and Vendor shall sell Grips to Purchaser in accordance with the terms and
conditions contained herein. The Grips will be resold as products of Purchaser
and will not, without Purchaser's and Vendor's written consent, bear the name of
or any logo or trademark of Vendor.
(b) Subject to the terms hereof, Purchaser hereby agrees to purchase
from Vendor 100% of its requirements of Grips during the term of this Agreement.
<PAGE>
* Confidential portion has been
omitted and filed separately
with the Commission
(c) Subject to the terms hereof, and except as set forth in Section 6.5
hereof, Vendor hereby agrees to sell 100% of the Grips it produces during the
term of this Agreement to Purchaser.
(d) The parties hereby acknowledge and agree that there will be a
transition period during which production of Grips will be transferred from
Purchaser to Vendor. During this period, Purchaser will continue to produce
Grips.
ARTICLE II
FORECASTS; ORDERS; AND SHIPMENT
2.1 1997 Purchase Obligations. Subject to Section 7.3(d) hereof, Purchaser
hereby agrees to purchase Grips from Vendor in each calendar year of this
Agreement at the annualized rate of [ * ] per year from the beginning of the
first full month in which Vendor achieves full production. Vendor estimates that
it will achieve full production by February 1, 1997 and commits to achieve full
production levels no later than February 15, 1997. By way of example, if Vendor
achieves full production by February 1, 1997, Purchaser will be obligated to
purchase 11/12 x [ * ] Grips, or [ * ] Grips in 1997 (plus any Grips produced by
and purchased from Vendor in January 1997). Thereafter, during each year of the
Agreement, Purchaser shall purchase a minimum of [ * ] Grips.
2.2 Rolling Forecasts; Firm Orders.
(a) Purchaser agrees that during the term of this Agreement it shall
provide Vendor with a rolling forecast of its purchase requirements of Grips for
each of the following three months. This forecast shall be provided on or before
the first day of the month immediately preceding the first month included in
such forecast. Within five (5) days from the date when Vendor has received a
forecast from Purchaser, Vendor shall confirm such forecast by facsimile to
Purchaser.
(b) Forecasts shall be deemed to be firm orders with respect to the
first month included in such rolling three month forecasts (unless notified in
writing to the contrary at least a month prior to the first month of the
forecast). With respect to the second and third months included in such
forecasts, such forecasts shall not be considered binding commitments on the
part of Purchaser to order the quantity of Grips specified therein, but are to
be given solely for the purpose of enabling Vendor to make preliminary plans for
its manufacturing operations during the applicable period. By way of example, a
forecast for the three months April to June of a given year shall be supplied on
or before March 1 of such year; the forecast for April shall be deemed to be a
firm order (unless modified prior to March 1). A copy of Purchaser's initial
forecast/firm order has been provided to Vendor.
(c) Reasonable notice will be given by Purchaser to Vendor if it
anticipates significant differences in its forecast and by Vendor to Purchaser
if it anticipates significant differences in production capabilities to
forecast.
2
<PAGE>
* Confidential portion has been
omitted and filed separately
with the Commission
(d) By written notice to Vendor, Purchaser may increase the quantities
or vary scheduled delivery dates for Grips subject to firm orders, and Vendor
agrees to use its reasonable best efforts to accommodate such changes. Vendor
may charge Purchaser for incremental costs incurred in connection with any
material changes to firm orders.
2.3 Shipping and Delivery. Vendor hereby agrees as follows:
(a) Vendor shall preserve, package, handle, pack and insure all Grips
so as to protect the Grips from loss or damage, in conformance with good
commercial practice, government regulations, and other applicable standards.
(b) All Grips shall be shipped F.O.B. Vendor's production facility in
New Bedford, Massachusetts. Title and risk of loss or damage to any shipment of
Grips sold by Vendor to Purchaser hereunder shall pass to Purchaser upon
delivery by Vendor to the common carrier for delivery to customers of Purchaser.
(c) Vendor hereby guarantees that a minimum of ninety percent (90%) of
all shipments of Grips to customers of Purchaser in a given month will be made
by Vendor in the specified quantity and within the time for such delivery
specified by Purchaser on at least two business days notice with respect to
Grips that are subject to firm orders. Vendor will use its reasonable best
efforts to provide Grips in the quantities and within the time period requested
by Purchaser to the extent such quantities vary from those provided for in a
firm order. In the event Vendor fails to make any delivery of Grips within the
required time period for firm orders, Vendor shall ship all Grips applicable to
such order via a premium shipping method and shall pay all shipping costs
associated therewith.
ARTICLE III
PRICING
3.1 Initial Purchase Price for Grips. Purchaser and Vendor hereby agree that the
purchase price per Grip ordered by Purchaser hereunder shall be a base price of
[ * ] per Grip for 1997 and 1998, and [ * ] thereafter, which shall include all
applicable shipping and packaging charges. The parties hereby acknowledge that
the minimum volume requirements set forth in Section 2.1 and the initial price
provisions set forth in this Section 3.1, together with the terms of the Lease
Agreement, have been negotiated between the parties hereto at arm's length and
are integral elements of the transactions between Purchaser and Vendor.
3.2 Price Changes.
(a) Notwithstanding Section 3.1 hereof, the parties agree that: (i)
Vendor will use its reasonable best efforts to continually improve its Grip
manufacturing operations, will share with Purchaser equally in all cost savings
that result in a cost of goods sold (i.e., the cost of raw materials, cost of
direct labor, and incremental overhead added due to this supply contract) below
3
<PAGE>
the base price per Grip set forth in Section 3.1, in the form of reductions in
the base price of Grips, and will make available to Purchaser such data and
other information as Purchaser may periodically request to assess Vendor's cost
of goods sold, and (ii) the purchase price for Grips will, pursuant to mutual
agreement not to be unreasonably withheld, be adjusted for material increases or
decreases in the prices of raw materials which, in the case of raw materials
increases, are not offset by production efficiencies. A material change in the
prices of raw materials shall mean an increase or decrease of 5% over a 12 month
period in overall raw material costs.
(b) Purchaser hereby grants to Vendor options to purchase its common
stock upon the terms set forth in Schedule 3.2(b)(A). In this connection, Vendor
acknowledges that as the supplier of Purchaser's Grips it will have access to
Purchaser's production forecasts and other confidential or proprietary
information. Accordingly, Vendor agrees that for so long as it is a supplier of
products to Purchaser, it will comply with Purchaser's insider trading policy
attached as Schedule 3.2(b)(B), as the same may be amended from time to time by
Purchaser, together with all applicable securities and other laws, in connection
with any purchase or sale of Purchaser's options or common stock underlying such
options (collectively, "Securities"). In addition, Vendor represents, warrants,
and agrees as follows: (i) Vendor is an "accredited investor" within the meaning
of Regulation D promulgated under the Securities Act of 1933, as amended (the
"Act"); (ii) Vendor has such knowledge and experience in financial and business
matters that it is capable of understanding and evaluating the merits and risks
of an acquisition of Securities, and is financially capable of bearing the risk
of its investment in such Securities; (iii) Vendor understands and acknowledges
that an investment in the Securities of Purchaser involves a high degree of
risk; (iv) Vendor has received from Purchaser and has carefully reviewed and
understands all reports filed by the Purchaser with the Securities and Exchange
Commission (the "Commission") under the Securities and Exchange Act of 1934 (the
"Exchange Act") since December 31, 1995, and such other documents as Vendor has
requested (collectively referred to as the "Purchaser Disclosure Materials");
(v) Vendor has had an opportunity to ask questions of and to receive answers
from Purchaser concerning the Purchaser Disclosure Materials and the affairs and
prospects of Purchaser in general, and desires no further information pertaining
to Purchaser; and (vi) Vendor is purchasing the shares of common stock for its
own account, for investment purposes only and not with a view to immediate
resale or distribution either in whole or in part. Furthermore, Vendor
understands and agrees that (x) the Securities cannot be resold in whole or in
part unless they are registered or sold pursuant to an exemption from
registration; and (y) a legend will be placed on the certificates representing
the Securities indicating that such Securities have not been registered under
federal or state securities laws and are subject to restrictions on sale until
they are so registered. Any requests for transfer prior to registration by
Vendor must be accompanied by an opinion of counsel in form and substance and
from counsel acceptable to Purchaser.
(c) Purchaser shall cause the shares underlying the options to be
registered for resale under the Securities Act of 1933, as amended, as promptly
as reasonably practicable.
4
<PAGE>
3.3 Payment of Invoices.
(a) Purchaser shall pay all shipping and rigging costs associated with
the shipment of the equipment to Vendor's plant pursuant to the Lease Agreement;
provided, that Vendor acknowledges that Purchaser shall receive a credit against
initial invoices under this Agreement for 50% of such costs and that the
remaining 50% of such costs shall be added to the initial lease balance under
the Lease Agreement.
(b) The invoiced value of each shipment of Grips shall be determined
upon delivery of such shipment of Grips to Vendor's shipment department. All
invoices shall be due and payable by Purchaser net ten (10) days from the date
of invoice through June 30, 1997, and net forty-five (45) days thereafter.
(c) The amount due Vendor for each order of Grips supplied by Vendor
hereunder shall be determined by multiplying the total number of Grips covered
in Vendor's invoice(s) therefor by the applicable base prices. Purchaser shall
be responsible for all freight, insurance, taxes, and other charges.
ARTICLE IV
QUALITY AND WARRANTY
4.1 Conformance to Specifications.
(a) All Grips will be produced at Vendor's plant at New Bedford,
Massachusetts, or at any other location acceptable to Purchaser, which
acceptance will not be unreasonably withheld.
(b) Vendor warrants to Purchaser that it will maintain an objective
quality program with respect to the production of all Grips supplied pursuant to
this Agreement, which program will be in accordance with the technical and
aesthetic specifications (the "Specifications") established by Purchaser and
delivered to Vendor within two business days following the date hereof, as the
same may be amended from time to time by written agreement of the parties
hereto.
(c) Purchaser shall have the right to inspect, at Vendor's plant, Grips
and manufacturing processes for Grips. Any inspection of Grips shall be prior to
shipment; manufacturing processes may be inspected at any time during the term
of this Agreement. Purchaser's inspection may be for any reason reasonably
related to this Agreement, including to assure Vendor's compliance with the
Specifications. Vendor shall provide adequate space and other facilities to
Purchaser at its plant to oversee the production and shipment of Grips and to
facilitate research and development as provided in Section 6.1.
(d) Grips that are deemed by Purchaser to be defective shall be
returned immediately by Purchaser to Vendor. Vendor shall, as soon as reasonably
practical, but not more than ten (10) days from receipt of the defective Grips,
replace such Grip shipment with a substitute
5
<PAGE>
shipment that meets the Specifications. Purchaser shall be credited for any
returned Grips which are defective.
4.2 Warranties. Seller warrants that all Grips shall: (i) be manufactured,
processed, and assembled by Seller at its New Bedford, Massachusetts facilities;
(ii) conform to the Specifications; (iii) be free from defects in design,
material, workmanship, and performance; and (iv) be free and clear of all liens,
encumbrances, and other claims against title. All warranties specified in the
preceding sentence shall survive any inspection, delivery, acceptance, or
payment by Purchaser and be in effect for the longer of Vendor's normal warranty
period or one year from the date of acceptance of the Grips by Purchaser.
ARTICLE V
OWNERSHIP AND CONFIDENTIALITY
5.1 Ownership of Grip-related Assets.
(a) Vendor acknowledges and agrees that all equipment transferred
pursuant to the Lease Agreement (unless and until purchased by Vendor
thereunder), all Grips produced in connection with this Agreement, all compounds
and related formulae pertaining to golf grips, grip designs and tooling designs,
cavities and anything of a similar nature which relates to the production of
golf grips (but excluding Vendor's own manufacturing processes and techniques),
in each case whether in existence or developed or conceived by Purchaser or
Vendor during the term of this Agreement, and all intellectual property rights
in such material, including, without limitation, any copyrights, patents, trade
secrets, trademarks, inventions, ideas and know-how, and the derivative use of
and rights in and to such material, as well as the confidential information
embodied in any such material, are and shall be the sole and exclusive property
of Purchaser.
(b) Without Purchaser's prior written consent, Vendor hereby agrees
that, except as may be provided under Section 6.5, all compounds, formulae or
designs relating to golf grips or tooling for golf grips created or developed by
Vendor in connection with and during the term of this Agreement and all
equipment leased under the Lease Agreement or used by Vendor to fulfill its
obligations hereunder shall be used by Vendor only in connection with the
production of Grips for Purchaser pursuant to this Agreement.
(c) Purchaser grants to Vendor the right to use Purchaser's design or
other patents and trademarks, and the trademarks of Purchaser's customers,
solely to the extent necessary to fulfill its obligations to Purchaser under
this Agreement.
(d) With respect to the items set forth in (a) above, Purchaser shall
have the sole and exclusive right to register and hold in Purchaser's name
copyrights, trademark registrations, patents, or whatever protection Purchaser
may deem appropriate. Vendor shall execute any documents, including assignments
of any existing patent or trademark rights or other forms of
6
<PAGE>
protection, and provide any assistance as is necessary, at Purchaser's expense,
to protect the rights set forth herein.
(e) The parties agree that items described in (a) above developed
during the term of this Agreement shall be deemed works made for hire as defined
by the laws of the United States regarding copyrights and therefor owned by
Purchaser. In the event and to the extent that they are deemed not to constitute
works made for hire, Vendor hereby sells, assigns, and transfers to Purchaser
all right, title and interest in and to all such items without the need for
consideration additional to the consideration paid to Vendor by Purchaser
hereunder. Vendor shall obtain from its personnel any assignment to the Vendor
required to make the foregoing assignment to Purchaser of all right, title, and
interest in all such items and Vendor shall retain no rights therein and agrees
not to contest or challenge Purchaser's rights therein. This assignment and
transfer includes all causes of action for all infringements of the rights
assigned and transferred and the rights to use and retain the proceeds
therefrom.
5.2 Confidential and Proprietary Information. Vendor and Purchaser hereby
acknowledge and agree that in connection with the performance of their
obligations herein, a party may be provided with or shall otherwise be exposed
to or receive certain confidential and proprietary information of the other (or
of third parties, such as Purchaser's customers). In Purchaser's case, such
confidential and proprietary information may include, but shall not be limited
to, information concerning customers, customer orders, specifications and
designs relating to golf grips and tooling and other information concerning
Purchaser's grips and products, and, in Vendor's case, information concerning
its manufacturing and production techniques (all of the foregoing shall be
deemed "Proprietary Information" for purposes of this Agreement). Each party
agrees that any and all Proprietary Information which is disclosed to the other
party or to which the other party has access to based upon this Agreement shall
be and shall remain the sole and exclusive property of such party, and that the
other party shall not in any way reveal, disclose or use such information other
than in accordance with this Agreement or except as specifically directed by the
disclosing party. The term "Proprietary Information" does not include
information which: (i) becomes generally available to the public other than as a
result of a disclosure by a party contrary to the terms of this Agreement; (ii)
was available on a nonconfidential basis prior to its disclosure; or (iii)
becomes available on a non-confidential basis from a source other than the other
party, provided such source is not contractually obligated to keep such
information confidential.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Cord Grips. The parties acknowledge and agree that this Agreement covers the
purchase and sale of rubber injected golf grips, and that Purchaser also markets
and sells cord grips. Vendor desires to have the opportunity to produce such
grips for Purchaser. Purchaser hereby agrees to consider enabling Vendor to
produce the cord grips on behalf of Purchaser once full production of Grips has
been achieved and subject to other appropriate factors, such as preexisting
supplier relationships.
7
<PAGE>
6.2 Research and Development; Tooling.
(a) The parties acknowledge and agree that one of Purchaser's principal
purposes for entering into this Agreement is to have access to Vendor's research
and development capabilities, and that Vendor will essentially perform research
and development activities on Purchaser's behalf during the term of this
Agreement. Vendor hereby agrees that, during the term of this Agreement, it will
actively pursue and fund research and development efforts related to the
development of compounds, Grips, manufacturing processes and similar matters,
and will supply all technical, engineering, and quality control support
necessary to develop or produce new Grip compounds and products, including, on
an as needed basis (which Vendor acknowledges may be full time), a chemist.
(b) During the term of this Agreement Vendor shall be responsible for
procuring all necessary equipment, tooling, facilities, employees and other
items necessary for it to fulfill its obligations hereunder.
(c) Notwithstanding the foregoing, Purchaser agrees to pay for all
product profile design expenses and the cost of all prototype and production
cavities used in the development or production of new Grip products; provided,
however, that Vendor agrees to procure on behalf of Purchaser at mutually agreed
upon prices all such cavities.
6.3 Management Information Systems. Vendor will provide to Purchaser all
software, formats and other resources necessary to enable Purchaser and Vendor
to communicate in real time via computer link-up.
6.4 Training. Purchaser agrees to provide necessary training to Vendor's
shipping personnel as well as all computer hardware and peripherals related to
product shipping.
6.5 Sales of Grips and Golf Products to Third Parties. During the term of this
Agreement, Purchaser agrees that Vendor may sell golf grips to third parties
with Purchaser's prior written consent, which consent may not be unreasonably
withheld. Any agreement with respect to sales of golf grips to third parties
shall provide for Purchaser to receive a royalty of 3 to 5% of the base price of
such grips as may be mutually agreed upon. Any such royalty shall terminate upon
any termination of this Agreement by Vendor arising out of a material breach of
this Agreement by Purchaser, or upon expiration of this Agreement, and three (3)
years after any termination by Purchaser by reason of material breach by Vendor.
Vendor further agrees that, during the term of this Agreement, (i) if it is
approached by any third party about producing grips it will direct the
prospective customer to Purchaser to determine whether it would be appropriate
for such prospective customer to sell grips under Purchaser's trademarks and
through its distribution channels on terms mutually agreed upon, and (ii) in the
event Vendor determines to develop and/or produce any other golf products it
will consult with Purchaser first to determine whether it would be appropriate
for those products to be marketed and sold under Purchaser's trademarks and
through its distribution channels.
8
<PAGE>
6.6 Insurance.
(a) Without in any way limiting any of the obligations of Vendor set
forth herein, Vendor hereby agrees to maintain all insurance that may be
required under the laws, ordinances, and regulations of any governmental
authority, together with the following: (i) workers' compensation insurance as
prescribed by applicable law and employer's liability insurance with limits of
liability not less than $100,000 per employee; (ii) comprehensive general
liability insurance with limits of liability not less than $1,000,000, with
umbrella coverage of $20,000,000, including coverage for its inventory of Grips,
supplementary coverages for contractual liability assumed under this Agreement,
personal injury liability with the "employee" and "contractual" exclusions
deleted, and broad form property damage liability; (iii) in addition, if
automobiles are to be used in the performance of Vendor's obligations hereunder,
Vendor shall maintain automobile bodily injury and property damage liability
insurance with limits of liability not less than $1,000,000 extending to owned,
non-owned, and hired automobiles used in the performance of this Agreement which
is in compliance with all applicable laws, rules, and regulations; and (iv)
business interruption insurance with limits of liability not less than
$1,000,000 with umbrella coverage of $20,000,000.
(b) The insurance specified in (a)(i) above shall contain an assignment
of statutory lien. The insurance specified in (a)(ii), a(iii), and (a)(iv) above
shall: (i) name Purchaser, its directors, agents, and employees as additional
insureds in matters covered by this Agreement; (ii) provide that such insurance
is primary coverage with respect to all insureds; (iii) contain a standard cross
liability endorsement that provides that the insurance applies separately to
each insured and that the policies cover claims or suits by one insured against
another; and (iv) not be terminated, canceled, or substantially changed without
thirty (30) days prior written notice to Purchaser.
(c) Upon Purchaser's request, Vendor shall provide Purchaser with
certification by a properly qualified representative of the insurer of the names
of insureds, the type and amount of coverage, the location and operations to
which the insurance applies, the expiration date, and the insurer's agreement to
provide written notice to Purchaser at least thirty (30) days prior to the
effective date of any termination, cancellation, lapse, or material change in
the policy.
(d) All insurance policies required shall be issued by companies
licensed to transact business in the state of Massachusetts who hold a current
rating of not less than A according to Best's Insurance Reports.
(e) Vendor's obligations to maintain the insurance required herein, and
to provide evidence of same, shall survive for a period of three (3) years
beyond the termination, cancellation, or expiration of this Agreement.
9
<PAGE>
6.7 Financial Information. Purchaser and Vendor agree to provide the other with
the following information:
(a) As soon as available but in any event within forty-five (45) days
after the end of each of the first three calendar quarters in each fiscal year,
unaudited consolidated financial statements, including statements of operations
and cash flows for such quarter and for the period from the beginning of the
fiscal year to the end of such quarter and balance sheets as of the end of such
quarter, setting forth in each case comparisons to the corresponding period in
the preceding fiscal year, and all such statements will be prepared in
accordance with generally accepted accounting principles, consistently applied,
subject to normal year-end audit adjustments and excluding footnote disclosures;
(b) As soon as available but in any event within ninety (90) days after
the end of each fiscal year, audited consolidated financial statements,
including statements of operations and cash flows for such fiscal year and
balance sheets as of the end of such fiscal year, setting forth in each case
comparisons to the corresponding period in the preceding fiscal year, and all
such statements will be prepared in accordance with generally accepted
accounting principles, consistently applied.
(c) With reasonable promptness, such other information and data
concerning such party as the other party may reasonably request.
ARTICLE VII
TERM AND TERMINATION;
MATERIAL BREACH
7.1 Term of Agreement. This Agreement shall commence on the Effective Date and
continue for an initial term of ten (10) years. Thereafter, Purchaser shall have
the right to renew this Agreement for three additional terms of five (5) years.
7.2 Certain Breaches by Vendor. The following sets forth specific remedies for
certain breaches of this Agreement by Vendor as follows. With respect to any
shipment of Grips that is not delivered within the guarantee set forth in
Section 2.3(c) above or that fails to meet the Specifications referenced in
Section 4.1(b) above, Vendor shall promptly reimburse Purchaser for any loss in
gross margin arising therefrom, whether pursuant to a cancellation of the
customer's order, a reduction in the price of Grips to the customer or
otherwise. If Vendor fails to meet delivery schedules or Specifications with
respect to Grips representing more than 10% of the aggregate dollar value of all
Grips shipped in any given calendar quarter, such failure shall constitute a
material breach pursuant to which Purchaser, at its option, may terminate the
Agreement and/or seek damages or other relief against Vendor pursuant to the
provisions of Section 9.2 hereof.
7.3 Certain Breaches by Purchaser. The following sets forth specific remedies
for certain breaches of this Agreement by Purchaser as follows:
10
<PAGE>
* Confidential portion has been
omitted and filed separately
with the Commission
(a) If Purchaser fails to pay for any shipment of Grips within the time
set forth in Section 3.3(b) above following written notice thereof, it shall pay
interest on any outstanding overdue balance at the rate of 12% simple interest
per annum (other than overdue balances with respect to which a bona fide dispute
exists).
(b) Purchaser shall have a grace period of ten (10) days with respect
to the provision of forecasts and firm orders required pursuant to Section
2.2(a) of this Agreement. Thereafter, it shall pay a penalty of $500 per day
with respect to late forecasts or firm orders.
(c) If Purchaser fails to provide a firm order or forecast prior to the
expiration of any grace period provided under Section 2.2(b) more than two times
within any given calendar year, or more than $200,000 of invoices become overdue
at any given time, such failure shall constitute a material breach pursuant to
which Vendor, at its option, may terminate the Agreement and/or seek damages or
other relief against Purchaser pursuant to the provisions of Section 9.2 hereof.
(d) If, during the term of this Agreement, Purchaser purchases more
than [ * ] Grips but less than [ * ] Grips on an annualized basis in any
calendar year, Purchaser shall pay to Vendor promptly following the end of such
calendar year an amount equal to [ * ] minus the number of Grips actually
purchased multiplied by the average gross margin that Vendor realized on Grips
which it sold to Purchaser during the calendar year; provided, however, that
Purchaser's failure to purchase at least [ * ] Grips in any two calendar years,
or at least [ * ] Grips in any one calendar year, shall constitute a material
breach pursuant to which Vendor, at its option, may terminate the Agreement
and/or seek damages or other relief against Vendor pursuant to the provisions of
Section 9.2 hereof.
7.4 Termination. Notwithstanding Section 7.1, either party may terminate this
Agreement immediately and at any time if the other party commits a material
breach of this Agreement, and such party fails to cure the breach within thirty
(30) days after receiving a notice of such breach from the non-breaching party
(or such other specific period as is set forth herein). In addition to those
described in Section 7.2 and 7.3 above;
(a) A material breach of this Agreement with respect to Vendor shall
include, but not be limited to, the following: (i) Vendor fails to achieve full
production of Grips by February 15, 1997; (ii) Vendor makes an assignment for
the benefit of creditors or files any petition or action under any bankruptcy,
reorganization, insolvency or moratorium law, or any other law or laws for the
relief of, or relating to, debtors; or (iii) Vendor materially breaches or
commits an event of default under the Lease Agreement; and
(b) A material breach of this Agreement with respect to Purchaser shall
include, but not be limited to, the following: (i) Purchaser makes an assignment
for the benefit of creditors or files any petition or action under any
bankruptcy, reorganization, insolvency or moratorium law, or any other law or
laws for the relief of, or relating to, debtors, or (ii) Purchaser materially
breaches the Lease Agreement.
11
<PAGE>
(c) Upon any termination of this Agreement by Purchaser arising out of
a material breach by Vendor or upon expiration of the term of this Agreement,
Vendor agrees to promptly and fully assist Purchaser in the orderly transition
of Grip production operations to Purchaser or another third party, as Purchaser
may determine, and, upon Purchaser's request, to sell or transfer to Purchaser
or to assist Purchaser in selling or transferring to a third party designated by
Purchaser all equipment used by Vendor in its Grip production operations at the
fair market value thereof, as determined by a third party appraiser mutually
agreed upon by the parties, or in the absence of such agreement, selected by the
mediator designated in Schedule 9.2.
7.5 Force Majeure. In the event of any failure by Vendor in the performance of
this Agreement as a result of actions or events not under the control of Vendor
(including, but not limited to, acts of God, regulation or law or other action
of any government, war or insurrection, civil commotion, destruction of
production facilities or materials by earthquake, fire, flood, or storm, labor
disturbances, epidemic, or failure of suppliers, public utilities, or common
carriers), Vendor agrees to employ reasonable best efforts to fully resume its
performance hereunder and, during any period in which Vendor's performance
hereunder is delayed or interrupted by reason of force majeure events, to use
reasonable best efforts to establish temporary facilities and to provide
necessary equipment or personnel to enable Vendor to fulfill Purchaser's
requirements for Grips, or to cooperate in enabling Purchaser or another third
party to fulfill Purchaser's requirements for Grips, as Purchaser shall
determine. Nothing herein shall relieve Vendor of its obligations under this
Agreement, nor affect Purchaser's rights or remedies, in the case of a force
majeure event.
7.6 Voluntary Termination by Purchaser. Purchaser shall have the right to
terminate this Agreement with Vendor at any time by giving Vendor written notice
of termination and paying to Vendor a termination fee determined in accordance
with Schedule 7.6.
7.7 Exercise of Rights of Termination. Neither Vendor nor Purchaser shall,
solely by reason of the bona fide exercise of rights to terminate or suspend
this Agreement, be liable to the other for compensation, reimbursement, or
damages either on account of present or prospective profits on sales or
anticipated sales or on account of expenditures, investments, or commitments
made in connection therewith, provided, that, such termination shall not affect
the rights or liabilities of the parties with respect to any amounts owing by
either party to the other prior to termination.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF THE PARTIES
Each party hereto represents and warrants to the other party hereto:
8.1 Organization and Qualification. The party is a corporation duly organized,
validly existing, and in good standing under the laws of its state of
incorporation, and has the requisite corporate power and authority to own and
operate its properties and to carry on its business as
12
<PAGE>
now conducted in every jurisdiction where the failure to do so would have a
material adverse effect on its business, properties, or ability to conduct the
business currently conducted by it.
8.2 Authority Relative to this Agreement. The party has the requisite power and
authority to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement by such party and the
consummation by such party of the transactions contemplated hereby have been
duly authorized by such party, and no other corporate proceedings on the part of
such party are necessary to authorize this Agreement and such transactions. This
Agreement has been duly executed and delivered by such party and constitutes a
valid and binding obligation of such party, enforceable in accordance with its
terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, or other similar laws relating to the enforcement of
creditors' rights generally and by general principles of equity.
8.3 No Conflicts. The party is not subject to, or obligated under, any provision
of (i) its Certificate of Incorporation or Bylaws, (ii) any material agreement,
arrangement, or understanding, (iii) any material license, franchise, or permit,
or (iv) any law, regulation, order, judgment, or decree, which would be breached
or violated, or in respect of which a right of termination or acceleration would
arise, or pursuant to which any encumbrance on any of its or any of its
subsidiaries' material assets would be created, by its execution, delivery, and
performance of this Agreement and the consummation by it of the transactions
contemplated hereby.
8.4 No Consents. No authorization, consent, or approval of, or filing with, any
public body, court, or authority is necessary on the part of the party for the
consummation by such party of the transactions contemplated by this Agreement.
8.5 Financial Statements. The party has provided to the other party unaudited
financial statements for and as of the period ended September 30, 1996, and
audited financial statements for and as of the period ended December 31, 1995,
all of which financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved and fairly present the financial position of
such party as of the dates thereof and the results of its operations and cash
flows for the periods then ended, subject in the case of unaudited financial
statements to normal year-end adjustments in the absence of complete footnote
disclosure.
8.6 No Litigation. The party is not subject to any legal, administrative,
arbitration or other suit, proceeding, claim, action, investigation, or inquiry
pending or, to the knowledge of such party, threatened against or involving such
party which could have a material adverse effect upon its ability to perform
this Agreement or upon its results of operations or financial condition, or
which questions the validity of this Agreement or any action taken or to be
taken by such party pursuant to this Agreement and, to the knowledge of such
party, there is no valid basis for any such suit, proceeding, claim, action,
investigation or inquiry.
13
<PAGE>
ARTICLE IX
MISCELLANEOUS
9.1. Notices.
(a) All notices and demands of any kind which either party may be
required or desire to serve upon the other under the terms of this Agreement
shall be in writing and shall be sent by registered mail, return receipt
requested, or by facsimile with confirming copy by registered mail to the
receiving party at the address of the receiving party set forth below:
If to Purchaser: Royal Grip, Inc.
--------------- 444 W. Geneva
Tempe, Arizona 85282
Phone: (602) 829-9000
Fax: (602) 829-9100
Attn: President
If to Vendor: Acushnet Rubber Company, Inc.
------------ 744 Belleville Avenue
New Bedford, Massachusetts 02742-6916
Phone: (508) 998-4004
Fax: (508) 998-4102
Attn: Chief Operating Officer
(b) Either party may change such address upon written notice to the
other party hereto in the manner set forth in this Section 9.1. All notices or
demands shall be deemed to have been given when received by the party to whom
such notice is sent as evidenced by a receipt signed and dated by a
representative of the receiving party.
9.2 Dispute Resolution. Any dispute among the parties hereto shall be resolved
in accordance with the dispute resolution procedures attached hereto as Schedule
9.2; provided, that, nothing herein shall preclude any party from seeking or
obtaining equitable relief, such as an injunction, or from enforcing any order
or judgement of an arbitrator through judicial process.
9.3 Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the state of Massachusetts (excluding its, or any
other jurisdiction's, choice of law principles).
9.4 Effect of Waiver. No delay or omission to exercise any right, power or
remedy accruing to a party upon any breach or default of the other party
hereunder shall impair any such right, power, or remedy nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein or of or in any similar breach or default thereafter occurring, nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default
14
<PAGE>
theretofore or thereafter occurring. Any waiver, permit, consent, or approval of
any kind or character on the part of a party hereto of any breach or default
under this Lease must be in writing specifically set forth.
9.5 Severability. Should any part of any provision of this Agreement be held
invalid or unenforceable, the invalid or unenforceable part or provision shall
be replaced with a provision which accomplishes, to the extent possible, the
original business purpose and economic intent of such part or provision in a
valid and enforceable manner, and the remainder of this Agreement shall remain
binding upon the parties hereto.
9.6 Assignment and Transferability. Neither party may assign its rights and/or
obligations under this Agreement or any interest therein to any other party
without the prior written consent of the other party. Subject to the foregoing,
this Agreement shall be binding upon and inure to the benefit of the permitted
assignees, transferees, or successors of Purchaser and Vendor, respectively.
9.7 Survival. The provisions of Sections 5.1, 5.2, 9.2, and 9.3 shall survive
termination or expiration of this Agreement (as the case may be) and shall
remain at all times in full force and effect.
9.8 Captions. The captions of this Agreement are solely for the convenience of
reference and shall not affect its interpretation.
9.9 Entire Agreement.
(a) This Agreement embodies the entire understanding as of the date of
execution hereof between the parties hereto with respect to the subject matter
hereof, and supersedes any and all prior agreements, negotiations,
understandings, representations statements and writings between the parties. No
modification, alteration, waiver or change in any of the terms of this Agreement
shall be valid or binding upon the parties hereto unless made in writing and
duly executed by both of the parties hereto.
(b) Purchaser and Vendor agree that the supply of Grips hereunder shall
be subject to and governed by the terms and conditions hereof, and none of the
terms and conditions set forth on any purchase order or order form, or any
invoice relating thereto, shall affect or modify the terms and conditions
hereof.
9.10 Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
9.11 Time of Essence. Time is of the essence in this Agreement.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives on the date and year first
written above.
"PURCHASER" "VENDOR"
ROYAL GRIP, INC. ACUSHNET RUBBER COMPANY, INC.
By:/s/ Robert G.J. Burg, II By: /s/ Ronald V. Fernandes
------------------------------- ---------------------------
Name: Robert G.J. Burg, II Name: Ronald V. Fernandes
Title: President Title: Executive Vice President and
Chief Operating Officer
16
<PAGE>
-SCHEDULE 3.2(A)
----------------
OPTIONS
Total: 250,000 shares subject to option
Exercise
Price: 50,000 shares at closing sale price on the date of this Agreement
200,000 shares at $1.00 above such closing sale price
Vesting
Schedule: Fully vested immediately
Term: 3 years from the date hereof
17
<PAGE>
SCHEDULE 3.2 (b)(B)
ROYAL GRIP, INC.
POLICY STATEMENT
SECURITIES TRADING BY COMPANY PERSONNEL
GENERAL
As a general rule, it is against the law to buy or sell any securities
while in possession of material non-public information relevant to that security
(sometimes called "inside information"), or to communicate such information to
others who trade on the basis of such information (known a "tipping"), In recent
years, Congress has toughened the penalties for trading on or tipping materia
inside information and the Securities and Exchange Commission ("SEC") and U.S.
Attorneys have aggressively prosecuted such trades and tippers. Until recently,
their efforts have concentrated on individuals directly involved in trading
abuses. To further deter insider trading violations, Congress has expanded the
authority of the SEC and the United States Justice Department, adopting the
Insiders Trading and Securities Fraud Enforcement Act and the Securities
Enforcement Remedies Act. In addition to increasing the penalties for insider
trading and other securities law violations, these laws put the onus on
companies and possible other "controlling persons" for violations by company
personnel. Accordingly, companies which do not take active steps to adopt
preventative policies and procedures covering securities trades by company
personnel could face severe consequences.
In addition to responding to the requirements of the federal securities
laws, Royal Grip, Inc (the "Company") is adopting this Policy Statement to avoid
even the appearance of improper conduct on the part of anyone employed by or
associated with, the Company (not just so-called insiders). We have all worked
hard over the years to establish our reputation for integrity and ethical
conduct. We cannot afford to have it damaged.
The consequences of insider trading violations can be staggering:
For individuals who trade on inside information (or tip information to
others)
o A civil penalty of up to three times the profit gained or loss
avoided;
o A criminal fine (no matter how small the profit) of up to $1
million;
o A jail term of up to ten years; and
o Prohibition from serving as an officer or director of the
Company.
For a company (as well as possibly any supervisory person) that fails
to take appropriate steps to prevent illegal trading:
o A civil penalty of the greater of $1 million or three times
the profit gained or loss avoided as a result of the
employee's violations; and
o A criminal penalty of up to $2.5 million.
2
<PAGE>
Moreover, if an employee violates the Company's insider trading policy,
Company-imposed sanctions, including dismissal for cause, could result from
failing to comply with the Company's policy or procedures. Needless to say, any
of the above consequences, even an SEC investigation that does not result in
prosecution, can tarnish one's reputation and irreparably damage a career.
GENERAL TRADING POLICY
If a director, officer or any employee has material non-public
information relating to the Company, it is our policy that neither that person
nor any related person may buy or sell securities of the Company or engage in
any other action to take advantage of, or pass on to others, that information.
This policy also applies to information relating to any other company, including
our customers or suppliers, obtained in the course o employment.
Transactions that may be necessary or justifiable for independent
reasons (such as the need to raise money for an emergency expenditure) are no
exception. Even the appearance of an improper transaction must be avoided to
preserve our reputation for adhering to the highest standards of conduct.
This Policy includes transactions within a 401K.
Material Information. Material information is any information that a
reasonable investor would consider important in a decision to buy, hold, or sell
stock, i.e., any information, positive or negative, which could reasonably
affect the price of the stock. Examples of events or developments that should be
presumed to be "material" in the context of the Company's stock would be events
such as the following that have not yet been fully disclosed to the public:
regulatory developments, knowledge of a trend in the Company's revenues or
earnings, a merger, major litigation, a purchase or sale of substantial assets,
changes in dividend policies, the declaration of a stock split, the offering of
additional securities, changes in management, significant new products or
developments, impending bankruptcy or financial liquidity problems, and the gain
or loss of a substantial customer or supplier, or any other significant
corporate transaction. These examples are illustrative only and are not intended
to be exhaustive examples of material information. Either positive or negative
information may be material.
Non-Public Information. Information is "non-public" until it has been
effectively communicated to the marketplace through appropriate news media. In
many cases, this may require the passage of several trading days after any
initial disclosure.
Twenty-Twenty Hindsight. Whether a particular item was "material" will
be judged with hindsight. Accordingly, when in doubt as to a particular item of
information, you should presume it to be material and not to have been disclosed
to the public.
3
<PAGE>
Transactions by Family Members. The very same restrictions apply to
your family members and others living in your household (a "Family Member").
Employees are responsible for the compliance of their Family Members with the
Company's Policy Statement.
Tipping Information to Others. Whether the information is proprietary
information about our Company or information that could have an impact on our
stock price, employees must not pass that information on to others. The above
penalties apply, whether or not you derive any benefit from another's actions.
Inadvertent Disclosure. All employees, officers and directors are
reminded to use extreme care to assure that confidential information is not
inadvertently disclosed to others. Be particularly careful to avoid discussing
any matter that might be sensitive or confidential in public places, such as
lobbies, restrooms, airports or restaurants. Meetings in which confidential
information is discussed should be conducted behind closed doors. Even
inadvertent "leaks" of confidential information can create problems for the
Company and its employees, officers and directors.
Public Announcements. It is improper for an officer, director or
employee to enter a trade immediately after the Company has made a public
announcement of material information, including earnings releases. As a general
rule you should not engage in any transactions until the third day after the
information has been released. With respect to earnings releases, as a general
rule, you should not engage in any transactions during the period beginning the
first day of the last month of the quarter through the third business day after
the information has been released.
Violation. As with the Company's other employee policies, violation of
this Policy Statement by an employee of the Company or any of its subsidiaries
(or by any Family Member of the employee) is grounds for immediate disciplinary
action, including possible dismissal from employment.
III. SPECIFIC RESTRICTIONS ON TRADING IN ROYAL GRIP, INC. STOCK
Approval of Trades. To provide assistance in preventing inadvertent
violations and avoiding even the appearance of an improper transaction (which
could result, for example, where an employee engages in a trade while unaware of
a pending major development), all transactions in Company stock (acquisitions,
dispositions, transfers, etc.) by directors, officers and their Family Members,
must be pre-approved by Tom Schneider. In addition, any employee or Family
Member of an employee contemplating a transaction that would result in an
aggregate of 250 shares or more of Company stock being traded (either purchased
or sold) by such person during any three-month period, must be pre-approved by
Tom Schneider. If you contemplate a transaction requiring pre-approval, you
should give written notice to Tom Schneider one week in advance.
These restrictions do not apply to exercises of stock options, which do
not require prior approval. Sales of shares of stock acquired from option
exercises, however, do require approval.
4
<PAGE>
The foregoing restrictions apply to the purchase or sale of stock for
any fiduciary account (e.g., trustee, executor, custodian) with respect to which
the employee, officer, director or Family Member makes the investment decision,
regardless of whether the employee, officer, director or Family Member has any
beneficial interest in the account.
In addition, short sales, buying or selling puts or calls or purchases
on margin of the Company's stock by any employee, officer, director or Family
Member are absolutely prohibited. Any Company stock purchased in the open market
must be held for a minimum of six months and ideally longer. (Note that the
SEC's short-swing profit rule already prevents executive officers and directors
from selling any Company stock within six months of a purchase. We are simply
expanding this rule to all officers of the Company and its subsidiaries.
However, the rule does not apply to stock option exercises, except to the extent
required for officers and directors.)
IV. CONFIDENTIALITY
Serious problems could be caused for the Company by unauthorized
disclosure of internal information the Company, whether or not for the purpose
of facilitating improper trading in the stock. Company personnel should not
discuss internal Company matters or developments with anyone outside the
Company, except as required in the performance of regular corporate duties.
This prohibition applies specifically (but not exclusively) to
inquiries about the Company which may be by financial press, investment analysts
or others in the financial community. It is important that all such
communications on behalf of the Company be through an appropriately designated
officer under carefully controlled circumstances. Unless you are expressly
authorized to the contrary, if you receive any inquires of this nature, you
should decline comment and refer the inquirer to Tom Schneider, Bob Burg or
Danny Edwards.
COMPANY ASSISTANCE
Any person who has any question about specific transactions may obtain
additional guidance from Tom Schneider. Remember, however, that the ultimate
responsibility for adhering to the Policy Statement and avoiding improper
transactions rests with you. In this regard it is imperative that you use your
best judgement.
CERTIFICATIONS
Officers and directors will be required to certify their understanding
of, and intent to comply with this Policy Statement and may be required to
certify compliance on an annual basis. Remember, you are responsible for the
compliance of your Family Members with the Company's Policy Statement.
5
<PAGE>
October 9, 1996
TO: Officers, Directors and Key Employees of Royal Grip, Inc. (the
"Company")
RE: Certification of the Company's Policy Statement on Securities
Trading by Company Personnel
Enclosed is a copy of the Company's new Policy Statement covering
securities trading by Company personnel. As you will see from the Policy
Statement, the consequences of an insider trading violation can be devastating
to both the individual involved and the Company.
Please take a few minutes to carefully read the enclosed Policy
Statement and then return the attached copy of this letter. If you have any
questions regarding the Policy Statement, do not hesitate to contact me.
Very truly yours,
/s/ Tom Schneider
Tom Schneider
Vice President - Finance
Certification:
The undersigned hereby certifies that he / she has read and understands,
and agrees to comply with, the Company's Policy Statement on Securities Trading
By Company Personnel, a copy of which was distributed with this letter.
Date:___________________________
Signature:____________________________________
Name:_________________________________
(please print)
Dept:_________________________________
6
<PAGE>
SCHEDULE 7.6
------------
The termination fee contemplated by Section 7.6 of the Agreement shall
be the sum of the following:
(i) Vendor's up-front costs in establishing manufacturing operations
under this Agreement, as shall be mutually agreed upon within 60 days of
execution of this Agreement, plus (ii) the fair value of the equipment used by
Vendor in conjunction with the production of Grips, which shall be repurchased
by Purchaser at the fair value thereof as determined in accordance with Section
7.4(c), plus (iii) $2 million.
18
<PAGE>
SCHEDULE 9.2
------------
DISPUTE RESOLUTION PROCEDURES
All claims, disputes and other matters in controversy (herein called
"dispute") arising directly or indirectly out of or related to this Agreement,
or the breach thereof, whether contractual or noncontractual, and whether during
the term or after the termination of this Agreement, shall be resolved
exclusively according to the procedures set forth in this Schedule 9.2.
A. Negotiation. The parties shall attempt to settle disputes arising
out of or relating to this Agreement or the breach thereof by a meeting of two
designated representatives of each party within five (5) days after a request by
either of the parties to the other party asking for the same.
B. Mediation. If such dispute cannot be settled at such meeting either
party within five (5) days of such meeting may give a written notice (a "Dispute
Notice") to the other party setting forth the nature of the dispute. The parties
shall attempt in good faith to resolve the dispute by mediation in Phoenix,
Arizona under the Commercial Mediation Rules of the American Arbitration
Association ("AAA") in effect on the date of the Dispute Notice. The parties
shall select a person who will act as the mediator under this Paragraph B within
60 days of the date of the Agreement. If the dispute has not been resolved by
mediation as provided above within thirty (30) days after delivery of the
Dispute Notice, then the dispute shall be determined by arbitration in
accordance with the provisions of Paragraph C hereof.
C. Arbitration. Any dispute that is not settled through mediation as
provided in Paragraph B above shall be resolved by arbitration in Phoenix,
Arizona, governed by the Federal Arbitration Act, 9 U.S.C. ss. I et seq, and
administered by the AAA under its Commercial Arbitration Rules in effect on the
date of the Dispute Notice, as modified by the provisions of this Section C, by
a single arbitrator. The arbitrator selected, in order to be eligible to serve,
shall be a lawyer with at least 15 years experience specializing in either
general commercial litigation or general corporate and commercial matters. In
the event the parties cannot agree on a mutually acceptable single arbitrator
from the list submitted by the AAA, the AAA shall appoint the arbitrator who
shall meet the foregoing criteria. The arbitrator shall base the award on
applicable law and judicial precedent and, unless both parties agree otherwise,
shall include in such award the findings of fact and conclusions of law upon
which the award is based. Judgment on the award rendered by the arbitrator(s)
may be entered in any court having jurisdiction thereof. The award may only be
made for compensatory damages, and if any other damages (whether exemplary,
punitive, consequential, statutory or other) are included, the award shall be
vacated and remanded, or modified or corrected, as appropriate to promote this
damage limitation.
Notwithstanding the foregoing:
(a) Upon the application by either party to a court for an
order confirming, modifying or vacating the award, the court shall have the
power to review whether, as a matter of law based on the findings of fact
determined by the arbitrator, the award should be confirmed, modified or vacated
in order to correct any errors of law made by the arbitrator.
19
<PAGE>
In order to effectuate such judicial review limited to issues of law, the
parties agree (and shall stipulate to the court) that the findings of fact made
by the arbitrator shall be final and binding on the parties and shall serve as
the facts to be submitted to and relied on by the court in determining the
extent to which the award should be confirmed, modified or vacated.
(b) Either party shall have the right to apply to any court
for an order to enforce any of the ownership and confidentiality provisions
contained in the Agreement.
D. Costs and Attorneys' Fees. If either party fails to proceed with
mediation or arbitration as provided herein or unsuccessfully seeks to stay such
mediation or arbitration, or fails to comply with any arbitration award, or is
unsuccessful in vacating or modifying the award pursuant to a petition or
application for judicial review, the other party shall be entitled to be awarded
costs, including reasonable attorneys' fees, paid or incurred by such other
party in successfully compelling such arbitration or defending against the
attempt to stay, vacate or modify such arbitration award and/or successfully
defending or enforcing the award.
E. Tolling of Statute of Limitations. All applicable statutes of
limitations and defenses based upon the passage of time shall be tolled while
the procedures specified in this Schedule 9.2 are pending. The parties will take
such action, if any, required to effectuate such tolling.
20
* Indicated that confidential portion
has been omitted and filed separately
with the Securities and Exchange Commission
Exhibit 10.17
AMENDMENT TO MANUFACTURING AND SUPPLY AGREEMENT
This AMENDMENT TO MANUFACTURING AND SUPPLY AGREEMENT (the "Amendment")
is made as of this 4th day of April, 1997 by and between ROYAL GRIP, INC., a
Nevada corporation ("Purchaser"), and ACUSHNET RUBBER COMPANY, INC., a
Massachusetts corporation ("Vendor").
RECITALS
--------
A. Purchaser and Vendor are parties to that certain Manufacturing and Supply
Agreement dated as of December 21, 1996 (the "Agreement") whereby, among other
things, Vendor became the exclusive supplier of non-cord grips (the "Grips") to
Purchaser.
B. Vendor has experienced delays in the production of Grips and, as a result
thereof, has failed to meet production requirements under the Agreement.
C. The parties have agreed to amend and to waive certain provisions of the
Agreement and are entering into this Amendment in furtherance of such
agreements.
NOW, THEREFORE, in consideration of the mutual agreements set forth
herein, the parties hereby agree as follows:
1. Amendments. The parties to the Agreement hereby agree to amend and
to waive certain provisions of the Agreement as follows:
(i) Section 1.1(b) is hereby amended by deleting such
subsection in its entirety and by inserting in lieu thereof the
following: "Subject to the terms hereof, Purchaser hereby agrees to
purchase from Vendor 100% of its requirements of Grips during the term
of this Agreement; provided, however, that if and to the extent that
Vendor fails for any reason to supply (or fails to notify Purchaser in
accordance herewith of its ability to supply) a number of Grips
sufficient to meet Purchaser's requirements at any time or from time to
time during the term of this Agreement, Purchaser may (whether or not
such notice is provided), at its option and discretion and without
prejudice to any of its rights or remedies arising hereunder or under
applicable law, purchase from one or more third party suppliers the
Grips not supplied by Vendor in accordance herewith that are necessary
to fulfill Purchaser's requirements (the "Additional Grips"). Vendor
further agrees that in the event Purchaser purchases Additional Grips
from other third party suppliers, Vendor shall promptly notify
Purchaser from time to time of its ability to manufacture and supply
all or any portion of such Additional Grips (on an ongoing basis), and
Purchaser shall use reasonable efforts to transition the manufacture
and supply of such Additional Grips (or portion thereof) back to Vendor
as soon as is reasonably practicable, subject to any supply agreements
entered into by Purchaser for such Additional Grips. Nothing contained
herein shall relieve Vendor from either the minimum production
requirements or the penalties for failing to meet such requirements set
forth in Section 2.1(b) or elsewhere herein."
<PAGE>
* Confidential portion has been omitted
and filed separately with the Commission
(ii) Section 2.1 is hereby amended by deleting such section in
its entirety and by inserting in lieu thereof the following:
"Purchase Requirements.
-----------------------
(a) Upon receipt of Purchaser's firm orders therefor,
Vendor hereby agrees to manufacture and supply to
Purchaser Grips during each calendar month beginning
April 1, 1997 and ending December 31, 1997 (the
"Transition Term") at a rate of up to [ * ] Grips per
month. For purposes of calculating Vendor's
production requirements pursuant to this Section 2.1,
the number of Grips manufactured and supplied by
Vendor shall constitute the number of Grips actually
manufactured and supplied by Vendor and the number of
Grips not manufactured by Vendor but with respect to
which Vendor completes secondary buffing, trimming or
painting, in each case pursuant to Purchaser's orders
during each month of the Transition Term, and shall
not include any Grips manufactured by Vendor or
otherwise in Vendor's inventory prior to April 1,
1997, or during any period prior to the commencement
of any calendar month during the Transition Term.
(b) In the event Purchaser orders from Vendor a
number of Grips equal to or less than [ * ] Grips
during any calendar month during the Transition Term,
and Vendor fails for any reason to manufacture and
supply the number of Grips ordered by Purchaser (up
to [ * ] Grips) during any month of such Transition
Term, Purchaser shall be entitled to, and Vendor
shall provide Purchaser with, a credit (each a
"Purchase Credit" and collectively, the "Purchase
Credits"), to be applied against invoices for
purchases of Grips by Purchaser during the term of
this Agreement. Each such Purchase Credit shall be
equal to the product of (i) the number of Grips
ordered by Purchaser for delivery to its customers or
distributors each calendar month (up to [ * ] Grips),
minus the number of Grips manufactured and supplied
by Vendor in accordance with this Agreement during
each such month, (ii) multiplied by $[ * ]. In the
event that this Agreement is terminated or expires
prior to the time that Purchaser has used all of its
accumulated Purchase Credits and other credits
pursuant to Section 3.3 (d) hereof, Vendor shall pay
to Purchaser, in addition to any other amounts owing
hereunder, an amount in cash equal to all unused
Purchase Credits existing at the time of such
termination or expiration, such payment to be made
within
2
<PAGE>
* Confidential portion has been omitted
and filed separately with the Commission
three (3) days after the date of such termination or
expiration.
(c) In the event Purchaser is permitted to order from
Vendor (and orders from Vendor and sells) more than [
* ] Grips during any calendar month during the
Transition Term, and Vendor manufactures and supplies
in such calendar month a number of Grips in excess of
[ * ] Grips ordered and sold by Purchaser (such
excess amount over [ * ] Grips being referred to
herein as the "Excess Grips"), Vendor shall be
entitled, in addition to the base price for such
Grips in accordance with Section 3.1 hereof, to a sum
equal to (i) $[ * ] per Grip, multiplied by (ii) the
number of Excess Grips; provided, however, that the
maximum amount payable to Vendor pursuant to this
Section 2.1(c) shall in no event exceed an aggregate
of $[ * ] plus the amount of any additional Purchase
Credits previously earned by Purchaser. If on the due
date of any payment owing to Vendor by Purchaser
under this Section 2.1(c) Purchaser has unused
Purchase Credits or any unused portion of its Initial
Credit under Section 3.3(d) hereof, such payment
obligations shall be satisfied by appropriate offset
or reduction of Purchaser's unused credits. In the
event Purchaser has no accumulated unused credits at
the time such payment obligation is due hereunder,
and subject to the remaining provisions hereof,
Purchaser shall be obligated to pay such amounts to
Vendor in accordance with the then existing payment
terms between Purchaser and Vendor.
(d) Subject to Section 7.3(d) hereof, Purchaser
hereby agrees to purchase Grips from Vendor in each
calendar year of this agreement commencing January 1,
1999 at the annualized rate of [ * ] Grips per year."
(iii) Section 2.2 is hereby amended by adding to such section a new
subsection (e) which provides as follows: "(e) Purchaser agrees that no
later than June 30 of each year (commencing June 30, 1997) during the
term of this Agreement it shall provide Vendor with a forecast of its
annual purchase requirements of Grips for the following year, such
forecast to be provided by part number. Such forecasts shall not be
considered binding commitments on the part of Purchaser to order the
quantity or types of Grips specified therein. Vendor hereby agrees that
it will be obligated to produce the number of Grips identified in such
forecast to the extent the number of Grips identified therein does not
constitute an increase of more than ten percent (10%) of the number of
Grips ordered by Purchaser during the immediately preceding calendar
year (the "Maximum Annual Requirement"), and agrees to notify Purchaser
in writing within thirty (30) days after receipt of Purchaser's annual
forecast of its ability or inability to produce the Maximum
3
<PAGE>
* Confidential portion has been omitted
and filed separately with the Commission
Annual Requirement of Grips in accordance herewith. Vendor and
Purchaser hereby further agree that Vendor shall not be obligated to
produce more than ten percent (10%) of the Maximum Annual Requirement
of Grips during any one calendar month of the applicable calendar year.
For 1998, Vendor shall be obligated to produce and supply a minimum of
[ * ] Grips, if ordered by Purchaser. By way of example, an annual
forecast for Purchaser's Grip requirements in calendar year 1999 shall
be provided to Vendor on or before June 30, 1998. If Purchaser's total
Grip requirement for 1998 was [ * ] Grips, Vendor will be obligated to
supply the number of Grips specified in Purchaser's forecast for 1999
up to [ * ] Grips, and no more than [ * ] Grips in any one month during
1999. In the event Vendor fails for any reason to supply the number of
Grips required hereunder, Purchaser shall be entitled to the amounts
set forth in Section 7.2 hereof. The forecasts set forth in Sections
2.2(a) and 2.2(b) of this Agreement shall be subject in all respects to
the production and output requirements set forth in Sections 2.1 and
this 2.2(e)."
(iv) Section 3.1 is hereby amended by deleting the first sentence and
by inserting in lieu thereof the following: "Purchaser and Vendor
hereby agree that the purchase price per Grip ordered by Purchaser
hereunder shall be as set forth on a pricing schedule agreed to by
Purchaser and Vendor, which pricing schedule shall reference this
Agreement and shall be binding on the parties in accordance with its
terms."
(v) Section 3.2(c) is hereby amended by deleting such subsection in its
entirety and by inserting in lieu thereof the following: "Purchaser
shall use its reasonable best efforts to cause the shares underlying
the options to be registered for resale under the Securities Act of
1933, as amended, as promptly as is reasonably practicable after the
receipt of written demand therefor by Vendor, but in no event on or
before a date that is one hundred and eighty (180) days after the
consummation of Purchaser's proposed transaction with FM Precision Golf
Corporation. Vendor shall be entitled to cause Purchaser to cancel
166,667 (but not more or less than 166,667) of the 250,000 options
granted pursuant to Section 3.2(b) above upon sixty (60) days' prior
written notice to Purchaser; provided, however, that Vendor shall not
be entitled to cancel such options if (i) Vendor is then in breach (or
but for the passage of time would be in breach) of this Agreement, or
(ii) if Purchaser's accountants determine that the cancellation of such
options will not result in a positive impact on Purchaser's earnings.
Upon proper cancellation of such options, Vendor shall be entitled,
subject to the limitations set forth below, to an offset or reduction
of the then unused portion of the Initial Credit provided to Purchaser
under Section 3.3(d) hereof, if any. In no event shall Vendor be
entitled to payment in cash or anything else of value other than such
credit offset . The amount of such offset shall be equal to the value
of such options on the date notice of cancellation is provided, as
valued by Purchaser's accountants in accordance with the Black-Scholes
option pricing model, but in no event shall the value of such options
exceed in the aggregate the lesser of (y) $239,333 or (z) the amount of
any then unused portion of Purchaser's Initial Credit, regardless of
the value of the options determined by such accountants. "
4
<PAGE>
(vi) Section 3.3 is hereby amended by adding to such section a new
subsection (d) which provides as follows: "(d) Purchaser shall be
entitled to, and Vendor hereby provides to Purchaser, a purchase credit
in the amount of $400,000 (the "Initial Credit"), such Initial Credit
to be in addition to any and all Purchase Credits owed to Purchaser
from time to time under Section 2.1(b) hereof. The Initial Credit under
this subsection (d) and all Purchase Credits under Section 2.1(b) shall
be applied by Purchaser against, and shall constitute timely payment
of, any unpaid invoices of Vendor for Grips existing as of the date of
this Agreement or thereafter (up to the amount of all such credits)."
(vii) Section 7.2 is hereby amended by adding a new sentence
immediately after the second sentence thereof which provides as
follows: "The reimbursement amounts set forth in the immediately
preceding sentence shall not apply to any failure of Vendor to supply
the quantity of Grips specified in Section 2.1(b) hereof during the
Transition Term, which failure shall be subject to the reimbursement
provisions set forth in Section 2.1(b)."
(viii) Section 7.3(b) is hereby amended by deleting the first sentence
of such subsection and by inserting in lieu thereof the following:
"Purchaser shall have a grace period of ten (10) days with respect to
the provision of forecasts and firm orders required pursuant to Section
2.2(a) of the Agreement, and shall have a grace period of thirty (30)
days with respect to the provision of non-binding annual forecasts
required pursuant to Section 2.2(e) of the Agreement."
(ix) The provisions of Section 7.3(d) of the Agreement are hereby
waived with respect to the purchase of Grips by Purchaser during
calendar years 1997 and 1998.
(x) Section 7.7 is hereby re-designated as Section 7.8 and there shall
be added a new Section 7.7 to provide as follows:
"7.7 Voluntary Termination by Vendor.
--------------------------------
(a) Vendor shall have the right to terminate this Agreement
with Purchaser at any time on or after June 30, 1998 by giving
Purchaser not less than ten (10) months' prior written notice
of termination and by paying to Purchaser in cash a
termination fee which shall be the sum of the following:
(i) The aggregate profit realized or realizable by
Vendor with respect to the exercise and subsequent
sale of 166,667 of the options granted pursuant to
Section 3.2(b) hereof (the "Retained Options"). For
purposes of this subsection (a)(i), the profit
realized or realizable by Vendor with respect to such
Retained Options shall mean (y) with respect to any
shares of Common Stock of Purchaser acquired by
Vendor upon exercise of such Retained Options and
subsequently sold by Vendor, the aggregate sales
price of such Common Stock (less reasonable brokerage
commissions
5
<PAGE>
incurred by Vendor pursuant to such sales), less the
aggregate exercise price paid by Vendor upon exercise
of the Retained Options underlying such shares, and
(z) with respect to any shares of Common Stock of
Purchaser acquired by Vendor upon exercise of
Retained Options which have not subsequently been
sold by Vendor (the "Retained Shares"), the closing
price of the Company's Common Stock as provided by
the NASD on the termination date multiplied by the
number of Retained Shares then held by Vendor, less
the exercise price paid by Vendor upon exercise of
the Retained Options underlying such shares, in each
case plus or minus the aggregate Tax Benefit or Tax
Liability (as defined below) to Vendor arising out of
the transactions described herein. For purposes of
this Section 7.7(a)(i), Vendor's Tax Liability shall
be equal to the aggregate amount of any capital gains
or income taxes incurred by it (or its shareholders)
as a result of its sale or other disposition of
shares of Common Stock acquired pursuant to exercise
of the Retained Options, and Vendor's Tax Benefit
shall be equal to the aggregate tax benefit to it (or
its shareholders) arising out of the payment of
profits or other amounts pursuant to this subsection
(a)(i) before giving effect to any other amounts paid
or payable by Vendor as a result of its termination
of this Agreement. In the event Vendor's Tax
Liability exceeds the amount of its Tax Benefits as
provided herein, the difference shall be deducted
from the profits payable hereunder to Purchaser. In
the event Vendor's Tax Benefits exceeds the amount of
its tax Liabilities as provided herein, the
difference shall be payable to Purchaser as
additional profits pursuant to this subsection
(a)(i);
(ii) An amount equal to all shipping and installation
costs of all Grip manufacturing tools, molds and
other equipment incurred in connection with the
transition of production operations, up to $100,000;
and
(iii) An additional $2.5 million.
(b) In addition to payment of the termination fee set forth in
subsection (a) above, Vendor hereby further agrees that, upon
termination or notice of termination, as the case may be, of
this Agreement pursuant to this Section 7.7:
(i) All Retained Options originally granted to Vendor
under Section 3.2(b) that are unexercised on the date
of Vendor's termination notice shall be canceled by
Purchaser and not subject to exercise by any holder
thereof effective immediately on an as of the notice
of termination;
(ii) Vendor shall continue to produce Grips in
accordance with this Agreement, and shall be subject
to the penalties and damages provided under this
Agreement in connection therewith, during the ten
(10) month
6
<PAGE>
period following Vendor's notice of termination,
which production and penalty provisions shall survive
notice of termination and termination of this
Agreement. Purchaser agrees that it will use its
reasonable best efforts to begin transition of Grip
production as early as is reasonably practicable
under the circumstances upon termination of the
Agreement;
(iii) Vendor shall provide all Grip compounds to
Purchaser and any new suppliers engaged by Purchaser
at Vendor's cost for a period of two (2) years after
the start-up of production by Purchaser or such new
suppliers. For purposes of this subsection (b)(iii),
Vendor's cost shall mean Vendor's actual and direct
cost of materials, labor and overhead attributable to
the purchase of such compounds;
(iv) Vendor shall sell to Purchaser all Grip
production equipment used or owned by Vendor covered
under the Lease Agreement. The purchase price payable
by Purchaser for such equipment shall be the
outstanding balance of the Lease Agreement. In
addition, Vendor shall, at Purchaser's option and
election, sell to Purchaser any or all additional
Grip production equipment owned by Vendor that is not
subject to the Lease Agreement, which equipment shall
be sold to Purchaser at Vendor's net book value
thereof; and
(v) Vendor shall, immediately upon providing notice
of termination to Purchaser, promptly and fully
assist Purchaser in finding new Grip suppliers and in
the orderly transitioning of Grip production
operations to one or more new suppliers (or to
Purchaser, if Purchaser elects to resume Grip
production operations), which assistance shall
include but not be limited to the provision of all
recipe and mixing instructions to Purchaser and
Purchaser's new suppliers. It is hereby understood
and agreed that Purchaser will use its reasonable
best efforts to transition Grip production operations
to other third party suppliers upon receipt of
Vendor's notice of termination of this Agreement;
provided, however, that Purchaser shall have full
discretion in selecting other third party suppliers
in accordance with Purchaser's then existing quality
and pricing objectives."
(xi) Section 7.8 (formerly Section 7.7) is hereby amended by adding to
the end of such sentence after the term "prior to termination" and
before the period the following: "and during any notice of termination
period."
7
<PAGE>
* Confidential portion has been omitted
and filed separately with the Commission
(xii) The parties hereby agree that all purchase orders for Grips in
excess of [ * ] Grips provided by Purchaser prior to the effective date
of this Amendment are hereby canceled, and there shall be effective as
of the date hereof purchase orders for no greater than [ * ] Grips per
month.
(xiii) The parties hereby agree that, for purposes of clause (i) of
Schedule 7.6 to the Agreement, Vendor's up-front costs in establishing
manufacturing operations under the Agreement were $500,000.
2. Effective Date. The agreements of each of the parties set forth
herein shall be effective on and as of March 31, 1997, except that the amendment
adding a new Section 2.1(d) to the Agreement, the amendments to Section 3.2(c)
of the Agreement, and the waivers to Section 7.3(d) of the Agreement shall be
effective on and as of December 21, 1996.
3. No Other Effect. Except as specifically set forth herein, all other
terms, conditions, and provisions of the Agreement shall remain in full force
and effect and no amendment, waiver, release, or consent of or with respect to
any of the matters set forth in such Agreement shall be implied except as
otherwise expressly set forth in this Amendment.
4. Counterparts. This Amendment may be executed by facsimile and in any
number of counterparts, each of which shall be deemed to be an original and all
of which shall be deemed to be one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed by their duly authorized representatives on the day and year first
above written.
"VENDOR" "PURCHASER"
ACUSHNET RUBBER COMPANY, INC. ROYAL GRIP, INC.
By: /s/ Ronald V. Fernandes By: /s/ Bob Burg
-------------------------- --------------------------
Its: Executive V.P. C.O.O. Its: President
------------------------- -------------------------
8
CAPITAL LEASE AGREEMENT
THIS CAPITAL LEASE AGREEMENT ("Lease") is made as of the 21st day of
December, 1996, by and between ROYAL GRIP, INC., a Nevada corporation, having
its principal executive offices at 444 West Geneva, Tempe, Arizona 85282
("Lessor"), and ACUSHNET RUBBER COMPANY, INC., a Massachusetts corporation,
having its principal executive offices at 744 Belleville Avenue, New Bedford,
Massachusetts 02742-6912 ("Lessee").
RECITALS
A. The parties desire that Lessor lease to Lessee certain specialized
manufacturing equipment (the "Units" and, individually, a "Unit") used in the
production of non-cord golf grips ("Grips").
B. Lessee is willing to lease the Units from Lessor and Lessor is
willing to lease the Units to Lessee upon the terms and conditions hereinafter
set forth.
C. As of the date hereof, Lessor and Lessee are also entering into a
manufacturing and sales agreement (the "MSA Agreement") pursuant to which Lessee
will become the exclusive supplier of Grips to Lessor and it is intended will
become the exclusive supplier of cord grips..
D. This Agreement and the MSA Agreement have been negotiated by Lessor
and Lessee at arm's length and in good faith for the purpose of achieving the
parties' commercial expectations.
NOW, THEREFORE, in consideration of the covenants and mutual agreements
set forth herein and in the MSA Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
in reliance upon the representations and warranties contained herein, the
parties agree as follows:
ARTICLE I
PROCUREMENT, DELIVERY, AND ACCEPTANCE
1.1 Business of Lessor and Lessee; MSA Agreement. Lessor is in the business of
selling and manufacturing Grips. Lessee manufactures rubber-based materials.
Lessor and Lessee have entered into that certain MSA Agreement, whereby Lessor,
among other things, agrees that, following a transition period, it will purchase
from Lessee, during the term of the MSA Agreement, one hundred percent (100%) of
Lessee's total production of Grips as the exclusive provider of Grips to Lessor,
and Lessee agrees to sell to Lessor one hundred percent (100%) of Lessee's
production of Grips. In order to produce the Grips required by Lessor, Lessee
will acquire the Units, which Lessor is willing to provide subject to the terms
of this Lease.
- 1 -
<PAGE>
1.2 Shipment of Equipment. Lessor hereby grants to Lessee access to Lessor's
current manufacturing facility located at 444 West Geneva, Tempe, Arizona 85282
(the "Facility") to allow Lessee, at its expense, to disassemble the Units
currently located at the Facility and to prepare them for shipment. Lessor shall
ship all such Units to Lessee F.O.B. for delivery to the dock at Lessee's plant
(the "Plant"). In addition, Lessee shall cause all Units which are currently
subject to purchase agreements between Lessor and the manufacturer of such
Unit(s) to be delivered F.O.B. the dock at the Plant. Lessee shall, at its
expense, install and set up all Units at the Plant.
1.3 Additional Deliveries. Contemporaneously herewith, Lessee shall, at its sole
expense, deliver to Lessor the following documents, in form and substance
satisfactory to Lessor:
(a) UCC financing statements executed by Lessee; and
(b) any other documents specified in the Appendix and such other
documents as Lessor may reasonably request.
ARTICLE II
TERM, RENT, AND PAYMENT
2.1 Term. The term of this Lease as to each Unit shall commence upon the date
hereof and continue as specified in the Appendix.
2.2 Rent. Lessee shall pay to Lessor rent for each Unit in the amounts and at
the times set forth in the Appendix.
2.3 Payment of Rent. Rent and all other sums due Lessor hereunder shall be paid
at the office of Lessor set forth above.
2.4 Abatement; No Termination Upon Certain Events. This Lease is a net lease and
Lessee shall not be entitled to any abatement or reduction of rent or any setoff
against rent, whether arising by reason of any past, present or future claim of
any nature by Lessee against Lessor or otherwise. Except as otherwise expressly
provided herein, this Lease shall not terminate, nor shall the obligations of
Lessor or Lessee be otherwise affected by reason of (a) any defect in, damage
to, loss of possession or use or destruction of any Unit, however caused, (b)
the attachment of any lien, encumbrance, security interest or other right or
claim of any third party to any Unit, except when such third party is a creditor
of Lessor attempting to collect a debt or obligation of Lessor, (c) any
prohibition or restriction of or interference with Lessee's use of any Unit by
any person or entity, except when such person or entity is a creditor of Lessor
attempting to collect a debt or obligation of Lessor, (d) (except as otherwise
provided herein) the insolvency of or the commencement by or against Lessee of
any bankruptcy, reorganization or similar proceeding, or (e) any other cause,
whether similar or dissimilar to the foregoing, any present or future law to the
contrary notwithstanding. Except as otherwise provided herein, it is the
intention of the
- 2 -
<PAGE>
parties that all rent and other amounts payable by Lessee hereunder shall be
payable in all events in the manner and at the times herein provided unless
Lessee's obligations in respect thereof have been terminated pursuant to the
express provisions of this Lease.
2.5 Order of Payments. Payments shall be applied in the following order: (a)
expenses, including attorneys' fees; (b) interest on late payments; and (c) rent
and all other sums due thereunder.
ARTICLE III
NO WARRANTIES BY LESSOR
3.1 Acknowledgment by Lessee. LESSEE ACKNOWLEDGES AND AGREES THAT (a) LESSEE IS
SATISFIED THAT EACH UNIT IS SUITABLE FOR ITS PURPOSES; (b) LESSOR IS NOT A
MANUFACTURER THEREOF NOR A DEALER IN PROPERTY OF SUCH KIND; (c) EXCEPT AS
OTHERWISE PROVIDED HEREIN LESSOR HAS NOT MADE, AND DOES NOT HEREBY MAKE, ANY
REPRESENTATION, WARRANTY OR COVENANT EXPRESS OR IMPLIED AS TO ANY MATTER
INCLUDING, WITHOUT LIMITATION, THE TITLE, MERCHANTABILITY, CONDITION, QUALITY,
DESCRIP TION, DURABILITY, FITNESS FOR PURPOSE OR SUITABILITY OF ANY UNIT IN ANY
RESPECT OR IN CONNECTION WITH OR FOR THE PURPOSES AND USES OF LESSEE; (d) LESSOR
SHALL NOT BE REQUIRED TO PROVIDE ANY MECHANICAL SERVICES TO LESSEE INCLUDING,
WITHOUT LIMITATION, ANY MAINTENANCE, REPAIR, SHIPPING OR INSPECTIONS; AND (e) AS
AGAINST LESSOR, ALL UNITS SHALL BE ACCEPTED IN "AS IS" CONDITION.
3.2 Assignment of Warranties. Lessor hereby assigns to Lessee, to the extent
assignable, any warranties, covenants and representations of Vendor with respect
to any Unit, but any action taken by Lessee by reason thereof shall be at
Lessee's expense and shall be consistent with Lessee's obligations under Article
II.
ARTICLE IV
POSSESSION, USE, AND MAINTENANCE
4.1 Possession and Use. Lessee shall not (i) use, operate, maintain or store any
Unit improperly, carelessly or in violation of any applicable law or regulation
of any governmental authority or the manufacturer's recommended operating
procedures, standards and warranty requirements, (ii) abandon any Unit, (iii)
sublease any Unit or permit its use by anyone other than Lessee without the
prior written consent of Lessor, not to be unreasonably withheld, (iv) permit
any Unit to be removed from the state specified in the Schedule without the
prior written consent of Lessor, (v) sell, assign or transfer, or directly or
indirectly create, incur or suffer to exist any lien, claim, security interest
or encumbrance of any kind on any of its rights hereunder or in any Unit.
- 3 -
<PAGE>
4.2 Maintenance. Lessee shall at its expense at all times during the term of
this Lease maintain the Units in good operating order, repair, condition and
appearance and in accordance with the manufacturer's recommended procedures,
operating standards and warranty requirements.
4.3 Alterations. Lessee may alter any Unit or affix or place any accessory,
equipment or device on any Unit. If an Event of Default has occurred and is
continuing, and any Units are recovered and/or delivered to Lessor by Lessee,
all parts accessories, equipment or deliveries attached to such Units shall be
deemed the property of Lessor.
4.4 Inspection by Lessor. Upon prior notice to Lessee, Lessor and its designees
shall have the right at all reasonable times to inspect any Unit, observe its
use and inspect records related thereto.
ARTICLE V
GENERAL TAX INDEMNITY
5.1 Impositions. Lessee shall pay or reimburse Lessor for, and indemnify, defend
and hold Lessor harmless for, from, and against all fees (including, but not
limited to, license, documentation, recording or registration fees), and all
sales, use, privilege, excise, property, or other taxes, levies, imposts,
duties, assessments, charges or withholdings of any nature whatsoever, together
with any penalties, fines or additions to tax, or interest thereon (all of the
foregoing being hereafter referred to as "Impositions"), arising at any time
before or during the term of this Lease, or upon any termination of this Lease
or return of the Units to Lessor, and levied or imposed on Lessor, directly or
otherwise, by any federal, state or local government or taxing authority in the
United States or by any foreign country or foreign or international taxing
authority on or with respect to (a) any Unit, (b) the exportation, importation,
registration, purchase, ownership, delivery, leasing, possession, use,
operation, storage, maintenance, repair, transportation, return, sale, transfer
of title or other disposition thereof, (c) the rents, receipts, or earnings
arising from any Unit, or (d) this Lease or any payment made hereunder,
excluding, however, taxes measured by Lessor's net income imposed or levied by
the United States or any state thereof but not excluding any such net income
taxes that by the terms of the statute imposing such tax expressly relieve
Lessee from the payment of any Impositions Lessee would otherwise have been
obligated to pay, reimburse or indemnify.
5.2 Payment of Impositions by Lessor. Lessor shall pay directly all Impositions
for which Lessor is primarily responsible and as to which Lessor gives Lessee
notice that Lessor will pay directly; and Lessee shall promptly reimburse Lessor
for such Impositions so paid (except any Impositions excluded by Section 5.1)
upon presentation of a bill therefor.
5.3 Payment of Impositions by Lessee. Lessee shall pay on or before the time or
times prescribed by law any Impositions for which Lessee is primarily
responsible under applicable law and any other Impositions (except any
Impositions excluded by Section 5.1) not payable by Lessor pursuant to Section
5.2, but Lessee shall have no obligation to pay any such Imposition while
- 4 -
<PAGE>
Lessee is contesting such Imposition in good faith and by appropriate legal
proceedings and the nonpayment thereof does not, in the opinion of Lessor,
adversely affect the title, property, use, disposition or other rights of Lessor
with respect to the Units or result in any enforcement, collection, foreclosure
or forfeiture proceeding or any levy or execution which remains unstayed for a
period of fifteen (15) days. Lessee shall furnish on Lessor's request proof of
payment of any Imposition paid by Lessee.
5.4 Tax Returns. Lessor shall prepare and file all required personal property
tax reports or returns as "Owner" of the Units but Lessee must timely provide
Lessor with all information available to Lessee that Lessor requires to prepare
properly any such report or return. Lessee shall report the Units as "Equipment
Leased from Others" on any property tax reports or returns required to be filed
by Lessee. Lessee shall furnish on Lessor's request copies of reports or returns
so filed.
5.5 Certain Economic Benefits. Lessor acknowledges that Lessee has the right to
claim certain economic benefits available to it under the Internal Revenue Code
of 1986, as amended from time to time (the "Code"), and/or under equivalent
state income tax laws, based upon depreciable lives of the Units, averaging
conventions, methods of depreciation and other such methods as Lessee elects for
income tax purposes (the "MACRS Deductions").
5.6 No Indemnification. Notwithstanding what may otherwise be provided herein,
the indemnifications described in this Section 5 shall not be applicable to the
extent of the gross negligence or intentional misconduct of Lessor, its
employees, agents, representatives or assigns.
ARTICLE VI
RISK OF LOSS; WAIVER AND INDEMNITY
6.1 Casualty Occurrence. If any Unit is worn out, stolen, destroyed, or
irreparably damaged, from any cause whatsoever, or taken or requisitioned by
condemnation or otherwise (any such occurrence being hereinafter called a
"Casualty Occurrence") before or during the term of this Lease as to such Unit,
Lessee shall give Lessor prompt notice thereof. On the first rent payment date
after the Casualty Occurrence or, if there is no such rent payment date, thirty
(30) days after the Casualty Occurrence, Lessee shall pay to Lessor an amount
equal to the rent payment in respect of such Unit, if any, due on such date plus
a sum equal to the corresponding Ending Financed Balance described on Exhibit A
(the "Casualty Value") for all of the Units as of such date. In the event of a
Casualty Occurrence, the Casualty Occurrence shall be deemed to have affected
all of the Units.
Upon the making of such payment by Lessee in respect of the Units, the
Rent for the Units shall cease to accrue and this Lease shall terminate. If
Lessor receives the Casualty Value for the Units, Lessee shall be entitled to
the proceeds of any recovery in respect of the Unit(s) from insurance or
otherwise.
- 5 -
<PAGE>
6.2 Indemnification. With respect to a Unit, so long as such Unit is in the
possession of and/or under the control of Lessee, Lessee hereby waives and
releases any claim now or hereafter existing against Lessor, any company
controlled by, controlling, or under common control with Lessor and all of their
directors, officers, employees, agents, attorneys, successors and assigns (each,
an "Indemnified Person") on account of, and shall indemnify, reimburse and hold
each Indemnified Person harmless for, from, and against any and all claims
(including, but not limited to, claims based on or relating to copyright,
trademark or patent infringement, environmental liability, negligence, strict
liability in tort, statutory liability or violation of laws), losses, damages,
obligations, penalties, liabilities, demands, suits, judgments or causes of
action, and all legal proceedings, and any reasonable costs or expenses in
connection therewith, including reasonable attorneys' fees, including reasonable
allocated time charges of internal counsel, in each case imposed on, incurred by
or asserted against the Indemnified Person in any way relating to or arising in
any manner out of (a) the registration, purchase, or the ownership, delivery,
condition, lease, assignment, storage, transportation, possession, use,
operation, return, repossession, sale or other disposition of, any Unit, before
or during the term of this Lease as to the Unit; (b) any alleged or actual
defect in any Unit (whether arising from the material or any article used
therein, the design, testing, use, maintenance, service, repair, or overhaul
thereof or otherwise), regardless of when such defect is discovered or alleged
and no matter where it is located; or (c) any violation of any applicable local,
state or federal environmental law or regulation.
ARTICLE VII
INSURANCE
7.1 Insurance. Lessee shall maintain insurance in accordance with Section 6.6 of
the MSA Agreement.
ARTICLE VIII
COVENANTS
8.1 Financial Information. Lessor and Lessee agree to provide each other with
the following information:
(a) As soon as available but in any event within forty-five (45) days
after the end of each of the first three calendar quarters in each fiscal year,
unaudited consolidated financial statements, including statements of operations
and cash flows for such quarter and for the period from the beginning of the
fiscal year to the end of such quarter and balance sheets as of the end of such
quarter, setting forth in each case comparisons to the corresponding period in
the preceding fiscal year, and all such statements will be prepared in
accordance with generally accepted accounting principles, consistently applied,
subject to normal year-end audit adjustments and excluding footnote disclosures;
- 6 -
<PAGE>
(b) As soon as available but in any event within ninety (90) days after
the end of each fiscal year, audited consolidated financial statements,
including statements of operations and cash flows for such fiscal year and
balance sheets as of the end of such fiscal year, setting forth in each case
comparisons to the corresponding period in the preceding fiscal year, and all
such statements will be prepared in accordance with generally accepted
accounting principles, consistently applied.
(c) With reasonable promptness, such other information and data
concerning such party as the other party may reasonably request.
ARTICLE IX
REPRESENTATIONS AND WARRANTIES OF THE PARTIES
As of the date hereof, each party represents and warrants to the other
party the following:
9.1 Organization and Qualification. The party is a corporation duly organized,
validly existing, and in good standing under the laws of its state of
incorporation, and has the requisite corporate power and authority to own and
operate its properties and to carry on its business as now conducted in every
jurisdiction where the failure to do so would have a material adverse effect on
its business, properties, or ability to conduct the business currently conducted
by it.
9.2 Authority Relative to this Agreement. The party has the requisite power and
authority to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement by such party and the
consummation by such party of the transactions contemplated hereby have been
duly authorized by such party, and no other corporate proceedings on the part of
such party are necessary to authorize this Agreement and such transactions. This
Agreement has been duly executed and delivered by such party and constitutes a
valid and binding obligation of such party, enforceable in accordance with its
terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, or other similar laws relating to the enforcement of
creditors' rights generally and by general principles of equity.
9.3 No Conflicts. The party is not subject to, or obligated under, any provision
of (i) its Certificate of Incorporation or Bylaws, (ii) any material agreement,
arrangement, or understanding, (iii) any material license, franchise, or permit,
or (iv) any law, regulation, order, judgment, or decree, which would be breached
or violated, or in respect of which a right of termination or acceleration would
arise, or pursuant to which any encumbrance on any of its or any of its
subsidiaries' material assets would be created, by its execution, delivery, and
performance of this Agreement and the consummation by it of the transactions
contemplated hereby.
9.4 No Consents. No authorization, consent, or approval of, or filing with, any
public body, court, or authority is necessary on the part of the party for the
consummation by such party of the transactions contemplated by this Agreement.
- 7 -
<PAGE>
9.5 Financial Statements. The party has provided to the other party unaudited
financial statements for and as of the period ended September 30, 1996, and
audited financial statements for and as of the period ended December 31, 1995,
all of which financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved and fairly present the financial position of
such party as of the dates thereof and the results of its operations and cash
flows for the periods then ended, subject in the case of unaudited financial
statements to normal year-end adjustments in the absence of complete footnote
disclosure.
9.6 No Litigation. The party is not subject to any legal, administrative,
arbitration or other suit, proceeding, claim, action, investigation, or inquiry
pending or, to the knowledge of such party, threatened against or involving such
party which could have a material adverse effect upon its ability to perform
this Agreement or upon its results of operations or financial condition, or
which questions the validity of this Agreement or any action taken or to be
taken by such party pursuant to this Agreement and, to the knowledge of such
party, there is no valid basis for any such suit, proceeding, claim, action,
investigation or inquiry.
9.7 No Liens or Encumbrances. Lessor warrants and represents that Lessor has
good and marketable title to the Units free and clear of any liens and
encumbrances.
ARTICLE X
DEFAULTS; REMEDIES
10.1 Events of Default. The following shall constitute events of default
("Events of Default") hereunder:
(a) Lessee fails to make any payment to Lessor within ten (10) days
after written notice thereof to Lessee.
(b) Any representation or warranty of Lessee contained herein or in any
document furnished to Lessor in connection herewith is incorrect or misleading
in any material respect when made;
(c) Lessee fails to observe or perform any other covenant, agreement or
warranty made by Lessee hereunder and such failure continues for thirty (30)
days after written notice thereof to Lessee;
(d) Lessee makes an assignment for the benefit of creditors or files
any petition or action under any bankruptcy, reorganization, insolvency or
moratorium law, or any other law or laws for the relief of, or relating to,
debtors;
(e) Any involuntary petition is filed under any bankruptcy statute
against Lessee, or any receiver, trustee, custodian or similar official is
appointed to take possession of the properties
- 8 -
<PAGE>
of Lessee, any guarantor of this Lease or any general partner of Lessee, unless
such petition or appointment is set aside or withdrawn or ceases to be in effect
within one-hundred twenty (120) days from the date of the filing or appointment;
(f) Lessee elects to totally liquidate its assets and/or dissolve;
(g) Lessee merges or consolidates with any other entity except that
Lessee may merge or consolidate with its parent or any subsidiary of Lessee;
provided, that, in each case, immediately after giving effect to such proposed
transaction no Event of Default would exist; and provided further that, in the
case of a merger or consolidation with a subsidiary of Lessee, the Lessee is the
surviving corporation; or
(h) Lessee commits a material breach (which is not cured within any
applicable grace period) under the MSA Agreement.
10.2 Lessor's Remedies. If any Event of Default occurs, Lessor, at its option,
without notice to or demand upon Lessee except as otherwise provided in this
Section 10.2, may:
(a) Terminate this Lease and/or Lessee's rights of possession and use
of all or any portion of the Units under the Lease;
(b) Take possession of all or any portion of the Units, wherever
located, or render the same unusable;
(c) Require the Lessee to assemble and return all or any portion of the
Units to Lessor (as more fully specified in Section 11 hereof);
(d) Retain, hold, sell, lease or otherwise dispose of all or any
portion of the Units, in a public or private transaction, without demand upon or
notice to Lessee, and any such sale, lease or other disposition shall be free
and clear of any rights of Lessee;
(e) Recover other and further damages, which shall include but not be
limited to payment by Lessee immediately upon demand of the following, each
bearing interest until paid in full at the Default Rate (as defined in the
Appendix) from the earlier of (A) the date such demand is made or (B) the date
otherwise due and payable:
(i) all accrued and unpaid rent payments payable under all or
any of the Leases and all other costs, charges, fees and amounts
payable thereunder or hereunder,
(ii) all of Lessor's costs and expenses in connection with
Lessee's breach of this Lease, or the enforcement of this lease
(including reasonable attorneys' fees and expenses), or associated with
the repossession, reconditioning and sale, lease or other disposition
of the Units; and Lessor's remedies hereinabove specified are
cumulative, and may be
- 9 -
<PAGE>
exercised by Lessor in any order or manner, as to the Lease and Units
or only a portion thereof, all as Lessor shall determine in its sole
discretion. No exercise of any remedy available to Lessor shall
constitute any election foreclosing Lessor from the subsequent exercise
of any other remedy. In furtherance of its remedies, Lessor may and is
hereby irrevocably authorized by Lessee (and Lessee, at its sole cost
and expense, shall cause Lessor to be duly authorized by all necessary
parties) to enter without trespass or liability upon any premises on
which the Units or any portion thereof may be located. In the event
that Lessor, at its option, shall give Lessee notice of any proposed
sale or other disposition of the Units or any part thereof, Lessee
hereby agrees that written notice given to Lessee in accordance with
the terms of this Lease at least ten (10) days prior to any such sale
or other disposition shall be and be deemed to be commercially
reasonable notice.
10.3 Payments by Lessor on Behalf of Lessee. If Lessee fails to timely make
(within all grace and/or cure periods) any payment or to do any act required
hereunder, than Lessor shall have the right, but not the obligation, to do the
act or make the payment, without further notice to, or demand on Lessee and
without releasing Lessee from any contractual obligation, and to pay, purchase,
contest or compromise any encumbrance, charge or lien which Lessor judges (in
its reasonable discretion) to affect the Unit or Lessor's rights therein. In
exercising such right, Lessor may incur any liability and expend any amount
which in its reasonable discretion it deems necessary. All sums Lessor so incurs
or spends shall be, without demand, immediately due and payable by Lessee to
Lessor and shall bear interest from the date so incurred or spent, whichever is
earlier, until paid in full to Lessor at the Default Rate.
ARTICLE XI
BANKRUPTCY
11.1 Bankruptcy of Lessor.
(a) Lessor represents, warrants and covenants that it does not
presently intend to file or solicit its creditors to file on Lessor's behalf for
protection or reorganization under the bankruptcy laws of the United States. If
there shall be filed by or against the Lessor a petition (whether voluntary or
involuntary) under any Chapter of the United States Bankruptcy Code (the "Code")
on or after the date hereof, it is the intention of the Lessor and the Lessee
that the Lessee shall have the immediate right, at its option, to elect one of
the following alternatives:
(i) provided that Lessee has terminated the MSA Agreement and
this Lease, return all of the Units to Lessor F.O.B. at such location
in the metropolitan area of Phoenix as directed by Lessor (in the event
Lessor fails or refuses to provide for a delivery site, Lessee shall
have the unqualified right to deliver the Units to a storage facility
and Lessor shall be liable for any and all storage expenses incurred
thereby); or
- 10 -
<PAGE>
(ii) provided that Lessee reaffirms its obligations under the
MSA Agreement and this Lease, Lessee shall have the immediate right to
exercise the purchase option described in the Appendix or to continue
the Lease.
Lessor and Lessee acknowledge that the remedies of the Lessee set forth in this
Section 11.1 are the sole and exclusive remedies of Lessee (in lieu of all other
remedies) arising from the bankruptcy of Lessor and are therefore fair and
equitable. The purpose of this Lease (as to Lessee) is to provide Lessee with
the machinery necessary to fulfill its obligations under the MSA Agreement.
Lessor's bankruptcy may result in a reduction in the volume of Grips purchased
by Lessor and therefore the commercial value of both the MSA Agreement and this
Lease will be materially reduced. Lessor hereby agrees not to object to, nor to
request a trustee in bankruptcy to attempt to, petition the Bankruptcy Court to
set aside the provisions of this Section 11.1.
11.2 Bankruptcy of Lessee. Lessee represents, warrants and covenants that it
does not presently intend to file or solicit its creditors to file on Lessor's
behalf for protection or reorganization under the Bankruptcy Laws of the United
States or to make any assignment for the benefit of creditors under any state
laws. If there shall be filed by or against the Lessee a petition (whether
voluntary or involuntary) under any chapter of the Code, on or after the date
hereof, it is the intention of the Lessor and Lessee that the Lessor shall have
immediate right to terminate this Lease, enter upon the Plant, and disassemble
and remove the Units. The MSA Agreement shall thereafter be deemed terminated
and all obligations of Lessee and Lessor hereunder shall immediately terminate.
Lessor and Lessee acknowledge that the rights and remedies of Lessor set forth
in this Section 11.2 are the sole and exclusive remedies of Lessor (in lieu of
all other remedies) arising from the bankruptcy of Lessor and are therefore fair
and equitable. The purpose of this Lease (as to Lessor) is to provide Lessor
with an acceptable manufacturer to fulfill 100% of Lessor's needs for Grips (of
the quality required by Lessor). Lessee's bankruptcy may result in a material
reduction in the commercial value of both the MSA Agreement and this Lease.
Lessee hereby agrees not to object to, nor to request a trustee in bankruptcy
to, attempt to petition the Bankruptcy Court to set aside the conditions of this
Section 11.
ARTICLE XII
MISCELLANEOUS
12.1 Assignment. Lessor may not assign or transfer all or any of the right,
title or interest of Lessor in and to the Units without the prior written
consent of Lessee, but may assign the rights, benefits and advantages of Lessor
under the Lease hereunder, including the rights to receive payment of rent or
any other payment hereunder. No assignment of this lease or any right or
obligation hereunder may be made by Lessee or any assignee of Lessee without the
prior written consent of Lessor.
- 11 -
<PAGE>
12.2 Further Assurances. Lessee and Lessor confirm there is no pending
litigation, tax claim, proceeding or dispute that may adversely affect its
financial condition or impair its ability to perform its obligations hereunder.
Lessee will, at its expense, maintain its legal existence in good standing (and
authorized to do business in any applicable state) and do any further act and
execute, acknowledge, deliver, file, register and record any further documents
Lessor may reasonably request in order to protect Lessor's title to the Units
and Lessor's rights and benefits under this Lease.
12.3 Late Payments. Lessee shall pay to Lessor, on demand, interest at the rate
set forth in the Appendix on the amount of any payment not made when due
hereunder from the date due until payment is made.
12.4 Effect of Waiver. No delay or omission to exercise any right, power or
remedy accruing to Lessor upon any breach or default of Lessee hereunder shall
impair any such right, power or remedy nor shall it be construed to be a waiver
of any such breach or default, or an acquiescence therein or of or in any
similar breach or default thereafter occurring, nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring. Any waiver, permit, consent or approval of
any kind or character on the part of Lessor of any breach or default under this
Lease must be in writing specifically set forth.
12.5 Survival of Covenants. All obligations of Lessee and Lessor (as applicable)
under Articles 1, 2, 4, 5, 6, 7, 8, 11 and 12.1 and the Appendix shall survive
the expiration or termination of this Lease to the extent required for their
full observance and performance.
12.6 Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the state of Massachusetts (excluding its, or any
other jurisdiction's, choice of law principles).
12.7 Severability. Should any part of any provision of this Lease be held
invalid or unenforceable, the invalid or unenforceable part or provision shall
be replaced with a provision which accomplishes, to the extent possible, the
original business purpose and economic intent of such part or provision in a
valid and enforceable manner, and the remainder of this Lease shall remain
binding upon the parties hereto.
12.8 Financial Information. Lessee shall keep its books and records in
accordance with generally accepted accounting principles and practices
consistently applied and shall deliver to Lessor such financial statements and
information as Lessor may reasonably request. Credit information relating to
Lessee may be disseminated among Lessor and any of its affiliates and any of
their respective successors and assigns.
- 12 -
<PAGE>
12.9 Notices.
(a) All notices and demands of any kind which either party may be
required or desire to serve upon the other under the terms of this Lease shall
be in writing and shall be sent by registered mail, return receipt requested, or
by facsimile with confirming copy by registered mail to the receiving party at
the address of the receiving party set forth below:
If to Lessor: Royal Grip, Inc.
444 W. Geneva
Tempe, Arizona 85282
Phone: (602) 829-9000
Fax: (602) 829-9100
Attn: President
If to Lessee: Acushnet Rubber Company, Inc.
744 Belleville Avenue
New Bedford, Massachusetts 02742-6916
Phone: (508) 998-4004
Fax: (508) 998-4102
Attn: Chief Operating Officer
(b) Either party may change such address upon written notice to the
other party hereto in the manner set forth in this Section 12.9. All notices or
demands shall be deemed to have been given when received by the party to whom
such notice is sent as evidenced by a receipt signed and dated by a
representative of the receiving party.
12.10 Dispute Resolution. Any dispute among the parties hereto shall be resolved
in accordance with the dispute resolution procedures attached hereto in the
Appendix ; provided, that, nothing herein shall preclude any party from seeking
or obtaining equitable relief, such as an injunction, or from enforcing any
order or judgement of an arbitrator through judicial process.
12.11 Counterparts. Two counterparts of this Lease have been executed by the
parties hereto. One counterpart has been prominently marked "Lessor's Copy". One
counterpart has been prominently marked "Lessee's Copy". Only the counterpart
marked "Lessor's Copy" shall evidence a monetary obligation of Lessee.
12.12 Transaction Costs. If the negotiation or drafting of lease documents is
required, the Lessee shall be responsible for its own legal costs and expenses
and Lessor shall be responsible for its own legal costs.
12.13 Audits. Lessee will allow Lessor and its agents to inspect Lessee's
records regarding the Units and make copies of books and records at any
reasonable time and upon reasonable notice.
- 13 -
<PAGE>
12.14 Effect and Modification of Lease. This Lease exclusively and completely
states the rights of Lessor and Lessee with respect to the leasing of the Units
and supersedes all prior agreements, oral or written, with respect thereto. No
variation or modification of this Lease shall be valid unless in writing.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives on the date
and year first written above.
ROYAL GRIP, INC., a Nevada corporation ACUSHNET RUBBER COMPANY, INC., a
Massachusetts corporation
By: /s/ Robert G.J. Burg, II By: /s/ Ronald V. Fernandes
----------------------------------- -----------------------------------
Name: Robert G.J. Burg, II Name: Ronald V. Fernandes
Title: President Title: Executive Vice President and
Chief Operating Officer
- 14 -
<PAGE>
APPENDIX to LEASE AGREEMENT dated as of December 21, 1996,
between Royal Grip, Inc. and Acushnet Rubber Company, Inc..
Units.
------
The Unit(s) to be leased hereunder consist(s) of used and new
fabrication machines and related equipment for the manufacture of Grips as more
particularly described in Schedule 1 attached hereto and made part hereof and
all modifications, replacements and substitutions. Some of the Units are
currently under the possession and control of Lessor and some of the Units are
subject to purchase orders between Lessor and the respective manufacturer
thereof.
Fair Market Value
-----------------
"Fair Market Value" with respect to the Units means the Ending Financed
Balance set forth on Exhibit "A".
Term.
-----
The term of this Lease shall begin on the date hereof and, unless
sooner terminated, shall end on December 31, 2006, at which time Lessor shall
deliver to Lessee and Lessee shall accept from Lessor a Bill of Sale for all of
the Units.
Location.
---------
The Units shall be located in the state of Massachusetts and the
Schedule relating to each Unit shall set forth the state, county and city in
which such Unit is to be principally located. Lessee shall give Lessor notice of
any change in the location within the state no later than ten (10) days after
such change.
Rent.
-----
Lessee shall pay to Lessor rent for the Units in the total amount of
$4,508,384.56 comprised of $3,122,000 (the Fair Market Value of the Units as of
the date hereof plus fifty percent (50%) of the rigging and freight costs
incurred by Lessor for the F.O.B. delivery described in Section 1.2 hereof) plus
$1,386,384.56 (which equals the fair market value of the units times 7.8125% per
annum over 10 years) payable in 120 consecutive monthly installments, with the
first such installment due on the first day of the first month following the
date hereof, each Rent installment to be (subject to adjustment as provided in
the Lease) $37,569.87.
-1-
<PAGE>
Default Rate.
-------------
Lessee shall pay Lessor interest on late payments at the rate
of twelve percent (12%) per annum.
Reimbursement for Shipping Costs.
---------------------------------
The Rent due to Lessor hereunder shall be in addition to the
credits against the shipping costs described in Section 3.4 of the MSA
Agreement.
Purchase Option.
----------------
If no Event of Default exists, Lessee may at any time during
the term of this Lease, by written notice delivered to Lessor, elect to purchase
all (but not less than all) of the Units for a purchase price (the "Capital
Lease Option Balance") equal to corresponding "End of Month Payoff Balance"
described in the attached Exhibit A. The option to purchase described herein
shall be completed as of the last day of the immediately succeeding calendar
month at which time Lessor shall deliver to Lessee a bill of sale for all of the
Units together with a UCC-2 Termination Statement.
Security Deposit.
-----------------
Lessee shall deposit with Lessor, as security $ -0-.
-2-
<PAGE>
Dispute Resolution Procedures.
- ------------------------------
All claims, disputes and other matters in controversy (herein called
"dispute") arising directly or indirectly out of or related to this Lease, or
the breach thereof, whether contractual or noncontractual, and whether during
the term or after the termination of this Agreement, shall be resolved
exclusively according to the procedures set forth in this Appendix.
A. Negotation. The parties shall attempt to settle disputes arising out
of or relating to this Lease or the breach thereof by a meeting of two
designated representatives of each party within five (5) days after a request by
either of the parties to the other party asking for the same.
B. Mediation. If such dispute cannot be settled at such meeting, either
party, within five (5) days of such meeting may give a written notice (a
"Dispute Notice") to the other party setting forth the nature of the dispute.
The parties shall attempt in good faith to resolve the dispute by mediation in
Phoenix, Arizona, under the Commercial Mediation Rules of the American
Arbitration Association ("AAA") in effect on the date of the Dispute Notice. The
parties shall select a person who will act as the mediator under this Paragraph
B within 60 days of the date of the Lease. If the dispute has not been resolved
by mediation as provided above within thirty (30) days after delivery of the
Dispute Notice, then the dispute shall be determined by arbitration in
accordance with the provisions of Paragraph C hereof.
C. Arbitration. Any dispute that is not settled through mediation as
provided in Paragraph B above shall be resolved by arbitration in Phoenix,
Arizona, governed by the Federal Arbitration Act, 9 U.S.C. ss. 1 et seq, and
administered by the AAA under its Commercial Arbitration Rules in effect on the
date of the Dispute Notice, as modified by the provisions of this Section C, by
a single arbitrator. The arbitrator selected, in order to be eligible to serve,
shall be a lawyer with at least 15 years experience specializing in either
general commercial litigation or general corporate and commercial matters. In
the event the parties cannot agree on a mutually acceptable single arbitrator
from the list submitted by the AAA, the AAA shall appoint the arbitrator who
shall meet the foregoing criteria. The arbitrator shall base the award on
applicable law and judicial precedent and, unless both parties agree otherwise,
shall include in such award the findings of fact and conclusions of law upon
which the award is based. Judgment on the award rendered by the arbitrator(s)
may be entered in any court having jurisdiction thereof. The award may only be
made for compensatory damages, and if any other damages (whether exemplary,
punitive, consequential, statutory or other) are included, the award shall be
vacated and remanded, or modified or corrected, as appropriate to promote this
damage limitation.
Notwithstanding the foregoing:
(a) Upon the application by either party to a court for an
order confirming, modifying or vacating the award, the court shall have the
power to review whether, as a matter of law based on the findings of fact
determined by the arbitrator, the award should be confirmed, modified or vacated
in order to correct any errors of law made by the arbitrator. In order to
effectuate such judicial review limited to issues of law, the parties agree (and
shall stipulate to the
-3-
<PAGE>
court) that the findings of fact made by the arbitrator shall be final and
binding on the parties and shall serve as the facts to be submitted to and
relied on by the court in determining the extent to which the award should be
confirmed, modified or vacated.
(b) Either party shall have the right to apply to any court
for an order to enforce any of the ownership and confidentiality provisions
contained in the Agreement.
D. Costs and Attorneys' Fees. If either party fails to proceed with
mediation or arbitration as provided herein or unsuccessfully seeks to stay such
mediation or arbitration, or fails to comply with any arbitration award, or is
unsuccessful in vacating or modifying the award pursuant to a petition or
application for judicial review, the other party shall be entitled to be awarded
costs, including reasonable attorneys' fees, paid or incurred by such other
party in successfully compelling such arbitration or defending against the
attempt to stay, vacate or modify such arbitration award and/or successfully
defending or enforcing the award.
E. Tolling of Statute of Limitations. All applicable statutes of
limitations and defenses based upon the passage of time shall be tolled while
the procedures specified herein are pending. The parties will take such action,
if any, required to effectuate such tolling.
ROYAL GRIP, INC. , a Nevada ACUSHNET RUBBER COMPANY,
corporation INC., a Massachusetts corporation
By: /s/ Robert G.J. Burg, II By: /s/ Ronald V. Fernandes
----------------------------------- -----------------------------------
Name: Robert G.J. Burg, II Name: Ronald V. Fernandes
Title: President Title: Executive Vice President and
444 West Geneva Drive Chief Operating Officer
Tempe, Arizona 85282 744 Belleville Avenue
New Bedford, MA 02742-6916
-4-
<PAGE>
SCHEDULE 1
A complete description of the Units has been provided to Lessee.
-5-
<PAGE>
EXHIBIT A
Capital Lease Schedule
----------------------
<TABLE>
<CAPTION>
Amount Financed Through Capital Lease $ 3,122,000
Finance Rate % 7.8125
Term in Months 120
Payment due date 21 st of each month
Beginning Paydown Ending
Period Financed Imputed of Financed Financed
Ending Balance Payment Interest Balance Balance
------ ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1/21/97 3,122,000.00 37,569.87 20,325.52 17,244.35 3,104,755.65
2/21/97 3,104,755.65 37,569.87 20,213.25 17,356.62 3,087,399.03
3/21/97 3,087,399.03 37,569.87 20,100.25 17,469.62 3,069,929.42
4/21/97 3,069,929.42 37,569.87 19,986.52 17,583.35 3,052,346.07
5/21/97 3,052,346.07 37,569.87 19,872.04 17,697.83 3,034,648.24
6/21/97 3,034,648.24 37,569.87 19,756.82 17,813.05 3,016,835.20
7/21/97 3,016,835.20 37,569.87 19,640.85 17,929.02 2,998,906.18
8/21/97 2,998,906.18 37,569.87 19,524.13 18,045.74 2,980,860.44
9/21/97 2,980,860.44 37,569.87 19,406.64 18,163.23 2,962,697.21
10/21/97 2,962,697.21 37,569.87 19,288.39 18,281.48 2,944,415.74
11/21/97 2,944,415.74 37,569.87 19,169.37 18,400.50 2,926,015.24
12/21/97 2,926,015.24 37,569.87 19,049.58 18,520.29 2,907,494.95
1/21/98 2,907,494.95 37,569.87 18,929.00 18,640.87 2,888,854.08
2/21/98 2,888,854.08 37,569.87 18,807.64 18,762.23 2,870,091.86
3/21/98 2,870,091.86 37,569.87 18,685.49 18,884.38 2,851,207.48
4/21/98 2,851,207.48 37,569.87 18,562.55 19,007.32 2,832,200.16
5/21/98 2,832,200.16 37,569.87 18,438.80 19,131.07 2,813,069.09
6/21/98 2,813,069.09 37,569.87 18,314.25 19,255.62 2,793,813.47
7/21/98 2,793,813.47 37,569.87 18,188.89 19,380.98 2,774,432.49
8/21/98 2,774,432.49 37,569.87 18,062.71 19,507.16 2,754,925.33
9/21/98 2,754,925.33 37,569.87 17,935.71 19,634.16 2,735,291.18
10/21/98 2,735,291.18 37,569.87 17,807.89 19,761.98 2,715,529.19
11/21/98 2,715,529.19 37,569.87 17,679.23 19,890.64 2,695,638.55
12/21/98 2,695,638.55 37,569.87 17,549.73 20,020.14 2,675,618.41
1/21/99 2,675,618.41 37,569.87 17,419.39 20,150.48 2,655,467.93
2/21/99 2,655,467.93 37,569.87 17,288.20 20,281.67 2,635,186.26
3/21/99 2,635,186.26 37,569.87 17,156.16 20,413.71 2,614,772.55
4/21/99 2,614,772.55 37,569.87 17,023.26 20,546.61 2,594,225.94
5/21/99 2,594,225.94 37,569.87 16,889.49 20,680.38 2,573,545.56
6121/99 2,573,545.56 37,569.87 16,754.85 20,815.02 2,552,730.55
7/21/99 2,552,730.55 37,569.87 16,619.34 20,950.53 2,531,780.02
8/21/99 2,531,780.02 37,569.87 16,482.94 21,086.93 2,510,693.09
9/21/99 2,510,693.09 37,569.87 16,345.66 21,224.21 2,489,468.88
10/21/99 2,489,468.88 37,569.87 16,207.48 21,362.39 2,468,106.49
11/21/99 2,468,106.49 37,569.87 16,068.40 21,501.47 2,446,605.02
12/21/99 2,446,605.02 37,569.87 15,928.42 21,641.45 2,424,963.57
1/21/00 2,424,963.57 37,569.87 15,787.52 21,782.35 2,403,181.22
2/21/00 2,403,181.22 37,569.87 15,645.71 21,924.16 2,381,257.06
</TABLE>
Page 1
<PAGE>
EXHIBIT A
Capital Lease Schedule
----------------------
<TABLE>
<CAPTION>
Amount Financed Through Capital Lease $ 3,122,000
Finance Rate % 7.8125
Term in Months 120
Payment due date 21st of each month
Beginning Paydown Ending
Period Financed Imputed of Financed Financed
Ending Balance Payment Interest Balance Balance
------ ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
3/21/00 2,381,257.06 37,569.87 15,502.98 22,066.89 2,359,190.17
4/21/00 2,359,190.17 37,569.87 15,359.31 22,210.56 2,336,979.61
5/21/00 2,336,979.61 37,569.87 15,214.71 22,355.16 2,314,624.45
6/21/00 2,314,624.45 37,569.87 15,069.17 22,500.70 2,292,123.75
7/21/00 2,292,123.75 37,569.87 14,922.68 22,647.19 2,269,476.56
8/21/00 2,269,476.56 37,569.87 14,775.24 22,794.63 2,246,681.93
9/21/00 2,246,681.93 37,569.87 14,626.84 22,943.03 2,223,738.89
10/21/00 2,223,738.89 37,569.87 14,477.47 23,092.40 2,200,646.49
11/21/00 2,200,646.49 37,569.87 14,327.13 23,242.74 2,177,403.74
12/21/00 2,177,403.74 37,569.87 14,175.81 23,394.06 2,154,009.68
1/21/01 2,154,009.68 37,569.87 14,023.50 23,546.37 2,130,463.31
2/21/01 2,130,463.31 37,569.87 13,870.20 23,699.67 2,106,763.64
3/21/01 2,106,763.64 37,569.87 13,715.91 23,853.96 2,082,909.68
4/21/01 2,082,909.68 37,569.87 13,560.61 24,009.26 2,058,900.42
5/21/01 2,058,900.42 37,569.87 13,404.30 24,165.57 2,034,734.85
6/21/01 2,034,734.85 37,569.87 13,246.97 24,322.90 2,010,411.95
7/21/01 2,010,411.95 37,569.87 13,088.62 24,481.25 1,985,930.70
8/21/01 1,985,930.70 37,569.87 12,929.24 24,640.63 1,961,290.07
9/21/01 1,961,290.07 37,569.87 12,768.82 24,801.05 1,936,489.02
10/21/01 1,936,489.02 37,569.87 12,607.35 24,962.52 1,911,526.50
11/21/01 1,911,526.50 37,569.87 12,444.83 25,125.04 1,886,401.46
12121/01 1,886,401.46 37,569.87 12,281.26 25,288.61 1,861,112.85
1/21/02 1,861,112.85 37,569.87 12,116.62 25,453.25 1,835,659.60
2/21102 1,835,659.60 37,569.87 11,950.91 25,618.96 1,810,040.64
3/21102 1,810,040.64 37,569.87 11,784.12 25,785.75 1,784,254.89
4/21/02 1,784,254.89 37,569.87 11,616.24 25,953.63 1,758,301.26
5/21/02 1,758,301.26 37,569.87 11,447.27 26,122.60 1,732,178.66
6/21/02 1,732,178.66 37,569.87 11,277.20 26,292.67 1,705,886.00
7/21102 1,705,886.00 37,569.87 11,106.03 26,463.84 1,679,422.16
8/21/02 1,679,422.16 37,569.87 10,933.74 26,636.13 1,652,786.03
9/21/02 1,652,786.03 37,569.87 10,760.33 26,809.54 1,625,976.48
10/21/02 1,625,976.48 37,569.87 10,585.78 26,984.09 1,598,992.40
11/21/02 1,598,992.40 37,569.87 10,410.11 27,159.76 1,571,832.63
12/21/02 1,571,832.63 37,569.87 10,233.29 27,336.58 1,544,496.05
1/21/03 1,544,496.05 37,569.87 10,055.31 27,514.56 1,516,981.49
2/21/03 1,516,981.49 37,569.87 9,876.18 27,693.69 1,489,287.80
3/21/03 1,489,287.80 37,569.87 9,695.88 27,873.99 1,461,413.82
4/21/03 1,461,413.82 37,569.87 9,514.41 28,055.46 1,433,358.36
</TABLE>
Page 2
<PAGE>
EXHIBIT A
Capital Lease Schedule
----------------------
<TABLE>
<CAPTION>
Amount Financed Through Capital Lease $ 3,122,000
Finance Rate % 7.8125
Term in Months 120
Payment due date 21st of each month
Beginning Paydown Ending
Period Financed Imputed of Financed Financed
Ending Balance Payment Interest Balance Balance
------ ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
5/21/03 1,433,358.36 37,569.87 9,331.76 28,238.11 1,405,120.25
6/21103 1,405,120.25 37,569.87 9,147.92 28,421.95 1,376,698.30
7/21/03 1,376,698.30 37,569.87 8,962.88 28,606.99 1,348,091.31
8/21/03 1,348,091.31 37,569.87 8,776.64 28,793.23 1,319,298.07
9/21/03 1,319,298.07 37,569.87 8,589.18 28,980.69 1,290,317.38
10/21/03 1,290,317.38 37,569.87 8,400.50 29,169.37 1,261,148.02
11/21/03 1,261,148.02 37,569.87 8,210.60 29,359.27 1,231,788.75
12/21/03 1,231,788.75 37,569.87 8,019.46 29,550.41 1,202,238.33
1/21/04 1,202,238.33 37,569.87 7,827.07 29,742.80 1,172,495.54
2/21/04 1,172,495.54 37,569.87 7,633.43 29,936.44 1,142,559.10
3/21/04 1,142,559.10 37,569.87 7,438.54 30,131.33 1,112,427.77
4/21/04 1,112,427.77 37,569.87 7,242.37 30,327.50 1,082,100.27
5/21/04 1,082,100.27 37,569.87 7,044.92 30,524.95 1,051,575.32
6/21/04 1,051,575.32 37,569.87 6,846.19 30,723.68 1,020,851.64
7/21/04 1,020,851.64 37,569.87 6,646.17 30,923.70 989,927.94
8/21/04 989,927.94 37,569.87 6,444.84 31,125.03 958,802.92
9/21/04 958,802.92 37,569.87 6,242.21 31,327.66 927,475.25
10/21/04 927,475.25 37,569.87 6,038.25 31,531.62 895,943.63
11/21/04 895,943.63 37,569.87 5,832.97 31,736.90 864,206.73
12/21/04 864,206.73 37,569.87 5,626.35 31,943.52 832,263.20
1/21/05 832,263.20 37,569.87 5,418.38 32,151.49 800,111.71
2/21/05 800,111.71 37,569.87 5,209.06 32,360.81 767,750.91
3/21/05 767,750.91 37,569.87 4,998.38 32,571.49 735,179.41
4/21105 735,179.41 37,569.87 4,786.32 32,783.55 702,395.87
5/21/05 702,395.87 37,569.87 4,572.89 32,996.98 669,398.89
6/21/05 669,398.89 37,569.87 4,358.07 33,211.80 636,187.08
7/21/05 636,187.08 37,569.87 4,141.84 33,428.03 602,759.06
8/21/05 602,759.06 37,569.87 3,924.21 33,645.66 569,113.40
9/21/05 569,113.40 37,569.87 3,705.17 33,864.70 535,248.69
10/21/05 535,248.69 37,569.87 3,484.69 34,085.18 501,163.52
11/21/05 501,163.52 37,569.87 3,262.78 34,307.09 466,856.43
12/21/05 466,856.43 37,569.87 3,039.43 34,530.44 432,325.99
1/21/06 432,325.99 37,569.87 2,814.62 34,755.25 397,570.74
2/21/06 397,570.74 37,569.87 2,588.35 34,981.52 362,589.22
3/21/06 362,589.22 37,569.87 2,360.61 35,209.26 327,379.96
4/21/06 327,379.96 37,569.87 2,131.38 35,438.49 291,941.47
5/21/06 291,941.47 37,569.87 1,900.66 35,669.21 256,272.26
6/21/06 256,272.26 37,569.87 1,668.44 35,901.43 220,370.83
</TABLE>
Page 3
<PAGE>
EXHIBIT A
Capital Lease Schedule
----------------------
<TABLE>
<CAPTION>
Amount Financed Through Capital Lease $ 3,122,000
Finance Rate % 7.8125
Term in Months 120
Payment due date 21st of each month
Beginning Paydown Ending
Period Financed Imputed of Financed Financed
Ending Balance Payment Interest Balance Balance
------ ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
7/21/06 220,370.83 37,569.87 1,434.71 36,135.16 184,235.67
8/21/06 184,235.67 37,569.87 1,199.45 36,370.42 147,865.25
9/21/06 147,865.25 37,569.87 962.66 36,607.21 111,258.04
10/21/06 111,258.04 37,569.87 724.34 36,845.53 74,412.51
11/21/06 74,412.51 37,569.87 484.46 37,085.41 37,327.09
12/21/06 37,327.09 37,570.11 243.01 37,327.10 (0.00)
</TABLE>
Page 4
CREDIT AND SECURITY AGREEMENT
Dated as of February 10, 1997
ROYAL GRIP, INC., a Nevada corporation and ROXXI, INC., a
Nevada corporation (collectively, jointly and severally, the "Borrower"), and
NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), hereby
agree as follows:
ARTICLE I
Definitions
-----------
1.1 Definitions. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the
meanings assigned to them in this Article, and include the plural as well as the
singular; and
(b) all accounting terms not otherwise defined herein
have the meanings assigned to them in accordance with generally accepted
accounting principles.
"Accounts" means the aggregate unpaid obligations of
customers and other account debtors to the Borrower or either
of them arising out of the sale or lease of goods or rendition
of services by the Borrower or either of them on an open
account or deferred payment basis.
"Advance" means an advance to the Borrower by the
Lender under the Credit Facility.
"Affiliate" or "Affiliates" means any Person
controlled by, controlling or under common control with either
Borrower, including (without limitation) any Subsidiary of
either Borrower. For purposes of this definition, "control",
when used with respect to any specified Person, means the
power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of
voting securities, by contract or otherwise.
"Agreement" means this Credit and Security Agreement.
"Banking Day" means a day other than a Saturday on
which banks are generally open for business in Phoenix,
Arizona.
"Base Rate" means the rate of interest publicly
announced from time to time by Norwest Bank Minnesota,
National Association as its "base rate" or, if such bank
ceases to announce a rate so designated, any similar successor
rate designated by the Lender.
<PAGE>
"Borrowing Base" means, at any time and subject to
change from time to time in the Lender's sole discretion, the
lesser of
(i) the Commitment, or
(ii) the sum of
(A) the lesser of (x) 80% of Eligible
Accounts, or (y) $1,750,000.00, plus
(B) the lesser of (x) 50% of Eligible
Royal Grip Inventory, or (y)
$500,000.00, plus
(C) the lesser of (x) 25% of Eligible
Roxxi Raw Materials Inventory, or
(y) $250,000.00, plus
(D) the lesser of (x) 50% of Eligible
Roxxi Inventory (exclusive of
Eligible Raw Materials Inventory),
or (y) $100,000.00.
"Capital Expenditures" means net tangible and
intangible expenditures of the applicable Person or Persons
for the lease, purchase or acquisition of capital assets, or
the lease of any other asset, plus gain or minus loss, as
applicable, on sales of assets during the period in question.
"Collateral" means all of the Equipment, General
Intangibles, Inventory, Receivables, and all sums on deposit
in the Collateral Accounts, together with all substitutions
and replacements for and products of any of the foregoing
Collateral and together with proceeds of any and all of the
foregoing Collateral and, in the case of all tangible
Collateral, together with all accessions and together with (i)
all accessories, attachments, parts, equipment and repairs now
or hereafter attached or affixed to or used in connection with
any such goods, and (ii) all warehouse receipts, bills of
lading and other documents of title now or hereafter covering
such goods.
"Collateral Accounts" has the meaning specified in
Section 4.1(d) hereof.
"Commitment" means $1,750,000.00, unless said amount
is reduced pursuant to Section 2.10(c) hereof, in which event
it means the amount to which said amount is reduced.
"Credit Facility" means the revolving credit facility
being made available to the Borrower by the Lender pursuant to
Article II hereof.
"Current Maturities Long-Term Debt" means contractual
debt amortization of long-term debt and capitalized leases of
the Borrower.
-2-
<PAGE>
"Default" means an event that, with giving of notice
or passage of time or both, would constitute an Event of
Default.
"Default Period" means the period following the
occurrence of a Default or Event of Default which period shall
continue until and unless the Lender shall thereafter waive
such Default or Event of Default in writing.
"Default Rate" means at any time 3% over the Floating
Rate and/or Incentive Rate, as applicable, which Default Rate
shall change when and as the Floating Rate or the Incentive
Rate change.
"Eligible Accounts" means all unpaid Accounts of
Royal Grip and Roxxi, as applicable, net of any credits,
except the following shall not in any event be deemed Eligible
Accounts:
(i) That portion of Accounts over 90 days
past invoice date;
(ii) That portion of Accounts that are
disputed or subject to a claim of offset or a contra
account;
(iii) That portion of Accounts not yet
earned by the final delivery of goods or rendition of
services, as applicable, by the Borrower to the
customer;
(iv) Accounts owed by any unit of
government, whether foreign or domestic (provided,
however, that there shall be included in Eligible
Accounts that portion of Accounts owed by such units
of government with respect to which the Borrower has
provided evidence satisfactory to the Lender that (A)
the Lender has a first priority perfected security
interest and (B) such Account may be enforced by the
Lender directly against such unit of government under
all applicable laws);
(v) Accounts owed by an account debtor
located outside the United States which are not
backed by a bank letter of credit assigned to the
Lender, in the possession of the Lender and
acceptable to the Lender in all respects, in its sole
discretion;
(vi) Accounts owed by an account debtor that
is the subject of bankruptcy proceedings or has gone
out of business;
(vii) Accounts owed by a shareholder,
subsidiary, Affiliate, officer or employee of the
Borrower;
(viii) Accounts not subject to a duly
perfected security interest in favor of the Lender or
which are subject to any lien, security interest or
claim in favor of any Person other than the Lender;
-3-
<PAGE>
(ix) That portion of Accounts that have been
restructured, extended, amended or modified;
(x) That portion of Accounts that
constitutes finance charges, service charges or sales
or excise taxes;
(xi) Accounts owed by an account debtor,
regardless of whether otherwise eligible, if 10% or
more of the total amount due under Accounts from such
debtor is ineligible under clauses (i), (ii) or (ix)
above;
(xii) Accounts consisting of tooling
charges; and
(xiii) Accounts, or portions thereof,
otherwise deemed ineligible by the Lender in its sole
discretion.
"Eligible Roxxi Inventory" means all inventory of
Roxxi valued at weighted average cost as determined in
accordance with generally accepted accounting principles;
provided, however, that the following shall not in any event
be deemed Eligible Roxxi Inventory:
(i) Inventory that is: in-transit; located
at any warehouse or other premises not approved by
the Lender in writing; located outside of the states,
or localities, as applicable, in which the Lender has
filed financing statements to perfect a first
priority security interest in such inventory; covered
by any negotiable or non-negotiable warehouse
receipt, bill of lading or other document of title;
on consignment to or from any other person or subject
to any bailment;
(ii) Packaging, label or irregular
inventory;
(iii) Work-in-process inventory;
(iv) Inventory that is damaged, obsolete or
not currently saleable in the normal course of the
Borrower's operations;
(v) Inventory that the Borrower has
returned, has attempted to return, is in the process
of returning or intends to return to the vendor
thereof;
(vi) Inventory that is subject to a security
interest in favor of any Person other than the
Lender;
(vii) Slow-Moving Inventory;
-4-
<PAGE>
(viii) Inventory that is subject to a
licensing agreement, which licensing agreement would
preclude or hinder the Lender from liquidating such
Inventory in the ordinary course of business; and
(ix) Inventory otherwise deemed ineligible
by the Lender in its sole discretion.
"Eligible Roxxi Raw Materials Inventory" means that
portion of Eligible Roxxi Inventory consisting of Raw
Materials.
"Eligible Royal Grip Inventory" means all inventory
of Royal Grip valued at weighted average cost as determined in
accordance with generally accepted accounting principles;
provided, however, that the following shall not in any event
be deemed Eligible Royal Grip Inventory:
(i) Inventory that is: in-transit; located
at any warehouse or other premises not approved by
the Lender in writing; located outside of the states,
or localities, as applicable, in which the Lender has
filed financing statements to perfect a first
priority security interest in such inventory; covered
by any negotiable or non-negotiable warehouse
receipt, bill of lading or other document of title;
on consignment to or from any other person or subject
to any bailment;
(ii) Packaging inventory;
(iii) Work-in-process inventory;
(iv) Inventory that is damaged, obsolete or
not currently saleable in the normal course of the
Borrower's operations;
(v) Inventory that the Borrower has
returned, has attempted to return, is in the process
of returning or intends to return to the vendor
thereof;
(vi) Inventory that is subject to a security
interest in favor of any Person other than the
Lender;
(vii) Inventory that does not consist of
finished grips;
(viii) Slow-Moving Inventory;
(ix) Inventory that is subject to a
licensing agreement, which licensing agreement would
preclude or hinder the Lender from liquidating such
Inventory in the ordinary course of business; and
-5-
<PAGE>
(x) Inventory otherwise deemed ineligible by
the Lender in its sole discretion.
"Environmental Laws" has the meaning specified in
Section 5.12 hereof.
"Equipment" means all of the Borrower's equipment, as
such term is defined in the UCC, whether now owned or
hereafter acquired, including but not limited to all present
and future machinery, vehicles, furniture, fixtures (whether
located upon the Premises or otherwise), manufacturing
equipment, shop equipment, office and recordkeeping equipment,
parts, tools, supplies, and including specifically (without
limitation) the goods described in any equipment schedule or
list herewith or hereafter furnished to the Lender by the
Borrower.
"ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
"Event of Default" has the meaning specified in
Section 8.1 hereof.
"Floating Rate" means an annual rate equal to the sum
of the Base Rate plus one and three quarters percent (1.75%),
which Floating Rate shall change when and as the Base Rate
changes.
"Funds from Operations" means after tax net income of
the Borrower for the applicable period or periods, adjusted to
exclude items of income or expense which are extraordinary
items or items not related to operations, plus depreciation
and amortization, deferred income taxes and other non-cash
items.
"General Intangibles" means all of the Borrower's
general intangibles, as such term is defined in the UCC,
whether now owned or hereafter acquired, including (without
limitation) all present and future patents, patent
applications, copyrights, trademarks, trade names, trade
secrets, customer or supplier lists and contracts, manuals,
operating instructions, permits, franchises, the right to use
the Borrower's name, and the goodwill of the Borrower's
business.
"Incentive Rate" means an annual rate equal to the
sum of the Base Rate, plus 1%, which Incentive Rate shall
change when and as the Base Rate changes.
"Initial Advance" has the meaning specified in
Section 4.1(r) hereof.
"Interest Expense" means total gross interest expense
of the Borrower (cash and capitalized, including interest on
capitalized leases and not net of interest income).
"Inventory" means all of the Borrower's inventory, as
such term is defined in the UCC, whether now owned or
hereafter acquired, whether consisting of whole goods, spare
parts or components, supplies or materials, whether acquired,
-6-
<PAGE>
held or furnished for sale, for lease or under service
contracts or for manufacture or processing, and wherever
located.
"Issuer" means the issuer of any Letter of Credit.
"Loan Documents" means this Agreement, the Note and
the Security Documents.
"L/C Amount" means the sum of (i) the aggregate face
amount of any issued and outstanding Letters of Credit and
(ii) the unpaid amount of the Obligation of Reimbursement.
"L/C Application" means an application and agreement
for letters of credit in a form acceptable to the Issuer and
the Lender.
"Letter of Credit" has the meaning specified in
Section 2.4 hereof.
"Minimum Interest Charge" has the meaning specified
in Section 2.9(b) hereof.
"Net Income" means consolidated after tax net income
of both of the Borrowers from continuing operations, but
before extraordinary gains.
"Net Loss" means after tax net loss of the Borrower
from continuing operations.
"Net Worth" means the net worth of the Borrower
determined in accordance with generally accepted accounting
principles consistent with those used in preparing Borrower's
most recent consolidating and consolidated audited financial
statements.
"Note" means the Revolving and Term Note of the
Borrower payable to the order of the Lender in substantially
the form attached hereto as Exhibit A.
"Obligations" has the meaning specified in Section
3.1 hereof.
"Obligation of Reimbursement" has the meaning
specified in Section 2.5 hereof.
"Person" means any individual, corporation,
partnership, joint venture, limited liability company,
association, joint-stock company, trust, unincorporated
organization or government or any agency or political
subdivision thereof.
"Plan" means an employee benefit plan or other plan
maintained for employees of the Borrower and covered by Title
IV of ERISA.
-7-
<PAGE>
"Premises" means all premises where the Borrower
conducts its business and has any rights of possession,
including (without limitation) the premises legally described
in Exhibit E attached hereto.
"Receivables" means each and every right of the
Borrower to the payment of money, whether such right to
payment now exists or hereafter arises, whether such right to
payment arises out of a sale, lease or other disposition of
goods or other property, out of a rendering of services, out
of a loan, out of the overpayment of taxes or other
liabilities, or otherwise arises under any contract or
agreement, whether such right to payment is created, generated
or earned by the Borrower or by some other person who
subsequently transfers such person's interest to the Borrower,
whether such right to payment is or is not already earned by
performance, and howsoever such right to payment may be
evidenced, together with all other rights and interests
(including all liens and security interests) which the
Borrower may at any time have by law or agreement against any
account debtor or other obligor obligated to make any such
payment or against any property of such account debtor or
other obligor; all including but not limited to all present
and future accounts, contract rights, loans and obligations
receivable, chattel papers, bonds, notes and other debt
instruments, tax refunds and rights to payment in the nature
of general intangibles.
"Reportable Event" shall have the meaning assigned to
that term in Title IV of ERISA.
"Roxxi" means Roxxi, Inc., a Nevada corporation.
"Royal Grip" means Royal Grip, Inc., a Nevada
corporation.
"Security Documents" means the Collateral Account
Agreements, the Assignment of Security Agreements and UCCs,
the Assignment of Capital Lease Agreement, the Assignment of
Patents, the Collateral Assignment of Trademarks, the Patent
Mortgage, the Assignment of Trademarks, each as described in
Section 4.1 hereof.
"Security Interest" has the meaning specified in
Section 3.1 hereof.
"Slow-Moving Inventory" means any inventory where
100% of the like inventory has not turned in the previous
twelve (12) months.
"Special Account" means a specified cash collateral
account maintained by a financial institution acceptable to
the Lender in connection with Letters of Credit, as
contemplated by Sections 2.6 and 3.6 hereof.
"Subsidiary" means any corporation of which more than
50% of the outstanding shares of capital stock having general
voting power under ordinary circumstances to elect a majority
of the board of directors of such corporation,
-8-
<PAGE>
irrespective of whether or not at the time stock of any other
class or classes shall have or might have voting power by
reason of the happening of any contingency, is at the time
directly or indirectly owned by either Borrower, by either
Borrower and one or more other Subsidiaries, or by one or more
other Subsidiaries.
"Term Loan" has the meaning specified in Section 2.2
hereof.
"Termination Date" means February 28, 2000.
"UCC" means the Uniform Commercial Code as in effect
from time to time in the state designated in Section 9.12
hereof as the state whose laws shall govern this Agreement, or
in any other state whose laws are held to govern this
Agreement or any portion hereof.
ARTICLE II
Amount and Terms of the Credit Facility and Term Loan
-----------------------------------------------------
2.1 Advances. The Lender agrees, on the terms and subject to
the conditions herein set forth, to make Advances to the Borrower from time to
time during the period from the date hereof to and including the Termination
Date, or the earlier date of termination in whole of the Credit Facility
pursuant to Sections 2.10(a) or 8.2 hereof, in an aggregate amount at any time
outstanding not to exceed the Borrowing Base less the L/C Amount, which Advances
shall be secured by the Collateral as provided in Article III hereof. The Credit
Facility shall be a revolving facility and it is contemplated that the Borrower
will request Advances, make prepayments and request additional Advances. The
Borrower agrees to comply with the following procedures in requesting Advances
under this Section 2.1:
(a) The Borrower will not request any Advance under
this Section 2.1 if, after giving effect to such requested Advance, the sum of
the outstanding and unpaid Advances under this Section 2.1 or otherwise would
exceed the Borrowing Base less the L/C Amount.
(b) Each request for an Advance under this Section
2.1 shall be made to the Lender prior to 11:00 a.m. (Phoenix time) of the day of
the requested Advance by the Borrower. Each request for an Advance may be made
in writing or by telephone, specifying the date of the requested Advance and the
amount thereof, and shall be by (i) any officer of either Royal Grip or Roxxi;
or (ii) any person designated as the Borrower's agent by any officer of either
Borrower in a writing delivered to the Lender; or (iii) any person reasonably
believed by the Lender to be an officer of either Royal Grip or Roxxi or such a
designated agent.
(c) Upon fulfillment of the applicable conditions set
forth in Article IV hereof, the Lender shall disburse loan proceeds by crediting
the same to the Borrower's demand deposit operating account maintained with
Norwest Bank Arizona, N.A. unless the Lender and either Royal Grip or Roxxi
shall agree in writing to another manner of disbursement. Upon request of the
Lender, the Borrower shall promptly confirm each telephonic request for an
-9-
<PAGE>
Advance by executing and delivering an appropriate confirmation certificate to
the Lender. The Borrower shall be obligated to repay all Advances under this
Section 2.1 notwithstanding the failure of the Lender to receive such
confirmation and notwithstanding the fact that the person requesting the same
was not in fact authorized to do so. Any request for an Advance under this
Section 2.1, whether written or telephonic, shall be deemed to be a
representation by the Borrower that (i) the condition set forth in Section
2.1(a) hereof has been met, and (ii) the conditions set forth in Section 4.2
hereof have been met as of the time of the request.
2.2 Term Loan. The Lender agrees, on the terms and subject to
the conditions herein set forth, to make a one time advance of a term loan (the
"Term Loan") in the aggregate principal amount of $700,000.00, which Term Loan
shall be secured by the Collateral as provided in Article III hereof. Upon the
Borrower's request and fulfillment of the applicable conditions set forth in
Article IV hereof, the Lender shall make a one time disbursement of loan
proceeds to payoff indebtedness owed by Royal Grip to Biltmore Investors Bank.
2.3 Note. All Advances and the Term Loan, if any, made by the
Lender under this Article II shall be evidenced by and repayable with interest
in accordance with the Note. The principal of the Note shall be payable as
provided herein and on the earlier of the Termination Date or acceleration by
the Lender pursuant to Section 8.2 hereof, and shall bear interest as provided
herein. The portion of the Note which evidences principal of the Term Loan, if
any, shall be payable beginning on April 1, 1997 and continuing on the 1st day
of each month thereafter by payment of principal payments each in the amount of
$12,000.00; provided, however, that notwithstanding such amortization
calculation, the entire amount of such unpaid principal shall be due on the
earlier of the Termination Date, or acceleration by the Lender pursuant to
Section 8.2 hereof.
2.4 Issuance of Letters of Credit.
(a) Upon the request of either Borrower, the Lender
may, in its sole discretion, on the terms and subject to the conditions herein
set forth, cause to be issued by an Issuer one or more letters of credit for the
account of the Borrower (each a "Letter of Credit") from time to time. In the
event Lender elects to issue one or more Letters of Credit, the aggregate amount
at any time outstanding all of such Letters of Credit shall not exceed the
Borrowing Base less the sum of (i) all outstanding and unpaid Advances hereunder
and (ii) the unpaid amount of the Obligation of Reimbursement. Each Letter of
Credit, if any, shall be issued pursuant to a separate L/C Application entered
into by the Borrower and the Lender as co-applicants for the benefit of the
Issuer, completed in a manner satisfactory to the Lender and the Issuer. The
terms and conditions set forth in each such L/C Application shall supplement the
terms and conditions hereof, but in the event of inconsistency between the terms
of any such L/C Application and the terms hereof, the terms hereof shall
control.
(b) Any request for the issuance of a Letter of
Credit under this Section 2.4 shall be deemed to be a representation by the
Borrower that (i) the condition set forth in Section 2.4(a) hereof has been met,
and (ii) the statements set forth in Section 4.2 hereof are correct as of the
time of the request.
-10-
<PAGE>
2.5 Payment of Amounts Drawn Under Letters of Credit. The
Borrower acknowledges that the Lender, as co-applicant, will be liable to the
Issuer of any Letter of Credit for reimbursement of any and all draws thereunder
and all other amounts required to be paid under the applicable L/C Application.
Accordingly, the Borrower agrees to pay to the Lender any and all amounts
required to be paid under the applicable L/C Application, when and as required
to be paid thereby, and the amounts designated below, when and as designated:
(a) The Borrower hereby agrees to pay the Lender on
the day a draft is honored under any Letter of Credit a sum equal to all amounts
drawn under such Letter of Credit plus any and all reasonable charges and
expenses that the Issuer or the Lender may pay or incur relative to such draw,
plus interest on all such amounts, charges and expenses as set forth below (all
such amounts are hereinafter referred to, collectively, as the "Obligation of
Reimbursement").
(b) The Borrower hereby agrees to pay the Lender on
demand interest on all amounts, charges and expenses payable by the Borrower to
the Lender under this Section 2.5, accrued from the date any such draft, charge
or expense is paid by the Issuer until payment in full by the Borrower at the
Default Rate.
If the Borrower fails to pay to the Lender promptly the amount
of its Obligation of Reimbursement in accordance with the terms hereof and the
L/C Application pursuant to which such Letter of Credit was issued, the Lender
is hereby irrevocably authorized and directed, in its sole discretion, to make
an Advance in an amount sufficient to discharge the Obligation of Reimbursement,
including all interest accrued thereon but unpaid at the time of such Advance,
and such Advance shall be evidenced by the Note and shall bear interest as
provided in Section 2.9 hereof.
2.6 Special Account. If the Credit Facility is terminated for
any reason whatsoever, while any Letter of Credit is outstanding, the Borrower
shall thereupon pay the Lender in immediately available funds for deposit in the
Special Account an amount equal to the maximum aggregate amount available to be
drawn under all Letters of Credit then outstanding, assuming compliance with all
conditions for drawing thereunder. The Special Account shall be maintained for
the Lender by any financial institution acceptable to the Lender. Any interest
earned on amounts deposited in the Special Account shall be credited to the
Special Account. Amounts on deposit in the Special Account may be applied by the
Lender at any time or from time to time to the Borrower's Obligation of
Reimbursement or any other Obligations, in the Lender's sole discretion, and
shall not be subject to withdrawal by the Borrower so long as the Lender
maintains a security interest therein. The Lender agrees to transfer any balance
in the Special Account to the Borrower at such time as the Lender is required to
release its security interest in the Special Account under applicable law.
-11-
<PAGE>
2.7 Increased Costs and Reduced Return.
(a) If the Lender shall determine that, after the
date hereof, the adoption of any applicable law, rule or regulation, or any
change therein, or any change in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Issuer or the
Lender or its parent corporation with any requirement or directive (whether or
not having the force of law) of any such authority, central bank or comparable
agency:
(i) shall subject the Issuer or the Lender
or its parent corporation to any tax, duty or other similar charge with respect
to any Letter of Credit, the Advances or the Note or shall change the basis of
taxation of payments to the Issuer or the Lender or its parent corporation of
the Reimbursement Obligation, of the principal of or interest on the Advances or
of any other amounts due under this Agreement in respect of any Letter of
Credit, the Advances or the Note (except for any change in respect of any tax
imposed on the overall income of the Issuer or the Lender or its parent
corporation); or
(ii) shall impose, modify or deem applicable
any reserve, special deposit or similar requirement (including, without
limitation, any such requirement imposed by the Board of Governors of the
Federal Reserve System) against assets of, deposits with or for the account of,
or credit extended by, the Issuer or the Lender or its parent corporation or
shall impose on the Issuer or the Lender or its parent corporation any other
condition affecting any Letter of Credit, the Advances or the Note;
and the result of any of the foregoing is to increase the cost to the Issuer or
the Lender or its parent corporation of issuing or maintaining any Letter of
Credit or of making or maintaining any Advances, or to reduce the amount of any
sum received or receivable by the Issuer or the Lender or its parent corporation
under the application and agreement pursuant to which the Letter of Credit was
issued, this Agreement or the Note with respect thereto, by an amount deemed by
the Lender or its parent corporation to be material, then upon demand by the
Lender, the Borrower shall pay to the Lender such additional amount or amounts
as will compensate the Issuer or the Lender or its parent corporation for such
increased cost or reduction.
(b) If the Lender shall determine that the adoption
after the date hereof of any applicable law, rule or regulation regarding
capital adequacy, or any change therein after the date hereof, any change after
the date hereof in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Lender or its
parent corporation with any guideline or request issued after the date hereof
regarding capital adequacy (whether nor not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on the Lender's or the Lender's parent corporation's
capital as a consequence of any Letters of Credit, Advances or the Lender's
obligations hereunder to a level below that which the Lender or its parent
corporation could have achieved but for such adoption, change or compliance
(taking into consideration the Lender's policies with respect to capital
adequacy and those of the Lender's parent corporation) by an amount deemed to
the Lender or its parent corporation to be material, then from time to time
-12-
<PAGE>
on demand by the Lender, the Borrower shall pay to the Lender such additional
amount or amounts as will compensate the Lender or its parent corporation for
such reduction.
(c) Certificates of the Lender sent to the Borrower
from time to time claiming compensation under this Section, stating the reason
therefor and setting forth in reasonable detail the calculation of the
additional amount or amounts to be paid to the Lender hereunder shall be
conclusive absent manifest error. In determining such amounts, the Lender or its
parent corporation may use any reasonable averaging and attribution methods.
2.8 Obligations Absolute. The obligations of the Borrower
arising under this Agreement shall be absolute, unconditional and irrevocable,
and shall be paid strictly in accordance with the terms of this Agreement, under
all circumstances whatsoever, including (without limitation) the following
circumstances:
(a) any lack of validity or enforceability of any
Letter of Credit or any other agreement or instrument relating to any Letter of
Credit (collectively the "Related Documents");
(b) any amendment or waiver of or any consent to
departure from all or any of the Related Documents;
(c) the existence of any claim, setoff, defense or
other right which the Borrower may have at any time, against any beneficiary or
any transferee of any Letter of Credit (or any persons or entities for whom any
such beneficiary or any such transferee may be acting), or other person or
entity, whether in connection with this Agreement, the transactions contemplated
herein or in the Related Documents or any unrelated transactions;
(d) any statement or any other document presented
under any Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or inaccurate
in any respect whatsoever;
(e) payment by or on behalf of the Issuer or the
Lender under any Letter of Credit against presentation of a draft or certificate
which does not strictly comply with the terms of such Letter of Credit; or
(f) any other circumstance or happening whatsoever,
whether or not similar to any of the foregoing.
2.9 Interest.
(a) The principal of the Advances and the Term Loan
outstanding from time to time during any month shall bear interest (computed on
the basis of actual days elapsed in a 360-day year) at the Floating Rate;
provided, however, that, assuming there is not a then existing Event of Default
or Default Period from the first day of the first month following the receipt by
the Lender of the fiscal year end audited financial statements of the Borrower
complying with the provisions of Section 6.1(a) for the fiscal year ending
December 31, 1997,
-13-
<PAGE>
the principal of the Advances and the Term Loan outstanding from time to time
shall bear interest at the Incentive Rate but only if such financial statements
show a Net Income of $500,000.00 or more; and provided, further, however, that
from the first day of any month during which any Default Period or Event of
Default occurs or exists at any time, in the Lender's discretion and without
waiving any of its other rights and remedies, the principal of the Advances and
the Term Loan outstanding from time to time shall bear interest at the Default
Rate during the entire Default Period; and provided, further, however, that in
any event no rate change shall be put into effect which would result in a rate
greater than the highest rate permitted by law. Interest accruing on the
principal balance of the Advances and the Term Loan outstanding from time to
time shall be payable on the first day of each succeeding month and on the
Termination Date or earlier demand or prepayment in full. The Borrower agrees
that the interest rate contracted for includes the interest rate set forth
herein plus any other charges or fees set forth herein and costs and expenses
incident to this transaction paid by the Borrower to the extent same are deemed
interest under applicable law.
(b) Notwithstanding the interest payable pursuant to
Section 2.9(a) hereof or the unused fee payable pursuant to Section 2.16(a)
hereof, the Borrower shall be liable to the Lender for interest and the unused
fee hereunder at such rate as may be necessary to result in interest and unused
fee payments in the aggregate of not less than $6,500.00 per full calendar month
(the "Minimum Interest Charge") during the term of this Agreement, and the
Borrower shall pay any deficiency between the Minimum Interest Charge and the
amount of interest and unused fee otherwise calculated under Section 2.9(a) and
Section 2.16(a) on the first day of each calendar month for the immediate
preceding full calendar month elapsing after the date of this Agreement.
(c) If any Person shall acquire a participation in
the Advances or the Term Loan under this Agreement, the Borrower shall be
obligated to the Lender to pay the full amount of all interest calculated under
Sections 2.9(a) and 2.9(b) hereof, along with all other fees, charges and other
amounts due under this Agreement, regardless if such Person elects to accept
interest with respect to its participation at a lower rate than the Floating
Rate, or otherwise elects to accept less than its pro rata share of such fees,
charges and other amounts due under this Agreement.
2.10 Voluntary Prepayment; Termination of Agreement by the
Borrower; Permanent Reduction of the Commitment.
(a) Except as otherwise provided herein, the Borrower
may, in its discretion, prepay the Advances and the Term Loan in whole at any
time. The Borrower may terminate this Agreement at any time so long as no Letter
of Credit has been issued and is outstanding with an expiration date after such
date and, subject to payment and performance of all the Borrower's Obligations
to the Lender, may obtain any release or termination of the Security Interest to
which the Borrower is otherwise entitled by law by (A) giving at least 30 days'
prior written notice to the Lender of the Borrower's intention to terminate this
Agreement; and (B) paying the Lender a termination fee of (i) 3% of the
aggregate amount of the Commitment and the outstanding principal balance of the
Term Loan immediately preceding such termination if such termination occurs
during the period from the date of this Agreement
-14-
<PAGE>
through January 31, 1998, or (ii) 2% of the aggregate amount of the Commitment
and the outstanding principal balance of the Term Loan immediately preceding
such termination if such termination occurs during the period from February 1,
1998 through January 31, 1999, or (iii) 1% of the aggregate amount of the
Commitment and the outstanding principal balance of the Term Loan immediately
preceding such termination if such termination occurs during the period from
February 1, 1999 until the Termination Date, provided, however, no such fee
shall be payable if and to the extent such termination represents a refinancing
of the Obligations by Norwest Bank, Arizona, N.A.
(b) Except as otherwise provided herein, the Borrower
may, in its discretion, prepay the Term Loan from time to time in part by (1)
giving at least 30 days' prior written notice to the Lender of the Borrower's
intent to so prepay; and (2) paying the Lender a prepayment fee of (i) 3% of the
amounts so prepaid if such prepayment occurs during the period from the date of
this Agreement through January 31, 1998, or (ii) 2% of the amounts so prepaid if
such prepayment occurs during the period from February 1, 1988 through January
31, 1999, or (iii) 1% of the amounts so prepaid if such prepayment occurs during
the period from February 1, 1999 until the Termination Date, provided, however,
no such fee shall be payable if and to the extent such prepayment represents a
refinancing of the Obligations by Norwest Bank, Arizona, N.A. Any prepayments of
the Term Loan shall be applied to principal installments of the Term Loan in
inverse order of maturity.
(c) The Borrower may at any time and from time to
time, upon at least 30 days' prior written notice to the Lender, permanently
reduce in part the Commitment; provided, however, that no reduction shall reduce
the Commitment to an amount less than the then-aggregate amount of the Advances;
and provided, further, that if the Borrower shall elect permanently to reduce in
part the Commitment at any time other than the Termination Date, the Borrower
shall pay to the Lender a premium in an amount equal to (i) 3% of the reduction
from the date of this Agreement through January 31, 1998, or (ii) 2% of the
reduction from February 1, 1998 through January 31, 1999, or (iii) 1% of the
reduction from February 1, 1999 until the Termination Date.
2.11 Mandatory Prepayment. Without notice or demand, if the
sum of the outstanding principal balance of the Advances plus the L/C Amount
shall at any time exceed the Borrowing Base, the Borrower shall (i) first,
immediately prepay the Advances to the extent necessary to eliminate such
excess; and (ii) if prepayment in full of the Advances is insufficient to
eliminate such excess, pay to the Lender in immediately available funds for
deposit in the Special Account an amount equal to the remaining excess. Any
payment received by the Lender under this Section 2.11 or under Section 2.10 may
be applied to the Obligation of Reimbursement or the Advances, including
interest thereon and any fees, commissions, costs and expenses hereunder and
under the Security Documents, in such order and in such amounts as the Lender,
in its discretion, may from time to time determine. For each day or portion
thereof that the Advances shall exceed the Borrowing Base, the Borrower shall
pay to the Lender an overadvance charge in the amount of $100.00; provided,
however, that if any such day occurs during a Default Period, the overadvance
charge for such day shall be $200.00.
-15-
<PAGE>
2.12 Payment. All payments of principal and interest on the
Advances, the Term Loan, the Obligation of Reimbursement, the commissions and
fees hereunder and amounts required to be paid to the Lender for deposit in the
Special Account shall be made to the Lender in immediately available funds. The
Borrower hereby authorizes the Lender, in its discretion at any time or from
time to time and without request by the Borrower, to make an Advance or Advances
in such amount as shall be necessary to pay any interest, fees, costs or
expenses hereunder or under the Loan Documents.
2.13 Payment on Non-Banking Days. Whenever any payment to be
made hereunder shall be stated to be due on a day which is not a Banking Day,
such payment may be made on the next succeeding Banking Day, and such extension
of time shall in such case be included in the computation of interest on the
Advances and the Term Loan or the fees hereunder, as the case may be.
2.14 Use of Proceeds. The proceeds of Advances, the Term Loan
and each Letter of Credit issued shall be used by the Borrower (i) to repay all
outstanding indebtedness of the Borrower owed to Biltmore Investors Bank, and
(ii) to refinance indebtedness secured by Equipment currently owned by the
Borrower, and (iii) for ordinary working capital purposes.
2.15 Liability Records. The Lender may maintain from time to
time, at its discretion, liability records as to any and all Advances and the
Term Loan made or repaid, interest accrued or paid under this Agreement,
outstanding Letters of Credit and fees thereon and the Borrower's Obligation of
Reimbursement. All entries made on any such record shall be presumed correct
until the Borrower establishes the contrary. On demand by the Lender, the
Borrower will admit and certify in writing the exact principal balance that the
Borrower then asserts to be outstanding to the Lender for Advances and the Term
Loan under this Agreement and the amount of any Letters of Credit outstanding.
Any billing statement or accounting rendered by the Lender shall be conclusive
and fully binding on the Borrower unless specific written notice of exception is
given to the Lender by the Borrower within 30 days after its receipt by the
Borrower.
2.16 Fees.
(a) The Borrower agrees to pay to the Lender an
unused fee each month at the annual rate of .5% on the average daily unused
amount of the Commitment from the date hereof to and including the date on which
such facility is terminated, due and payable monthly in arrears on the first day
of each month, commencing March 1, 1997, provided that any such unused fee
remaining unpaid upon termination of the Credit Facility or acceleration of the
Note by the Lender pursuant to Section 8.2 hereof shall be due and payable on
the date of such termination or acceleration. Such fee shall be calculated on
the basis of actual days elapsed in a 360-day year.
(b) The Borrower hereby agrees to pay the Lender a
commission with respect to each Letter of Credit, if any, accruing on a daily
basis and computed at the annual rate of three percent (3%) of the available
amount of such Letter of Credit (as it may be changed from time to time) from
and including the date of issuance of such Letter of Credit until such
-16-
<PAGE>
date as such Letter of Credit shall terminate by its terms, payable annually in
arrears, and prorated for any part of a full calendar year in which such Letter
of Credit remains outstanding. The foregoing commission shall be in addition to
any and all fees, commissions and charges of any Issuer of a Letter of Credit
with respect to or in connection with such Letter of Credit.
(c) The Borrower agrees to pay the Lender, on written
demand, the administrative fees charged by the Issuer in connection with the
honoring of drafts under any Letter of Credit, amendments thereto, transfers
thereof and all other activity with respect to the Letters of Credit.
(d) The Borrower hereby agrees to pay the Lender, on
demand, audit fees of $50.00 per hour (or Lender's then applicable rate) per
auditor in connection with any audits or inspections by the Lender of any
collateral or the operations or business of the Borrower, together with all
actual out-of-pocket costs and expenses incurred in conducting any such audit or
inspection. So long as there is not any then existing Event of Default or
Default Period, such audit fees shall not exceed $2,500.00 per audit and audits
shall be performed not more frequently than quarterly. Lender shall send to
Borrower an invoice applicable to such audit fees, out-of-pocket costs and
expenses, provided, however, any failure of Lender to send such invoices shall
not relieve Borrower of its obligations under this Section 2.16(d).
2.17 Setoff. The Borrower agrees that the Lender may at any
time or from time to time, at is sole discretion and without demand and without
notice to anyone, setoff any liability owed to the Borrower by the Lender,
whether or not due, against any indebtedness owed to the Lender by the Borrower
(for Advances, the Term Loan or for any other transaction or event), whether or
not due. In addition, each other Person holding a participating interest in any
Advances or the Term Loan made to the Borrower by the Lender shall have the
right to appropriate or setoff any deposit or other liability then owed by such
Person to the Borrower, whether or not due, and apply the same to the payment of
said participating interest, as fully as if such Person had lent directly to the
Borrower the amount of such participating interest.
2.18 Capital Adequacy. If the Lender shall determine that the
adoption after the date hereof of any applicable law, rule or regulation
regarding capital adequacy, or any change therein after the date hereof, any
change after the date hereof in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Lender or its
parent corporation with any guideline or request issued after the date hereof
regarding capital adequacy (whether nor not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on the Lender's or the Lender's parent corporation's
capital as a consequence of the Lender's obligations hereunder to a level below
that which the Lender or its parent corporation could have achieved but for such
adoption, change or compliance (taking into consideration the Lender's policies
with respect to capital adequacy and those of the Lender's parent corporation)
by an amount deemed to the Lender or its parent corporation to be material, then
from time to time on demand by the Lender, the Borrower shall pay to the Lender
such additional amount or amounts as will compensate the Lender or its parent
corporation for such reduction. Certificates of the Lender sent to the Borrower
from time to time claiming compensation under this Section, stating the
-17-
<PAGE>
reason therefor and setting forth in reasonable detail the calculation of the
additional amount or amounts to be paid to the Lender hereunder shall be
conclusive absent manifest error. In determining such amounts, the Lender or its
parent corporation may use any reasonable averaging and attribution methods.
ARTICLE III
Security Interest
-----------------
3.1 Grant of Security Interest. The Borrower hereby assigns
and grants to the Lender a security interest (collectively referred to as the
"Security Interests") in the Collateral, as security for the payment and
performance of each and every debt, liability and obligation of every type and
description which the Borrower may now or at any time hereafter owe to the
Lender (whether such debt, liability or obligation now exists or is hereafter
created or incurred, whether it arises in a transaction involving the Lender
alone or in a transaction involving other creditors of the Borrower, and whether
it is direct or indirect, due or to become due, absolute or contingent, primary
or secondary, liquidated or unliquidated, or sole, joint, several or joint and
several, and including specifically, but not limited to, the Obligation of
Reimbursement and all indebtedness of the Borrower arising under this Agreement,
the Note, any L/C Application completed by the Borrower or any other loan or
credit agreement or guaranty between the Borrower and the Lender, whether now in
effect or hereafter entered into; all such debts, liabilities and obligations
are herein collectively referred to as the "Obligations").
3.2 Notification of Account Debtors and Other Obligors. In
addition to the rights of the Lender under Section 6.10 hereof, with respect to
any and all rights to payment constituting Collateral, the Lender may at any
time (either before or after the occurrence of an Event of Default) notify any
account debtor or other person obligated to pay the amount due that such right
to payment has been assigned or transferred to the Lender for security and shall
be paid directly to the Lender. The Borrower will join in giving such notice if
the Lender so requests. At any time after the Borrower or the Lender gives such
notice to an account debtor or other obligor, the Lender may, but need not, in
the Lender's name or in the Borrower's name, (a) demand, sue for, collect or
receive any money or property at any time payable or receivable on account of,
or securing, any such right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such account
debtor or other obligor; and (b) as agent and attorney in fact of the Borrower,
notify the United States Postal Service to change the address for delivery of
the Borrower's mail to any address designated by the Lender, otherwise intercept
the Borrower's mail, and receive, open and otherwise handle the Borrower's mail,
applying all Collateral as permitted under this Agreement and holding all other
mail for the Borrower's account or forwarding such mail to the Borrower's last
known address.
3.3 Assignment of Insurance. As additional security for the
payment and performance of the Obligations, the Borrower hereby assigns to the
Lender any and all monies (including, without limitation, proceeds of insurance
and refunds of unearned premiums) due or to become due under, and all other
rights of the Borrower with respect to, any and all policies of insurance now or
at any time hereafter covering the Collateral or any evidence thereof or any
-18-
<PAGE>
business records or valuable papers pertaining thereto, and the Borrower hereby
directs the issuer of any such policy to pay all such monies directly to the
Lender. At any time, whether before or after the occurrence of any Event of
Default, the Lender may (but need not), in the Lender's name or in the
Borrower's name, execute and deliver proof of claim, receive all such monies,
endorse checks and other instruments representing payment of such monies, and
adjust, litigate, compromise or release any claim against the issuer of any such
policy.
3.4 Occupancy.
(a) The Borrower hereby irrevocably grants to the
Lender the right to take possession of the Premises at any time after the
occurrence and during the continuance of an Event of Default.
(b) The Lender may use the Premises only to hold,
process, manufacture, sell, use, store, liquidate, realize upon or otherwise
dispose of goods that are Collateral and for other purposes that the Lender may
in good faith deem to be related or incidental purposes.
(c) The right of the Lender to hold the Premises
shall cease and terminate upon the earlier of (A) payment in full and discharge
of all Obligations, and (B) final sale or disposition of all goods constituting
Collateral and delivery of all such goods to purchasers.
(d) The Lender shall not be obligated to pay or
account for any rent or other compensation for the possession, occupancy or use
of any of the Premises; provided, however, in the event that the Lender does pay
or account for any rent or other compensation for the possession, occupancy or
use of any of the Premises, the Borrower shall reimburse the Lender promptly for
the full amount thereof. In addition, the Borrower will pay, or reimburse the
Lender for, all taxes, fees, duties, imposts, charges and expenses at any time
incurred by or imposed upon the Lender by reason of the execution, delivery,
existence, recordation, performance or enforcement of this Agreement or the
provisions of this Section 3.4.
3.5 License. The Borrower hereby grants to the Lender a
non-exclusive, worldwide and royalty-free license to use or otherwise exploit
all trademarks, franchises, trade names, copyrights and patents of the Borrower
for the purpose of selling, leasing or otherwise disposing of any or all
Collateral following an Event of Default.
3.6 Security Interest in Special Account and Collateral
Accounts. The Borrower hereby pledges, and grants to the Lender a security
interest in, all funds held in the Special Account and in the Collateral
Accounts from time to time and all proceeds thereof, as security for the payment
of all present and future Obligations of Reimbursement and all other
Obligations.
-19-
<PAGE>
ARTICLE IV
Conditions of Lending
---------------------
4.1 Conditions Precedent to the Initial Advance and the Term
Loan. The obligation of the Lender to make the initial Advance under the Credit
Facility or the one time disbursement of the Term Loan, shall be subject to the
condition precedent that the Lender shall have received all of the following,
each in form and substance satisfactory to the Lender:
(a) This Agreement, properly executed on behalf of
the Borrower.
(b) The Note, properly executed on behalf of the
Borrower.
(c) A true and correct copy of any and all leases
pursuant to which the Borrower is leasing the Premises, together with a
landlord's disclaimer and consent with respect to each such lease; and with
respect to any and all of the Premises owned by Borrower a mortgagee's
disclaimer as to all such Premises which are subject to a mortgage, deed of
trust or other lien.
(d) Collateral Account Agreements, duly executed by
both Borrowers and Norwest Bank Arizona, N.A. pursuant to which the Borrowers
and Norwest Bank Arizona, N.A. establish a depository accounts (the "Collateral
Accounts") in the name of and under the sole and exclusive control of the
Lender, from which such institution agrees to transfer finally collected funds
to the Lender for application to the Advances.
(e) Current searches of appropriate filing offices
showing that (i) no state or federal tax liens have been filed and remain in
effect against the Borrower, (ii) no financing statements have been filed and
remain in effect against the Borrower, except those financing statements
relating to liens permitted pursuant to Section 7.1 hereof and those financing
statements filed by the Lender, and (iii) the Lender has duly filed all
financing statements necessary to perfect the Security Interests granted
hereunder, to the extent the Security Interests are capable of being perfected
by filing.
(f) A certificate of the Secretary or an Assistant
Secretary of each of Royal Grip and Roxxi, certifying as to (i) the resolutions
of the directors and, if required, the shareholders of each of Royal Grip and
Roxxi, authorizing the execution, delivery and performance of this Agreement and
the Security Documents, (ii) the articles of incorporation and bylaws of each of
Royal Grip and Roxxi, and (iii) the signatures of the officers or agents of each
of Royal Grip and Roxxi authorized to execute and deliver this Agreement, the
Loan Documents and other instruments, agreements and certificates, including
Advance requests, on behalf of each of Royal Grip and Roxxi.
(g) A current certificate issued by the Corporation
Commission of the state of each of Royal Grip's and Roxxi's incorporation,
certifying that they are in compliance with all corporate organizational
requirements of such state.
-20-
<PAGE>
(h) Evidence that each of Royal Grip and Roxxi is
duly licensed or qualified to transact business in all jurisdictions where the
character of the property owned or leased or the nature of the business
transacted by it makes such licensing or qualification necessary.
(i) A certificate of an officer of each of Royal Grip
and Roxxi confirming, in his official capacity, the representations and
warranties set forth in Article V hereof.
(j) An opinion of counsel to each of Royal Grip and
Roxxi, addressed to the Lender, together with the results of a litigation search
or searches showing all actions and proceedings where each of Royal Grip and
Roxxi is a defendant or involving a claim against the Borrower.
(k) Certificates of the insurance required hereunder,
with all hazard insurance containing a loss payee endorsement in favor of the
Lender and with all liability insurance naming the Lender as an additional
insured.
(l) Assignments of all Security Agreements and UCC-1
financing statements listing either Royal Grip or Roxxi as Secured Party and
Acushnet Rubber Company, Inc. ("Acushnet") as Debtor properly executed by Royal
Grip and Acushnet (the "Assignments of Security Agreements and UCCs").
(m) An Assignment of Capital Lease Agreement (the
"Capital Lease Agreement") dated December 21, 1996 entered into by and between
Royal Grip and Acushnet, properly executed by Royal Grip and Acushnet (the
"Assignment of Capital Lease Agreement").
(n) An Assignment of Patents, properly executed on
behalf of Borrower (the "Assignment of Patents").
(o) A Collateral Assignment of Trademarks, properly
executed on behalf of Borrower (the "Collateral Assignment of Trademarks").
(p) A Patent Mortgage, Assignment and Security
Agreement, properly executed on behalf of Borrower (the "Patent Mortgage").
(q) An Assignment of Trademarks, properly executed on
behalf of Borrower (the "Assignment of Trademarks").
(r) Evidence from the Borrower satisfactory to the
Lender establishing the amount of the Borrowing Base and a request for Advance
from the Borrower in an amount such that the minimum excess loan availability of
the Borrower after such Advance (the "Initial Advance") and payment of all fees
of the Lender required hereunder shall be $500,000.00.
(s) Management Support Agreements in favor of the
Lender properly executed by Danny Edwards, Robert G.J. Burg II and Tom
Schneider.
-21-
<PAGE>
(t) Payment of the fees and commissions due through
the date of the Initial Advance, Term Loan, or Letter of Credit under Section
2.16 hereof and expenses incurred by the Lender through such date and required
to be paid by the Borrower under Section 9.7 hereof.
(u) Such other documents as the Lender in its sole
discretion may require.
4.2 Conditions Precedent to All Advances and The Term Loan.
The obligation of the Lender to make each Advance or the Term Loan shall be
subject to the further conditions precedent that on such date:
(a) the representations and warranties contained in
Article V hereof are correct on and as of the date of such Advance or Term Loan
as though made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date; and
(b) no event has occurred and is continuing, or would
result from such Advance or Term Loan, as the case may be, which constitutes a
Default or an Event of Default.
ARTICLE V
Representations and Warranties
------------------------------
The Borrower represents and warrants to the Lender as follows:
5.1 Corporate Existence and Power; Name; Chief Executive
Office; Inventory and Equipment Locations. Royal Grip is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Nevada and is duly licensed or qualified to transact business in all
jurisdictions where the character of the property owned or leased or the nature
of the business transacted by it makes such licensing or qualification
necessary. Roxxi is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Nevada, and is duly licensed or
qualified to transact business in all jurisdictions where the character of the
property owned or leased or the nature of the business transacted by it makes
such licensing or qualification necessary. The Borrower has all requisite power
and authority, corporate or otherwise, to conduct its business, to own its
properties and to execute and deliver, and to perform all of its obligations
under, the Loan Documents. During its corporate existence, the Borrower has done
business solely under the names set forth in Exhibit B hereto. The chief
executive office and principal place of business of the Borrower is located at
the address set forth in Exhibit B hereto, and all of the Borrower's records
relating to its business or the Collateral are kept at that location. All
Inventory and Equipment is located at that location or at one of the other
locations set forth in Exhibit B hereto. The Borrower's tax identification
number is correctly set forth in Section 9.4.
5.2 Authorization of Borrowing; No Conflict as to Law or
Agreements. The execution, delivery and performance by the Borrower of the Loan
Documents and the
-22-
<PAGE>
borrowings from time to time hereunder have been duly authorized by all
necessary corporate action and do not and will not (a) require any consent or
approval of the stockholders of either Royal Grip or Roxxi, (b) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
authorization, consent, approval, registration, declaration, filing or notice as
has been obtained, accomplished or given prior to the date hereof, (c) violate
any provision of any law, rule or regulation (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
either Royal Grip or Roxxi or of the Articles of Incorporation or Bylaws of
either Royal Grip or Roxxi, (d) to the best of both of the Borrower's knowledge
after due inquiry, result in a breach of or constitute a default under any
indenture or loan or credit agreement or any other material agreement, lease or
instrument to which either Royal Grip or Roxxi is a party or by which it or its
properties may be bound or affected, or (e) result in, or require, the creation
or imposition of any mortgage, deed of trust, pledge, lien, security interest or
other charge or encumbrance of any nature (other than the Security Interests)
upon or with respect to any of the properties now owned or hereafter acquired by
either Royal Grip or Roxxi.
5.3 Legal Agreements. This Agreement constitutes and, upon due
execution by the Borrower, the other Loan Documents will constitute the legal,
valid and binding obligations of Royal Grip and Roxxi, enforceable against Royal
Grip and Roxxi in accordance with their respective terms.
5.4 Subsidiaries. Except as set forth in Exhibit B attached
hereto, neither Borrower has any Subsidiaries.
5.5 Financial Condition; No Adverse Change. The Borrower has
heretofore furnished to the Lender consolidated audited financial statements of
Royal Grip and Roxxi for their fiscal year ended December 31, 1995, and
consolidated unaudited financial statements of Royal Grip and Roxxi for the
months ended October 31, 1996, and those statements fairly present the financial
condition of the Borrower on the dates thereof and the results of its operations
and cash flows for the periods then ended and were prepared in accordance with
generally accepted accounting principles. Except as specifically set forth in
that certain Commitment Letter dated December 30, 1996, since the date of the
most recent financial statements, there has been no material adverse change in
the business, properties or condition (financial or otherwise) of the Borrower.
5.6 Litigation. To the best of both of the Borrower's
knowledge after due inquiry, there are no actions, suits or proceedings pending
or, to the knowledge of the Borrower, threatened against or affecting either
Borrower or any of their Affiliates or the properties of either Borrower or any
of their Affiliates before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, which, if
determined adversely to the Borrower or any of its Affiliates, would have a
material adverse effect on the financial condition, properties or operations of
the Borrower or any of its Affiliates.
-23-
<PAGE>
5.7 Regulation U. Neither Borrower is engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of any Advance or Term Loan will be
used to purchase or carry any margin stock or to extend credit to others for the
purpose of purchasing or carrying any margin stock.
5.8 Taxes. To the best of both of the Borrower's knowledge
after due inquiry, the Borrower and its Affiliates have paid or caused to be
paid to the proper authorities when due all federal, state and local taxes
required to be withheld by each of them. The Borrower and its Affiliates have
filed all federal, state and local tax returns which to the knowledge of the
officers of the Borrower or any Affiliate, as the case may be, are required to
be filed, and the Borrower and its Affiliates have paid or caused to be paid to
the respective taxing authorities all taxes as shown on said returns or on any
assessment received by any of them to the extent such taxes have become due.
5.9 Titles and Liens. The Borrower has good and absolute title
to all Collateral described in the collateral reports provided to the Lender and
all other Collateral, properties and assets reflected in the latest balance
sheet referred to in Section 5.5 hereof and all proceeds thereof, free and clear
of all mortgages, security interests, liens and encumbrances, except for (i)
mortgages, security interests and liens permitted by Section 7.1 hereof, (ii)
liens in favor of Biltmore Investors Bank, securing the repayment of
indebtedness which will be fully repaid with the proceeds of the Initial
Advance, and (iii) in the case of any such property which is not Collateral or
other collateral described in the Security Documents, covenants, restrictions,
rights, easements and minor irregularities in title which do not materially
interfere with the business or operations of the Borrower as presently
conducted. No financing statement naming the Borrower as debtor is on file in
any office except to perfect only security interests permitted by Section 7.1
hereof and clause (ii) above.
5.10 Plans. Except as disclosed to the Lender in writing prior
to the date hereof, neither Borrower nor any of their Affiliates maintains or
has maintained any Plan. Neither Borrower nor any Affiliate has received any
notice or has any knowledge to the effect that it is not in full compliance with
any of the requirements of ERISA. No Reportable Event or other fact or
circumstance which may have an adverse effect on the Plan's tax qualified status
exists in connection with any Plan. Neither Borrower nor any of their Affiliates
has:
(a) Any accumulated funding deficiency within the
meaning of ERISA; or
(b) Any liability or knows of any fact or
circumstances which could result in any liability to the Pension Benefit
Guaranty Corporation, the Internal Revenue Service, the Department of Labor or
any participant in connection with any Plan (other than accrued benefits which
or which may become payable to participants or beneficiaries of any such Plan).
5.11 Default. To the best of both of the Borrower's knowledge
after due inquiry, each Borrower is in compliance with all provisions of all
agreements, instruments, decrees and orders to which it is a party or by which
it or its property is bound or affected, the
-24-
<PAGE>
breach or default of which could have a material adverse effect on the financial
condition, properties or operations of the Borrower.
5.12 Environmental Protection. To the best of both of the
Borrower's knowledge after due inquiry, the Borrower has obtained all permits,
licenses and other authorizations which are required under federal, state and
local laws and regulations relating to emissions, discharges, releases of
pollutants, contaminants, hazardous or toxic materials, or wastes into ambient
air, surface water, ground water or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or hazardous or toxic
materials or wastes ("Environmental Laws") at the Borrower's facilities or in
connection with the operation of its facilities. The Borrower shall provide
copies of all such permits, licenses and other authorizations to the Lender upon
the Lender's request. The Borrower also shall provide to the Lender copies of
all environmental investigation and inspection reports available to the Borrower
that pertain to the Borrower's facilities, upon the Lender's request. Except as
previously disclosed to the Lender in writing, to the best of both of the
Borrower's knowledge after due inquiry, the Borrower and all activities of the
Borrower at its facilities comply with all Environmental Laws and with all terms
and conditions of any required permits, licenses and authorizations applicable
to the Borrower with respect thereto. Except as previously disclosed to the
Lender in writing, the Borrower is also in compliance with all limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in Environmental Laws or contained in any
plan, order, decree, judgment or notice of which the Borrower is aware. Except
as previously disclosed to the Lender in writing, the Borrower is not aware of,
nor has the Borrower received notice of, any events, conditions, circumstances,
activities, practices, incidents, actions or plans which may interfere with or
prevent continued compliance with, or which may give rise to any liability
under, any Environmental Laws. Except as previously disclosed to the Lender in
writing, the Borrower has received no inquiry from any federal, state or local
agency concerning the Borrower's facilities or any adjacent properties involving
possible environmental contamination or violations of any Environmental Laws,
and has no knowledge of any such inquiry to any party concerning the Borrower's
facilities or any adjacent properties. The Borrower agrees to notify Lender
promptly in writing of any inquiries by third parties or regulatory agencies
concerning the possible presence of environmental contamination on the
Borrower's facilities or any adjacent properties or concerning any possible
violations of Environmental Laws involving the Borrower's facilities or any
adjacent properties. The Lender shall have the right to enter the Borrower's
facilities for the purpose of conducting environmental investigations, including
taking soil and water samples, during the Borrower's normal business hours of
operation.
5.13 Submissions to the Lender. All financial and other
information provided to the Lender by or on behalf of the Borrower in connection
with the Borrower's request for the credit facilities contemplated hereby is
true and correct in all material respects and, as to projections, valuations or
proforma financial statements, present a good faith opinion as to such
projections, valuations and proforma condition and results.
5.14 Financing Statements. The Borrower has provided to the
Lender signed financing statements sufficient when filed to perfect the Security
Interests and the other security
-25-
<PAGE>
interests created by the Security Documents. When such financing statements are
filed in the offices noted therein, the Lender will have a valid and perfected
security interest in all Collateral and all other collateral described in the
Security Documents which is capable of being perfected by filing financing
statements. None of the Collateral or other collateral covered by the Security
Documents is or will become a fixture on real estate, unless a sufficient
fixture filing is in effect with respect thereto.
5.15 Rights to Payment. Each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral or other collateral covered by the Security Documents is
(or, in the case of all future Collateral or such other collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower's records pertaining thereto as being
obligated to pay such obligation.
ARTICLE VI
Affirmative Covenants of the Borrower
-------------------------------------
So long as the Note shall remain unpaid, the Credit Facility
or any Letter of Credit shall be outstanding, the Borrower will comply with the
following requirements, unless the Lender shall otherwise consent in writing:
6.1 Reporting Requirements. The Borrower will deliver, or
cause to be delivered, to the Lender each of the following, which shall be in
form and detail acceptable to the Lender:
(a) as soon as available, and in any event within 90
days after the end of each fiscal year of the Borrower, consolidated audited
financial statements of Royal Grip and Roxxi with the unqualified opinion of
independent certified public accountants selected by the Borrower and acceptable
to the Lender, which annual financial statements shall include the balance sheet
of the Borrower as at the end of such fiscal year and the related statements of
income, retained earnings and cash flows of the Borrower for the fiscal year
then ended, prepared, if the Lender so requests, on a consolidating and
consolidated basis to include any other Affiliates, all in reasonable detail and
prepared in accordance with generally accepted accounting principles applied on
a basis consistent with the accounting practices applied in the financial
statements referred to in Section 5.5 hereof, together with (i) a report signed
by such accountants stating that in making the investigations necessary for said
opinion they obtained no knowledge, except as specifically stated, of any
Default or Event of Default hereunder and all relevant facts in reasonable
detail to evidence, and the computations as to, whether or not the Borrower is
in compliance with the requirements set forth in Sections 6.12 through 6.14 and
Section 7.10 hereof; and (ii) a certificate of the Vice President of Finance or
any other officer of each of Royal Grip and Roxxi stating that such financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a basis consistent with the accounting practices reflected
in the annual financial statements referred to in Section 5.5 hereof and whether
or not such officer has knowledge of the occurrence of any Default or Event of
Default hereunder and, if so, stating in reasonable detail the facts with
respect thereto;
-26-
<PAGE>
(b) as soon as available and in any event within 20
days after the end of each month, a consolidated unaudited/internal balance
sheet and statements of income and retained earnings of Royal Grip and Roxxi as
at the end of and for such month and for the year to date period then ended,
prepared, if the Lender so requests, on a consolidating and consolidated basis
to include any other Affiliates, in reasonable detail and stating in comparative
form the figures for the corresponding date and periods in the previous year,
all prepared in accordance with generally accepted accounting principles applied
on a basis consistent with the accounting practices reflected in the financial
statements referred to in Section 5.5 hereof, subject to year-end audit
adjustments; and accompanied by a certificate of the Vice President of Finance
or any other officer of each of Royal Grip and Roxxi, substantially in the form
of Exhibit D hereto stating (i) that such financial statements have been
prepared in accordance with generally accepted accounting principles applied on
a basis consistent with the accounting practices reflected in the financial
statements referred to in Section 5.5 hereof, subject to year-end audit
adjustments, (ii) whether or not such officer has knowledge of the occurrence of
any Default or Event of Default hereunder not theretofore reported and remedied
and, if so, stating in reasonable detail the facts with respect thereto, and
(iii) all relevant facts in reasonable detail to evidence, and the computations
as to, whether or not the Borrower is in compliance with the requirements set
forth in Sections 6.12 through 6.14 and Section 7.10 hereof;
(c) within 15 days after the end of each month,
agings of the Borrower's accounts receivable and its accounts payable and an
inventory certification report as at the end of such month;
(d) at least 30 days before the beginning of each
fiscal year of the Borrower, the projected balance sheets and income statements
for each month of such year, each in reasonable detail, representing the good
faith projections of the Borrower and certified by the Borrower's Vice President
of Finance or any other officer as being the most accurate projections available
and identical to the projections used by the Borrower for internal planning
purposes, together with such supporting schedules and information as the Lender
may in its discretion require;
(e) immediately after the commencement thereof,
notice in writing of all litigation and of all proceedings before any
governmental or regulatory agency affecting the Borrower of the type described
in Section 5.6 hereof or which seek a monetary recovery against the Borrower in
excess of $50,000.00;
(f) as promptly as practicable (but in any event not
later than five business days) after an officer of the Borrower obtains
knowledge of the occurrence of any breach, default or event of default under any
Security Document or any event which constitutes a Default or Event of Default
hereunder, notice of such occurrence, together with a detailed statement by a
responsible officer of the Borrower of the steps being taken by the Borrower to
cure the effect of such breach, default or event;
(g) as soon as possible and in any event within 30
days after the Borrower knows or has reason to know that any Reportable Event
with respect to any Plan has occurred, the statement of the Vice President of
Finance or any other officer of the Borrower
-27-
<PAGE>
setting forth details as to such Reportable Event and the action which the
Borrower proposes to take with respect thereto, together with a copy of the
notice of such Reportable Event to the Pension Benefit Guaranty Corporation;
(h) as soon as possible, and in any event within 10
days after the Borrower fails to make any quarterly contribution required with
respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986,
as amended, the statement of the Vice President of Finance or any other officer
of the Borrower setting forth details as to such failure and the action which
the Borrower proposes to take with respect thereto, together with a copy of any
notice of such failure required to be provided to the Pension Benefit Guaranty
Corporation;
(i) promptly upon knowledge thereof, notice of (i)
any disputes or claims by customers of the Borrower in excess of $10,000.00;
(ii) any goods returned to or recovered by the Borrower valued in excess of
$10,000.00; and (iii) any change in the persons constituting the officers and
directors of the Borrower;
(j) promptly upon knowledge thereof, notice of any
loss of or material damage to any Collateral or other collateral covered by the
Security Documents or of any substantial adverse change in any Collateral or
such other collateral or the prospect of payment thereof;
(k) promptly upon their distribution, copies of all
financial statements, reports and proxy statements which the Borrower shall have
sent to its stockholders;
(l) promptly after the sending or filing thereof,
copies of all regular and periodic financial reports which the Borrower shall
file with the Securities and Exchange Commission or any national securities
exchange;
(m) promptly upon knowledge thereof, notice of the
violation by the Borrower of any law, rule or regulation, the non-compliance
with which could materially and adversely affect its business or its financial
condition; and
(n) from time to time, with reasonable promptness,
any and all receivables schedules, collection reports, deposit records,
equipment schedules, copies of invoices to account debtors, shipment documents
and delivery receipts for goods sold, and such other material, reports, records
or information as the Lender may request.
(o) on each Banking Day assignment of Receivables,
collections and deposit information of the Borrower.
6.2 Books and Records; Inspection and Examination. The
Borrower will keep accurate books of record and account for itself pertaining to
the Collateral and pertaining to the Borrower's business and financial condition
and such other matters as the Lender may from time to time request in which true
and complete entries will be made in accordance with generally accepted
accounting principles consistently applied and, upon request of the Lender, will
permit
-28-
<PAGE>
any officer, employee, attorney or accountant for the Lender to audit, review,
make extracts from or copy any and all corporate and financial books and records
of the Borrower at all times during ordinary business hours, to send and discuss
with account debtors and other obligors requests for verification of amounts
owed to the Borrower, and to discuss the affairs of the Borrower with any of its
directors, officers, employees or agents. The Borrower will permit the Lender,
or its employees, accountants, attorneys or agents, to examine and inspect any
Collateral, other collateral covered by the Security Documents or any other
property of the Borrower at any time during ordinary business hours.
6.3 Account Verification. The Borrower will at any time and
from time to time upon request of the Lender send requests for verification of
accounts or notices of assignment to account debtors and other obligors.
6.4 Compliance with Laws; Environmental Indemnity. The
Borrower will (a) comply with the requirements of applicable laws and
regulations, the non-compliance with which would materially and adversely affect
its business or its financial condition, (b) comply with all applicable
Environmental Laws and obtain any permits, licenses or similar approvals
required by any such Environmental Laws, and (c) use and keep the Collateral,
and will require that others use and keep the Collateral, only for lawful
purposes, without violation of any federal, state or local law, statute or
ordinance. Each Borrower will, jointly and severally, indemnify, defend and hold
the Lender harmless from and against any claims, loss or damage to which the
Lender may be subjected as a result of any past, present or future existence,
use, handling, storage, transportation or disposal of any hazardous waste or
substance or toxic substance by either Borrower or on property owned, leased or
controlled by either Borrower. This indemnification agreement shall survive the
termination of this Agreement and payment of the indebtedness hereunder.
6.5 Payment of Taxes and Other Claims. The Borrower will pay
or discharge, when due, (a) all taxes, assessments and governmental charges
levied or imposed upon it or upon its income or profits, upon any properties
belonging to it (including, without limitation, the Collateral) or upon or
against the creation, perfection or continuance of the Security Interests, prior
to the date on which penalties attach thereto, (b) all federal, state and local
taxes required to be withheld by it, and (c) all lawful claims for labor,
materials and supplies which, if unpaid, might by law become a lien or charge
upon any properties of the Borrower; provided, that the Borrower shall not be
required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and so long as the Collateral and Lender's lien thereon is not in
any manner impaired by any enforcement remedy available to the tax levying
entity during the period of such contest.
6.6 Maintenance of Properties.
(a) The Borrower will keep and maintain the
Collateral, the other collateral covered by the Security Documents and all of
its other properties necessary or useful in its business in good condition,
repair and working order (normal wear and tear excepted) and will from time to
time replace or repair any worn, defective or broken parts; provided, however,
that nothing in this Section 6.6 shall prevent the Borrower from discontinuing
the operation and
-29-
<PAGE>
maintenance of any of its properties if such discontinuance is, in the judgment
of the Lender, desirable in the conduct of the Borrower's business and not
disadvantageous in any material respect to the Lender.
(b) The Borrower will defend the Collateral against
all claims or demands of all persons (other than the Lender) claiming the
Collateral or any interest therein.
(c) The Borrower will keep all Collateral and other
collateral covered by the Security Documents free and clear of all security
interests, liens and encumbrances except the Security Interests and other
security interests permitted by Section 7.1 hereof.
6.7 Insurance. The Borrower will obtain and at all times
maintain insurance with insurers believed by the Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business and owning
similar properties in the same general areas in which the Borrower operates.
Without limiting the generality of the foregoing, the Borrower will at all times
keep all tangible Collateral insured against risks of fire (including so-called
extended coverage), theft, collision (for Collateral consisting of motor
vehicles) and such other risks and in such amounts as the Lender may reasonably
request, with any loss payable to the Lender to the extent of its interest, and
all policies of such insurance shall contain a lender's loss payable endorsement
for the benefit of the Lender. All policies of liability insurance required
hereunder shall name the Lender as an additional insured.
6.8 Preservation of Corporate Existence. Each Borrower will
preserve and maintain its corporate existence and all of its rights, privileges
and franchises necessary or desirable in the normal conduct of its business and
shall conduct its business in an orderly, efficient and regular manner.
6.9 Delivery of Instruments, etc. Upon request by the Lender,
the Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel papers constituting Collateral, duly endorsed or assigned
by the Borrower.
6.10 Collateral Accounts.
(a) Each Borrower agrees to deposit in its respective
Collateral Account or, at the Lender's option, to deliver to the Lender all
collections on Accounts, contract rights, chattel paper and other rights to
payment constituting Collateral (but not the proceeds of any loan to Borrower as
a borrower made by any party other than Lender and permitted under the terms of
this Agreement), and all other cash proceeds of Collateral, which the Borrower
may receive immediately upon receipt thereof, in the form received, except for
the Borrower's endorsement when deemed necessary. Until delivered to the Lender
or deposited in the Collateral Accounts, all proceeds or collections of
Collateral shall be held in trust by the Borrower for and as the property of the
Lender and shall not be commingled with any funds or property of the Borrower.
Amounts deposited in the Collateral Accounts shall not bear interest and shall
not be subject to withdrawal by the Borrower, except after full payment and
discharge of all Obligations. All
-30-
<PAGE>
such collections shall constitute proceeds of Collateral and shall not
constitute payment of any Obligation. Collected funds from the Collateral
Accounts shall be transferred to the Lender's general account, and the Lender
may deposit in its general account or in the Collateral Accounts any and all
collections received by it directly from the Borrower. The Lender may commingle
such funds with other property of the Lender or any other person. The Lender
from time to time at its discretion shall, after allowing (i) two Banking Days
after deposit in the Collateral Accounts and/or (ii) one Banking Day after
direct deposit in Lender's Account No. 00-28-995 at Norwest Bank Minnesota, NA,
and/or (iii) such later date as may be required for collection, apply such funds
to the payment of any and all Obligations, in any order or manner of application
satisfactory to the Lender. All items delivered to the Lender or deposited in
the Collateral Accounts shall be subject to final payment. If any such item is
returned uncollected, the Borrower will immediately pay the Lender, or, for
items deposited in the Collateral Accounts, the bank maintaining such account,
the amount of that item, or such bank at its discretion may charge any
uncollected item to the Borrower's commercial account or other account. The
Borrower shall be liable as an endorser on all items deposited in the Collateral
Accounts, whether or not in fact endorsed by the Borrower.
(b) If a Default or Default Period exists and upon
demand of the Lender, the Borrower shall establish one or more lockbox accounts
as directed by the Lender with such banks or depository institutions as shall be
satisfactory to the Lender and shall irrevocably direct all present and future
Account Debtors and other Persons obligated to make payments constituting
Collateral to make such payments directly to such lockbox account. All of the
Borrower's invoices, account statements and other written or oral communications
directing, instructing, demanding or requesting payment of any Account or any
other amount constituting Collateral shall conspicuously direct that all
payments be made to such lockbox and shall include such lockbox address or
addresses. All payments received in such lockbox accounts shall be processed to
the Collateral Accounts.
6.11 Performance by the Lender. If the Borrower at any time
fails to perform or observe any of the foregoing covenants contained in this
Article VI or elsewhere herein, and if such failure shall continue for a period
of ten calendar days after the Lender gives the Borrower written notice thereof
(or in the case of the agreements contained in Sections 6.5, 6.7 and 6.10
hereof, immediately upon the occurrence of such failure, without notice or lapse
of time), the Lender may, but need not, perform or observe such covenant on
behalf and in the name, place and stead of the Borrower (or, at the Lender's
option, in the Lender's name) and may, but need not, take any and all other
actions which the Lender may reasonably deem necessary to cure or correct such
failure (including, without limitation, the payment of taxes, the satisfaction
of security interests, liens or encumbrances, the performance of obligations
owed to account debtors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments); and the Borrower shall
thereupon pay to the Lender on demand the amount of all monies expended and all
costs and expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Lender in connection with or as a result of the performance or
observance of such agreements or the taking of such action by the Lender,
together with interest thereon from the date expended or incurred at the
Floating Rate or the Incentive Rate, if then applicable to the Credit Facility.
To facilitate the performance or observance by the Lender of
-31-
<PAGE>
such covenants of the Borrower, the Borrower hereby irrevocably appoints the
Lender, or the delegate of the Lender, acting alone, as the attorney in fact of
the Borrower (which appointment is coupled with an interest) with the right (but
not the duty) from time to time to create, prepare, complete, execute, deliver,
endorse or file in the name and on behalf of the Borrower any and all
instruments, documents, assignments, security agreements, financing statements,
applications for insurance and other agreements and writings required to be
obtained, executed, delivered or endorsed by the Borrower under this Section
6.11.
6.12 Debt Service Coverage Ratio. The Borrower agrees that it
shall, as of the last day of each fiscal quarter, on and after June 30, 1997,
maintain an average minimum debt service coverage ratio (based upon the period
set forth below) as follows:
Quarter Ending Debt Service Coverage Ratio
- -------------- ---------------------------
June 30, 1997 1.0 to 1 based upon the immediately
preceding five month period
December 31, 1997 1.25 to 1 based upon the immediately
preceding eleven month period
March 31, 1998 and on the last day of 1.25 to 1 based upon the immediately
each fiscal quarter thereafter preceding twelve month period
The debt service coverage ratio shall be calculated according
to the following formula:
<TABLE>
<S> <C>
Funds from Operations + Interest Expense - Unfinanced Portion of Capital Expenditures
-------------------------------------------------------------------------------------
Current Maturities Long-Term Debt (actually paid during the period) + Interest Expense
</TABLE>
6.13 Net Worth. The Borrower warrants that, as of December 31,
1996 Borrower has a minimum Net Worth of not less than $6,300,000.00. The
Borrower covenants that the minimum Net Worth as of the end of each future
fiscal quarter end shall be not less than the amounts set forth below as
measured from the immediately preceding fiscal quarter ending Net Worth.
Net Worth Increase
Quarter Ending (Decrease)
-------------- ----------------
March 31 ($300,000.00)
June 30 $400,000.00
September 30 $150,000.00
December 31 ($250,000.00)
Notwithstanding anything to the contrary, beginning with the fiscal year ending
December 31, 1997, and continuing each fiscal year thereafter, the Borrower's
minimum Net Worth as of the end of each fiscal year end shall increase by not
less than $300,000.00 over the Borrower's Net Worth as of the end of the
immediately preceding fiscal year end.
-32-
<PAGE>
6.14 Net Income. The Borrower covenants that beginning with
the fiscal quarter ending March 31, 1997, and continuing each fiscal quarter
thereafter, it shall achieve a Net Income of at least (or, in the event a Net
Loss is allowed for such fiscal quarter, a Net Loss of not more than) the amount
set forth below for each fiscal quarter of each fiscal year.
Quarter Ending Net Income (Loss)
-------------- -----------------
March 31 ($300,000.00)
June 30 $400,000.00
September 30 $150,000.00
December 31 ($250,000.00)
Notwithstanding anything to the contrary, beginning with April of 1997, and
continuing for each month thereafter, the Borrower shall not suffer a Net Loss
in excess of $100,000.00 in any one month. Notwithstanding anything to the
contrary, beginning with the fiscal year ending December 31, 1997, and
continuing each fiscal year thereafter, the Borrower shall achieve a Net Income
of not less than $300,000.00.
ARTICLE VII
Negative Covenants
------------------
So long as the Note shall remain unpaid, the Credit Facility
shall be outstanding or any Letter of Credit shall be outstanding, the Borrower
agrees that, without the prior written consent of the Lender:
7.1 Liens. The Borrower will not create, incur or suffer to
exist any mortgage, deed of trust, pledge, lien, security interest, assignment
or transfer upon or of any of its assets, now owned or hereafter acquired, to
secure any indebtedness; excluding, however, from the operation of the
foregoing:
(a) mortgages, deeds of trust, pledges, liens,
security interests and assignments in existence on the date hereof and listed in
Exhibit C hereto, securing indebtedness for borrowed money permitted under
Section 7.2(b) hereof;
(b) the Security Interests; and
(c) purchase money security interests relating to
Capital Expenditures (and which attach only to the assets acquired by such
Capital Expenditures) made after the date of this Agreement by the Borrower or
any Affiliate so long as the Borrower is in, and maintains, compliance with
every other provision of this Agreement.
7.2 Indebtedness. The Borrower will not incur, create, assume
or permit to exist any indebtedness or liability on account of deposits or
advances or any indebtedness for borrowed money, or any other indebtedness or
liability evidenced by notes, bonds, debentures or similar obligations, except:
-33-
<PAGE>
(a) indebtedness arising hereunder;
(b) indebtedness of the Borrower in existence on the
date hereof and listed in Exhibit C hereto; and
(c) indebtedness relating to liens permitted in
accordance with Section 7.1(c) hereof.
7.3 Guaranties. The Borrower will not assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except:
(a) the endorsement of negotiable instruments by the
Borrower for deposit or collection or similar transactions in the ordinary
course of business; and
(b) guaranties, endorsements and other direct or
contingent liabilities in connection with the obligations of other Persons in
existence on the date hereof and listed in Exhibit C hereto.
7.4 Investments and Subsidiaries. (a) The Borrower will not
purchase or hold beneficially any stock or other securities or evidences of
indebtedness of, make or permit to exist any loans or advances to, or make any
investment or acquire any interest whatsoever in, any other Person, including
specifically but without limitation any partnership or joint venture, except:
(i) investments in direct obligations of the
United States of America or any agency or instrumentality thereof whose
obligations constitute full faith and credit obligations of the United States of
America having a maturity of one year or less, commercial paper issued by U.S.
corporations rated "A-1" or "A-2" by Standard & Poors Corporation or "P-1" or
"P-2" by Moody's Investors Service or certificates of deposit or bankers'
acceptances having a maturity of one year or less issued by members of the
Federal Reserve System having deposits in excess of $100,000,000 (which
certificates of deposit or bankers' acceptances are fully insured by the Federal
Deposit Insurance Corporation);
(ii) travel advances or loans to officers
and employees of the Borrower not exceeding at any one time an aggregate of
$20,000.00; and
(iii) advances in the form of progress
payments, prepaid rent or security deposits.
(b) The Borrower will not create or permit to exist
any Subsidiary, other than any Subsidiary in existence on the date hereof and
listed in Exhibit B hereto.
7.5 Dividends. The Borrower will not declare or pay any
dividends (other than dividends payable solely in stock of the Borrower) on any
class of its stock or make any payment on account of the purchase, redemption or
other retirement of any shares of such stock
-34-
<PAGE>
or make any distribution in respect thereof, either directly or indirectly;
provided, however, that if the Borrower is an S Corporation within the meaning
of the Internal Revenue Code of 1986, as amended, or shall become such an S
Corporation with the Lender's consent under Section 7.16 hereof, and after first
providing such supporting documentation as the Lender may request, the Borrower
may pay dividends in an amount equal to the amount of state and federal income
tax which would be due by each shareholder with respect to income deemed to be
received by such shareholder from the Borrower as a result of the Borrower's
status as an S Corporation at the highest marginal income tax rate for federal
and state (for the state or states in which each shareholder is liable for
income taxes with respect to such income) income tax purposes, after taking into
account any deduction for state income taxes in calculating the federal income
tax liability.
7.6 Sale or Transfer of Assets; Suspension of Business
Operations. The Borrower will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of
its assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person other than the
sale of Inventory in the ordinary course of business and will not liquidate,
dissolve or suspend business operations. The Borrower will not in any manner
transfer any property without prior or present receipt of full and adequate
consideration.
7.7 Consolidation and Merger; Asset Acquisitions. The Borrower
will not consolidate with or merge into any Person, or permit any other Person
to merge into it, or acquire (in a transaction analogous in purpose or effect to
a consolidation or merger) all or substantially all the assets of any other
Person.
7.8 Sale and Leaseback. The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the Borrower
shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such property
or any part thereof or any other property which the Borrower intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.
7.9 Restrictions on Nature of Business. The Borrower will not
engage in any line of business materially different from that presently engaged
in by the Borrower and will not purchase, lease or otherwise acquire assets not
related to its business.
7.10 Capital Expenditures. The Borrower will not expend or
contract to make unfinanced Capital Expenditure greater than $800,000.00 in the
aggregate during any fiscal year for the lease, purchase or other acquisition of
any capital asset, or for the lease of any other asset, whether payable
currently or in the future.
7.11 Accounting. The Borrower will not adopt any material
change in accounting principles other than as required by generally accepted
accounting principles. The Borrower will not adopt, permit or consent to any
change in its fiscal year.
-35-
<PAGE>
7.12 Discounts, etc. The Borrower will not, after notice from
the Lender, grant any discount, credit or allowance to any customer of the
Borrower or accept any return of goods sold, or at any time (whether before
after notice from the Lender) modify, amend, subordinate, cancel or terminate
the obligation of any account debtor or other obligor of the Borrower.
7.13 Defined Benefit Pension Plans. The Borrower will not
adopt, create, assume or become a party to any defined benefit pension plan,
unless disclosed to the Lender pursuant to Section 5.10 hereof.
7.14 Other Defaults. The Borrower will not permit any breach,
default or event of default to occur under any note, loan agreement, indenture,
lease, mortgage, contract for deed, security agreement or other contractual
obligation binding upon the Borrower.
7.15 Place of Business; Name. The Borrower will not transfer
its chief executive office or principal place of business, or move, relocate,
close or sell any business location. The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interests. The Borrower will not change
its name.
7.16 Organizational Documents; S Corporation Status. The
Borrower will not amend its certificate of incorporation, articles of
incorporation or bylaws. The Borrower will not become an S Corporation within
the meaning of the Internal Revenue Code of 1986, as amended, or, if the
Borrower already is such an S Corporation, it shall not change or rescind its
status as an S Corporation.
7.17 Salaries. The Borrower will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation; or increase the salary, bonus, commissions, consultant fees or
other compensation of any director, officer or consultant, or any member of
their families, by more than 10% or as recommended by Borrower's Board of
Directors in any one year, either individually or for all such persons in the
aggregate, or pay any such increase from any source other than profits earned in
the year of payment.
7.18 Issuance of Stock/Loss of Voting Control. Except as
required in order for the Borrower to comply with its contractual obligations
contained in that certain Manufacturing Supply Agreement dated December 21, 1996
entered into by and between Royal Grip and Acushnet (the "Manufacturing
Agreement"), the Borrower will not issue or sell any stock of the Borrower. The
Borrower shall not permit or suffer to occur any transfer, assignment, pledge or
other disposition of any or all of the issued and outstanding stock of the
Borrower so as to materially change the voting control of the Borrower.
7.19 Payments to Affiliates. Royal Grip shall not, without the
express written consent of Lender, which consent may be granted or withheld in
Lender's sole discretion, make any transfer, conveyance, loan or payment of any
kind to Roxxi or any other Affiliates in excess of $500,000.00 per fiscal year.
Roxxi shall not, without the express written consent of Lender,
-36-
<PAGE>
which consent may be granted or withheld in Lender's sole discretion, make any
transfer, conveyance, loan or payment of any kind to any Affiliate other than
Royal Grip.
7.20 Management Control. The Borrower shall not permit or
suffer to occur any change in its current executive management structure.
ARTICLE VIII
Events of Default, Rights and Remedies
--------------------------------------
8.1 Events of Default. "Event of Default", wherever used
herein, means any one of the following events:
(a) Default in the payment of any interest on or
principal of the Note when it becomes due and payable; or
(b) Failure to pay when due any amount specified in
Section 2.5 hereof relating to the Borrower's Obligation of Reimbursement, or
failure to pay immediately when due or upon termination of the Credit Facility
any amounts required to be paid for deposit in the Special Account under Section
2.6 or 2.11 hereof; or
(c) Default in the payment of any fees, commissions,
costs or expenses required to be paid by the Borrower under this Agreement; or
(d) Default in the performance, or breach, of any
covenant or agreement of the Borrower contained in this Agreement other than a
covenant or agreement which is specifically dealt with in this Section 8.1 and
the continuance thereof for a period of 5 days after the actual knowledge
thereof by an executive officer of either Borrower or receipt of written notice
thereof from the Lender; or
(e) Either Royal Grip or Roxxi shall be or become
insolvent, or admit in writing its inability to pay its or his debts as they
mature, or make an assignment for the benefit of creditors; or either Royal Grip
or Roxxi shall apply for or consent to the appointment of any receiver, trustee,
or similar officer for it or for all or any substantial part of its property; or
such receiver, trustee or similar officer shall be appointed without the
application or consent of Royal Grip or Roxxi, as the case may be; or either
Royal Grip or Roxxi shall institute (by petition, application, answer, consent
or otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding relating to
it under the laws of any jurisdiction; or any such proceeding shall be
instituted (by petition, application or otherwise) against Royal Grip or Roxxi
and shall not be dismissed within 60 calendar days; or any judgment, writ,
warrant of attachment, garnishment or execution or similar process shall be
issued or levied against a substantial part of the property of Royal Grip or
Roxxi; or
-37-
<PAGE>
(f) A petition shall be filed by or against (which
when filed against shall not be dismissed within 60 calendar days) either Royal
Grip or Roxxi under the United States Bankruptcy Code naming Royal Grip or Roxxi
as debtor; or
(g) Any representation or warranty made by the
Borrower in this Agreement or by the Borrower (or any of its officers) in any
agreement, certificate, instrument or financial statement or other statement
contemplated by or made or delivered pursuant to or in connection with this
Agreement shall prove to have been incorrect in any material respect when deemed
to be effective; or
(h) The rendering against either Royal Grip or Roxxi
of a final judgment, decree or order for the payment of money in excess of
$50,000.00 and the continuance of such judgment, decree or order unsatisfied and
in effect for any period of 30 consecutive days without a stay of execution; or
(i) A default under any bond, debenture, note or
other evidence of indebtedness of either Borrower owed to any Person other than
the Lender, or under any indenture or other instrument under which any such
evidence of indebtedness has been issued or by which it is governed, or under
any lease of any of the Premises, and the expiration of the applicable period of
grace, if any, specified in such evidence of indebtedness, indenture, other
instrument or lease; or
(j) Any Reportable Event, which the Lender determines
in good faith might constitute grounds for the termination of any Plan or for
the appointment by the appropriate United States District Court of a trustee to
administer any Plan, shall have occurred and be continuing 30 days after written
notice to such effect shall have been given to the Borrower by the Lender; or a
trustee shall have been appointed by an appropriate United States District Court
to administer any Plan; or the Pension Benefit Guaranty Corporation shall have
instituted proceedings to terminate any Plan or to appoint a trustee to
administer any Plan; or the Borrower shall have filed for a distress termination
of any Plan under Title IV of ERISA; or the Borrower shall have failed to make
any quarterly contribution required with respect to any Plan under Section
412(m) of the Internal Revenue Code of 1986, as amended, which the Lender
determines in good faith may by itself, or in combination with any such failures
that the Lender may determine are likely to occur in the future, result in the
imposition of a lien on the assets of the Borrower in favor of the Plan; or
(k) An event of default shall occur under any
Security Document or under any other security agreement, mortgage, deed of
trust, assignment or other instrument or agreement securing any obligations of
the Borrower hereunder or under any note; or
(l) Either Borrower shall liquidate, dissolve,
terminate or suspend its business operations or otherwise fail to operate its
business in the ordinary course, or sell all or substantially all of its assets,
without the prior written consent of the Lender; or
(m) Either Borrower shall fail to pay, withhold,
collect or remit any tax or tax deficiency when assessed or due (other than any
tax deficiency which is being contested
-38-
<PAGE>
in good faith and by proper proceedings and for which it shall have set aside on
its books adequate reserves therefor) or notice of any state or federal tax
liens shall be filed or issued; or
(n) Default in the payment of any amount owed by
either Borrower to the Lender other than any indebtedness arising hereunder; or
(o) Any event of default shall occur (and not be
cured within the prescribed cure period) under the Manufacturing Agreement or
the Capital Lease Agreement; or
(p) Any breach, default or event of default by or
attributable to any Affiliate under any agreement between such Affiliate and the
Lender.
8.2 Rights and Remedies. Upon the occurrence of an Event of
Default or at any time thereafter during the resulting Default Period, the
Lender may exercise any or all of the following rights and remedies:
(a) The Lender may, by notice to the Borrower,
declare the Credit Facility to be terminated, whereupon the same shall forthwith
terminate;
(b) The Lender may, by notice to the Borrower,
declare to be forthwith due and payable the entire unpaid principal amount of
the Note then outstanding, all interest accrued and unpaid thereon, all amounts
payable under this Agreement and any other Obligations, whereupon the Note, all
such accrued interest and all such amounts and Obligations shall become and be
forthwith due and payable, without presentment, notice of dishonor, protest or
further notice of any kind, all of which are hereby expressly waived by the
Borrower;
(c) The Lender may, without notice to the Borrower
and without further action, apply any and all money owing by the Lender to the
Borrower to the payment of the Advances and the Term Loan, including interest
accrued thereon, and of all other sums then owing by the Borrower hereunder,
including, without limitation, the Obligation of Reimbursement;
(d) The Lender may make demand upon the Borrower and,
forthwith upon such demand, the Borrower will pay to the Lender in immediately
available funds for deposit in the Special Account pursuant to Sections 2.11 and
3.6 hereof an amount equal to the maximum aggregate amount available to be drawn
under all Letters of Credit then outstanding, assuming compliance with all
conditions for drawing thereunder;
(e) The Lender may exercise and enforce any and all
rights and remedies available upon default to a secured party under the UCC,
including, without limitation, the right to take possession of Collateral, or
any evidence thereof, proceeding without judicial process or by judicial process
(without a prior hearing or notice thereof, which the Borrower hereby expressly
waives) and the right to sell, lease or otherwise dispose of any or all of the
Collateral, and, in connection therewith, the Borrower will on demand assemble
the Collateral
-39-
<PAGE>
and make it available to the Lender at a place to be designated by the Lender
which is reasonably convenient to both parties;
(f) the Lender may exercise and enforce its rights
and remedies under the Loan Documents; and
(g) the Lender may exercise any other rights and
remedies available to it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in Section 8.1(f) hereof, the entire unpaid principal amount of the
Note and the Obligation of Reimbursement (whether contingent or funded), all
interest accrued and unpaid thereon, all other amounts payable under this
Agreement and any other Obligations shall be immediately due and payable
automatically without presentment, demand, protest or notice of any kind.
8.3 Certain Notices. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 9.3) at least ten calendar days prior
to the date of intended disposition or other action.
ARTICLE IX
Miscellaneous
-------------
9.1 No Waiver; Cumulative Remedies. No failure or delay on the
part of the Lender in exercising any right, power or remedy under the Loan
Documents shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy under the
Loan Documents. The remedies provided in the Loan Documents are cumulative and
not exclusive of any remedies provided by law.
9.2 Amendments, Etc. No amendment, modification, termination
or waiver of any provision of any Loan Document or consent to any departure by
the Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.
9.3 Addresses for Notices, Etc. Except as otherwise expressly
provided herein, all notices, requests, demands and other communications
provided for under the Loan Documents shall be in writing and shall be (a)
personally delivered, (b) sent by first class United States mail, (c) sent by
overnight courier of national reputation, or (d) transmitted by telecopy,
-40-
<PAGE>
in each case addressed to the party to whom notice is being given at its address
as set forth below and, if telecopied, transmitted to that party at its
telecopier number set forth below:
If to Royal Grip or Roxxi:
Royal Grip, Inc.
444 West Geneva Drive
Tempe, Arizona 85282
Telecopier: (602) 829-9100
Attention: Tom Schneider
If to the Lender:
Norwest Business Credit, Inc.
Norwest Tower, Mail Station 9025
3300 North Central Avenue
Phoenix, Arizona 85012-2501
Telecopier: (602) 263-6215
Attention: Pete Lowney
or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article II hereof shall not
be effective until received by the Lender.
9.4 Financing Statement. A carbon, photographic or other
reproduction of this Agreement or of any financing statements signed by the
Borrower is sufficient as a financing statement and may be filed as a financing
statement in any state to perfect the security interests granted hereby. For
this purpose, the following information is set forth:
Name and address of Debtors:
Royal Grip, Inc.
444 West Geneva Drive
Tempe, Arizona 85282
Federal Tax Identification No. 86-0615648
Roxxi, Inc.
2621 SE 15th Street
Oklahoma City, Oklahoma 73129
Federal Tax Identification No. 86-0801779
-41-
<PAGE>
Name and address of Secured Party:
Norwest Business Credit, Inc.
Norwest Tower, Mail Station 9025
3300 North Central Avenue
Phoenix, Arizona 85012-2501
Telecopier: (602) 263-6215
Attention: Pete Lowney
9.5 Further Documents. The Borrower will from time to time
execute and deliver or endorse any and all instruments, documents, conveyances,
assignments, security agreements, financing statements and other agreements and
writings that the Lender may reasonably request in order to secure, protect,
perfect or enforce the Security Interests or the rights of the Lender under this
Agreement (but any failure to request or assure that the Borrower executes,
delivers or endorses any such item shall not affect or impair the validity,
sufficiency or enforceability of this Agreement and the Security Interests,
regardless of whether any such item was or was not executed, delivered or
endorsed in a similar context or on a prior occasion).
9.6 Collateral. This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender's duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third person, exercises reasonable care in
the selection of the bailee or other third person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender shall
not be obligated to preserve any rights the Borrower may have against prior
parties, to realize on the Collateral at all or in any particular manner or
order or to apply any cash proceeds of the Collateral in any particular order of
application.
9.7 Costs and Expenses. The Borrower agrees to pay on demand
all costs and expenses, including (without limitation) reasonable attorneys'
fees, incurred by the Lender in connection with the Obligations, this Agreement,
the Loan Documents, any Letters of Credit, and any other document or agreement
related hereto or thereto, and the transactions contemplated hereby, including
without limitation all such costs, expenses and fees incurred in connection with
the negotiation, preparation, execution, amendment, administration, performance,
collection and enforcement of the Obligations and all such documents and
agreements and the creation, perfection, protection, satisfaction, foreclosure
or enforcement of the Security Interests.
9.8 Indemnity. In addition to the payment of expenses pursuant
to Section 9.7 hereof and the environmental indemnity pursuant to Section 6.4
hereof, Royal Grip and Roxxi, jointly and severally agree to indemnify, defend
and hold harmless the Lender, and any of its participants, parent corporations,
subsidiary corporations, affiliated corporations, successor corporations, and
all present and future officers, directors, employees and agents of the
foregoing (the "Indemnitees"), from and against (i) any and all transfer taxes,
documentary taxes, assessments or charges made by any governmental authority by
reason of the execution
-42-
<PAGE>
and delivery of this Agreement and the other Loan Documents or the making of the
Advances, Term Loan or issuance of any Letter of Credit, and (ii) any and all
liabilities, losses, damages, penalties, judgments, suits, claims, costs and
expenses of any kind or nature whatsoever (including, without limitation, the
reasonable fees and disbursements of counsel) in connection with any
investigative, administrative or judicial proceedings, whether or not such
Indemnitee shall be designated a party thereto, which may be imposed on,
incurred by or asserted against such Indemnitee, in any manner relating to or
arising out of or in connection with the making of the Advances, Term Loan, or
the issuance of any Letter of Credit, this Agreement and all other Loan
Documents or the use or intended use of the proceeds of the Advances or any
Letter of Credit (the "Indemnified Liabilities"). If any investigative, judicial
or administrative proceeding arising from any of the foregoing is brought
against any Indemnitee, upon request of such Indemnitee, Royal Grip and Roxxi,
or counsel designated by either one and satisfactory to the Indemnitee, will
resist and defend such action, suit or proceeding to the extent and in the
manner directed by the Indemnitee, at the Borrower's sole cost and expense. Each
Indemnitee will use its best efforts to cooperate in the defense of any such
action, suit or proceeding. If the foregoing undertaking to indemnify, defend
and hold harmless may be held to be unenforceable because it violates any law or
public policy, the Borrower shall nevertheless make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law. The obligation of the Borrower under this
Section 9.8 shall survive the termination of this Agreement and the discharge of
the Borrower's other Obligations.
9.9 Participants. The Lender and its participants, if any, are
not partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its participants.
All rights and powers specifically conferred upon the Lender may be transferred
or delegated to any of the participants, successors or assigns of the Lender.
9.10 Execution in Counterparts. This Agreement and other Loan
Documents may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same instrument.
9.11 Binding Effect; Assignment; Complete Agreement; Sharing
of Information. The Loan Documents shall be binding upon and inure to the
benefit of the Borrower and the Lender and their respective successors and
assigns, except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the prior written consent of the
Lender. This Agreement, together with the Loan Documents, comprises the complete
and integrated agreement of the parties on the subject matter hereof and
supersedes all prior agreements, written or oral, on the subject matter hereof.
Without limitation of the Lender's right to share information regarding the
Borrower and its Affiliates with Lender's participants, accountants, lawyers and
other advisors, the Lender may share at any time with Norwest Corporation, and
all direct and indirect subsidiaries of Norwest Corporation, any and all
information the Lender may have in its possession regarding the Borrower and its
Affiliates, and the Borrower waives any right of confidentiality it may have
with respect to such sharing of such information.
-43-
<PAGE>
9.12 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial.
The Loan Documents shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of Arizona. Each party
consents to the personal jurisdiction of the state and federal courts located in
the State of Arizona in connection with any controversy related to this
Agreement, waives any argument that venue in any such forum is not convenient
and agrees that any litigation initiated by any of them in connection with this
Agreement shall be venued in either the Superior Court of Maricopa County,
Arizona, or the United States District Court, District of Arizona. The parties
waive any right to trial by jury in any action or proceeding based on or
pertaining to this Agreement.
9.13 Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
9.14 Headings. Article and Section headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
REMAINDER OF PAGE INTENTIONALLY BLANK; SIGNATURE PAGE FOLLOWS
-44-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized
as of the date first above written.
ROYAL GRIP, INC., a Nevada corporation
By /s/ Tom Schneider
----------------------------------
Its Secretary
------------------------------
ROXXI, INC., a Nevada corporation
By /s/ Tom Schneider
----------------------------------
Its Secretary
------------------------------
NORWEST BUSINESS CREDIT, INC., a
Minnesota corporation
By /s/ Pete Lowney
----------------------------------
Its Vice President
------------------------------
-45-
<PAGE>
Exhibit A to Credit and
Security Agreement
REVOLVING AND TERM NOTE
$2,450,000.00 Phoenix, Arizona
_________, 1997
For value received, the undersigned, ROYAL GRIP, INC., a
Nevada corporation and ROXXI, INC., a Nevada corporation (collectively, the
"Borrower"), hereby jointly and severally promise to pay on January 31, 2000 to
the order of Norwest Business Credit, Inc., a Minnesota corporation (the
"Lender"), at its office in Phoenix, Arizona, or at any other place designated
at any time by the holder hereof, in lawful money of the United States of
America and in immediately available funds, the principal sum of TWO MILLION
FOUR HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($2,450,000.00) or, if less, the
aggregate unpaid principal amount of all Advances and the Term Loan made by the
Lender to the Borrower under the Credit Agreement (defined below) together with
interest on the principal amount hereunder remaining unpaid from time to time,
computed on the basis of the actual number of days elapsed and a 360-day year,
from the date hereof until this Note is fully paid at the rate from time to time
in effect under the Credit and Security Agreement of even date herewith (the
"Credit Agreement") by and between the Lender and the Borrower. The principal
hereof and interest accruing thereon shall be due and payable as provided in the
Credit Agreement. This Note may be prepaid only in accordance with the Credit
Agreement.
This Note is issued pursuant, and is subject, to the Credit
Agreement, which provides, among other things, for acceleration hereof. This
Note is the Note referred to in the Credit Agreement.
This Note is secured, among other things, pursuant to the
Credit Agreement and the Security Documents as therein defined, and may now or
hereafter be secured by one or more other security agreements, mortgages, deeds
of trust, assignments or other instruments or agreements.
Both entities constituting the Borrower hereby, jointly and
severally, agree to pay all costs of collection, including attorneys' fees and
legal expenses in the event this Note is not paid when due, whether or not legal
proceedings are commenced.
The Borrower agrees that the interest rate contracted for
includes the interest rate set forth herein plus any other charges or fees set
forth herein and costs and expenses incident to this transaction paid by the
Borrower to the extent the same are deemed interest under applicable law.
A-1
<PAGE>
Presentment or other demand for payment, notice of dishonor
and protest are expressly waived.
ROYAL GRIP, INC., a Nevada corporation
By __________________________________
Its ________________________________
ROXXI, INC., a Nevada corporation
By __________________________________
Its ________________________________
A-2
<PAGE>
Exhibit B to Credit and
Security Agreement
Names
-----
None
Chief Executive Office/Principal Place of Business
--------------------------------------------------
Royal Grip: 444 West Geneva Drive, Tempe, AZ 85282
Roxxi: 2621 SE 15th Street, Oklahoma City, OK 73129
Other Inventory and Equipment Locations
---------------------------------------
ACUSHNET LOCATION
744 Belleville Avenue
New Bedford, Massachusetts 02742-6912
Subsidiaries
------------
Roxxi is a subsidiary of Royal Grip
B-1
<PAGE>
Exhibit C to Credit and
Security Agreement
Permitted Liens, Indebtedness and Guaranties
--------------------------------------------
Liens
-----
NONE
Indebtedness
------------
$6,000,000.00 owed by Roxxi to Royal Grip
Guaranties
----------
NONE
C-1
<PAGE>
Exhibit D to Credit and
Security Agreement
Compliance Certificate
----------------------
To: ______________________
Norwest Business Credit, Inc.
Date: ____________________
Subject: ______________________________
Financial Statements
In accordance with our Credit and Security Agreement dated as
of ____________________ (the "Credit Agreement"), attached are the financial
statements of Royal Grip, Inc. and/or Roxxi, Inc., as applicable (the
"Borrower") and the year-to-date period then ended (the "Current Financials").
All terms in this certificate have the meanings given in the Credit Agreement.
I certify that the Current Financials have been prepared in
accordance with GAAP, subject to year-end audit adjustments, and fairly present
the financial condition of the Borrower as of the date thereof.
Events of Default. (Check one):
___ The undersigned does not have knowledge of the
occurrence of a Default or Event of Default under the Credit
Agreement.
___ The undersigned has knowledge of the occurrence
of a Default or Event of Default under the Credit Agreement
and attached hereto is a statement of the facts with respect
to thereto.
Financial Covenants. I further hereby certify as follows:
___ The Reporting Date does not correspond to the end
of the Borrower's fiscal quarters, hence I am completing only
paragraphs ___ below.
___ The Reporting Date corresponds to the end of one
of the Borrower's fiscal quarters, hence I am completing all
paragraphs below.
1. Minimum Debt Service Coverage Ratio. Pursuant to
Section 6.12 of the Credit Agreement, for the applicable
period ending on the Reporting Date, the Borrower's Debt
Service Coverage Ratio was ___ to 1.00, which
D-1
<PAGE>
____ satisfies ____ does not satisfy the requirement that such
ratio be no less than ____ to 1.00.
2. Minimum Net Worth. Pursuant to Section 6.13 of the
Credit Agreement, as of the Reporting Date, the Borrower's
Book Net Worth was $_______________, which ____ satisfies ____
does not satisfy the requirement that such amounts be not less
than $_______________ on the Reporting Date.
3. Minimum Net Income. Pursuant to Section 6.14 of
the Credit Agreement, as of the Reporting Date, the Borrower's
Net Income for the applicable period was $___________, which
___ satisfies ___ does not satisfy the requirement that such
amounts be not less than $______ on the Reporting Date.
4. Capital Expenditures. Pursuant to Section 7.10 of
the Credit Agreement, for the year-to-date period ending on
the Reporting Date, the Borrower has expended or contracted to
expend during the fiscal year ending December 31, 199_, for
Capital Expenditures, $__________ in the aggregate which ____
satisfies ____ does not satisfy the requirement that such
expenditures not exceed $800,000.00 in the aggregate during
the fiscal year ended December 31, 199_, and each fiscal year
thereafter.
5. Salaries. As of the Reporting Date, the Borrower
____ is ____ is not in compliance with Section 7.17 of the
Credit Agreement concerning salary increases.
Officers Percentage Increase
-------- -------------------
--------------------------- -------------------------------
--------------------------- -------------------------------
--------------------------- -------------------------------
(To be completed within 30 days of any officer salary
increase)
6. Payments to Affiliates. Pursuant to Section 7.19
of the Credit Agreement, for the year-to-date period ending on
the Reporting Date, Royal Grip has in the aggregate made
transfers, conveyances, loans and payments to Affiliates in
the amount of $_________ which ____ satisfies ____ does not
satisfy the requirement that such amount not exceed
$500,000.00 in the aggregate during the fiscal year ended
December 31, 199__, and each fiscal year thereafter, and Roxxi
has in the aggregate made transfers, conveyances, loans and
payments to Affiliates other than Royal Grip in the amount of
$_________ which ____ satisfies ____ does not satisfy the
requirement that no such transfers be made.
D-2
<PAGE>
Attached hereto are all relevant facts in reasonable detail to
evidence, and the computations of the financial covenants referred to above.
These computations were made in accordance with GAAP.
ROYAL GRIP, INC., a Nevada corporation
By __________________________________
Its ________________________________
ROXXI, INC., a Nevada corporation
By __________________________________
Its ________________________________
D-3
<PAGE>
Exhibit E to Credit and Security
Agreement
Premises
--------
The Premises referred to in the Credit and Security Agreement
are legally described as follows:
E-1
FIRST AMENDMENT TO CREDIT AGREEMENT
This Amendment is made as of the 11th day of April, 1997 by
and between ROYAL GRIP, INC., a Nevada corporation ("Royal Grip") and ROXXI,
INC., a Nevada corporation ("Roxxi") (collectively, the "Borrower"), and NORWEST
BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender").
Recitals
The Borrower and the Lender have entered into the Credit and
Security Agreement dated as of February 10, 1997 (the "Credit Agreement").
The Lender has agreed to make certain loan advances to the
Borrower pursuant to the terms and conditions set forth in the Credit Agreement.
The loan advances under the Credit Agreement are evidenced by
the Borrower's Revolving and Term Note dated as of February 10, 1997, in the
maximum principal amount of $2,450,000.00 and payable to the order of the Lender
(the "Note").
All indebtedness of the Borrower to the Lender is secured
pursuant to the terms of the Credit Agreement and all other Security Documents
as defined therein (collectively, the "Security Documents").
The Borrower has requested that certain amendments be made to
the Credit Agreement, which the Lender is willing to make pursuant to the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements herein contained, it is agreed as follows:
1. Terms used in this Amendment which are defined in the
Credit Agreement shall have the same meanings as defined therein, unless
otherwise defined herein.
2. Prior to the date of this Amendment, the Borrower has (i)
failed to submit audited fiscal year-end financial statements within 90 days of
the fiscal year-ending 1996 as required by Section 6.1(a) of the Credit
Agreement, (ii) failed to maintain the minimum debt service coverage ratio
required by Section 6.12 of the Credit Agreement, (iii) failed to maintain the
minimum Net Worth required by Section 6.13 of the Credit Agreement, and (iv)
failed to comply with the Net Income (Loss) requirements of Section 6.14 of the
Credit Agreement (collectively the "Current Defaults"). Upon satisfaction by
Borrower of all of the terms and conditions set forth in this Amendment, the
Lender, although under no obligation to do so, shall waive the Current Defaults.
Nothing herein shall be construed as a waiver by Lender of any existing default
or Default Period under the terms of the Credit Agreement other than the Current
Defaults. Nothing herein shall be construed as obligating Lender to waive any
future defaults or Default Period under the Credit Agreement including any
future defaults or Default
<PAGE>
Period under Sections 6.1, 6.12, 6.13 and 6.14 of the Credit Agreement. Upon the
satisfaction of all of the terms and conditions set forth in this Amendment, the
Default Period arising as a result of the Current Defaults shall be deemed to
have ceased.
3. The Credit Agreement is hereby amended as follows:
(a) The definition of "Default Rate" is hereby
deleted in its entirety and replaced as follows:
"Default Rate" means at any time three percent (3%)
over the Floating Rate, the Incentive Rate and/or the
Increased Floating Rate, as applicable, which Default Rate
shall change when and as the Floating Rate, the Incentive Rate
and the Increased Floating Rate change.
(b) The definition of "Floating Rate" is hereby
deleted in its entirety and replaced as follows:
"Floating Rate" means, effective April 1, 1997, an
annual rate equal to the sum of the Base Rate plus three
percent (3%), which Floating Rate shall change when and as the
Base Rate changes.
(c) The definition of "Incentive Rate" is hereby
deleted in its entirety and replaced as follows:
"Incentive Rate" means an annual rate equal to the
sum of the Base Rate, plus two percent (2%), which Incentive
Rate shall change when and as the Base Rate changes.
(d) There is hereby added to the Credit Agreement the
"Increased Floating Rate" as a new defined term. The definition of the Increased
Floating Rate shall be as follows:
"Increased Floating Rate" means an annual rate equal
to the sum of the Base Rate, plus four percent (4%), which
Increased Floating Rate shall change when and as the Base Rate
changes.
(e) Section 2.9(a) of the Credit Agreement is hereby
deleted in its entirety and replaced as follows:
The principal of the Advances and the Term Loan
outstanding from time to time during any month shall bear
interest (computed on the basis of actual days elapsed in a
360-day year) at the Floating Rate; provided, however, if
there is not a then existing Event of Default or Default
Period, then from the first day
-2-
<PAGE>
of the first month following the receipt by the Lender of the
fiscal year end audited financial statements of the Borrower
complying with the provisions of Section 6.1(a) for the fiscal
year ending December 31, 1997, the principal of the Advances
and the Term Loan outstanding from time to time shall bear
interest at the Incentive Rate, but only if such financial
statements show a Net Loss of $400,000.00 or less; and
provided, further, however, in the event such financial
statements show a Net Loss in excess of $750,000.00, then
effective January 1, 1998, the principal of the Advances and
the Term Loan outstanding from time to time shall bear
interest at the Increased Floating Rate; and provided,
further, however, that from the first day of any month during
which any Default Period or Event of Default occurs or exists
at any time, in the Lender's discretion and without waiving
any of its other rights and remedies, the principal of the
Advances and the Term Loan outstanding from time to time shall
bear interest at the Default Rate during the entire Default
Period; and provided, further, however, that in any event no
rate change shall be put into effect which would result in a
rate greater than the highest rate permitted by law. Interest
accruing on the principal balance of the Advances and the Term
Loan outstanding from time to time shall be payable on the
first day of each succeeding month and on the Termination Date
or earlier demand or prepayment in full. The Borrower agrees
that the interest rate contracted for includes the interest
rate set forth herein plus any other charges or fees set forth
herein and costs and expenses incident to this transaction
paid by the Borrower to the extent same are deemed interest
under applicable law.
(f) Section 6.1(a) of the Credit Agreement is hereby
modified to provide that (i) Borrower must deliver its audited financial
statement for the fiscal year ended December 31, 1996 on or before April 21,
1997, and (ii) such audited financial statements may contain a going concern
qualification based solely upon Borrower's ability to obtain adequate financing
and funds in order to meet future obligations. These modifications apply only to
the delivery of Borrower's audited financial statements for the fiscal year
ended December 31, 1996. For all future years, Section 6.1(a) remains in full
force and effect, unmodified in any way.
(g) Section 6.12 of the Credit Agreement is hereby
deleted in its entirety and replaced as follows:
Section 6.12 Debt Service Coverage Ratio. The
Borrower agrees that it shall, as of the last day of each
fiscal quarter, on and after March 31, 1998, maintain an
average minimum debt service coverage ratio (based upon the
period set forth below) as follows:
Quarter Ending Debt Service Coverage
- -------------- ---------------------
Ratio
-----
March 31, 1998 1.0 to 1 based upon the
immediately preceding
three month period
June 30, 1998 1.25 to 1 based upon the
immediately preceding six
month period
September 30, 1998 1.25 to 1 based upon the
immediately preceding
nine month period
December 31, 1998 and on the 1.25 to 1 based upon the
last day of each fiscal quarter immediately preceding
thereafter twelve month period
The debt service coverage ratio shall be calculated
according to the following formula:
Funds from Operations + Interest Expense - Unfinanced Portion of
----------------------------------------------------------------
Capital Expenditures
--------------------
Current Maturities Long-Term Debt (actually paid during the period) +
Interest Expense
(h) Section 6.13 of the Credit Agreement is hereby
deleted in its entirety and replaced as follows:
Section 6.13 Net Worth. The Borrower warrants that,
as of December 31, 1996 Borrower had a minimum Net Worth of
not less than $6,300,000.00, less a dollar for dollar
reduction for amounts associated exclusively with the write
off of Roxxi acquisition goodwill in Borrower's 1996 fiscal
year.
The Borrower covenants that its minimum Net Worth as
of the end of each fiscal quarter, or month, as applicable, in
the 1997 fiscal year shall decrease by not more than the
amounts set forth below as measured from the Borrower's 1996
fiscal year end Net Worth.
Cumulative Net Worth
Quarter/Month Ending Increase (Decrease)
-------------------- -------------------
March 31, 1997 ($1,000,000.00)
June 30, 1997 ($1,600,000.00)
July 31, 1997 ($1,600,000.00)
August 31, 1997 ($1,600,000.00)
September 30, 1997 ($1,600,000.00)
October 31, 1997 ($1,600,000.00)
-3-
<PAGE>
November 30, 1997 ($1,600,000.00)
December 31, 1997 ($1,600,000.00)
The Borrower covenants that the minimum Net Worth as
of the end of each future fiscal quarter end, beginning with
the fiscal quarter ending March 31, 1998, shall increase by
not less than (or, in the event a decrease is allowed for such
fiscal quarter, decrease by not more than) the amounts set
forth below as measured from the immediately preceding fiscal
quarter ending Net Worth.
Net Worth Increase
Quarter Ending (Decrease)
-------------- ------------------
March 31 ($300,000.00)
June 30 $400,000.00
September 30 $150,000.00
December 31 ($250,000.00)
Notwithstanding anything to the contrary, beginning
with the fiscal year ending December 31, 1998, and continuing
each fiscal year thereafter, the Borrower's minimum Net Worth
as of the end of each fiscal year end shall increase by not
less than $300,000.00 over the Borrower's Net Worth as of the
end of the immediately preceding fiscal year end.
(i) Section 6.14 of the Credit Agreement is hereby
deleted in its entirety and replaced as follows:
6.14 Net Income. The Borrower covenants that
beginning with the fiscal quarter ending March 31, 1997, and
continuing each fiscal quarter, or month, as applicable, in
the 1997 fiscal year thereafter it shall achieve a cumulative
1997 fiscal year Net Loss of not more than the amounts set
forth below:
Quarter Ending Cumulative Net Loss
-------------- -------------------
March 31, 1997 ($1,000,000.00)
June 30, 1997 ($1,600,000.00)
July 31, 1997 ($1,600,000.00)
August 31, 1997 ($1,600,000.00)
September 30, 1997 ($1,600,000.00)
October 31, 1997 ($1,600,000.00)
November 30, 1997 ($1,600,000.00)
December 31, 1997 ($1,600,000.00)
The Borrower covenants that beginning with the fiscal
quarter ending March 31, 1998, and continuing each fiscal
quarter
-4-
<PAGE>
thereafter, it shall achieve a Net Income of at least (or, in
the event a Net Loss is allowed for such fiscal quarter, a Net
Loss of not more than) the amount set forth below for each
fiscal quarter of each fiscal year.
Quarter Ending Net Income (Loss)
-------------- -----------------
March 31 ($300,000.00)
June 30 $400,000.00
September 30 $150,000.00
December 31 ($250,000.00)
Except as specifically provided above, prior to March
of 1998 there shall be no limitation as to the amount of a Net
Loss the Borrower shall be allowed to sustain in any one
month. Notwithstanding anything to the contrary, beginning
with March of 1998, and continuing for each month thereafter,
the Borrower shall not suffer a Net Loss in excess of
$100,000.00 in any one month. Notwithstanding anything to the
contrary, beginning with the fiscal year ending December 31,
1998, and continuing each fiscal year thereafter, the Borrower
shall achieve a Net Income of not less than $300,000.00.
(j) Section 7.10 of the Credit Agreement is hereby
deleted in its entirety and replaced as follows:
7.10 Capital Expenditures. The Borrower will not
expend or contract to make unfinanced Capital Expenditure
greater than (i) $250,000.00 in the aggregate during the 1997
fiscal year, or (ii) $800,000.00 in the aggregate during any
fiscal year thereafter for the lease, purchase or other
acquisition of any capital asset, or for the lease of any
other asset, whether payable currently or in the future.
4. Except as specifically amended by this Amendment, all of
the terms and conditions of the Credit Agreement shall remain in full force and
effect and shall apply to any Advance thereunder.
5. The Borrower agrees to pay the Lender as of the date
hereof a fully earned, non-refundable fee in the amount of $20,000.00 in
consideration of the execution by the Lender of this Amendment.
6. This Amendment shall be effective upon receipt by the
Lender of an executed original hereof, together with each of the following, each
in substance and form acceptable to the Lender in its sole discretion:
-5-
<PAGE>
(a) Certificate of the Secretary of the Borrower
certifying as to (i) the resolutions of the board of directors of the Borrower
approving the execution and delivery of this Amendment, (ii) the fact that the
Articles of Incorporation and Bylaws of the Borrower, which were certified and
delivered to the Lender in connection with the execution and delivery of the
Credit Agreement continue in full force and effect and have not been amended or
otherwise modified except as set forth in the Certificate to be delivered, and
(iii) certifying that the officers and agents of the Borrower who have been
certified to the Lender as being authorized to sign and to act on behalf of the
Borrower continue to be so authorized.
7. The Borrower hereby represents and warrants to the Lender
as follows:
(a) The Borrower has all requisite power and
authority to execute this Amendment and to perform all of its obligations
hereunder, and this Amendment has been duly executed and delivered by the
Borrower and constitutes the legal, valid and binding obligation of the
Borrower, enforceable in accordance with its terms.
(b) The execution, delivery and performance by the
Borrower of this Amendment have been duly authorized by all necessary corporate
action and do not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, (ii) violate any provision of any law, rule or regulation
or of any order, writ, injunction or decree presently in effect, having
applicability to the Borrower, or the articles of incorporation or by-laws of
the Borrower, or (iii) result in a breach of or constitute a default under any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which the Borrower is a party or by which it or its properties may
be bound or affected.
(c) All of the representations and warranties
contained in Article V of the Credit Agreement are correct on and as of the date
hereof as though made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date.
8. All references in the Credit Agreement to "this Agreement"
shall be deemed to refer to the Credit Agreement as amended hereby; and any and
all references in the Security Documents to the Credit Agreement shall be deemed
to refer to the Credit Agreement as amended hereby.
9. From the date of this Amendment forward, Exhibit D of the
Credit Agreement shall be amended to comply with the revisions to the Credit
Agreement contained herein.
10. Except as specifically set forth in Section 2 above, the
execution of this Amendment and acceptance of any documents related hereto shall
not be deemed to be a waiver of any Default, Event of Default or Default Period
under the Credit Agreement or breach, default or event of default under any
Security Document or other document held by the Lender, whether or not known to
the Lender and whether or not existing on the date of this Amendment.
-6-
<PAGE>
11. The Borrower hereby absolutely and unconditionally
releases and forever discharges the Lender, and any and all participants, parent
corporations, subsidiary corporations, affiliated corporations, insurers,
indemnitors, successors and assigns thereof, together with all of the present
and former directors, officers, agents and employees of any of the foregoing,
from any and all claims, demands or causes of action of any kind, nature or
description, whether arising in law or equity or upon contract or tort or under
any state or federal law or otherwise, which the Borrower has had, now has or
has made claim to have against any such person for or by reason of any act,
omission, matter, cause or thing whatsoever arising from the beginning of time
to and including the date of this Amendment, whether such claims, demands and
causes of action are matured or unmatured or known or unknown.
12. The Borrower hereby reaffirms its agreement under the
Credit Agreement to pay or reimburse the Lender on demand for all costs and
expenses incurred by the Lender in connection with the Credit Agreement, the
Security Documents and all other documents contemplated thereby, including
without limitation all reasonable fees and disbursements of legal counsel.
Without limiting the generality of the foregoing, the Borrower specifically
agrees to pay all fees and disbursements of counsel to the Lender for the
services performed by such counsel in connection with the preparation of this
Amendment and the documents and instruments incidental hereto. The Borrower
hereby agrees that the Lender may, at any time or from time to time in its sole
discretion and without further authorization by the Borrower, make a loan to the
Borrower under the Credit Agreement, or apply the proceeds of any loan, for the
purpose of paying any such fees, disbursements, costs and expenses and the fee
required under paragraph 5 hereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed as of the day and year first above written.
ROYAL GRIP, INC., a Nevada corporation
By /s/ Thomas A. Schneider
---------------------------------
Its Secretary
----------------------------
ROXXI, INC., a Nevada corporation
By /s/ Thomas A. Schneider
---------------------------------
Its Secretary
----------------------------
-7-
<PAGE>
NORWEST BUSINESS CREDIT, INC., a
Minnesota corporation
By /s/ Scott Schryver
---------------------------------
Its Vice-President
----------------------------
-8-
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-99944) pertaining to the 401(k) Savings Plan, the Registration
Statement (Form S-8 No. 33-69212) pertaining to the Non-Employee Directors'
Stock Option Plan, and the Registration Statements (Form S-8 No. 33-69222 and
Form S-8 No. 33-81742) pertaining to the 1993 Stock Option Plan of our report
dated February 14, 1997, except as to Notes 12 and 17 as to which the date is
April 11, 1997, with respect to the consolidated financial statements and
schedule of Royal Grip, Inc. included in the Annual Report (Form 10-K) for the
year ended December 31, 1996.
/s/ Ernst & Young LLP
Phoenix, Arizona
April 14, 1997
INDEPENDENT AUDITORS' REPORT ON SCHEDLUE AND CONSENT
The Board of Directors and Stockholders
Royal Grip, Inc.:
The audit referred to in our report dated February 24, 1995 included the related
consolidated financial statement schedule as of December 31, 1994. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this consolidated
financial statement schedule based on our audit. In our opinion, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to incorporation by reference in the Registration Statements No.
33-99944, No. 33-69212, No. 33-69222, No. 33-81742 on Form S-8 of Royal Grip,
Inc. of our report dated February 24, 1995, relating to the consolidated
statements of operations, stockholders' equity and cash flows and related
schedule of Royal Grip, Inc. and subsidiaries for the year ended December 31,
1994, which report appears in the December 31, 1996 Annual Report on Form 10-K
of Royal Grip, Inc.
KPMG PEAT MARWICK LLP
Phoenix, Arizona
April 14, 1997
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Danny Edwards and Robert G.J. Burg, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, for filing with the Securities and Exchange Commission by
Royal Grip, Inc., a Nevada corporation, together with any and all amendments to
such Form 10-K, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: February 21, 1997
/s/ Gardiner Dutton
----------------------------
Gardiner Dutton
<PAGE>
STATE of Arizona )
)
County of Maricopa )
On this 21st day of February, 1997, before me, the undersigned Notary
Public, personally appeared GARDINER DUTTON, known to me to be the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Kazuko McMillen
---------------------------
Notary Public
[SEAL]
My commission expires
My commission expires December 16, 1998
- ----------------------------------------
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Danny Edwards and Robert G.J. Burg, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, for filing with the Securities and Exchange Commission by
Royal Grip, Inc., a Nevada corporation, together with any and all amendments to
such Form 10-K, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: February 20, 1997
/s/ Barry Entous
----------------------------
Barry Entous
<PAGE>
STATE of California )
)
County of Los Angeles )
On this 20th day of February, 1997, before me, the undersigned Notary
Public, personally appeared BARRY ENTOUS, known to me to be the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Wanda D. Perry
---------------------------
Notary Public
[SEAL]
My commission expires
May 24, 1999
- ----------------------------
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Danny Edwards and Robert G.J. Burg, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, for filing with the Securities and Exchange Commission by
Royal Grip, Inc., a Nevada corporation, together with any and all amendments to
such Form 10-K, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: February 25, 1997
/s/ James Myers
--------------------------
James Myers
<PAGE>
STATE of Arizona )
)
County of Maricopa )
On this 25th day of February, 1997, before me, the undersigned Notary
Public, personally appeared JAMES MYERS, known to me to be the person whose name
is subscribed to the within instrument and acknowledged that he executed the
same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Betty J. Bernard
---------------------------
Notary Public
[SEAL]
My commission expires
May 10, 1997
- --------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 38,099
<SECURITIES> 0
<RECEIVABLES> 2,143,009
<ALLOWANCES> 549,455
<INVENTORY> 1,381,215
<CURRENT-ASSETS> 3,359,931
<PP&E> 3,194,969
<DEPRECIATION> 1,269,913
<TOTAL-ASSETS> 8,495,285
<CURRENT-LIABILITIES> 2,195,267
<BONDS> 0
0
0
<COMMON> 2,735
<OTHER-SE> 5,618,082
<TOTAL-LIABILITY-AND-EQUITY> 8,495,285
<SALES> 16,120,617
<TOTAL-REVENUES> 16,120,617
<CGS> 12,324,745
<TOTAL-COSTS> 8,200,308
<OTHER-EXPENSES> (9,847)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,348
<INCOME-PRETAX> (4,446,937)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,446,937)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,446,937)
<EPS-PRIMARY> (1.63)
<EPS-DILUTED> (1.63)
</TABLE>
