<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) August 29, 1997
---------------
Royal Precision, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-71735 06-1453896
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
3490 Clubhouse Drive, Suite 102, Jackson Hole, Wyoming 83001
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (307) 739-1188
--------------
FM Precision Golf Corp.
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ROYAL PRECISION, INC.
FORM 8-K
CURRENT REPORT
Item 2. Acquisition or Disposition of Assets.
-------------------------------------
On August 29, 1997 (the "Effective Date"), FMPSUB, Inc., a wholly owned
subsidiary of Royal Precision, Inc. (the "Registrant") merged with and into
Royal Grip, Inc. ("RG"). RG was the surviving corporation and became a
wholly-owned subsidiary of the Registrant. The Merger will be treated as a
purchase of RG by Registrant for accounting and financial reporting purposes.
The Merger was approved by the holders of a majority of Registrant's
common stock on April 17, 1997. The Merger was approved by the holders of a
majority of RG's common stock on August 29, 1997.
In the Merger, each outstanding share of RG common stock was converted
into the right to receive one-half share of common stock, par value $.001 per
share, of Registrant. No fractional shares of Registrant were issued in the
Merger. In lieu of any such fractional shares, each holder of RG common stock
who was otherwise entitled to receive a fractional share of Registrant common
stock pursuant to the Merger will be paid an amount in cash equal to such
fractional interest multiplied by the average of the high and low trading prices
per share of RG common stock for the five trading days ended immediately prior
to the Merger which was $3.94. As a result of the Merger, the pre-Merger
stockholders and option holders of RG own or have the right to acquire 30% of
Registrant's common stock on a fully diluted basis. The number of shares of
Registrant's common stock issued in the Merger was determined by arms-length
negotiations between Registrant and RG.
The Merger is intended to qualify as a tax-free reorganization within
the meaning of Section 386(a)(1)(A) and Section 368(a)(2)(E) of the Internal
Revenue Code of 1986, as amended. If the Merger qualifies as a tax-free
reorganization, RG shareholders will not recognize gain or loss for federal
income tax purposes by reason of their exchange of shares of RG common stock for
Registrant's common stock. RG shareholders who receive cash in lieu of
fractional shares may be required to recognize a gain or loss as to such
fractional shares for federal income tax purposes.
Registrant became the parent company of RG as a result of the Merger.
Until their respective successors are duly elected or appointed, the officers of
the Registrant are Richard P. Johnston, Chairman of the Board; Danny Edwards,
Vice Chairman of the Board; Christopher A. Johnston, President, Chief Executive
Officer and Treasurer; Ronald L. Chalmers, Executive Vice President; Robert G.
J. Burg, II, Executive Vice President; David E. Johnston, Executive Vice
President; and Kenneth J. Warren, Secretary. The directors of the Registrant are
Messrs. Burg, Edwards, Richard Johnston, Christopher Johnston, David Johnston,
Chalmers, Warren, Raymond J. Minella and James G. DeMello.
RG is the surviving corporation in the Merger and will be operated as a
wholly owned subsidiary of the Registrant. One of the directors of the surviving
corporation is Robert G. J. Burg, II, and the officers of RG immediately prior
to the Merger continue as the officers of the surviving corporation, in each
case until their respective successors are duly elected or appointed.
RG uses its physical property to design and distribute golf club grips
and to design, manufacture and distribute athletic headwear. Registrant intends
to continue to use this physical property for the same purposes.
RG designs and distributes golf club grips and designs and manufactures
athletic headwear. In 1989, RG introduced a rubber wrap golf grip that gained
widespread acceptance in the golf industry and enabled RG to achieve brand name
recognition. Registrant is a leading designer and manufacturer of high-quality
innovative golf shafts. Registrant believes that there is a natural fit between
RG and the Registrant and that the similar customer base of the
<PAGE> 3
ROYAL PRECISION, INC.
FORM 8-K
CURRENT REPORT
combined companies may provide enhanced operating efficiencies and marketing
opportunities in the sporting goods industry.
Registrant has entered into a Consulting Agreement with Danny Edwards.
Under the Consulting Agreement, Mr. Edwards will make himself available to
consult with Registrant on matters relating to its business and Mr. Edwards has
agreed to endorse the products of Registrant and promote Registrant and its
products by actively appearing on the "Nike" tour and in golf tournaments
sponsored by the PGA. Mr. Edwards' consulting obligations are limited to 25
hours during a calendar quarter. The term of the agreement commences with the
Effective Date and expires on its second anniversary. Registrant has agreed to
pay Mr. Edwards $180,000 per year and provide him with health insurance for his
services as a consultant. If Mr. Edwards does not complete the first two days of
at least ten tournaments on the Nike tour or PGA events in any year, Registrant
may reduce the payment to him by $15,000 for each tournament not completed,
unless the noncompletion is due to injury and Mr. Edwards appears and promotes
Registrant products at such tournament. Registrant may terminate the agreement
if Mr. Edwards engages in gross and wilful misconduct injurious to Registrant or
if Mr. Edwards fails to complete the first two days of at least five tournaments
during any year unless non-completion is due to injury and Mr. Edwards appears
at the tournament and promotes Registrant products. Mr. Edwards has agreed not
to compete with Registrant during the term of this agreement and to hold
confidential information in confidence during the term of the agreement and for
one year thereafter. The value of this Consulting Agreement to Mr. Edwards for
the two-year term is approximately $370,000. Mr. Edwards is the only RG
executive officer to receive a consulting agreement.
If the employment of Robert G. J. Burg, II (President of RG) with RG,
Registrant or any other successor is terminated by his employer for any reason
other than for gross and wilful misconduct or if Mr. Burg terminates his
employment because of certain changes to the conditions of his employment (the
Merger itself not constituting such a change), Mr. Burg will be entitled to
twelve months of severance pay to be paid upon termination along with existing
health benefits for a like period, and extension of the exercise period of his
RG Options for one year. Mr. Burg's RG Options are currently vested. Thomas A.
Schneider (Vice President of RG) has a substantially similar severance
agreement, except that the period for severance pay and benefits is nine months
rather than twelve and all options held by Mr. Schneider will immediately vest
upon termination. The value of the severance agreements for Mr. Burg and Mr.
Schneider is approximately $153,000 and $97,000, respectively, assuming these
amounts were payable as of the date of the Merger. The value of Mr. Schneider's
agreement includes the value of immediate vesting of nonvested RG Options
calculated using the closing RG Common Stock price on June 30, 1997 of $3.25,
less the exercise prices, multiplied by the number of options which vest
immediately upon termination.
Danny Edwards, Drew M. Brown, Mark N. Sklar, Bennett Dorrance, Trustee,
and DMB Property Ventures Limited Partnership (collectively, the "Edwards
Group") who collectively owned 54% of RG prior to the Merger and Christopher A.
Johnston, RPJ/JAJ Partners, Ltd., David E. Johnston, Berenson, Minella & Company
and certain of its affiliates and Kenneth J. Warren (collectively, the "Johnston
Group") have entered into a Registration Rights Agreement with Registrant. Under
the Registration Rights Agreement, a group (for this purpose Berenson Minella is
treated as a separate group) may demand registration under the Securities Act of
Registrant common stock having a value of not less than $5 million. Registrant
will not be obligated to effect more than one demand registration for the
Edwards Group, more than two demand registrations for the Johnston Group or more
than one demand registration for the Berenson Minella Group. No demand can be
made during the first year, and only one demand can be made during the second
year. Any group may join in pro rata only during the second year. The parties to
the Registration Rights Agreement also have the right to have their shares of
Registrant Common Stock included in certain other registration statements filed
by Registrant from time to time. The number of shares to be registered is
subject to reduction at the request of an underwriter. Under the Registration
Rights Agreement, Registrant will indemnify selling stockholders against
liabilities created by untrue statements of material fact or omissions of
material facts from a registration statement and each of the security holders
agrees to indemnify Registrant for a liability created by untrue statements of
material fact or omissions of material fact in information supplied by the
stockholder to Registrant which is included in a registration statement. A
stockholder will cease to have registration rights when the applicable group or
its
<PAGE> 4
ROYAL PRECISION, INC.
FORM 8-K
CURRENT REPORT
transferees hold Registrant Common Stock existing at the effective date of the
Merger or received upon the exercise of an option held by a party to the
Registration Rights Agreement on the effective date which is less than 5% of the
then outstanding shares. For this purpose, shares of Registrant common stock
that have been registered for sale under the Securities Act or that may be sold
without restriction under Rule 144(k) are not counted.
The Edwards Group and the Johnston Group have entered into a
Stockholder Agreement, which will take effect at the effective date of the
Merger and will terminate three years after the effective date. Under the
Stockholder Agreement, the Johnston Group will be entitled to designate six
members of the Registrant board of directors and the Edwards Group shall be
entitled to designate three members of the Registrant board of directors. The
Registrant board of directors will consist of at least nine members serving for
staggered three year terms. If the Registrant board of directors is expanded,
the groups will designate directors in a ratio of two to one unless the Edwards
Group no longer owns 10% of Registrant's voting securities or the vacancy is
filled by an independent director. Members of each group shall serve in each
class of directors. Danny Edwards and Robert G.J. Burg, II will serve on the
Executive Committee and the Edwards Group will be entitled to designate a member
of the Compensation Committee. Each of the parties to the Stockholder Agreement
has agreed to vote his shares of Registrant common stock in favor of designees
of the Johnston Group and the Edwards Group and to not vote for the removal of a
director designated under the Stockholder Agreement unless for cause, which is
limited to wilful and continued failure to substantially perform his duties,
wilful conduct which is significantly injurious to Registrant or conviction for
a felony, or with the written consent of the group that designated the director.
<PAGE> 5
ROYAL PRECISION, INC.
FORM 8-K
CURRENT REPORT
Item 5. Other Events.
-------------
On August 29, 1997, Registrant changed its name from FM Precision Golf
Corp. ("FMP") to Royal Precision, Inc.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
-------------------------------------------------------------------
(a) Financial Statements of Business Acquired.
Incorporated by reference to the Financial Statements of Royal Grip,
Inc. beginning on page F-1(RG) of the Registrant's Registration
Statement on Form S-4 filed on June 9, 1997, as amended by Amendment
Number 1 filed on July 25, 1997, Amendment Number 2 filed on August 15,
1997 and Amendment Number 3 filed on August 18, 1997 (the "Form S-4")
and filed herein as Exhibit 99.1.
(b) Pro Forma Financial Information.
Incorporated by reference to the Unaudited Pro Forma Condensed
Consolidated Financial Statements beginning on page 39 of the
Registrant's Form S-4 and filed herein as Exhibit 99.2.
(c) Exhibits.
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION, OR
SUCCESSION
Exhibit 2.1.
Agreement and Plan of Merger dated as of May 14, 1997 among Royal Grip,
Inc., FM Precision Golf Corp. and FMPSUB, Inc. (incorporated by
reference to Annex I to the Registrant's Form S-4).
Exhibit 2.2.
Consulting Agreement dated as of May 14, 1997 between FM Precision Golf
Corp. and Danny Edwards (incorporated by reference to Exhibit 2.2 to
the Registrant's Form S-4).
Exhibit 2.3.
Registration Rights Agreement dated as of May 14, 1997 among Danny
Edwards, Drew M. Brown, DMB Property Ventures Limited Partnership, Mark
N. Sklar, Bennett Dorrance, Trustee of the Bennett Dorrance Trust,
Christopher A. Johnston, RPJ/JAJ Partners, Ltd., David E. Johnston,
Kenneth J. Warren, Berenson Minella & Company, L.P. and FM Precision
Golf Corp. (incorporated by reference to Exhibit 2.3 to the
Registrant's Form S-4).
Exhibit 2.4.
Stockholder Agreement dated as of May 14, 1997 among Danny Edwards,
Drew M. Brown, DMB Property Ventures Limited Partnership, Mark N.
Sklar, Bennett Dorrance, Trustee of the Bennett Dorrance Trust,
Christopher A. Johnston, RPJ/JAJ Partners, Ltd., David E. Johnston,
Kenneth J. Warren, Berenson Minella & Company, L.P. and FM Precision
Golf Corp. (incorporated by reference to Exhibit 2.4 to the
Registrant's Form S-4).
<PAGE> 6
ROYAL PRECISION, INC.
FORM 8-K
CURRENT REPORT
Exhibit 2.5.
Voting Agreement dated as of May 14, 1997 among Danny Edwards, Drew M.
Brown, Mark N. Sklar, Bennett Dorrance, Trustee of the Bennett Dorrance
Trust, DMB Property Ventures Limited Partnership and FM Precision Golf
Corp. (incorporated by reference to Exhibit 2.5 to the Registrant's
Form S-4).
(4) INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS INCLUDING INDENTURES
Exhibit 4.1.
See Articles FOUR, FIVE and SEVEN of the Amended and Restated
Certificate of Incorporation of FM Precision Golf Corp. (incorporated
by reference to Annex IV to the Registrant's Form S-4).
Exhibit 4.2.
See Article I, Sections 2.1 and 2.2 of Article II and Section 7.3 of
Article VII of the Bylaws of Royal Precision, Inc. (f/k/a FM Precision
Golf Corp.) (incorporated by reference to Exhibit 3.2 to the
Registrant's Form S-4).
(23) CONSENTS OF EXPERTS AND COUNSEL
Exhibit 23.1.
Consent of Ernst & Young LLP.
(99) ADDITIONAL EXHIBITS
Exhibit 99.1
The audited financial statements of Royal Grip, Inc., as of December
31, 1995 and 1996 and the related notes, together with the report of
Ernst & Young LLP dated February 14, 1997, except as to Notes 10 and 15
as to which the date is April 11, 1997 and the unaudited condensed
financial statements of Royal Grip, Inc. as of June 30, 1997 and the
related notes thereto.
Exhibit 99.2
The Unaudited Pro Forma Condensed Consolidated Financial Statements
which give effect to the Merger as though the Merger occurred as of May
31, 1996 for the purpose of the unaudited pro forma condensed
consolidated statement of operations and give effect to the Merger as
though the Merger occurred as of May 31, 1997 for the purpose of the
unaudited pro forma condensed consolidated balance sheet.
<PAGE> 7
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ROYAL PRECISION, INC.
Date: September 10, 1997 By: /s/ Christopher A. Johnston
------------------ ----------------------------------
Christopher A. Johnston, President
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Royal Precision, Inc.'s Current
Report on Form 8-K of our report dated February 14, 1997, except as to Notes 10
and 15, as to which the date is April 11, 1997, with respect to the
consolidated financial statements of Royal Grip, Inc. for the year ended
December 31, 1996 included in the Proxy Statement of Royal Grip, Inc. that is
made a part of the Registration Statement (Form S-4/A No. 333-28841) and
Prospectus of FM Precision Golf Corp., filed with the Securities and Exchange
Commission.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
September 8, 1997
<PAGE> 1
Exhibit 99.1
FINANCIAL STATEMENTS
ROYAL GRIP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Financial Statements
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995........................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996 and
1995............................................................................. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1996 and 1995.................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and
1995............................................................................. F-6
Notes to Consolidated Financial Statements.......................................... F-7
Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 1997............................ F-19
Condensed Consolidated Statements of Operations for the Six Months Ended June 30,
1997 and 1996.................................................................... F-20
Condensed Consolidated Statements of Cash Flows for Six Months Ended June 30, 1997
and 1996......................................................................... F-21
Notes to Condensed Consolidated Financial Statements................................ F-22
</TABLE>
F-1(RG)
<PAGE> 2
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.
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 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 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.
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 10 and 15,
as to which the date is April 11, 1997.
F-2(RG)
<PAGE> 3
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.
F-3(RG)
<PAGE> 4
ROYAL GRIP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net sales....................................................... $16,120,617 $17,373,451
Cost of goods sold.............................................. 12,324,745 12,307,334
----------- -----------
Gross profit.................................................... 3,795,872 5,066,117
Selling, general and administrative expenses.................... 6,016,913 7,512,092
Loss on write-down and disposition of property and equipment.... 446,166 530,788
Manufacturing outsourcing and acquisition costs................. 1,052,900 110,754
Loss on write-off of intangibles................................ 684,329 --
----------- -----------
Loss from operations............................................ (4,404,436) (3,087,517)
Other income (expense):
Interest income................................................. 11,123 25,524
Interest expense................................................ (52,348) (62,904)
Other expense, net.............................................. (1,276) (7,424)
----------- -----------
Loss before income tax benefit.................................. (4,446,937) (3,132,321)
Income tax benefit.............................................. -- 359,000
----------- -----------
Net loss........................................................ $(4,446,937) $(2,773,321)
=========== ===========
Net loss per share.............................................. $ (1.63) $ (1.01)
=========== ===========
Weighted average shares used in computation..................... 2,734,678 2,734,678
=========== ===========
</TABLE>
See accompanying notes.
F-4(RG)
<PAGE> 5
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, 1995............. $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
non-employees......................... -- 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.
F-5(RG)
<PAGE> 6
ROYAL GRIP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................................ $(4,446,937) $(2,773,321)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization................................. 1,652,981 1,948,196
Allowance for doubtful accounts............................... 322,385 83,010
Loss on write-down and disposition of property and
equipment.................................................. 446,166 530,788
Loss on write-off of intangibles.............................. 684,329 --
Inventory write-down and reserves............................. 117,827 588,203
Issuance of stock options to non-employees.................... 393,618 --
Deferred income taxes......................................... -- (272,000)
Changes in operating assets and liabilities:
Trade accounts receivable.................................. (51,927) (572,502)
Income tax refund receivable............................... 101,139 349,800
Inventories................................................ 221,254 (191,713)
Prepaids and other current assets.......................... 12,271 121,126
Other assets and intangibles............................... (23,561) 37,514
Trade accounts payable and accrued expenses................ 256,411 716,762
----------- -----------
Net cash provided by (used in) operating activities... (314,044) 565,863
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment........................... (1,449,593) (830,842)
Proceeds from sale of property and equipment.................. 740,025 34,229
----------- -----------
Net cash used in investing activities................. (709,568) (796,613)
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)
Increase (decrease) in revolving line of credit............... 60,000 (480,000)
Increase in other liabilities................................. 8,147 --
----------- -----------
Net cash provided by (used in) financing activities... 648,366 (549,814)
----------- -----------
Net decrease in cash and cash equivalents............. (375,246) (780,564)
Cash and cash equivalents at beginning of year........ 413,345 1,193,909
----------- -----------
Cash and cash equivalents at end of year.............. $ 38,099 $ 413,345
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest........................................ $ 52,348 $ 62,062
</TABLE>
See accompanying notes.
F-6(RG)
<PAGE> 7
ROYAL GRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Royal Grip, Inc. ("RG") designs and manufactures golf club grips and
athletic headwear. RG's products are sold throughout the United States as well
as internationally, largely Japan and the United Kingdom. During December 1996,
RG outsourced the manufacturing of their golf club grips (see Note 10).
Principles of Consolidation
The consolidated financial statements include the financial statements of
RG 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
RG 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). Costs
incurred in securing trademark rights are amortized over a 20-year period.
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 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, RG assessed the recoverability of Roxxi intangibles based upon expected
future undiscounted cash flows of Roxxi and other relevant information. Based on
this evaluation, RG 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.
F-7(RG)
<PAGE> 8
ROYAL GRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
RG recognizes revenues as of the date merchandise is shipped to its
customers.
Income Taxes
RG accounts for income taxes under the asset and liability method of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes."
Advertising
RG expenses advertising as incurred. Advertising expense for the years
ended December 31, 1996 and 1995 approximated $621,000 and $1,446,000,
respectively.
Net Loss Per Share
Net loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding. Stock options were not included in 1996 and
1995 since they were antidilutive.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share" which is required to be adopted on December 31, 1997.
At that time, RG will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new requirements
for calculating primary earnings per share, the dilutive effect of stock options
will be excluded. The impact of SFAS No. 128 on the calculation of primary and
fully diluted earnings per share is not expected to be material.
Stock Based Compensation
RG 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. RG
accounts for stock option grants to employees in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25).
RG adopted SFAS No. 123 "Accounting for Stock Based Compensation" in 1996
related to stock options granted to non-employees. Expense equal to the fair
value of the options granted to non-employees 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 RG.
Long-Lived Assets
RG 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, RG 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. RG's estimate of the fair value (based on appraisals), less selling
costs, of the property and equipment approximated its net carrying value, and
accordingly, no loss was recorded related to the property and equipment.
However, RG wrote off the goodwill and covenants not to compete related to
Roxxi.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on
the basis that RG will continue as a going concern. RG has incurred successive
losses and, in order for RG to continue as a going
F-8(RG)
<PAGE> 9
ROYAL GRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
concern, RG must achieve profitable operations in the near term. If not
successful in achieving profitable operations, RG could be placed in default of
certain debt covenants which could accelerate the maturity of outstanding debt
balances or restrict RG's access to the loans. In the event RG 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 RG will be able
to obtain these funds on terms and conditions acceptable to RG, if at all.
Management's plans with respect to achieving profitable operations include
outsourcing its golf club grip manufacturing during 1997 (see Note 10) 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 RG's customer relationships. Accordingly,
RG is experiencing losses in early 1997 greater than anticipated. RG has entered
into an agreement with Acushnet whereby Acushnet will reimburse RG for amounts
which approximate the gross margin on sales lost as a result of failure to
produce sufficient quantities.
RG'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 RG to continue as a going concern at least through December 31, 1997.
2. INTANGIBLE ASSETS
Intangible assets at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------- ----------
<S> <C> <C>
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
======== ==========
</TABLE>
Amortization of intangibles expense of $178,343 and $220,574 was recorded
in 1996 and 1995, respectively. During the fourth quarter of 1996, RG wrote off
the goodwill and covenants not to compete related to Roxxi aggregating $684,329.
3. INVENTORIES
Inventories at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
F-9(RG)
<PAGE> 10
ROYAL GRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the first quarter of 1995, RG 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, RG recorded approximately $188,000 in
expense to cost of goods sold to reserve for certain excess and obsolete
inventory.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following:
<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 and $1,727,622 was recorded in 1996 and
1995, respectively.
5. INVESTMENT IN LEASE
RG 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 10). RG's net investment in
the direct financing lease at December 31, 1996 consists of:
<TABLE>
<S> <C>
Minimum lease payments receivable..................... $4,508,385
Unearned income....................................... (1,386,385)
----------
3,122,000
Less current portion.................................. (214,506)
----------
$2,907,494
==========
</TABLE>
F-10(RG)
<PAGE> 11
ROYAL GRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, future minimum lease payments receivable under the
direct financing lease are as follows:
<TABLE>
<S> <C>
1997................................................... $ 450,838
1998................................................... 450,838
1999................................................... 450,838
2000................................................... 450,838
2001................................................... 450,838
Thereafter............................................. 2,254,195
----------
$4,508,385
==========
</TABLE>
6. LINE OF CREDIT, LONG-TERM DEBT AND CAPITAL LEASES
At December 31, 1996, RG was in default of certain covenants on its
existing $1,200,000 line of credit which were waived by the bank. In February
1997, RG 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 RG 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 RG's consolidated balance
sheet.
The new line of credit allows RG 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 RG's
assets and contain certain covenants, the more restrictive of which prohibit the
payment of dividends, limit capital expenditures, and require RG to comply with
certain financial ratios. RG 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. RG 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. RG also has net income covenants which
correlate to the net worth covenants described above, and beginning in April
1997, RG cannot have a loss in excess of $100,000 in any one month. RG was in
default of its net worth covenant at December 31, 1996 and received a waiver
from the bank. See Note 15 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.
F-11(RG)
<PAGE> 12
ROYAL GRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 RG, $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>
At December 31, 1996, the maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1997.................................................... $207,230
1998.................................................... 222,626
1999.................................................... 149,673
2000.................................................... 298,211
2001.................................................... 544
--------
$878,284
========
</TABLE>
7. INCOME TAXES
Income tax benefit consists of the following for the years ended December
31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Current:
Federal.................................................. $ -- $ (87,000)
State.................................................... -- --
---------- ----------
(87,000)
Deferred:
Federal.................................................. -- (186,000)
State.................................................... -- (86,000)
---------- ----------
-- (272,000)
---------- ----------
$ -- $(359,000)
========== ==========
</TABLE>
F-12(RG)
<PAGE> 13
ROYAL GRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax benefit differs from amounts computed by applying the U.S.
federal income tax rate of 35 percent to loss before income taxes as a result of
the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Computed "expected" tax benefit......................... $(1,556,000) $(1,096,000)
Graduated surtax exemptions............................. 44,000 31,000
State income tax benefit, net of federal benefit........ -- (57,000)
Increase in valuation allowance......................... 1,270,000 776,000
Non-deductible goodwill amortization.................... 226,000 17,000
Other, net.............................................. 16,000 (30,000)
----------- -----------
$ -- $ (359,000)
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
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
Non-employee stock options.............................. 172,000 --
Alternative minimum tax credit.......................... -- 6,000
Other, net.............................................. 47,000 8,000
Net operating loss carry-forwards....................... 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................................. $ -- $ --
========== ==========
</TABLE>
The valuation allowance increased $1,497,000 and $776,000 during the years
ended December 31, 1996 and 1995, respectively.
At December 31, 1996, RG had federal and state net operating loss
carry-forwards of approximately $4,290,000. The federal and state net operating
loss carry-forwards will begin to expire in 2010 and 2000, respectively, if not
utilized.
F-13(RG)
<PAGE> 14
ROYAL GRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASES
RG leases corporate offices, manufacturing facilities and office equipment
under operating lease agreements expiring through March 2001. RG is negotiating
to move its corporate facilities in 1997. Minimum annual rental commitments
under noncancelable leases are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1997.................................................... $261,558
1998.................................................... 245,731
1999.................................................... 65,472
2000.................................................... 65,472
2001.................................................... 15,000
--------
$653,233
========
</TABLE>
Rental expense under operating leases totaled approximately $312,000 and
$295,000 for the years ended December 31, 1996 and 1995, respectively.
9. SIGNIFICANT CUSTOMERS
Sales to RG's exclusive Japanese distributor represented 19 percent and 21
percent of net sales for the years ended December 31, 1996 and 1995,
respectively. Additionally, during 1996 and 1995, sales to one original
equipment manufacturer accounted for 12 percent and 9 percent of net sales,
respectively.
International sales represented 21 percent and 22 percent of net sales for
the years ended December 31, 1996 and 1995, respectively.
10. MANUFACTURING AND SUPPLY AGREEMENT
On December 21, 1996, RG entered into a Manufacturing and Supply Agreement
(Acushnet Supply Agreement) with Acushnet. On April 4, 1997, RG and Acushnet
renegotiated certain aspects of their agreement. This agreement, as amended,
makes Acushnet the exclusive supplier of non-cord grips to RG, subject to RG's
ability to use other suppliers in the event Acushnet fails to meet production
requirements, and requires that RG 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 RG'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 RG's
arising out of a material breach by Acushnet, RG may at its option repurchase
any grip manufacturing equipment owned by Acushnet at fair market value. In
addition, RG may terminate the Acushnet Supply Agreement at any time upon
written notice, and Acushnet may terminate the agreement on and after June 30,
1998, by providing ten months' prior written notice 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, RG leased to Acushnet
RG'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, RG granted to Acushnet an
F-14(RG)
<PAGE> 15
ROYAL GRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
option to purchase RG'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, RG 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 5). No gain or loss was recorded on the transaction.
Acushnet has experienced start-up delays in the production of grips which
has adversely affected RG's customer relationships and results of operations,
has impaired RG's ability to satisfy its loan covenants and may make it more
difficult for RG to satisfy lending covenants in the future. The recent
amendments to the Acushnet Supply Agreement provide RG 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 levels specified in the amendment
during 1997 or as a result of its cancellation of stock options granted to it by
RG. These credits may be reduced only to the extent that RG orders grips above
such specified levels. The modified agreement also alters the future production
and purchase requirements of the parties.
As a result of the Acushnet Supply Agreement, RG 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 11). 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.
11. STOCK OPTIONS
RG 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 RG'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
RG has a Stock Option Plan (Plan), which provided for options on up to
400,000 shares of RG's common stock. These options are available for grant under
the Plan to employees and certain consultants of RG. 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 RG. The options vest over varying periods up to three years
and expire in five to eight years.
RG 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 RG 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 RG receives options to purchase 1,500 shares
of RG's common stock on the third day following the day upon which RG releases
its earning report for the previous
F-15(RG)
<PAGE> 16
ROYAL GRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 loss and loss per share is required by
SFAS 123 which also requires that the information be determined as if RG 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 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 0.00 percent, volatility factor of the expected
market price of RG'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 RG'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. RG's pro forma
information for the year ended December 31, 1996, follows:
<TABLE>
<S> <C>
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
==========
</TABLE>
Employee stock options granted in 1995 were not material to the operations
of RG. 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.
A summary of stock option activity granted within the plans and related
information for the years ended December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------------
OPTIONS WEIGHTED
AVAILABLE EXERCISE AVERAGE
FOR GRANT SHARES PRICE RANGE EXERCISE PRICE
--------- -------- ------------ --------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995.............. 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>
F-16(RG)
<PAGE> 17
ROYAL GRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. RG 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.
Other Stock Options
At December 31, 1996 and 1995, RG 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 RG'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 RG's stock at the date of grant of the
replacement options, therefore, no compensation expense was recorded by RG.
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% vested) at December 31, 1996 were $10.63
and 5 years, respectively.
During 1996, RG granted to Acushnet 50,000 options at $4.00 and 200,000
options at $5.00 to purchase common shares of RG. 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 RG'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.
12. RELATED PARTY TRANSACTIONS
During 1996 and 1995, RG 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 RG.
13. FINANCIAL INSTRUMENTS
Concentration of Credit Risk
RG 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, RG requires letter
of credit agreements from its Japanese distributor. The original equipment
manufacturer purchased finished goods throughout the year under normal terms.
Bad debt losses have been considered in establishing allowances for doubtful
accounts.
F-17(RG)
<PAGE> 18
ROYAL GRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 RG's current incremental borrowing rates for similar types of borrowing
arrangements.
14. BENEFIT PLAN
During 1995, RG 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. RG does not make
contributions to the Plan. RG offers, as one of the investment mediums to the
participants, common stock of RG and has reserved 50,000 shares for issuance
under the 401(k) Plan.
15. SUBSEQUENT EVENTS
During January 1997, RG 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
carry-forwards available to RG 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, RG 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.
In April 1997, RG 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 RG.
F-18(RG)
<PAGE> 19
ROYAL GRIP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1997
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ --
Trade accounts receivable (net of allowance for doubtful accounts of
$450,140)................................................................... 1,563,904
Inventories................................................................... 784,608
Current portion of net investment in lease.................................... 223,022
Prepaid expenses and other current assets..................................... 60,752
-----------
Total current assets.......................................................... 2,632,286
-----------
Property and equipment, net................................................... 1,857,315
Net investment in capital lease, less current portion......................... 2,793,813
Intangible assets, net........................................................ 255,177
Other assets.................................................................. 23,750
-----------
$ 7,562,341
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.............................................................. $ 732,027
Accounts payable and accrued expenses....................................... 1,147,249
Supply agreement credits.................................................... 472,393
Current portion of long-term debt and capital leases........................ 226,500
-----------
Total current liabilities................................................... 2,578,169
-----------
Long-term debt and capital leases, less current portion....................... 515,417
Other liabilities............................................................. 8,588
Stockholders' equity:
Preferred stock, par value $.001 per share. Authorized 5,000,000 shares;
none issued.............................................................. --
Common stock, par value $.001 per share. Authorized 15,000,000 shares;
issued and outstanding 2,742,178 shares at June 30, 1997................. 2,742
Additional paid-in capital.................................................. 12,630,338
Accumulated deficit......................................................... (8,172,913)
-----------
Total stockholders' equity.................................................. 4,460,167
-----------
$ 7,562,341
===========
</TABLE>
See accompanying notes.
F-19(RG)
<PAGE> 20
ROYAL GRIP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net sales....................................................... $ 5,837,100 $ 9,452,111
Cost of goods sold.............................................. 4,385,424 7,192,700
---------- ----------
Gross profit.................................................... 1,451,676 2,259,411
Selling, general and administrative expenses.................... 2,403,617 3,375,365
Merger costs.................................................... 279,861 --
---------- ----------
Loss from operation............................................. (1,231,802) (1,115,954)
Other income (expenses), net.................................... 33,713 (28,576)
---------- ----------
Loss before income taxes........................................ (1,198,089) 1,144,530
Income taxes.................................................... -- --
---------- ----------
Net loss........................................................ $(1,198,089) $(1,144,530)
========== ==========
Net loss per share.............................................. $ (0.44) $ (0.42)
========== ==========
Weighted average shares used in net loss per share.............. 2,740,101 2,734,678
========== ==========
</TABLE>
See accompanying notes.
F-20(RG)
<PAGE> 21
ROYAL GRIP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................... $(1,198,089) $(1,144,530)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization................................. 263,811 835,131
Compensatory stock option grants.............................. 16,813 14,504
(Gain) loss on disposition of property and equipment.......... (30) 22,175
Changes in operating assets and liabilities
Trade accounts receivable.................................. 29,650 (1,048,856)
Income tax refund receivable............................... -- 101,139
Inventories................................................ 596,607 252,337
Prepaid expenses and other current assets.................. 71,805 97,575
Other assets and intangibles............................... 16,341 (21,354)
Supply agreement credits................................... 472,393 --
Trade accounts payable and accrued expenses................ (780,788) (45,634)
--------- -----------
Net cash used by operating activities................. (511,487) (937,513)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................... (188,534) (578,075)
Principal payments received on capital lease receivable....... 105,165 --
Proceeds from sale of property and equipment.................. 30 788,919
--------- -----------
Net cash provided by (used in) investing activities........... (83,339) 210,844
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations............ -- (15,161)
Net payments on notes payable................................. (136,367) (65,528)
Exercise of employee options.................................. 20,626 --
Increase in line of credit.................................... 672,027 425,000
Increase in other liabilities................................. 441 --
--------- -----------
Net cash provided by financing activities..................... 556,727 344,311
--------- -----------
Net decrease in cash.......................................... (38,099) (382,358)
Cash at beginning of period................................... 38,099 413,345
--------- -----------
Cash at end of period......................................... $ -- $ 30,987
========= ===========
</TABLE>
See accompanying notes.
F-21(RG)
<PAGE> 22
ROYAL GRIP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles, pursuant
to rules and regulations of the Securities and Exchange Commission. In the
opinion of management, the accompanying condensed financial statements include
all adjustments (of a normal recurring nature) which are necessary for a fair
presentation of the results for the interim periods presented. Certain
information and footnote disclosures have been condensed or omitted pursuant to
such rules and regulations. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial statements for
the year ended December 31, 1996, included elsewhere herein. Results of
operations in interim periods are not necessarily indicative of results to be
expected for a full year. In February 1997, Financial Accounting Standards Board
issued Statement No. 128 "Earnings Per Share" which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
No. 128 on the calculation of primary and fully diluted earnings per share is
not expected to be material for the six months ended June 30, 1997 and June 30,
1996.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997
--------
<S> <C>
Finished goods......................................................... $219,186
Work in process........................................................ 102,634
Raw materials.......................................................... 462,788
--------
$784,608
========
</TABLE>
(3) MANUFACTURING AND SUPPLY AGREEMENT
In December 1996, the Company outsourced all of its production of non-cord
grips to Acushnet Rubber Company. During the first quarter of 1997, Acushnet
experienced startup delays in the production of grips. In light of these
difficulties, the Company and Acushnet renegotiated their agreement. In
connection with this renegotiation, Acushnet agreed to provide the Company with
a credit of $400,000 against future purchases of grips, to be applied against
current accounts payable due to Acushnet, and additional credits in the event
Acushnet fails to meet future production requirements. These credits may be
reduced, during 1997 only, depending upon Acushnet's production beyond levels
specified in the amendment to the Manufacturing and Supply Agreement, but only
to the extent that the Company orders grips above such specified levels. The
credits may also be reduced as a result of the cancellation of stock options
granted to Acushnet. Because of the contingent nature of this credit, the
Company recorded this amount as a liability under the Supply Agreement Credits
line item and a reduction in accounts payable to Acushnet. The Company intends
to recognize these credits as a reduction in cost of sales when it becomes
probable and estimable that Acushnet will not be able to earn back the credits
by either increasing its production or by virtue of a reduction in the Company's
orders below levels specified in the amendment. At June 30, 1997, the Company
has not recorded any of the credits as a reduction of cost of sales as Acushnet
can still earn back the credits and such amounts, if earned back, are payable in
cash.
During the quarter ended June 30, 1997, the Company recorded an additional
$72,000 of credits related to Acushnet's production shortfalls. The total credit
recorded as a liability at June 30, 1997 is approximately $472,000.
F-22(RG)
<PAGE> 23
(4) REVOLVING LINE OF CREDIT AND TERM DEBT
In February 1997, the Company entered into a new line of credit facility of
$1.75 million and term loan of $700,000 with a commercial bank. These credit
arrangements mature on February 10, 2000 and contain net worth requirements,
prohibit dividend payments and limit capital expenditures. At 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 existing 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 million for
the quarter ended March 31, 1997 and a cumulative loss of no more than $1.6
million 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 bank's prime rate plus 3.0 percent effective April 1, 1997,
subject to change based on the operating results of the Company. At June 30,
1997 RG was in compliance with its debt covenants and believes that it is
probable that RG will comply with the debt covenants at the measurement dates
over the next twelve months, therefore, the long term portion of RG's term loan
is classified as non-current in the balance sheet.
(5) MERGER COSTS
In May 1997, the Company entered into a definitive merger agreement with FM
Precision Golf Corp. During the six months ended June 30, 1997, the Company
incurred $280,000 in investment banking, legal and accounting fees related to
this transaction. The Company will also record merger costs of approximately
$400,000 (which approximates its fair value) for warrants to be issued to its
investment banker upon consummation of the Merger.
(6) DEFERRED INCOME TAXES
The Company accounts for income taxes under the asset and liability method
of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes."
No tax benefit is available in the first two quarters of 1997 due to a 100%
valuation allowance on a deferred tax asset. The Company recorded this valuation
allowance because it believed that it is more likely than not that the deferred
tax assets will not be realized.
F-23(RG)
<PAGE> 1
Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed consolidated statement of
operations gives effect to the Merger, which will be accounted for as a
purchase, as if the Merger had occurred as of May 31, 1996. The accompanying
unaudited condensed consolidated balance sheet gives effect to the Merger as if
it had occurred on May 31, 1997. These pro forma condensed consolidated
financial statements have been prepared based upon the audited financial
statements of FMP as of May 31, 1997 and for the year then ended, and the
unaudited consolidated financial statements of RG as of June 30, 1997 and for
the year then ended. Pro forma adjustments have been applied to FMP's and RG's
historical financial statements to account for the Merger as a purchase;
accordingly, assets acquired and liabilities assumed are reflected at their
estimated fair values, which values are subject to further refinement after the
closing of the Merger. FMP and RG do not expect that the final allocation of the
aggregate purchase price for the Merger will differ materially from the
preliminary allocation reflected in the accompanying pro forma condensed
consolidated financial statements.
These unaudited pro forma condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
of FMP as of May 31, 1997 and FMP's Predecessor Business as of May 30, 1996 and
for the years then ended, the audited consolidated financial statements of RG as
of December 31, 1996 and 1995 and for the years then ended and the unaudited
condensed consolidated financial statements of RG as of June 30, 1997 and for
the six months ended June 30, 1997 and 1996.
The accompanying pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the consolidated operating
results or financial position that would have occurred if the Merger had been
consummated as of May 31, 1996 or May 31, 1997, as the case may be, nor is it
necessarily indicative of future consolidated operating results or financial
position.
Refer to the accompanying notes to unaudited pro forma condensed
consolidated financial statements for an explanation of each pro forma
adjustment.
1
<PAGE> 2
FM PRECISION GOLF CORP. AND ROYAL GRIP, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
FM PRECISION
GOLF CORP. ROYAL GRIP, INC.
AS OF AS OF PRO FORMA PRO FORMA
MAY 31, 1997 JUNE 30, 1997 ADJUSTMENTS NOTE 2 CONSOLIDATED
------------- ---------------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 27,841 $ -- $ -- $ 27,841
Accounts receivable, net......... 3,257,932 1,563,904 -- 4,821,836
Inventories, net................. 3,493,080 784,608 -- 4,277,688
Other current assets............. 286,168 283,774 -- 569,942
---------- ---------- ---------- -----------
Total current assets..... 7,065,021 2,632,286 -- 9,697,307
Property and equipment, net...... 2,868,440 1,857,315 -- 4,725,755
Intangibles, net................. -- 255,177 772,639 (a, b) 9,565,851
8,538,035 (b)
Net investment in lease.......... -- 2,793,813 -- 2,793,813
Deferred merger costs............ 465,136 -- (465,136) (a) --
Other assets..................... 25,799 23,750 -- 49,549
---------- ---------- ---------- -----------
$ 10,424,396 $7,562,341 $ 8,845,538 $ 26,832,275
========== ========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt, and line-of-credit...... $ 2,466,136 $ 958,527 $ -- $ 3,424,663
Accounts payable................. 1,258,082 1,147,249 815,003 (a) 3,220,334
Accrued expenses................. 1,724,815 472,393 -- 2,197,208
---------- ---------- ---------- -----------
Total current
liabilities............ 5,449,033 2,578,169 815,003 8,842,205
---------- ---------- ---------- -----------
Long-term debt and capital leases,
net of current portion........... 2,616,808 515,417 -- 3,132,225
---------- ---------- ---------- -----------
Other liabilities.................. -- 8,588 -- 8,588
---------- ---------- ---------- -----------
Stockholders' equity:
Preferred stock.................. -- -- -- --
Common stock..................... 10 2,742 2,796 (b) 5,548
Paid-in capital.................. 1,424,990 12,630,338 362,326 (b) 13,910,154
(507,500) (a)
Retained earnings (deficit)...... 933,555 (8,172,913) 8,172,913 (b) 933,555
---------- ---------- ---------- -----------
Total stockholders'
equity................. 2,358,555 4,460,167 8,030,535 14,849,257
---------- ---------- ---------- -----------
$ 10,424,396 $7,562,341 $ 8,845,538 $ 26,832,275
========== ========== ========== ===========
</TABLE>
2
<PAGE> 3
FM PRECISION GOLF CORP. AND ROYAL GRIP, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FM PRECISION
GOLF CORP. ROYAL GRIP, INC.
FOR THE YEAR ENDED FOR THE YEAR ENDED PRO FORMA PRO FORMA
MAY 31, 1997 JUNE 30, 1997 ADJUSTMENTS NOTE 2 CONSOLIDATED
------------------ ------------------ ----------- ------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.................... $21,742,517 $12,505,606 $ -- $34,248,123
Cost of sales................ 15,387,789 9,517,469 -- 24,905,258
----------- ----------- --------- -----------
Gross margin............ 6,354,728 2,988,137 -- 9,342,865
Selling, general and
administrative expenses.... 4,236,535 5,045,165 465,533 (c) 9,747,233
Loss on write-down and
disposition of property and
equipment.................. -- 446,166 -- 446,166
Write-off of intangible
assets..................... -- 684,329 -- 684,329
Manufacturing and outsourcing
costs...................... -- 1,052,900 -- 1,052,900
----------- ----------- --------- -----------
Operating income
(loss)................ 2,118,193 (4,240,423) (465,533) (2,587,763)
Interest (income) expense.... 485,601 (30,532) -- 455,069
Other expense, net........... -- 290,605 -- 290,605
----------- ----------- --------- -----------
Income (loss) before
income taxes.......... 1,632,592 (4,500,496) (465,533) (3,333,437)
Provision for income taxes... 699,037 -- (699,037) (d) --
----------- ----------- --------- -----------
Net income (loss)............ $ 933,555 $(4,500,496) $ 233,504 $(3,333,437)
=========== =========== ========= ===========
Net income (loss) per
share...................... $ 899.38 $ (1.64) $ (0.58)
=========== =========== ===========
Shares used in computing net
income (loss) per share.... 1,038 2,737,390 5,707,288(Note 3)
=========== =========== ===========
</TABLE>
3
<PAGE> 4
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
The pro forma condensed consolidated financial statements reflect a
reduction in the par value of FMP's common stock from $.01 to $.001 per share, a
split of each issued and outstanding share of FMP common stock into 4,176.796
shares of common stock and the conversion of the 2,742,178 shares of RG's common
stock outstanding as of June 30, 1997 into 1,371,089 shares of FMP's common
stock pursuant to the Merger, which amount will represent approximately 25% of
the outstanding shares of FMP common stock (30% assuming the exercise of all
outstanding RG warrants and options). In connection with the Merger, options and
warrants to purchase 983,500 shares of RG common stock will be converted into
options and warrants to purchase approximately 491,750 shares of FMP common
stock. The Merger will be accounted for as a purchase.
NOTE 2.
The accompanying unaudited condensed consolidated balance sheet gives
effect to the Merger as if it had occurred on May 31, 1997 and reflects the
allocation of the purchase price based on the fair value of the net assets
acquired. The pro forma condensed consolidated statements of operations include
the adjustments necessary to give effect to the Merger as if it had occurred on
May 31, 1996. Also reflected in the pro forma condensed consolidated balance
sheet are the estimated Merger and registration statement costs, including
payments to financial advisors, independent accountants, attorneys and others.
Adjustments included in the pro forma condensed consolidated financial
statements are as follows:
(a) Total estimated transaction costs are approximately $1,560,000,
consisting of $1,052,500 of costs related to the Merger and $507,500 of
costs related to the registration statement. The pro forma adjustment
includes a reclassification of Merger costs deferred by FMP as of May 31,
1997 as purchase price and also reflects $279,861 of costs related to the
Merger which have been expensed by RG as of June 30, 1997.
(b) To reflect the purchase price which represents the sum of (i) the
estimated fair value of the 1,371,089 shares of FMP common stock, $.001 par
value, to be issued in exchange for the 2,742,178 shares of RG common stock
outstanding as of June 30, 1997 (the estimated fair value of the shares of
FMP common stock issued represents the average closing bid price of RG
common stock for the five-day period from May 12, 1997 to May 16, 1997,
which includes two days before and after the announcement of the revised
Merger exchange ratio and the signing of the definitive Merger agreement,
of $3.925 times the 2,742,178 shares of RG stock to be exchanged for the
shares of FMP common stock), (ii) the estimated fair value of the 983,500
options and warrants to purchase RG common stock outstanding (which will be
converted into options and warrants to purchase approximately 491,750
shares of FMP common stock) of $2,235,153 which amount was determined using
the Black Scholes valuation model and (iii) estimated Merger costs of
$1,052,500 discussed in (a) above. The estimated fair value of the RG
options and warrants includes warrants to purchase 100,000 shares of RG
common stock at $.01 per share valued at approximately $400,000 which will
be issued to an investment banker in connection with the Merger. The value
of the warrants to be issued to the investment banker will be expensed by
RG upon consummation of the Merger. The excess of purchase price over the
fair value of net assets acquired of $9,310,674 represents the difference
between the aggregate purchase price of $14,050,702 described above, less
$279,861 which was previously expensed by RG and less RG's equity as of
June 30, 1997 of $4,460,167 since the book value of RG's net assets
approximates their fair value.
4
<PAGE> 5
(c) To reflect amortization of the $9,310,674 of goodwill resulting
from the Merger over an estimated life of 20 years.
(d) To eliminate the income tax provision due to a consolidated net
loss.
NOTE 3.
The pro forma consolidated shares used in computing the pro forma
consolidated net loss per share for the periods presented represents the
weighted average common and common equivalent shares outstanding for FMP as
adjusted for the stock split (4,336,199 shares) and the issuance of 1,371,089
shares of the FMP common stock to RG as described in Note 1.
5
