U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended November 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT.
For the transition period from __________ to _________.
Commission File Number: 0-71735
ROYAL PRECISION, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 06-1453896
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
15170 North Hayden Road, Suite 1
Scottsdale, AZ 85260
(Address of Principal Executive Offices) (Zip code)
(602) 627-0200
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year if Changed Since
Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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___
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
Title of each class Outstanding at January 14, 1999
------------------- -------------------------------
Common Stock, par value $.001 5,667,375 Shares
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
<PAGE>
ITEM 1.
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
November 30, May 31,
1998 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 71 $ 28
Accounts receivable, net of allowance for doubtful accounts of
$572 at November 30, 1998 and $602 at May 31, 1998 2,268 4,042
Inventories 5,339 4,049
Current portion of net investment in capital lease 249 240
Other current assets 46 74
Deferred income taxes 265 265
------------ ------------
Total current assets 8,238 8,698
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land 123 123
Buildings and improvements 841 689
Furniture, fixtures and office equipment 749 544
Machinery and equipment 4,154 3,894
------------ ------------
5,867 5,250
Less - Accumulated depreciation (1,101) (754)
------------ ------------
4,766 4,496
------------ ------------
GOODWILL, net 9,767 10,028
------------ ------------
NET INVESTMENT IN CAPITAL LEASE, less current portion 2,447 2,593
------------ ------------
OTHER ASSETS 53 71
------------ ------------
Total assets $ 25,271 $ 25,886
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines-of-credit $ 2,732 $ 3,462
Current portion of long-term debt and capital lease obligations 1,686 1,047
Accounts payable 1,014 1,769
Accrued salaries and benefits 644 760
Other accrued expenses 1,230 1,259
------------ ------------
Total current liabilities 7,306 8,297
------------ ------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
less current portion 3,862 3,171
------------ ------------
DEFERRED INCOME TAXES 46 46
------------ ------------
OTHER LIABILITIES 1 45
------------ ------------
Total liabilities 11,215 11,559
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000 shares authorized;
no shares issued -- --
Common stock, $.001 par value; 50,000,000 shares authorized;
5,667,375 and 5,601,697 shares issued and outstanding at
November 30, 1998 and May 31, 1998, respectively 6 6
Additional paid-in capital 13,838 13,821
Retained earnings 212 500
------------ ------------
Total stockholders' equity 14,056 14,327
------------ ------------
Total liabilities and stockholders' equity $ 25,271 $ 25,886
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
November 30, November 29, November 30, November 29,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES:
Golf shafts $ 3,041 $ 4,542 $ 8,042 $ 9,464
Golf grips 810 1,298 1,847 1,298
Headwear 652 1,022 1,446 1,022
------------ ------------ ------------ ------------
4,503 6,862 11,335 11,784
------------ ------------ ------------ ------------
COST OF SALES:
Golf shafts 1,946 3,172 5,220 6,899
Golf grips 426 343 977 343
Headwear 587 805 1,296 805
------------ ------------ ------------ ------------
2,959 4,320 7,493 8,047
------------ ------------ ------------ ------------
Gross profit 1,544 2,542 3,842 3,737
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,711 2,243 3,867 3,268
NONRECURRING MERGER RELATED EXPENSES -- 675 -- 675
------------ ------------ ------------ ------------
Operating loss (167) (376) (25) (206)
INTEREST EXPENSE 248 170 443 293
OTHER INCOME (64) (57) (125) (57)
------------ ------------ ------------ ------------
Loss before benefit from income taxes (351) (489) (343) (442)
------------ ------------ ------------ ------------
BENEFIT FROM INCOME TAXES (60) (198) (55) (177)
------------ ------------ ------------ ------------
Net loss $ (291) $ (291) $ (288) $ (265)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.05) $ (0.05) $ (0.05) $ (0.05)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER COMMON SHARE 5,663,103 5,596,442 5,632,232 4,965,249
============ ============ ============ ============
</TABLE>
The accompanying notes are in integral
part of these condensed consolidated financial statements.
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<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
November 30, November 29,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (288) $ (265)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities -
Depreciation and amortization 608 400
Loss on write-off of fixed assets, net -- 347
Changes in operating assets and liabilities, net of effect
of business acquired -
Accounts receivable 1,774 1,295
Inventories (1,290) (28)
Other assets 46 120
Accounts payable and accrued expenses (900) (550)
Supply agreement credits -- (472)
Other liabilities (44) --
------------ ------------
Net cash (used in) provided by operating activities (94) 847
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from Royal Grip, Inc. -- 18
Payments from net investment in capital lease 137 --
Purchases of equipment, net (617) (612)
Merger costs -- (1,015)
------------ ------------
Net cash used in investing activities (480) (1,609)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock warrants and options 17 1
Proceeds from issuance of long-term debt 5,140 1,000
(Repayments) borrowings under lines-of-credit, net (730) 217
Repayments of long-term debt and capital lease obligations (3,810) (484)
------------ ------------
Net cash provided by financing activities 617 734
------------ ------------
INCREASE (DECREASE) IN CASH 43 (28)
CASH, beginning of period 28 28
------------ ------------
CASH, end of period $ 71 $ --
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 461 $ 269
============ ============
Income taxes $ 28 $ 60
============ ============
Non-cash transactions -
Issuance of common stock and options and warrants to purchase
common stock for acquisition of Royal Grip, Inc. $ -- $ 12,995
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Operations and Significant Accounting Policies:
Basis of presentation -
The condensed consolidated financial statements of Royal Precision,
Inc. and subsidiaries (collectively, RPI or the Company) presented
herein have been prepared pursuant to the rules of the Securities and
Exchange Commission for quarterly reports on Form 10-QSB and do not
include all of the information and note disclosures required by
generally accepted accounting principles. These condensed
consolidated financial statements should be read in conjunction with
the Company's consolidated financial statements and notes thereto for
the year ended May 31, 1998 included in the Company's Form 10-KSB. In
the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting
of only normal recurring adjustments, necessary to present fairly the
consolidated financial position, results of operations and cash flows
of the Company. Quarterly operating results are not necessarily
indicative of the results that would be expected for the full year.
Principles of consolidation -
The accompanying consolidated financial statements include Royal
Precision, Inc. (RPI) and its three wholly-owned subsidiaries, FM
Precision Golf Manufacturing Corp. (FMP), FM Precision Golf Sales
Corp. (FM Sales) and Royal Grip, Inc. (formerly FMPSUB, Inc.) and its
wholly owned subsidiary, Roxxi, Inc. (collectively RG). On May 14,
1997, RPI entered into an Agreement and Plan of Merger with RG. Under
the terms of the Merger agreement, effective August 29, 1997, FMPSUB,
Inc. (a wholly-owned subsidiary of RPI created for such purpose)
merged with and into RG (the Merger). RG was the surviving
corporation and became a wholly-owned subsidiary of RPI. Accordingly,
the results of operations of RPI for all periods presented exclude
the results of operations of RG prior to August 29, 1997. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Reporting periods -
The Company's first three fiscal quarters in the fiscal year ended
May 31, 1998 ended on a Saturday. The Company's first three fiscal
quarters in the fiscal year ending May 31, 1999 end on the last
calendar day of the quarter. The Company's year end is May 31.
2. Net Loss Per Share:
In February 1997, the Financial Accounting Standards Board adopted a
new standard (SFAS No. 128) on accounting for earnings per share
(EPS). This new standard replaced the presentation of primary EPS
with a presentation of basic EPS and changed the fully diluted
terminology to diluted. It also requires dual presentation of basic
and diluted EPS on the face of the income statement. In February
1998, the SEC issued Staff Accounting Bulletin (SAB) No. 98, which,
among other things, addresses the impact of cheap stock in earnings
per share computations. All weighted average share and net loss per
share amounts for all periods have been presented, and if necessary,
restated to conform to the SFAS No. 128 and SAB No. 98 requirements.
Basic earnings per common share are based on the average number of
common shares outstanding during the periods presented. Diluted
earnings per common share assumes, in addition to the above, a
dilutive effect of common share equivalents during the periods
presented. Common share equivalents represent dilutive stock options
using the treasury stock method. Common share equivalents were
antidilutive in all periods presented.
-5-
<PAGE>
3. New Accounting Standards:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income (net income together with other non-owner
changes in equity) and its components in a full set of general
purpose financial statements. RPI's comprehensive income is the same
as RPI's net income for the three and six month periods ended
November 30, 1998 and November 29, 1997.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and other Postretirement Benefits", which
revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of
those plans. It standardizes the disclosure requirements for pensions
and other postretirement benefits to the extent practicable and
requires additional information on changes in the benefit obligations
and fair values of plan assets that will facilitate financial
analysis. Since SFAS No. 132 affects disclosures only and not
measurement, the standard will have no financial impact upon adoption
at the end of fiscal 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which requires that
an entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments
at fair value. The Company will be required to adopt SFAS No. 133 as
of June 1, 2000 and does not anticipate any material impact resulting
from the adoption of this pronouncement.
4. Inventories:
Inventories as of November 30, 1998 and May 31, 1998 consisted of the
following (in thousands):
November 30, 1998 May 31, 1998
----------------- ------------
Raw materials $ 780 $1,161
Work-in-process 2,059 1,206
Finished goods 2,500 1,682
------ ------
$5,339 $4,049
====== ======
5. Information on Segments:
The Company has three reportable segments: golf club shafts, golf
club grips and headwear. The accounting policies of the segments are
the same as those described in the summary of significant accounting
policies. The Company evaluates the performance of these segments
based on segment profit or loss after income taxes. The Company
allocates certain administrative expenses to segments. The amounts in
this illustration are the amounts in reports used by the chief
operating decision maker as of November 30, 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended November 30, 1998
------------------------------------
Golf Golf
Shafts Grips Headwear Total
------ ----- -------- -----
<S> <C> <C> <C> <C>
Revenues from external customers $ 3,041 $ 810 $ 652 $ 4,503
Intersegment revenues -- -- 2 2
Segment profit (loss) (75) 107 (323) (291)
Segment assets 9,698 11,462 1,615 22,775
Total assets for reportable segments $ 22,775
Elimination of investment in subsidiaries (7,271)
Goodwill not allocated to segments 9,767
--------
Consolidated total assets $ 25,271
========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Three Months Ended November 29, 1997
------------------------------------
Golf Golf
Shafts Grips Headwear Total
------ ----- -------- -----
<S> <C> <C> <C> <C>
Revenues from external customers $ 4,542 $ 1,298 $ 1,022 $ 6,862
Intersegment revenues -- -- 2 2
Segment profit (loss) (333) 361 (319) (291)
Segment assets 9,020 11,781 2,120 22,921
Total assets for reportable segments $ 22,921
Elimination of investment in subsidiaries (7,608)
Goodwill not allocated to segments 10,271
--------
Consolidated total assets $ 25,584
========
Six Months Ended November 30, 1998
----------------------------------
Golf Golf
Shafts Grips Headwear Total
------ ----- -------- -----
Revenues from external customers $ 8,042 $ 1,847 $ 1,446 $ 11,335
Intersegment revenues -- -- 7 7
Segment profit (loss) (32) 158 (414) (288)
Segment assets 9,698 11,462 1,615 22,775
Total assets for reportable segments $ 22,775
Elimination of investment in subsidiaries (7,271)
Goodwill not allocated to segments 9,767
--------
Consolidated total assets $ 25,271
========
Six Months Ended November 29, 1997
----------------------------------
Golf Golf
Shafts Grips Headwear Total
------ ----- -------- -----
Revenues from external customers $ 9,464 $ 1,298 $ 1,022 $ 11,784
Intersegment revenues -- -- 2 2
Segment profit (loss) (307) 361 (319) (265)
Segment assets 9,020 11,781 2,120 22,921
Total assets for reportable segments $ 22,921
Elimination of investment in subsidiaries (7,608)
Goodwill not allocated to segments 10,271
--------
Consolidated total assets $ 25,584
========
</TABLE>
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<PAGE>
6. Borrowing Arrangements:
On October 9, 1998, FMP entered into a new credit facility and RG
amended its existing borrowing arrangement. As a result, all of the
Company's bank facilities are consolidated with one lender.
In connection with the new credit facility for FMP, all loans to FMP
were paid off and a new credit and security agreement was entered
into with RG's lender. In connection with the repayment of the old
FMP credit facility, FMP paid a $75,000 prepayment penalty which is
reflected as a component of interest expense in the second quarter.
Terms of FMP's new credit facility are as follows. The amount
available for borrowings under the FMP term loan is $4.3 million.
Such amount was funded on October 9, 1998. The amount available for
borrowing under the FMP revolving line-of-credit is based upon the
levels of eligible accounts receivable and inventories, as defined,
subject to maximum borrowing of $4.0 million. FMP's term loan is due
in monthly principal installments of $99,000 through and until
October 1, 1999 and $65,000 monthly, thereafter until the maturity of
the loan.
The borrowing arrangement with RG was amended and restated. The
amendment resulted in the funding of a new RG term loan of $840,000
in addition to the existing RG term loan that had $472,000
outstanding at October 9, 1998. The new RG term loan was funded on
October 9, 1998. The amount available for borrowings under the RG
revolving line-of-credit is based upon the levels of eligible
accounts receivable and inventories, as defined, subject to maximum
borrowing of $1.5 million. RG's term loans are due in monthly
principal installments of $40,000 through and until October 1, 1999
and $22,500 monthly, thereafter until the maturity of the loan.
Borrowings under all term loans and both revolving lines-of-credit
bear interest at a rate per annum equal to the prime rate (7.75% at
November 30, 1998) plus 0.75% and 0.25%, respectively, and are
secured by substantially all of the Company's assets. The maturity
date for all term loans and both revolving lines-of-credit is
September 30, 2001. On November 30, 1998, the Company had $2,732,000
outstanding under the revolving lines-of-credit and $736,000
available for additional borrowings.
As of November 30, 1998, the Company was in default of one covenant
in its credit facilities related to maximum consolidated net loss or
minimum consolidated net income on a monthly basis which default has
been waived by the lender. The Company was in compliance with the
covenant related to maximum consolidated net loss or minimum
consolidated net income on a quarterly basis and all other covenants
in its credit facilities as of November 30, 1998.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements -
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-QSB, any other
Form 10-QSB, Form 10-KSB, or Form 8-K, or any other written or oral
statements made by or on behalf of RPI may include forward looking
statements which reflect RPI's current views with respect to future
events and financial performance. These forward-looking statements
are subject to certain uncertainties and other factors that could
cause actual results to differ materially from such statements. These
uncertainties and other factors include, but are not limited to,
uncertainties relating to international, national, and local economic
conditions, customer plans and commitments, RPI's cost of raw
materials, the competitive environment in which RPI operates, and
changes in the financial markets relating to RPI's capital structure
and cost of capital. Statements in this Form 10-QSB, including the
Notes to the Condensed Consolidated Financial Statements and
"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 detailed in RPI's Form 10-KSB.
Please refer to "Risk Factors" therein. The words "believe,"
"expect," "anticipate," "project," and similar expressions identify
forward looking statements, which speak only as of the date the
statement was made. RPI undertakes no obligation to publicly update
or revise any forward looking statements, whether as a result of new
information, future events, or otherwise.
Overview -
Royal Precision, Inc. (RPI or the Company) has three wholly-owned
subsidiaries which are FM Precision Golf Manufacturing Corp. (FMP),
FM Precision Golf Sales Corp. (FM Sales), Royal Grip, Inc. (formerly
known as FMPSUB, Inc.) and its wholly owned subsidiary, Roxxi, Inc.
(collectively RG). RPI acquired RG on August 29, 1997 by means of a
merger whereby FMPSUB, Inc. merged with and into RG with RG being the
surviving corporation. The effective date of the merger was August
29, 1997. Accordingly, the results of operations of RPI for all
periods presented exclude the results of operations of RG prior to
August 29, 1997.
FMP is a manufacturer and distributor of golf shafts that are sold to
original equipment manufacturers (OEMs) and to distributors and
retailers for use in the replacement market. The majority of FMP's
sales are to OEMs. FMP also sells golf shafts in foreign markets
including Japan, Canada, Australia and the United Kingdom.
-8-
<PAGE>
RG designs and distributes golf club grips and manufactures and
distributes athletic headwear. RG's products are sold primarily
throughout the United States, Japan and the United Kingdom. The
majority of RG's grip sales are to its Japanese distributor. In
December 1996, RG outsourced the manufacturing of its non-cord grips
to Acushnet Rubber Company.
The Company's business experiences the impact of seasonality with
stronger demand for products during the quarters ending in February
and May.
Three Months Ended November 30, 1998 Compared to the Three Months
Ended November 29, 1997 -
Net Sales. Net sales for the three months ended November 30, 1998
were $4.5 million, a decrease of 34% from net sales of $6.9 million
for the corresponding period in 1997. The decrease in net sales of
$2.4 million is primarily attributable to a reduction in sales of the
Company's lower priced commercial grade golf club shafts of $1.6
million or 72%. Sales of this product were significantly reduced
following a price increase instituted by the Company in the first
quarter of fiscal 1999. In response to these unfavorable results, the
Company has modified its pricing structure in an effort to increase
sales of this product in future periods. Net sales of the Company's
other golf club shaft lines increased by $0.1 million or 8%. Net
sales of golf club grips decreased by $0.5 million or 38% primarily
as a result of decreased business with two significant OEM customers
which accounted for $205,000 in sales during the three months ended
November 29, 1997 compared to $25,000 during the comparable period in
1998. Additionally, golf club grip sales to the Company's Japanese
distributor decreased from $677,000 during the three months ended
November 29, 1997 to $539,000 during the comparable period in 1998.
This is a result of increased competitive pressure and a decline in
the demand for golf products due to the poor economic condition of
the region. The Company has recently decreased its pricing structure
in this market to respond to these conditions. Net sales of headwear
decreased by $0.4 million or 36% primarily as a result of increased
competitive pressure in the industry.
Cost of Goods Sold. Cost of goods sold for the three months ended
November 30, 1998 was $3.0 million, a decrease of 32% from cost of
goods sold of $4.3 million for the same period in 1997. The decrease
in cost of goods sold of $1.3 million is primarily attributable to
the decline in sales of commercial grade golf club shafts discussed
above. Total golf club shaft cost of goods sold decreased by $1.2
million. Golf club grips cost of sales increased by $0.1 million
despite a $0.5 million decrease in net sales due to a credit of $0.5
million received from Acushnet as compensation for delays and
shortfalls in the production of golf club grips for the Company. This
credit was recorded as a one-time reduction in golf club grips cost
of sales during the three months ended November 29, 1997.
Additionally, headwear cost of goods sold decreased by $0.2 million
as a result of lower sales.
Gross Profit. Gross profit for the three months ended November 30,
1998 was $1.5 million, a decrease of $1.0 million or 39% from gross
profit of $2.5 million for the corresponding period in 1997. Gross
profit on sales of golf club shafts for the three months ended
November 30, 1998 decreased by $0.3 million or 20% as compared to the
same period last year. As a percentage of sales, the gross profit on
shaft sales increased from 30% to 36% due to a change in the mix of
products sold from the lower margin commercial grade shafts to the
higher margin Rifle shafts. Gross profit on golf club grip sales
decreased by $0.6 million or 60%. The $0.5 million credit received
from Acushnet during the three months ended November 29, 1997
accounted for most of this decrease with the balance attributable to
lower unit volume offset by higher unit margins. Gross profit on
headwear sales decreased by $0.1 million due to reduced sales and
reduced unit margins during the three months ended November 30, 1998
compared to the same period last year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended November 30, 1998
were $1.7 million, a decrease of 24% from selling, general and
administrative expenses of $2.2 million for the same period in 1997.
The decrease in selling, general and administrative expenses of $0.5
million is primarily attributable to a reduction in marketing and
advertising costs of $0.4 million.
Nonrecurring Merger Related Expenses. In conjunction with the August
29, 1997 merger discussed above, nonrecurring expenses of $0.7
million were incurred during the three months ended November 29,
1997.
Interest Expense. Interest expense for the three months ended
November 30, 1998 was $248,000 compared to $170,000 for the same
period last year. The increase is primarily attributable to a $75,000
loan prepayment fee incurred on October 9, 1998 upon funding of the
new credit facilities discussed in note 6 to the condensed
consolidated financial statements.
Other Income. Other income for the three-month periods ended November
30, 1998 and November 29, 1997 is consistent at $64,000 and $57,000,
respectively.
Income Taxes. A benefit from income taxes of $0.1 million and $0.2
million was recorded for the three month periods ended November 30,
1998 and November 29, 1997, respectively. Taxes are provided based on
the estimated effective tax rate for the year which considers the
effect of nondeductible goodwill amortization and the inability to
carryback RG losses to periods prior to the Merger. At November 30,
1998, the Company had an unrecorded income tax benefit of
approximately $0.1 million due to the carryback limitations on RG
losses.
-9-
<PAGE>
Six Months Ended November 30, 1998 Compared to the Six Months Ended
November 29, 1997 -
Net Sales. Net sales for the six months ended November 30, 1998 were
$11.3 million, a decrease of 4% from net sales of $11.8 million for
the corresponding period in 1997. The decrease in net sales of $0.5
million is primarily attributable to a reduction in sales of the
Company's lower priced commercial grade golf club shafts of $2.4
million or 58%. Sales of this product were significantly reduced
following a price increase instituted by the Company in the first
quarter of fiscal 1999. In response to these unfavorable results, the
Company has modified its pricing structure in an effort to increase
sales of this product in future periods. Net sales of the Company's
other golf club shaft lines increased by $1.0 million or 21%. Net
sales of golf club grips and net sales of headwear increased by $0.5
million or 42% and $0.4 million or 41%, respectively. These increases
primarily result from the inclusion of RG golf club grip sales of
$1.0 million and headwear sales of $0.8 million during the three
month period ended August 31, 1998 compared to $0 during the
comparable period of 1997 which was prior to the effective date of
the Merger.
Cost of Goods Sold. Cost of goods sold for the six months ended
November 30, 1998 was $7.5 million, a decrease of 7% from cost of
goods sold of $8.0 million for the same period in 1997. The decrease
in cost of goods sold of $0.5 million is primarily attributable to
the decline in sales of commercial grade golf club shafts discussed
above. Total golf club shaft cost of goods sold decreased by $1.6
million. Golf club grips cost of goods sold and headwear cost of
goods sold increased by $0.6 million and $0.5 million, respectively.
These increases primarily result from the inclusion of RG golf club
grip cost of goods sold of $0.5 million and headwear cost of goods
sold of $0.7 million during the three month period ended August 31,
1998 compared to $0 during the comparable period of 1997 which was
prior to the effective date of the Merger.
Gross Profit. Gross profit for the six months ended November 30, 1998
was $3.8 million, an increase of 3% over gross profit of $3.7 million
for the corresponding period in 1997. The increase in gross profit of
$0.1 million is primarily attributable to the inclusion of $0.5
million in gross profit from sale of golf club grips and $0.1 million
in gross profit from sale of headwear during the three month period
ended August 31, 1998 compared to $0 during the comparable period of
1997 which was prior to the effective date of the Merger. Offsetting
these items is the $0.5 million credit from Acushnet which was
recorded as a one-time reduction to golf club grips cost of sales
during the three months ended November 29, 1997. As a percentage of
sales, the gross profit on shaft sales has increased from 27% to 35%
due to a change in the mix of products sold from the lower margin
commercial grade shafts to the higher margin Rifle shafts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended November 30, 1998
were $3.9 million, an increase of 18% from selling, general and
administrative expenses of $3.3 million for the same period in 1997.
The increase in selling, general and administrative expenses of $0.6
million is primarily attributable to the inclusion of $0.5 million of
selling, general and administrative expenses from RG for three month
period ended August 31, 1998 compared to $0 during the comparable
period of 1997 which was prior to the effective date of the Merger.
Nonrecurring Merger Related Expenses. In conjunction with the August
29, 1997 merger discussed above, nonrecurring expenses of $0.7
million were incurred during the six months ended November 29, 1997.
Interest Expense. Interest expense for the six months ended November
30, 1998 was $443,000 compared to $293,000 for the same period last
year. The increase in interest expense is primarily attributable to a
$75,000 loan prepayment fee incurred on October 9, 1998 upon funding
of the new credit facilities discussed in note 6 to the condensed
consolidated financial statements. Additionally, RG interest expense
totaled $54,000 for three month period ended August 31, 1998 compared
to $0 during the comparable period of 1997 which was prior to the
effective date of the Merger.
Other Income. Other income for the six months ended November 30, 1998
was $125,000, compared to $57,000 for the same period last year. This
increase is due to the inclusion of interest income of $54,000 from
RG's capital lease receivable for three month period ended August 31,
1998 compared to $0 during the comparable period of 1997 which was
prior to the effective date of the Merger.
Income Taxes. A benefit from income taxes of $0.1 million and $0.2
million was recorded for the six month periods ended November 30,
1998 and November 29, 1997, respectively. Taxes are provided based on
the estimated effective tax rate for the year which considers the
effect of nondeductible goodwill amortization and the inability to
carryback RG losses to periods prior to the Merger. At November 30,
1998, the Company had an unrecorded income tax benefit of
approximately $0.1 million due to the carryback limitations on RG
losses.
-10-
<PAGE>
Liquidity and Capital Resources. At November 30, 1998, RPI had
working capital of $932,000 and a current ratio of 1.1 to 1 as
compared to working capital of $401,000 and a current ratio of 1.0 to
1 at May 31, 1998. The Company believes that its existing capital
resources and credit lines available are sufficient to fund its
operations and capital requirements as presently planned over the
next twelve months. On October 9, 1998, FM entered into a new credit
facility and RG amended its existing borrowing arrangement. As a
result, all of the Company's bank facilities are consolidated with
one lender.
In connection with the new credit facility for FMP, all loans to FMP
were paid off and a new credit and security agreement was entered
into with RG's lender. In connection with the repayment of the old
FMP credit facility, FMP paid a $75,000 prepayment penalty which is
reflected as a component of interest expense in the second quarter.
Terms of FMP's new credit facility are as follows. The amount
available for borrowings under the FMP term loan is $4.3 million.
Such amount was funded on October 9, 1998. The amount available for
borrowing under the FMP revolving line-of-credit is based upon the
levels of eligible accounts receivable and inventories, as defined,
subject to maximum borrowing of $4.0 million. FMP's term loan is due
in monthly principal installments of $99,000 through and until
October 1, 1999 and $65,000 monthly, thereafter until the maturity of
the loan.
The borrowing arrangement with RG was amended and restated. The
amendment resulted in the funding of a new RG term loan of $840,000
in addition to the existing RG term loan that had $472,000
outstanding at October 9, 1998. The new RG term loan was funded on
October 9, 1998. The amount available for borrowings under the RG
revolving line-of-credit is based upon the levels of eligible
accounts receivable and inventories, as defined, subject to maximum
borrowing of $1.5 million. RG's term loans are due in monthly
principal installments of $40,000 through and until October 1, 1999
and $22,500 monthly, thereafter until the maturity of the loan.
Borrowings under all term loans and both revolving lines-of-credit
bear interest at a rate per annum equal to the prime rate (7.75% at
November 30, 1998) plus 0.75% and 0.25%, respectively, and are
secured by substantially all of the Company's assets. The maturity
date for all term loans and both revolving lines-of-credit is
September 30, 2001. On November 30, 1998, the Company had $2,732,000
outstanding under the revolving lines-of-credit and $736,000
available for additional borrowings.
As of November 30, 1998, the Company was in default of one covenant
in its credit facilities related to maximum consolidated net loss or
minimum consolidated net income on a monthly basis, which default has
been waived by the lender. The Company was in compliance with the
covenant related to maximum consolidated net loss or minimum
consolidated net income on a quarterly basis and all other covenants
in its credit facilities as of November 30, 1998.
During the six months ended November 30, 1998, net cash used in
operating activities was $0.1 million which primarily resulted from a
net loss of $0.3 million, an increase in inventories of $1.3 million
and a decrease in accounts payable and accrued expenses of $0.9
million offset by a decrease in accounts receivable of $1.8 million
and $0.6 million of depreciation and amortization. RPI used $0.5
million in investing activities during the six months ended November
30, 1998, primarily for the purchase of additional property, plant
and equipment. The Company estimates that capital expenditures for
the year ended May 31, 1999 will be approximately $1.7 million.
Net cash provided by financing activities for the six months ended
November 30, 1998, was $0.6 million by issuance of long term debt
totaling $5.1 million partially offset by the repayments of $3.8
million and $0.7 million on the Company's term loans and
lines-of-credit, respectively.
Year 2000 Assessment. The following Year 2000 discussion contains
various forward-looking statements that represent the Company's
beliefs or expectations regarding future events. When used in the
Year 2000 discussion, the words "believe", "expects", "estimates" and
other similar expressions are intended to identify forward-looking
statements. Forward-looking statements include, without limitation,
the Company's expectations as to when it and its significant
distributors, customers and suppliers will complete the
implementation and compliance phases of the Year 2000 Plan, as well
as its Year 2000 contingency plans; and the Company's belief that its
internal systems and equipment are Year 2000 compliant. All
forward-looking statements involve a number of risks and
uncertainties that could cause the actual results to differ
materially from the projected results. Factors that may cause these
differences include, but are not limited to, the availability of
qualified personnel and other information technology resources; the
ability to identify and rectify all date sensitive lines of code or
to replace embedded chips in affected systems or equipment;
unanticipated delays or expenses related to correction of the
problems; and the actions of independent third-parties with respect
to Year 2000 problems. The statements in the following section
include "Year 2000 Readiness Disclosure" within the meaning of the
Year 2000 Information and Readiness Disclosure Act of 1998.
-11-
<PAGE>
The Year 2000 problem refers to the inability of software to process
date information later than December 31, 1999. Date codes in many
software programs are abbreviated to allow only two digits for the
year. Software with date-sensitive functions that is not Year 2000
compliant may not be able to distinguish whether "00" means 1900 or
2000. When that happens, some software will not work at all and other
software will suffer critical calculation and other processing
errors. Hardware and other products with embedded chips may also
experience problems.
The Company believes that its critical internal systems including
versions of Macola, ADP, Oracle, Microsoft Exchange, and Microsoft
Office 97 products are Year 2000 compliant. In addition, the Company
tracks the version and updates available for these products to ensure
Year 2000 compliance.
The Company has completed a comprehensive evaluation of its internal
systems and equipment that addresses both information technology
systems ("IT") (i.e. business systems and the software development
environment) and non-IT systems, (i.e. elevators, building security
and HVAC systems) including hardware, software and firmware. In
addition, the Company has completed the upgrade of certain critical
systems to meet with Year 2000 requirements. During the previous
two-year period, the Company has incurred approximately $100,000 to
purchase and install new computer hardware and software resulting in
all Company hardware and software used for accounting purposes being
Year 2000 compliant. Expenses associated with evaluation of the
Company's internal systems for Year 2000 problems have been
approximately $20,000. The final phase of the internal Year 2000
project has been completed with the conversion of the E-mail system
to Microsoft Exchange at a cost of $10,000. The Company believes that
any future internal Year 2000 costs will be immaterial.
Due to the Company's extensive internal Year 2000 analysis and
subsequent completion of the Year 2000 project, the Company has
determined that an internal contingency plan is unnecessary. The
Company also is in the process of conducting a review of its
suppliers to determine that the suppliers' operations and the
products and services they provide are Year 2000 compliant. The
Company has already contacted its critical suppliers and utility
providers for each of its business units. All significant suppliers
and utilities except one of the Company's golf grip suppliers have
indicated that their products and company are Year 2000 compliant.
The primary supplier of the Company's golf grips is currently in the
process of converting, upgrading, and correcting all known Year 2000
problems. This supplier is in the last phase of its plan to correct
the Year 2000 problems and has indicated that the project will be
completed during the first calendar quarter of 1999. The Company is
closely monitoring the status of this project and is assisting in its
implementation.
The Company has no practical means to verify the information provided
by these independent third parties and is still pursuing those
secondary distributors and vendors who may not yet have responded.
Based upon this assessment and where practicable, the Company will
attempt to mitigate its risks with respect to any suppliers that may
not meet the requirements, including seeking alternative suppliers.
However, there can be no assurance that the Company will not
experience disruptions in its ability to conduct business because of
Year 2000 problems experienced by the Company's distributors or
vendors, such problems remain a possibility and could have an adverse
impact on the Company's results of operations and financial
condition. To the extent that its key distributors or vendors
experience problems relative to achieving Year 2000 compliance, the
Company could suffer unanticipated revenue losses.
Some independent sales representatives that the Company uses may have
applications that are not Year 2000 compliant. The Company does not
believe this is a material concern since product orders are either
manually written and submitted via fax, or are submitted on a Company
supplied automated order form that is Year 2000 compliant.
Some commentators have predicted significant litigation regarding
Year 2000 compliance issues. Because of the unprecedented nature of
such litigation, it is uncertain whether, or to what extent, the
Company may be affected. However, at this time the Company believes
that it is not likely to have a material adverse effect on the
Company or its operations.
-12-
<PAGE>
Business Environment and Future Results.
Reliance on Third Party Suppliers. RG currently purchases a majority
of its supply of non-cord grips from Acushnet Rubber Company
(Acushnet). During the transition to Acushnet beginning in December
1996, Acushnet experienced delays and quality problems in the
production of grips, which adversely affected RG's customer
relationships and results of operations.
Under the amended Manufacturing and Supply Agreement, either Acushnet
or RG may voluntarily terminate the agreement upon payment of a
specified termination fee, among other things. During calendar year
1999 and beyond, RG is required to purchase a minimum number of
grips. Failure by RG to purchase the minimum, during any calendar
year, constitutes a material breach of the Agreement pursuant to
which Acushnet, at its option, may terminate the Agreement without
paying the termination fee. Minimum order requirements commence on
January 1, 1999 and are measured on a calendar year basis. The
Company has placed orders to meet its minimum requirement for 1999.
However, there can be no assurances that the Company will be able to
meet its minimum order requirements in years subsequent to 1999.
RG currently has no back-up source of supply should the Company or
Acushnet elect to utilize its termination rights, and any transition
to alternative suppliers or the resumption of in-house manufacturing
operations by RG may result in production delays, the loss of sales
and key customers which would materially affect RG's financial
condition and results of operations. The contract requires Acushnet
to provide RG with 10 months notice to terminate the contract.
Although RG believes that it has certain remedies available to it
under its agreement with Acushnet arising out of a voluntary
termination of the agreement by Acushnet, including the payment of
termination fees and expenses, there can be no assurance that RG
would be able to successfully pursue such remedies or that such
remedies would adequately compensate RG for any losses incurred.
-13-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
(3) Certificate of Incorporation and Bylaws
Exhibit 3.1. Amended and Restated Certificate of Incorporation of FM
Precision Golf Corp. (incorporated by reference to Annex IV to the
Company's Form S-4; No. 333-28841 (the "Form S-4")).
Exhibit 3.2. Bylaws of Royal Precision, Inc. (incorporated by
reference to Exhibit 3.2 to the Form S-4).
(4) Instruments Defining the Rights of Security Holders
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 Exhibit 3.1 to the 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.
(incorporated by reference to Exhibit 3.2 to the Form S-4).
Exhibit 27. Financial Data Schedule (submitted electronically for SEC
information only)
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the
quarter ended November 30, 1998.
-14-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ROYAL PRECISION, INC.
Date January 14, 1999 By /s/ Thomas Schneider
- --------------------- -------------------------------------------
Thomas Schneider, President and
Treasurer (duly authorized officer
and principal financial officer)
-15-
<PAGE>
EXHIBIT INDEX
PAGE IN
SEQUENTIALLY
NUMBERED
EXHIBIT COPY
3.1 Amended and Restated Certificate of Incorporation of
registrant (incorporated by reference to Annex IV to the
Company's Form S-4, No. 333-28841) (the "Form S-4") *
3.2 Bylaws of Royal Precision, Inc. (incorporated by reference
to Exhibit 3.2 to the Form S-4) *
4.1 See Articles FOUR, FIVE and SEVEN of the Amended and
Restated Certificate of Incorporation of the registrant
(incorporated by reference to Exhibit 3.1 to the Form S-4. *
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. (incorporated by reference to Exhibit 3.2
to the Form S-4) *
27. Financial Data Schedule (submitted electronically for SEC
information only)
-----------------
* Incorporated by reference
-16-
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<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-30-1998
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