U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended August 31, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to _________.
Commission File Number: 0-22889
ROYAL PRECISION, INC.
(Exact Name of Registrant 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)
(480) 627-0200
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate 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 October 14, 1999
------------------- -------------------------------
Common Stock, par value $.001 5,670,130 Shares
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
AUGUST 31, MAY 31,
1999 1999
----------- ---------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 48 $ 184
Accounts receivable, net of allowance for
doubtful accounts of $443 at August 31, 1999
and $433 at May 31, 1999 2,277 4,617
Inventories 5,225 4,514
Other current assets 578 783
Deferred income taxes 647 647
-------- --------
Total current assets 8,775 10,745
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 123 123
Furniture, fixtures and office equipment 513 499
Buildings and improvements 670 670
Machinery and equipment 4,167 4,144
Construction in progress 899 402
-------- --------
6,372 5,838
Less - Accumulated depreciation (1,106) (929)
-------- --------
5,266 4,909
-------- --------
GOODWILL, net 8,735 8,857
-------- --------
DEFERRED INCOME TAXES 70 70
-------- --------
OTHER ASSETS 27 29
-------- --------
Total assets $ 22,873 $ 24,610
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital
lease obligations $ 1,031 $ 1,203
Accounts payable 1,263 1,839
Accrued salaries and benefits 547 595
Accrued pension liability 158 251
Other accrued expenses 1,200 1,079
-------- --------
Total current liabilities 4,199 4,967
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
less current portion included above 4,928 6,191
-------- --------
Total liabilities 9,127 11,158
-------- --------
COMMITMENTS AND CONTINGENCIES
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; 5,670,130 and 5,667,375 shares
issued and outstanding at August 31, 1999
and May 31, 1999, respectively 6 6
Additional paid-in capital 13,897 13,897
Accumulated deficit (110) (404)
Accumulated other comprehensive loss (47) (47)
-------- --------
Total stockholders' equity 13,746 13,452
-------- --------
Total liabilities and stockholders' equity $ 22,873 $ 24,610
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-2-
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(dollars in thousands, except per share amounts)
THREE MONTHS ENDED
----------------------
AUGUST 31, AUGUST 31,
1999 1998
---------- ----------
NET SALES:
Golf club shafts $ 5,286 $ 5,001
Golf club grips 1,230 1,037
------- -------
6,516 6,038
------- -------
COST OF SALES:
Golf club shafts 3,219 3,274
Golf club grips 850 551
------- -------
4,069 3,825
------- -------
Gross profit 2,447 2,213
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,761 1,895
------- -------
Operating income 686 318
INTEREST EXPENSE 151 161
OTHER INCOME 55 61
------- -------
Income from continuing operations before
provision for income taxes 590 218
PROVISION FOR INCOME TAXES 296 5
------- -------
Income from continuing operations 294 213
DISCONTINUED OPERATIONS:
Loss from operations of Roxxi, Inc. -- 210
------- -------
Net income $ 294 $ 3
======= =======
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 0.05 $ 0.04
Loss from discontinued operations -- (0.04)
------- -------
Net income $ 0.05 $ --
======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-3-
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED
----------------------
AUGUST 31, AUGUST 31,
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 294 $ 213
Adjustments to reconcile net income from continuing
operations to net cash provided by operating
activities --
Cash loss from discontinued operations -- (137)
Depreciation and amortization 304 231
Loss on retirement or write-off of fixed assets 7 --
Changes in operating assets and liabilities --
Accounts receivable, net 2,340 1,381
Inventories (711) 149
Other assets 207 51
Accounts payable and accrued expenses (596) (584)
Other liabilities -- (43)
------- -------
Net cash provided by operating activities 1,845 1,261
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments from net investment in capital lease -- 78
Purchases of equipment, net (546) (334)
------- -------
Net cash used in investing activities (546) (256)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options
and warrants -- 13
Repayments under lines-of-credit, net (1,036) (784)
Repayments of long-term debt and capital lease
obligations (399) (262)
------- -------
Net cash used in financing activities (1,435) (1,033)
------- -------
DECREASE IN CASH (136) (28)
CASH, beginning of period 184 28
------- -------
CASH, end of period $ 48 $ --
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for --
Interest $ 204 $ 205
======= =======
Income taxes $ 31 $ 17
======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-4-
<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, "RP" or the "Company") presented herein
have been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q 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, 1999 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.
ORGANIZATION --
The accompanying condensed consolidated financial statements include Royal
Precision, Inc. and its three wholly-owned subsidiaries, FM Precision Golf
Manufacturing Corp. ("FMP"), FM Precision Golf Sales Corp. ("FMP Sales")
and Royal Grip, Inc. ("RG") which has a wholly-owned subsidiary, Royal Grip
Headwear Company. All significant intercompany balances and transactions
have been eliminated in consolidation. As discussed in Note 7, the Company
disposed of the operating assets of Royal Grip Headwear Company (formerly
known as Roxxi, Inc. "Roxxi") in March 1999. Results of operations for
Roxxi for all periods through May 31, 1999 are reflected as discontinued
operations.
BUSINESS --
RP is a holding company which carries on its business operations through
its subsidiaries. FMP is a manufacturer and distributor of golf club shafts
which are sold to original equipment manufacturers and to distributors and
retailers for use in the replacement market. RG designs and distributes
golf club grips. RP's products are sold throughout the United States as
well as internationally, primarily in Japan, Australia, the United Kingdom
and Canada.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements such as the estimate for impairment of long-lived
assets and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. EARNINGS (LOSS) PER SHARE:
The Company accounts for earnings (loss) per share in accordance with SFAS
No. 128, "Earnings Per Share." Basic earnings (loss) per share are based on
the average number of common shares outstanding during the period. Diluted
earnings (loss) per share assumes, in addition to the above, a dilutive
effect of common share equivalents during the period. Common share
equivalents represent dilutive stock options using the treasury stock
method. The number of shares used in computing income from continuing
operations per share for the three months ended August 31, 1999 and 1998
were as follows (in thousands):
-5-
<PAGE>
1999 1998
---- ----
Basic:
Average common shares outstanding 5,668 5,602
Diluted:
Dilutive effect of stock options 138 107
----- -----
Average common shares outstanding 5,806 5,709
===== =====
As of August 31, 1998, basic and diluted average common shares outstanding
for discontinued operations were 5,602,000. Basic and diluted earnings
(loss) per share were the same for the three months ended August 31, 1999
and 1998.
3. NEW ACCOUNTING PRONOUNCEMENT:
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. In June
1999, the FASB issued SFAS No. 137 which deferred the effective date of
SFAS No. 133. The Company will be required to adopt SFAS No. 133 during the
fiscal year ended May 31, 2001. The Company does not anticipate any
material impact resulting from the adoption of SFAS No. 133.
4. INVENTORIES:
Inventories are valued at the lower of cost or market. Cost is determined
on the first-in, first-out method. Inventories as of August 31, 1999 and
May 31, 1999 consisted of the following (in thousands):
AUGUST 31, 1999 MAY 31, 1999
--------------- ------------
Raw materials $ 508 $ 471
Work-in-process 1,770 1,566
Finished goods 2,947 2,477
--------- ---------
$ 5,225 $ 4,514
========= =========
5. BORROWING ARRANGEMENTS:
In October 1998, RG amended and restated its existing credit facility
consisting of a term loan and a revolving line-of-credit. The amendment
resulted in the funding of a new term loan of $840,000 which is due in
monthly principal installments of $28,000 through and until October 1, 1999
and $10,500 monthly thereafter, until its maturity in September 2001. The
amount available for borrowings under the revolving line-of-credit is based
upon the levels of eligible RG accounts receivable and inventories, as
defined, subject to maximum borrowing of $1.5 million. As of August 31,
1999, RG had $11,000 outstanding under its revolving line-of-credit and
$130,000 available for additional borrowings. The line-of-credit expires in
September 2001.
In October 1998, FMP entered into a new credit facility with RG's lender
consisting of a term loan and a revolving line-of-credit and paid off all
existing loans to FMP's previous lender. In connection with the repayment
of the amounts outstanding under the old FMP credit facility, FMP incurred
a $75,000 prepayment penalty which was reflected as a component of interest
expense in the second quarter of fiscal 1999. The term loan of $4.3 million
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 in September 2001. The amount available for borrowings under the
revolving line-of-credit is based upon the levels of eligible FMP accounts
receivable and inventories, as defined, subject to maximum borrowing of
$4.0 million. As of August 31, 1999, FMP had $2,056,000 outstanding under
its revolving line-of-credit and $1,007,000 available for additional
borrowings. The line-of-credit expires in September 2001.
-6-
<PAGE>
Effective January 1, 1999, borrowings under the term loans and revolving
lines-of-credit of both credit facilities bear interest at a rate per annum
equal to the prime rate (8.25% at August 31, 1999) plus 1.75% and 1.25%,
respectively, and are secured by substantially all of the Company's assets.
The FMP and RG credit facilities contain financial and other covenants
which, among other things, limit annual capital expenditures and dividends
and require the maintenance of minimum monthly and quarterly earnings or
maximum monthly and quarterly losses, and minimum quarterly debt service
coverage ratios, as defined. The Company was in violation of the minimum
quarterly debt service coverage ratio covenant as of August 31, 1999. The
Company has received a conditional waiver of this covenant violation from
its lender. The Company and its lender are currently drafting an amendment
to the RG and FMP credit facilities. If this amendment is not executed
before November 15, 1999, waiver of the covenant violation will lapse. The
Company believes that the amendment will be executed prior to November 15,
1999. The Company was in compliance with all other financial loan covenants
at August 31, 1999.
6. INFORMATION ON SEGMENTS:
The Company has two reportable segments in continuing operations: golf club
shafts and golf club grips. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies
in Form 10-KSB. The Company evaluates the performance of these segments
based on segment operating income or loss and cash flows. The Company
allocates certain administrative expenses to segments. The amounts in this
illustration are the amounts in reports used by the chief operating officer
as of August 31, 1999 (in thousands):
THREE MONTHS ENDED AUGUST 31, 1999
----------------------------------
GOLF GOLF
SHAFTS GRIPS TOTAL
------ ----- -----
Net sales $ 5,286 $1,230 $ 6,516
Operating income (loss) 715 (29) 686
Depreciation and amortization 87 217 304
Assets 10,922 9,409 20,331
Total assets for reportable segments $20,331
Elimination of investment in subsidiaries (6,193)
Goodwill not allocated to segments 8,735
-------
Consolidated total assets $22,873
=======
THREE MONTHS ENDED AUGUST 31, 1998
----------------------------------
GOLF GOLF
SHAFTS GRIPS TOTAL
------ ----- -----
Net sales $ 5,001 $ 1,037 $ 6,038
Operating income 226 92 318
Depreciation and amortization 68 163 231
Assets 8,284 11,708 19,992
Total assets for reportable segments $19,992
Assets of discontinued operation 1,805
Elimination of investment in subsidiaries (7,466)
Goodwill not allocated to segments 9,898
-------
Consolidated total assets $24,229
=======
-7-
<PAGE>
7. DISCONTINUED OPERATIONS:
In March 1999, the operating assets of Roxxi were disposed of through two
separate transactions. Roxxi sold its trade name, customer list, design
database and related computer software and hardware for a royalty of 16% of
the buyer's net sales of Roxxi-licensed products for the two-year period
beginning May 1, 1999. Roxxi also sold its headwear manufacturing
equipment, headwear inventory and raw materials to another company for
$300,000 and a royalty of 2% of the buyer's net sales until the buyer has
paid an additional $200,000. Subsequently, Roxxi's name was changed to
Royal Grip Headwear Company. The Company is accounting for royalties as
income is earned during the two year period beginning May 1, 1999. For the
three months ended August 31, 1999, royalties of $38,000 were recorded and
are reflected as other income in the accompanying condensed consolidated
statement of operations.
Selected financial data for the discontinued operations is as follows for
the three months ended August 31, 1998 (in thousands):
1998
-------
Net sales $ 2,899
Loss from operations 210
Depreciation 73
8. TERMINATION OF MANUFACTURING SUPPLY CONTRACT:
In May 1999, RG and Acushnet Rubber Company ("Acushnet") executed a mutual
release agreement terminating their manufacturing and supply agreement and
capital lease agreement (the "Termination Agreement"). As a result in May
1999, RG received $1.5 million in cash and $1.0 million in purchase credits
from Acushnet to be applied against current and future amounts owed to
Acushnet for the production of grips. As of August 31, 1999, $500,000 of
the purchase credits had been utilized and the remaining $500,000 is
included in other current assets in the accompanying condensed consolidated
balance sheet.
In connection with the Termination Agreement, RG will receive the
manufacturing equipment which was leased to Acushnet and Acushnet's
obligation to make additional payments to RG under the capital lease was
terminated. The outstanding balance of RG's capital lease receivable from
Acushnet was approximately $2.6 million at the contract termination date.
Pursuant to the Termination Agreement, Acushnet is obligated to continue
producing grips through January 2000 and to pay up to $100,000 for shipping
and installing the manufacturing equipment at a new location. The Company
estimates that the manufacturing equipment which will be returned to them
has a net realizable value of approximately $1.0 million.
RG currently purchases the majority of its supply of non-cord, injected
grips from Acushnet and has no immediate replacement supply source. The
Company believes that it can obtain a sufficient supply of grips from
Acushnet and other existing vendors to satisfy customer demand during the
fiscal year ended May 31, 2000. Included in finished goods inventories at
August 31, 1999 are grips at a cost of approximately $662,000 located at
Acushnet. The Company is currently in discussions with certain grip
manufacturers which the Company believes can maintain RG's standard of
product quality and will facilitate a smooth transition. There can be no
assurances that the Company will be able to secure a source for grips on as
favorable terms or with the same or better quality as Acushnet. In
addition, there can be no assurances that a transition to a new supplier
will not result in production delays, the loss of sales and key customers
which would materially affect RG's financial condition and results of
operations.
9. TERMINATED MERGER AGREEMENT:
In February 1999, the Company and Coyote Sports, Inc. ("Coyote") entered
into a merger agreement pursuant to which RP would become a wholly-owned
subsidiary of Coyote (the "RP-Coyote Merger"). In June 1999, the RP-Coyote
Merger agreement was terminated at the request of the Company due to a
material change in the business of Coyote resulting in an inability to
obtain suitable long-term financing. The Company incurred professional fees
of $975,000 related to the RP-Coyote Merger during the fiscal year ended
May 31, 1999.
-8-
<PAGE>
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. The Company believes it has made forward-looking
statements within the meaning of the Litigation Reform Act in this Form 10-Q,
Forms 10-QSB, Forms 10-KSB, Forms 8-K, and other written or oral statements made
by or on behalf of RP which reflect RP'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, RP's
cost of raw materials, the competitive environment in which RP operates, and
changes in the financial markets relating to RP's capital structure and cost of
capital. Statements in this Form 10-Q, 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 RP'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.
OVERVIEW --
Royal Precision, Inc. ("RP" or the "Company") is a holding company with three
wholly-owned subsidiaries which are FM Precision Golf Manufacturing Corp.
("FMP"), FM Precision Golf Sales Corp. ("FMP Sales"), and Royal Grip, Inc.
("RG") which has a wholly-owned subsidiary, Royal Grip Headwear Company. RP
acquired RG on August 29, 1997 by means of a merger whereby FMPSUB, Inc. (a
wholly-owned subsidiary of RP created for such purpose) merged with and into RG
(the "FMP-RG Merger"). RG was the surviving corporation and became a
wholly-owned subsidiary of RP. As discussed in Note 7, the Company disposed of
the operating assets of Royal Grip Headwear Company (formerly known as Roxxi,
Inc. "Roxxi") in March 1999. Results of operations for Roxxi in all periods
through May 31, 1999 are reflected as discontinued operations.
FMP is a manufacturer and distributor of golf club 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 club shafts in foreign markets including Japan, Australia, the United
Kingdom, and Canada. RG designs and distributes golf club grips. 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 ("Acushnet"). In May 1999, RG and Acushnet executed a mutual release
agreement terminating the manufacturing and supply agreement and the capital
lease agreement. See Note 8 and Reliance on Third Party Suppliers under Business
Environment and Future Results below.
The Company's business is seasonal with stronger demand for its products during
the quarters ending in February and May.
THREE MONTHS ENDED AUGUST 31, 1999 COMPARED TO THE THREE MONTHS ENDED
AUGUST 31, 1998 --
NET SALES. Net sales from continuing operations for the three months ended
August 31, 1999 were $6.5 million, an increase of $0.5 million or 8% from net
sales from continuing operations of $6.0 million during the corresponding period
in 1998. Net sales of golf club shafts increased by $0.3 million or 6% and net
sales of golf club grips increased by $0.2 million or 19%. The increased sales
of golf club shafts reflects continued strong demand for the Company's
proprietary "Rifle" shafts. Net sales of the Company's higher priced, pro grade
golf club shafts including the "Rifle" increased by $0.9 million or 24%. Sales
of the Company's lower priced, commercial grade golf club shafts decreased by
$0.6 million or 51%. Sales of this product have been negatively impacted since
the Company instituted a significant price increase during the first quarter of
fiscal 1999. In response to these unfavorable results, the Company subsequently
modified its pricing structure in an effort to increase sales of this product in
future periods. The increased sales of golf club grips reflects the success of a
new buffed product introduced to the Japanese market in November 1998. Sales of
this product for the three months ended August 31, 1999 were $0.4 million
compared to $0 during the corresponding period of 1998.
-9-
<PAGE>
COST OF SALES. Cost of goods sold from continuing operations for the three
months ended August 31, 1999 was $4.1 million, an increase of $0.3 million or 6%
from cost of goods sold from continuing operations of $3.8 million during the
corresponding period in 1998. Golf club shafts cost of goods sold decreased by
$0.1 million or 2% despite an increase in net sales due to a favorable change in
the mix of product sales from lower margin, commercial grade shafts to higher
margin "Rifle" and other pro grade shafts. Golf club grips cost of goods sold
increased by $0.3 million as a result of higher total net sales.
GROSS PROFIT. Gross profit from continuing operations for the three months ended
August 31, 1999 was $2.4 million, an increase of $0.2 million or 11% from gross
profit from continuing operations of $2.2 million for the corresponding period
in 1998. Gross profit from sales of golf club shafts increased by $0.3 million
or 20% to $2.1 million due to higher total net sales and a favorable change in
the mix of product sales from lower margin, commercial grade shafts to higher
margin "Rifle" and other pro grade shafts. As a percentage of sales, the gross
profit on sales of golf club shafts increased from 34.5% to 39.1%. Gross profit
from sales of golf club grips decreased by $0.1 million or 22% to $0.4 million
despite an increase in net sales. As a percentage of sales, the gross profit on
sales of golf club grips decreased from 46.9% to 30.9%. The Company's new buffed
grip product is being manufactured at a higher cost and is being sold at a lower
profit margin than other RG products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended August 31, 1999 were $1.8
million, a decrease of 7% from selling, general and administrative expenses of
$1.9 million during the corresponding period in 1998. This net reduction of $0.1
million reflects the positive effect of the Company's cost cutting measures
implemented following the FMP-RG Merger which have resulted in reductions of
corporate overhead expenses.
INTEREST EXPENSE. Average outstanding borrowings were comparable during the
three months ended August 31, 1999 and 1998 and, therefore, interest expense is
consistent at $151,000 and $161,000, respectively.
OTHER INCOME. Other income of $55,000 for the three months ended August 31, 1999
is principally comprised of royalties earned on sales of Roxxi headwear
products. Other income of $61,000 for the three months ended August 31, 1998 is
principally comprised of interest income on the Acushnet capital lease
receivable.
PROVISION FOR INCOME TAXES. Provisions of $296,000 and $5,000 were recorded for
taxes on income from continuing operations during the three months ended August
31, 1999 and 1998, respectively. Taxes are provided based on the estimated
effective tax rate for the year which considers the effect of nondeductible
goodwill amortization.
DISCONTINUED OPERATIONS. As discussed in Note 7, the Company disposed of the
operating assets of Roxxi in March 1999. Losses from the operations of Roxxi for
the three months ended August 31, 1998 were $0.2 million.
LIQUIDITY AND CAPITAL RESOURCES. At August 31, 1999, RP had working capital of
$4.6 million and a current ratio of 2.1 to 1 as compared to working capital of
$5.8 million and a current ratio of 2.2 to 1 at May 31, 1999.
In October 1998, RG amended and restated its existing credit facility consisting
of a term loan and a revolving line-of-credit. The amendment resulted in the
funding of a new term loan of $840,000 which is due in monthly principal
installments of $28,000 through and until October 1, 1999 and $10,500 monthly
thereafter, until its maturity in September 2001. The amount available for
borrowings under the revolving line-of-credit is based upon the levels of
eligible RG accounts receivable and inventories, as defined, subject to maximum
borrowing of $1.5 million. As of August 31, 1999, RG had $11,000 outstanding
under its revolving line-of-credit and $130,000 available for additional
borrowings. The line-of-credit expires in September 2001.
In October 1998, FMP entered into a new credit facility with RG's lender
consisting of a term loan and a revolving line-of-credit and paid off all
existing loans to FMP's previous lender. In connection with the repayment of the
amounts outstanding under the old FMP credit facility, FMP incurred a $75,000
prepayment penalty which was reflected as a component of interest expense in the
second quarter of fiscal 1999. The term loan of $4.3 million 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 in September 2001. The amount
available for borrowings under the revolving line-of-credit is based upon the
levels of eligible FMP accounts receivable and inventories, as defined, subject
to maximum borrowing of $4.0 million. As of August 31, 1999, FMP had $2,056,000
outstanding under its revolving line-of-credit and $1,007,000 available for
additional borrowings. The line-of-credit expires in September 2001.
-10-
<PAGE>
Effective January 1, 1999, borrowings under the term loans and revolving
lines-of-credit of both credit facilities bear interest at a rate per annum
equal to the prime rate (8.25% at August 31, 1999) plus 1.75% and 1.25%,
respectively, and are secured by substantially all of the Company's assets.
The FMP and RG credit facilities contain financial and other covenants which,
among other things, limit annual capital expenditures and dividends and require
the maintenance of minimum monthly and quarterly earnings or maximum monthly and
quarterly losses, and minimum quarterly debt service coverage ratios, as
defined. The Company was in violation of the minimum quarterly debt service
coverage ratio covenant as of August 31, 1999. The Company has received a
conditional waiver of this covenant violation from its lender. The Company and
its lender are currently drafting an amendment to the RG and FMP credit
facilities. If this amendment is not executed before November 15, 1999, waiver
of the covenant violation will lapse. The Company believes that the amendment
will be executed prior to November 15, 1999. The Company was in compliance with
all other financial loan covenants at August 31, 1999.
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.
During the three months ended August 31, 1999, net cash provided by operating
activities was $1.8 million which primarily resulted from net income from
continuing operations of $0.3 million, depreciation and amortization of $0.3
million and decreases in accounts receivable and other assets of $2.3 million
and $0.2 million, respectively. Cash provided by operating activities was
reduced by an increase in inventories of $0.7 million and a decrease in accounts
payable and accrued expenses of $0.6 million.
Net cash used in investing activities for the three months ended August 31, 1999
was $0.5 million for the purchase of property, plant and equipment.
The Company estimates that capital expenditures for the fiscal year ended May
31, 2000 will be approximately $2.0 million including $750,000 to complete the
upgrade of FMP's wastewater treatment facilities. The Company incurred $250,000
during the fiscal year ended May 31, 1999 related to the wastewater treatment
facility. To finance a portion of the estimated $1 million total cost of this
project, the Company has received a funding commitment of $750,000 from the
Connecticut Development Authority which can be advanced to the Company upon the
completion of the facility and approval by the Connecticut Department of
Environmental Protection.
Net cash used in financing activities for the three months ended August 31,
1999, was $1.4 million resulting from repayments of long term debt and capital
lease obligations of $0.4 million and net repayments under lines-of-credit of
$1.0 million.
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.
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.
-11-
<PAGE>
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. The Company believes that its critical internal systems
including versions of Macola, ADP, Oracle, Microsoft Exchange, Microsoft Office
97, Microsoft Windows NT, Microsoft Windows 9x, and Microsoft SQL Server
products are Year 2000 compliant. In addition, the Company tracks the versions
and updates available for these products to ensure Year 2000 compliance. During
the previous two-year period, the Company has expended approximately $100,000 to
purchase and install new computer hardware and software resulting in all Company
hardware and software being Year 2000 compliant. Expenses associated with
evaluation of the Company's internal systems for Year 2000 problems have been
approximately $20,000. 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 has completed a review of its
significant suppliers to determine that the suppliers' operations and the
products and services they provide are Year 2000 compliant. All significant
suppliers and utilities have indicated that their products and company are Year
2000 compliant. The primary supplier of the Company's golf club grips recently
completed a conversion of its accounting system and has indicated that their
operations, products and services they provide are now Year 2000 compliant.
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.
BUSINESS ENVIRONMENT AND FUTURE RESULTS --
RELIANCE ON THIRD PARTY SUPPLIERS. In May 1999, RG and Acushnet Rubber Company
("Acushnet") executed a mutual release agreement terminating their manufacturing
and supply agreement and capital lease agreement (the "Termination Agreement").
As a result in May 1999, RG received $1.5 million in cash and $1.0 million in
purchase credits from Acushnet to be applied against current and future amounts
owed to Acushnet for the production of grips. As of August 31, 1999, $500,000 of
the purchase credits had been utilized and the remaining $500,000 is included in
other current assets in the accompanying condensed consolidated balance sheet.
In connection with the Termination Agreement, RG will receive the manufacturing
equipment which was leased to Acushnet and Acushnet's obligation to make
additional payments to RG under the capital lease was terminated. The
outstanding balance of RG's capital lease receivable from Acushnet was
approximately $2.6 million at the contract termination date. Pursuant to the
Termination Agreement, Acushnet is obligated to continue producing grips through
January 2000 and to pay up to $100,000 for shipping and installing the
manufacturing equipment at a new location. The Company estimates that the
manufacturing equipment which will be returned to them has a net realizable
value of approximately $1.0 million.
-12-
<PAGE>
RG currently purchases the majority of its supply of non-cord, injected grips
from Acushnet and has no immediate replacement supply source. The Company
believes that it can obtain a sufficient supply of grips from Acushnet and other
existing vendors to satisfy customer demand during the fiscal year ended May 31,
2000. Included in finished goods inventories at August 31, 1999 are grips at a
cost of approximately $662,000 located at Acushnet. The Company is currently in
discussions with certain grip manufacturers which the Company believes can
maintain RG's standard of product quality and will facilitate a smooth
transition. There can be no assurances that the Company will be able to secure a
source for grips on as favorable terms or with the same or better quality as
Acushnet. In addition, there can be no assurances that a transition to a new
supplier will not result in production delays, the loss of sales and key
customers which would materially affect RG's financial condition and results of
operations.
DISCONTINUED OPERATIONS. In March 1999, the operating assets of Roxxi were
disposed of through two separate transactions. Roxxi sold its trade name,
customer list, design database and related computer software and hardware for a
royalty of 16% of the buyer's net sales of Roxxi-licensed products for the
two-year period beginning May 1, 1999. Roxxi also sold its headwear
manufacturing equipment, headwear inventory and raw materials to another company
for $300,000 and a royalty of 2% of the buyer's net sales until the buyer has
paid an additional $200,000. Subsequently, Roxxi's name was changed to Royal
Grip Headwear Company. The Company is accounting for royalties as income is
earned during the two year period beginning May 1, 1999. For the three months
ended August 31, 1999, royalties of $38,000 were recorded and are reflected as
other income in the accompanying condensed consolidated statement of operations.
If the buyers generate net headwear sales of $3.0 million per year, as Roxxi did
during the twelve months ended February 28, 1999, the Company would be entitled
to receive royalties of approximately $0.5 million during each of the fiscal
years ended May 31, 2000 and 2001 under these contracts. However, there can be
no assurance that the two buyers will be able to achieve these sales amounts or
any sales amounts in the future. Royalties to be received by the Company are
contingent on the business operations of the two buyers over which the Company
has no influence or control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no derivative financial instruments subject to market risk other
than its fixed and variable rate debt. These borrowing arrangements are fully
described in Note 5 to the Condensed Consolidated Financial Statements.
-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
Registrant (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 Registrant (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).
(10) Material Contracts
Exhibit 10.1. Personal Services Agreement entered into as of August
29, 1999 between Danny Edwards and Royal Precision, Inc.
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 August 31, 1999.
-14-
<PAGE>
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 thereunto duly authorized.
ROYAL PRECISION, INC.
Date October 14, 1999 By /s/ Thomas Schneider
-------------------------------------
Thomas Schneider, President
(duly authorized officer)
By /s/ Kevin Neill
-------------------------------------
Kevin Neill, Vice President - Finance
(chief accounting 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) *
10.1 Personal Services Agreement entered into as of August 29,
1999 between Danny Edwards and Royal Precision, Inc. 17
27. Financial Data Schedule (submitted electronically for SEC
information only
* Incorporated by reference
PERSONAL SERVICES AGREEMENT
This PERSONAL SERVICES AGREEMENT (the "Agreement") is made and entered into
as of the 29th day of August, 1999 by and between ROYAL PRECISION, INC., a
Delaware corporation (the "Company") on the one hand, and DANNY EDWARDS, an
individual residing at 26420 N. Wrangler Road, Scottsdale, Arizona 85255
("Edwards") on the other hand.
WITNESSETH:
WHEREAS, Edwards and the Company entered into a Consulting Agreement which
terminates on August 29, 1999 (the "Consulting Agreement"); and
WHEREAS, the Company desires to maintain, on a formal basis, access to the
knowledge, information, contacts and experience of Edwards, as well as name,
likeness and visibility at PGA and Nike events;
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereto, intending to be legally bound, agree
as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF EDWARDS. Edwards hereby represents
and warrants to the Company that this Agreement is the legal, valid and binding
obligation of Edwards and is enforceable against Edwards in accordance with its
terms.
SECTION 2. REPRESENTATIONS OF THE COMPANY. The Company hereby represents and
warrants to Edwards that this Agreement has been duly authorized, executed and
delivered by the Company, is the legal, valid and binding obligation of the
Company and is enforceable against the Company in accordance with its terms.
SECTION 3. OBLIGATIONS OF EDWARDS.
3.1. SCOPE. Edwards shall make himself reasonably available to provide
personal services with the Company, and any of its subsidiaries as the Company
may from time to time designate, on a regular basis as the Company may
reasonably request with respect to matters involving suppliers and purchasers,
potential suppliers and purchasers, business practices, business opportunities,
pricing points and practices, outlook for prices, negotiations of contracts,
personnel and other employment and employee matters relating to the business of
the Company. In addition, Edwards shall (a) mention and promote the Company and
its products in interviews and conversations where appropriate, (b) wear golf
caps and use golf bags bearing the logo of the Company and or its products
supplied by the Company in each golf tournament in which Edwards plays, (c) make
a 20 minute presentation at all of Edwards' or Profile Sports' golf schools on
the benefits of the Company's products and frequency matching, (d) permit four
persons designated by the Company to attend one of Edwards' or Profile Sports'
golf schools during the term of this Agreement at no cost to the Company or the
persons selected to attend; and (e) use exclusively the grips and shafts of the
Company's subsidiaries while playing golf, which the Company will supply.
1
<PAGE>
3.2. LIMITATIONS. Edwards shall perform such personal services as may
reasonably be requested by the Company; provided, however, that (a) Edwards
shall not be required to perform under this Agreement for more than 20 hours
during any calendar quarter (provided that time spent on the PGA or Nike Tour
shall not count towards this minimum number of hours); and (b) the Company shall
reimburse Edwards for all of his reasonable out-of-pocket expenses (including,
but not limited to, telephone, fax and travel) incurred by Edwards in connection
with the performance of the consulting services required hereunder; provided
that no reimbursement for Tour expenses shall be required of the Company.
3.3. COMPENSATION. Edwards shall be entitled to the payments provided for
in Section 4 below, regardless of the extent to which the Company or its
subsidiaries request the use of the consulting services of Edwards.
3.4. TERM. The effectiveness of the provisions of Sections 3 and 4 shall
commence on August 30, 1999 (the "Effective Date") and shall end on May 31,
2001, except for the provisions of Section 3.7 which shall continue for an
additional period of two years following the Restricted Period (as hereinafter
defined).
3.7. INDEMNITY. The Company agrees to indemnify and hold Edwards harmless
against any losses, claims, damages or liabilities to which Edwards may become
subject in connection with the services which are the subject of this Agreement;
provided, however, that the Company shall not be liable under the foregoing
indemnity in respect of any loss, claim, damage or liability to the extent that
such loss, claim, damage or liability resulted from a breach of the obligations
of Edwards to the Company in connection with the performance by Edwards of the
services which are the subject of this Agreement or from the willful misfeasance
or gross negligence of Edwards.
SECTION 4. PAYMENTS.
4.1. PERSONAL SERVICES FEES. The Company shall pay Edwards $5,000 per month
commencing September, 1999 through and including May, 2001.
4.2. RELATIONSHIP. The Company is engaging Edwards as an independent
contractor and not as an employee. In performing his obligations under this
Agreement, Edwards shall not identify himself as an employee of the Company. In
the event that Edwards hires one or more employees, Edwards shall be solely
responsible for all costs and expenses of such employees.
4.3. OTHER BENEFITS. During the term of this Agreement, the Company shall
provide to Edwards (a) the same health insurance on the same terms as is made
available to executives of the Company, (b) the promotional materials,
presentation formats and staff training, if any, necessary for Edwards to
effectively deliver the presentations required under Section 3.1(c) of this
Agreement and (c) golf caps and a staff bag, grips and shafts for Edwards' use
in all tournaments in which Edwards plays.
2
<PAGE>
SECTION 5. DEFINITION OF "PERSON". For all purposes of this Agreement, "Person"
means any individual, partnership, corporation, limited liability company,
trust, or other entity.
SECTION 6. TERMINATION.
6.1. FOR CAUSE. Edwards recognizes the detriment to the Company that would
result from the impairment of public confidence in the honest and orderly
conduct, the integrity and good character of Edwards. Edwards agrees not to
promote any political views or organizations, including without limitation, the
Tour Players Association, while promoting the Company or its products. Edwards
therefore acknowledges that if he was engaged or should engage in gross and
willful misconduct injurious to the Company, the Company will have the right to
terminate this Agreement. In addition, the Company may terminate this Agreement
if Edwards fails, in any material respect, in the reasonable determination of
the Company's Board of Directors, to perform his obligation under this
Agreement, and such failure, if curable, shall continue for 30 days after
written notice to Edwards specifying the events constituting such failure.
6.2. CHANGE IN CONTROL, ETC. The Company may elect to terminate this
Agreement upon (a) a "Change in Control" (as hereinafter defined) or (b) Edwards
selling at least 75% of the shares of common stock of the Company he currently
owns. For the purposes hereof, a Change in Control of the Company has occurred
when, without the approval of a majority of the Board of Directors elected prior
to any Change in Control: (i) any person (defined for the purposes of this
paragraph to mean any person within the meaning of Section 13(d) of the
Securities Exchange Act of 1934 (the "Exchange Act")), acquires, directly or
indirectly, the beneficial ownership (determined under Rule 13d-3 of the
regulations promulgated by the Securities and Exchange Commission under Section
13(d) of the Exchange Act) of securities issued by the Company having 20% or
more of the voting power of all of the voting securities issued by the Company
in the election of directors at the next meeting of the holders of voting
securities to be held for such purpose; or (ii) a majority of the directors
elected at any meeting of the holders of voting securities of the Company are
persons who were not nominated for such election by the Board of Directors of
the Company or a duly constituted committee of the Board of Directors of the
Company having authority in such matters; or (iii) the Company merges or
consolidates with or transfers substantially all of its assets to another
person.
SECTION 7. COVENANT NOT TO COMPETE. Edwards acknowledges that (a) the Company is
in the business of designing and distributing golf club grips, shafts and other
equipment for use in the playing of golf (the "Business"), (b) Edwards is one of
the limited number of persons who developed such Business, and is a founder of a
subsidiary of the Company, (c) the Business is conducted throughout the United
States, (d) his work has given him, and his consulting for the Company will
continue to give him proprietary information and trade secrets of and
confidential information concerning the Company, and (e) the agreements and
covenants contained in this Section 7 are essential in order to induce the
Company to enter into the Agreement and to protect the Business and goodwill of
the Company. Accordingly, Edwards covenants and agrees as follows:
7.1. TERM. For a period commencing on the Effective Date and ending on the
later of (a) May 31, 2001, or (b) the date of the termination of Edwards'
retention by the Company (such period of time being referred to herein as the
"Restricted Period"), Edwards shall not, within the United States of America or
3
<PAGE>
Japan (the "Territory"), directly or indirectly, (i) engage in the Business or
any aspect of the Business for Edwards' own account, (ii) enter the employ of,
or render any services to, any Person (other than the Company or any subsidiary
of the Company) engaged in the Business or any aspect of the Business, (iii)
become associated with any Person engaged in the Business as an individual,
partner, shareholder (other than as a shareholder owning not more than 5% of the
voting securities of any corporation having more than 500 stockholders),
officer, director, employee, principal, agent, consultant or trustee, or (iv)
solicit, attempt to solicit or accept any business (which is related to any
aspect of the Business) to be conducted within the Territory (or help any other
Person solicit or accept any such business) from any Person who, during the 12
months preceding the date of termination or expiration of Edwards' retention by
the Company, is a customer or supplier of the Company or who during the
Restricted Period becomes, and is known by Edwards to be, a customer or supplier
of the Company. Nothing in this Agreement shall prohibit Edwards from sponsoring
products or companies that are not directly competitive with Company or any of
its subsidiaries.
7.2. EMPLOYEES; DISPARAGEMENT. Without the prior written consent of the
Company, during the Restricted Period, Edwards shall not, directly or
indirectly, hire or solicit any employee or consultant or advisor to the Company
or encourage any such employee or consultant or advisor to leave such employment
or retention for any business whether or not a competitor of the Company. During
the Restricted Period, Edwards shall not disparage the Company or any subsidiary
of the Company or their officers, directors, personnel or services, or
discourage or otherwise attempt to prevent any other Person from doing business
with the Company or any of its subsidiaries. Similarly, the Company, during the
Restricted Period, shall not disparage Edwards or his services, or discourage or
otherwise attempt to prevent any other Person from doing business with Edwards.
7.3. CONSIDERATION. Edwards acknowledges that the Company entering into
this Agreement and the payments and other consideration that he is receiving
under this Agreement constitute full and fair consideration for his covenants
under this Section 7.
7.4. REFORMATION. If a court of competent jurisdiction shall determine that
the terms of this Section 7 are partially or wholly inoperative, unenforceable
or invalid in a particular case because of their time or geographic scope or for
any other reason, such court shall have the power to limit such time or
geographic scope or otherwise to recast the terms of this Section 7 in such case
so as to permit its enforcement to the greatest extent permitted by applicable
law.
7.5. INJUNCTIVE RELIEF. Edwards specifically acknowledges and agrees that
the remedy at law for any breach of the provisions of Section 7, 8 and 9 will be
inadequate (for reasons which include, but are not limited to, the fact that
Edwards' talents, and the services to be provided by Edwards, are unique) and
that the Company, in addition to any other relief available to it, shall be
entitled to temporary and permanent injunctive relief.
4
<PAGE>
SECTION 8. MAINTAINING CONFIDENTIAL INFORMATION.
8.1. COMPANY INFORMATION. Edwards agrees that at all times while he is
retained by the Company and for a period of one year thereafter, he will hold in
strictest confidence, and not use, except for the benefit of the Company, or
disclose to anyone, other than directors, officers, employees and counsel of the
Company and Persons to whom such disclosure is authorized by executive officers
of the Company (other than Edwards) and is made in furtherance of the interest
of the Company, without the written authorization of the Company's Board of
Directors, its Chairman of the Board or President, any trade secrets,
confidential knowledge, data or other proprietary information of the Company or
its subsidiaries (including the trade secrets, confidential knowledge, data or
other proprietary information of the Company), which by way of illustration and
not limitation, include scientific, technical and business information relating
to products, processes, know-how, designs, formulas, methods, developmental or
experimental work, firmware, software (whether executable or source code),
improvements, discoveries, plans for research, new products, marketing and
selling, business plans, budgets and unpublished financial statements, licenses,
prices and costs, suppliers and customers, and information regarding the skills
and compensation of other employees of the Company and its subsidiaries, except
for information that becomes generally available to the public, or information
received on a non-confidential basis from sources other than the Company who are
not in violation of a confidentiality agreement with the Company or a subsidiary
of the Company.
8.2. THIRD PARTY INFORMATION. Edwards recognizes that the Company has
received and in the future will receive from third parties their confidential or
proprietary information subject to a duty on the Company's part to maintain the
confidentiality of such information and, in such cases, to use it only for
certain limited purposes. Edwards agrees that he owes the Company and such third
parties, during the term set forth in Section 8.1, a duty to hold all such
confidential or proprietary information in the strictest confidence and not to
disclose it to any Person or use it for the benefit of anyone other than the
Company or such third party, except in a manner that is consistent with the
Company's agreement with the third party.
SECTION 9. ASSIGNMENT OF INVENTIONS AND ORIGINAL WORKS.
9.1. INVENTIONS AND ORIGINAL WORKS RETAINED BY EDWARDS. Edwards represents
and warrants that he has heretofore assigned to the Company without further
payment or consideration all his right, title and interest in and to any ideas,
inventions, original works of authorship, developments, improvements or trade
secrets which he solely or jointly conceived or reduced to practice, or caused
to be conceived or reduced to practice while he was an employee of the Company
or which are related to the Business and has granted to the Company a perpetual
right to the molds used to inscribe his name on packaging, grips and other
items, and to the use of his name on such items without any further
consideration. Edwards confirms that Exhibit A to the Consulting Agreement
continues to be a complete list of all inventions, original works of authorship,
developments, improvements, and trade secrets that Edwards has, alone or jointly
with others, conceived, developed or reduced to practice before the commencement
of this Agreement, that Edwards considers to be his property or the property of
third parties. If disclosure of an item on Exhibit A would cause Edwards to
violate any prior confidentiality agreement, Edwards understands that he is not
to list such in Exhibit A but is to inform the Company that all items have not
been listed for that reason. A space is provided on Exhibit A for such purpose.
If no list is attached, Edwards represents that there are no such items.
5
<PAGE>
9.2. INVENTIONS AND ORIGINAL WORKS ASSIGNED TO THE COMPANY. Edwards agrees
to make prompt written disclosure to the Company of and will assign to the
Company without further payment or consideration all his right, title and
interest in and to any ideas, inventions, original works of authorship,
developments, improvements or trade secrets which Edwards may solely or jointly
conceive or reduce to practice, or cause to be conceived or reduced to practice
during the period of his retention by the Company. Edwards understands that only
ideas, inventions, original works of authorship, developments, improvements and
trade secrets which
(a) were not developed or produced using equipment, supplies, facilities
or trade secrets that belong to the Company or any subsidiary of the
Company, and
(b) do not relate to (i) the Business as it is currently conducted or
contemplated to be conducted or as it may be conducted during the term
of Edwards' retention by the Company or (ii) actual or contemplated
research or development conducted by the Company, and
(c) were not developed or produced during hours that Edwards is obligated
to engage in the Company related activities hereunder or for which the
Company pays Edwards
are not covered by Edwards' obligations to report and assign under the first
sentence of this Section 9.2.
9.3. WORKS MADE FOR HIRE. Edwards acknowledges that all original works of
authorship which are made by Edwards (solely or jointly with others) within the
scope of his duties under this Agreement and which are protectable by copyright
are "works made for hire," as that term is defined in the United States
Copyright Act (17 U.S.C., Section 101).
9.4. OBTAINING LETTERS PATENT, COPYRIGHT REGISTRATIONS AND OTHER
PROTECTIONS. Edwards will assist the Company in every reasonable way, and at the
sole expense of the Company, to obtain and from time to time enforce United
States and foreign proprietary rights, including patents and copyrights,
relating to any and all inventions, original works of authorship, developments,
improvements or trade secrets of the Company in any and all countries. To that
end Edwards will execute, verify and deliver such documents and perform such
other acts (including appearing as a witness) as the Company may reasonably
request for use in applying for, obtaining, perfecting, evidencing, sustaining
and enforcing such proprietary rights and the assignment thereof. In addition,
Edwards will execute, verify and deliver assignments of such proprietary rights
to the Company or its designee, without payment or further consideration.
Edwards' obligation to assist the Company with respect to proprietary rights in
any and all countries shall continue beyond the termination of his retention,
but the Company will compensate Edwards at a reasonable rate after his
termination for the time actually spent by Edwards at the Company's request on
such assistance.
6
<PAGE>
9.5. OBLIGATION TO KEEP THE COMPANY INFORMED. In addition to Edwards'
obligations under Section 9.2, during the Restricted Period, Edwards will
promptly disclose to the Company fully and in writing all patent applications
filed by Edwards or on his behalf. At the time of each such disclosure, Edwards
will advise the Company in writing of any inventions that he believes are not
required to be assigned to the Company by Section 9.2 above; and Edwards will at
that time provide to the Company in writing all evidence necessary to
substantiate that belief. Edwards understands that the Company will, and the
Company agrees to, keep in confidence and will not disclose to third parties
without Edwards' consent any proprietary information disclosed in writing to the
Company pursuant to this Agreement relating to such inventions. Edwards will
preserve the confidentiality of any invention that is required to be assigned to
the Company by Section 9.2 above.
9.6. RETURN OF THE COMPANY'S DOCUMENTS. When Edwards is no longer subject
to a personal services contract with the Company, he will deliver to the Company
(and will not keep in his possession, recreate or deliver to anyone else) any
and all devices, records, data, notes, reports, proposals, lists,
correspondence, specifications, drawings, blueprints, firmware, software
(whether executable or source code), sketches, materials, equipment, other
documents or property, together with all copies thereof (in whatever medium
recorded) belonging to the Company or any of its subsidiaries, their successors
or assigns.
SECTION 10. MISCELLANEOUS.
10.1. THIS AGREEMENT. This Agreement and the agreements and instruments
required to be executed and delivered hereunder set forth the entire agreement
of the parties with respect to the subject matter hereof and supersede and
discharge all prior agreements (written or oral) and negotiations and all
contemporaneous oral agreements concerning such subject matter and negotiations.
There are no oral conditions precedent to the effectiveness of this Agreement.
10.2. NON-WAIVER. Neither the failure of nor any delay by either party to
this Agreement to enforce any right hereunder or to demand compliance with its
terms is a waiver of any right hereunder. No action taken pursuant to this
Agreement on one or more occasions is a waiver of any right hereunder or
constitutes a course of dealing that modifies this Agreement.
10.3. WAIVERS. No waiver of any right or remedy under this Agreement shall
be binding on either party unless it is in writing and is signed by the party to
be charged. No such waiver of any right or remedy under any term of this
Agreement shall in any event be deemed to apply to any subsequent default under
the same or any other term contained herein.
10.4. AMENDMENTS. No amendment, modification or termination of this
Agreement shall be binding on either party hereto unless it is in writing and is
signed by the party to be charged.
10.5. SUCCESSORS. The terms of this Agreement shall be binding upon and
inure to the benefit of the parties and their respective heirs, personal
representatives or corporate successors.
10.6. THIRD PARTIES. Nothing herein expressed or implied is intended or
shall be construed to give any person other than the parties hereto any rights
or remedies under this Agreement.
7
<PAGE>
10.7. JOINT PREPARATION. This Agreement shall be deemed to have been
prepared jointly by the parties hereto. Any ambiguity herein shall not be
interpreted against either party hereto and shall be interpreted as if each of
the parties hereto had prepared this Agreement.
10.8. RULES OF CONSTRUCTION. In this Agreement, unless the context
otherwise requires, words in the singular number include the plural, and in the
plural include the singular; and words of the masculine gender include the
feminine and the neuter, and when the sense so indicates words of the neuter
gender may refer to any gender. The preamble and the recitals are part of this
Agreement. The captions and section numbers appearing in this Agreement are
inserted only as a matter of convenience. They do not define, limit or describe
the scope or intent of the provisions of this Agreement.
10.9. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which shall constitute one and the same instrument, and
either party hereto may execute this Agreement by signing and delivering one or
more counterparts.
10.10. LEGAL MATTERS. The parties, being concerned that either party may
obtain some advantage by having the law of the jurisdiction of its principal
place of business apply, and agreeing in concept to have this Agreement subject
to the laws of a neutral jurisdiction, whose laws are perceived as being fair in
general to the business community at large, have determined and agreed as
follows: THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO PRINCIPLES
OF CONFLICT OF LAWS. EACH OF THE PARTIES AGREES THAT ANY LEGAL ACTION BETWEEN
THE PARTIES RELATING TO THE ENTRY INTO OR PERFORMANCE OF THIS AGREEMENT, OR THE
INTERPRETATION OR ENFORCEMENT OF TERMS HEREOF, SHALL BE BROUGHT IN A FEDERAL OR
STATE COURT LOCATED IN NEW CASTLE COUNTY, DELAWARE, HAVING JURISDICTION OF THE
SUBJECT MATTER THEREOF, AND EACH PARTY IRREVOCABLY CONSENTS TO PERSONAL
JURISDICTION IN ANY SUCH FEDERAL OR STATE COURT, WAIVES ANY RIGHT TO OBJECT TO
SUCH VENUE OR TO ASSERT THE DEFENSE OF FORUM NON-CONVENIENS, AND AGREES THAT
SERVICE OF PROCESS MAY BE MADE BY CERTIFIED OR REGISTERED MAIL IN ACCORDANCE
WITH, SECTION 10.11 HEREOF.
10.11. NOTICES. Any notices or other communications required or permitted
by this Agreement shall be in writing and shall be delivered either by personal
delivery, by nationally recognized overnight courier service, by facsimile, by
first class mail or by registered or certified mail, return receipt requested,
addressed to the party at the address appearing below the signature of such
party, or to such other address as either party shall have previously designated
to the other by written notice given in the manner hereinabove set forth.
Notices shall be deemed given one day after being sent, if sent by overnight
courier; when delivered and receipted for, if hand delivered; when received, if
sent by facsimile or other electronic means or by first class mail; or when
receipted for (or upon the date of attempted delivery where delivery is refused
or unclaimed), if sent by certified or registered mail, return receipt
requested.
8
<PAGE>
SIGNATURES
IN WITNESS WHEREOF the parties have signed this Agreement as of this 29th
day of August, 1999.
ROYAL PRECISION, INC.
By: /s/ Thomas A. Schneider /s/ Danny Edwards
----------------------------------- -----------------------------------
Thomas A. Schneider, President DANNY EDWARDS
Address: 15170 North Hayden Road Address: 26420 N. Wrangler Road
Suite 1 Scottsdale, Arizona 85255
Scottsdale, Arizona 85260
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> AUG-31-1999
<EXCHANGE-RATE> 1
<CASH> 48
<SECURITIES> 0
<RECEIVABLES> 2,720
<ALLOWANCES> 443
<INVENTORY> 5,225
<CURRENT-ASSETS> 8,775
<PP&E> 6,372
<DEPRECIATION> 1,106
<TOTAL-ASSETS> 22,873
<CURRENT-LIABILITIES> 4,199
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 13,740
<TOTAL-LIABILITY-AND-EQUITY> 22,873
<SALES> 6,516
<TOTAL-REVENUES> 6,516
<CGS> 4,069
<TOTAL-COSTS> 1,761
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 151
<INCOME-PRETAX> 590
<INCOME-TAX> 296
<INCOME-CONTINUING> 294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 294
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.05
</TABLE>
