SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended: May 31, 2000
[ ] Transition Report under 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.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1453896
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
15170 North Hayden Road, Suite 1, Scottsdale, Arizona 85260
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(Address of Principal Executive Offices) (Zip Code)
(480) 627-0200
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.001 per share
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(Title of Class)
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
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of shares of Common Stock held by non-affiliates
of the Registrant on August 7, 2000 was $5,782,000.
The number of shares of Common Stock outstanding on August 7, 2000 was
5,678,956.
Documents incorporated by reference:
Portions of the Registrant's Proxy Statement relating to the 2000 Annual Meeting
of Stockholders have been incorporated by reference into Part III, Items 10, 11,
12 and 13.
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PART I
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Management believes that this Form 10-K
includes forward-looking statements which reflect the views of the Company with
respect to future events and financial performance. These forward-looking
statements are subject to uncertainties and other factors that could cause
actual results to differ materially from such statements. These uncertainties
and other factors include, but are not limited to, uncertainties relating to
economic conditions, customer plans and commitments, the cost of raw materials,
the competitive environment in which the Company operates, and changes in the
financial markets relating to the Company's capital structure and cost of
capital. Statements in this Form 10-K, including the Notes to 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 included in Exhibit 99.1. The words "believe," "expect,"
"anticipate," "project," and similar expressions identify forward-looking
statements, which speak only as of the date the statement was made.
ITEM 1. DESCRIPTION OF BUSINESS.
Royal Precision, Inc. ("RP" or the "Company") is a holding company which
carries on its business operations through its 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 (formerly known as Roxxi, Inc.,
"Roxxi"). RP (formerly FM Precision Golf Corp.), FMP and FMP Sales were
incorporated in Delaware on May 3, 1996 by a group of investors who acquired,
through such companies, substantially all of the assets of the golf club shaft
manufacturing business of Brunswick Corporation. RP acquired RG, a Nevada
corporation, on August 29, 1997 and RP simultaneously changed its name from FM
Precision Golf Corp. to Royal Precision, Inc. As discussed in note 3 to the
consolidated financial statements, the Company disposed of the operating assets
of Royal Grip Headwear Company, a Nevada corporation, in March 1999. Results of
operations for Roxxi in all periods through May 31, 1999 are reflected as
discontinued operations.
PRINCIPAL PRODUCTS; MARKETS
The Company designs, manufactures and distributes steel golf club shafts,
sales of which represented 85%, 82% and 85% of total revenues during the fiscal
years ended May 31, 2000, 1999 and 1998, respectively. The Company developed and
patented the "Rifle", the first modern stepless steel golf club shaft in the
industry. Management believes that this shaft is the premier steel shaft
available in the market today due to its patented internal and external design
characteristics which result in superior performance, consistency and strength
compared to other steel golf club shafts. The Company also pioneered, patented,
and now licenses the technology of Frequency Coefficient Matching ("FCM") golf
club shafts by means of an electronic analyzer. Management believes that FCM is
more accurate than any other sorting method, in that it ensures identical shaft
flex from club-to-club throughout a set, allowing the golfer to maintain a
consistent, natural swing tempo regardless of the club chosen.
The Company also designs and distributes golf club grips, sales of which
represented 15%, 18% and 15% of total revenues during the fiscal years ended May
31, 2000, 1999 and 1998, respectively. In 1989, RG introduced a rubber wrap golf
grip that gained widespread acceptance in the golf industry and enabled RG to
achieve brand name recognition. The Company currently offers a wide variety of
standard and custom models, all of which management believes feature durability
and a distinctive feel and appearance. These grips are sold principally into the
replacement market, which serves those golfers seeking to replace grips that
have become worn and slick due to prolonged use.
In February 2000, the Company introduced the "Rifle" Graphite shaft, a
filament wound product which it co-designed and distributes. Management believes
that this product has superior consistency properties based on the proprietary
filament winding and finishing processes utilized in its manufacture that give
the shaft uniform wall thickness and oscillation characteristics. Because the
"Rifle" Graphite was not introduced until the end of fiscal 2000, sales of this
product were immaterial to the Company's operations and financial condition,
representing less than 1% of total revenues during the fiscal year ended May 31,
2000.
Sales to original equipment manufacturers ("OEMs") accounted for the vast
majority of the Company's sales in fiscal 2000, with the remainder of the sales
being made to distributors, custom club assemblers, pro shops and repair shops.
The Company's products are sold by OEMs as a component of the complete golf club
through a variety of channels including sporting goods stores, discount stores,
mail order catalogs, pro shops and mass merchandisers.
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Of the Company's top ten customers during the fiscal year ended May 31,
2000, two are international. The Company's exclusive Japanese distributor is its
largest account (see "Principal Suppliers and Customers") and its Australian
distributor is its eighth largest account. The Company also has a presence in
Europe and Canada through other distributor relationships.
BACKLOG
As of May 31, 2000, the Company had open orders from customers totaling
approximately $4.2 million for shipment during the fiscal year ending May 31,
2001. Open orders as of May 31, 1999 for shipment during fiscal 2000 were
approximately $4.1 million.
COMPETITION
The golf equipment industry is highly competitive. There are numerous
companies competing in various segments of the golf equipment markets including
those which manufacture and sell the golf club component parts which are shafts,
grips and heads. Some of the Company's competitors have greater name
recognition, more extensive engineering, manufacturing and marketing
capabilities, and greater financial, technological and personnel resources than
those available to the Company. The Company competes primarily on the basis of
product quality, product specifications and design, on-time deliveries, customer
relationships and price.
The Company competes primarily with three companies which manufacture and
distribute steel golf club shafts to OEMs. FMP is the second largest producer of
steel shafts, after True Temper Sports, Inc. Management believes that its market
share in steel shafts is approximately 25% while True Temper's market share in
steel shafts is believed to be approximately 60%. Other competitors which
manufacture steel golf club shafts include Nippon Shaft Co., Ltd. and Far East
Machinery Co., Ltd., both of which are located in Asia.
The Company's principal competitors in the golf club grip market include
Eaton/Golf Pride and Lamkin Corp. Management believes that its market share in
golf club grips is approximately 3% while Eaton/Golf Pride's and Lamkin's market
shares are believed to be approximately 55% and 15%, respectively.
PRINCIPAL SUPPLIERS AND CUSTOMERS
In December 1996, RG and Acushnet Rubber Company ("Acushnet") entered into
a manufacturing and supply agreement whereby RG outsourced the manufacturing of
its golf club grips to Acushnet. Additionally, the two parties entered into an
agreement resulting in the transfer of RG's manufacturing equipment to Acushnet
under a capital lease. Since January 1997, RG has purchased the majority of its
supply of non-cord, injected grips from Acushnet. In May 1999, RG and Acushnet
executed a mutual release agreement terminating their manufacturing and supply
agreement and capital lease agreement (the "Termination Agreement"). Pursuant to
the Termination Agreement, RG received $1.5 million in cash and $1.0 million in
purchase credits from Acushnet in May 1999. Additionally, Acushnet's obligation
to make additional payments to RG under the capital lease was terminated but
Acushnet was required to continue producing grips through February 2000 at which
time RG received the manufacturing equipment which was previously leased to
Acushnet. The Company believes that its current inventory of grips is sufficient
to satisfy customer demand through December 31, 2000. The Company is currently
purchasing grips from various suppliers and believes it has an adequate source
of supply to meet its current and anticipated future customer needs. However,
there can be no assurance that the transition to new suppliers will not result
in production delays or the loss of sales and key customers which would have a
material adverse effect on the Company's financial condition and results of
operations.
FMP uses Worthington Industries, Inc. ("Worthington") as its primary
supplier for strip steel but has no supply contract with Worthington. Should
Worthington fail to deliver steel, there may be a disruption of operations at
FMP until an alternate supplier is procured. Worthington provides steel from two
separate plant locations. If one Worthington plant becomes unable to fill the
necessary requirements, orders could be filled from the alternate location.
Although FMP has elected to use Worthington as its primary supplier of strip
steel, management believes that there are other acceptable supply sources at
comparable prices and that the loss of Worthington as a supplier would not have
a significant adverse impact on the Company.
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The Company has a ten-year agreement with Precision FM Japan, Ltd.
("Precision FM") which grants exclusive distribution rights for sale of the
Company's golf club grips in Japan and certain other Asian countries. The
Company also has a five-year agreement with Marubeni Corporation ("Marubeni")
and Precision Japan, Ltd. ("Precision") which grants exclusive distribution
rights for sale of the Company's golf club shafts in Japan and certain other
Asian countries. Precision FM and Precision are subsidiaries of Marubeni and are
collectively referred to as "Precision Japan." The grip and shaft agreements
with Precision Japan expire in July 2001 and July 2002, respectively. Precision
Japan may renew the grip agreement for successive five-year terms. The grip
agreement is terminable by either party for cause or if they fail to agree upon
pricing terms, or by Precision Japan at any time upon six months prior notice to
the Company. Precision Japan may renew the shaft agreement for successive
two-year terms. The shaft agreement is terminable by either party for cause or
by the Company if Precision Japan fails to meet certain minimum purchase
requirements. While the Company currently enjoys a strong relationship with
Precision Japan, the loss of Precision Japan as a distributor of the Company's
products would have a significant adverse effect on the Company.
The Company is significantly dependent on sales to Precision Japan and
Taylor Made Golf which, in the aggregate, represented 46%, 40% and 35% of the
Company's total net sales for the fiscal years ended May 31, 2000, 1999 and
1998, respectively. Precision Japan accounted for 19% of golf club shaft sales
and 73% of golf club grip sales during fiscal 2000. Taylor Made Golf represented
22% of shaft sales and less than 1% of grip sales during fiscal 2000. The
Company does not have a supply agreement with Taylor Made Golf. The loss of
sales to either of these companies could have a significant adverse impact on
the Company's business.
Sales of golf equipment historically have been dependent on discretionary
spending by consumers, which may be adversely affected by general economic
conditions and the popularity of golf in general. A decrease in consumer
spending on golf equipment could have an adverse effect on the Company's
business and operating results. Sales in the golf equipment industry have
historically been seasonal in nature with consumer demand for product being the
strongest during the spring and summer months.
PATENTS, TRADEMARKS
The Company has obtained a trademark and a utility patent on the
manufacture and design of its "Rifle" steel shaft products. Management believes
that its "Rifle" products are superior to other steel golf club shafts in
performance, consistency and strength which provides the Company a competitive
advantage in the golf equipment industry. Management believes that some of the
shaft patents material to its future success are its patent which enables a club
maker to take frequency sorted steel shafts and calculate what new frequency
shafts are needed to produce a Frequency Matched product, its patent which
relates to the same frequency sorting, but for graphite shafts, and its patent
which relates to the manipulation of flex distribution within a shaft or set of
shafts. These patents expire on May 9, 2006, October 19, 2008, and January 12,
2016, respectively. Other patents held by the Company on frequency matching and
the manufacture of steel golf shafts and clubs have expired. While there can be
no assurance that competitors will not use the technology of the expired patents
in the future, the Company's principal competitors have not adopted, nor does
management believe that they have plans to copy, the expired patents.
The Company also relies upon trademarks to establish and protect its
proprietary rights in its grip products and technologies. The RG logo and the
name "Royal Grip" have been registered as trademarks in the United States, Japan
and in other foreign countries. In addition, the Company has filed trademark
applications relating to the names and configurations of several of its grip
products in the United States and in foreign countries, including Japan. The
Company has also obtained design patents on some of its grips and applied for
others that are pending. The Company protects its proprietary rubber compound
and related technologies as trade secrets. Despite such safeguards, there can be
no assurance that its proprietary rights are adequately protected or that
competitors will not be able to produce golf club grips that successfully
imitate the Company's designs and materials without infringing the Company's
proprietary rights.
REGULATIONS
The design of new golf clubs is greatly influenced by rules and
interpretations of the United States Golf Association ("USGA"). Although the
golf equipment standards established by the USGA generally apply only to
competitive events sanctioned by that organization, it has become critical for
designers of new products to assure compliance with USGA standards. Although the
Company believes that all of its golf club shafts and grips comply with current
USGA standards, no assurance can be given that any new products will receive
USGA approval or that existing USGA standards will not be altered in ways that
adversely affect the sales of the Company's products.
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RESEARCH AND DEVELOPMENT
The Company's engineering, sales and other staff, together with independent
consultants engaged by the Company, work to conceive new product opportunities
by creating prototypes and masters and by working with suppliers and customers
to design and produce finished products. New golf club shaft and grip products
are tested through the Company's sales force with customers and various tour
players. During the fiscal years ended May 31, 2000, 1999 and 1998, the Company
spent approximately $0.7 million, $0.6 million and $0.5 million on research and
development, respectively.
ENVIRONMENTAL
In May 1996, the Company acquired substantially all the assets of the golf
club shaft manufacturing business of Brunswick Corporation (the "Brunswick
Acquisition"). Included in the acquired assets were land, buildings and
equipment at the Company's Torrington, Connecticut manufacturing facility (the
"FMP plant"). In conjunction with the Brunswick Acquisition, Brunswick
Corporation agreed to indemnify the Company from potential liability arising
from certain environmental matters and to remediate certain environmental
conditions which existed at the FMP plant on the date of acquisition. Brunswick
Corporation has engaged an environmental consulting firm to perform testing at
the FMP plant and is in the process of developing a plan of remediation. Failure
of Brunswick Corporation to fulfill its obligations under the asset purchase
contract could have a material adverse effect on the Company's financial
condition and results of operations. The Company has retained legal counsel for
representation on various environmental matters related to the Brunswick
Acquisition. Total legal fees incurred related to these matters during the
fiscal year ended May 31, 2000 were approximately $0.1 million.
The Company received a notice of violation ("NOV") from the State of
Connecticut Department of Environmental Protection ("DEP") alleging violation of
certain provisions of a permit related to the discharge of treated wastewater at
the FMP plant. This permit was issued to the Company in February 1997 based on
an application prepared by Brunswick Corporation in April 1996. In April 2000,
the Company reached a settlement agreement with DEP discharging the Company from
any civil liability with respect to the allegations in the NOV, subject to
completion and approval of certain remedial measures at the FMP plant. The
Company incurred approximately $0.2 million in capital expense to complete these
remedial measures during the fiscal year ended May 31, 2000 and, in June 2000,
obtained a certification from DEP that the work was satisfactorily completed.
The Company is seeking reimbursement from Brunswick Corporation for the cost of
remediation and legal fees incurred in conjunction with this matter.
In April 2000, the Company received a request for information from the U.S.
Environmental Protection Agency ("EPA") related to disposal and treatment of
waste materials from the FMP plant during a period from 1982 to 1997. The EPA is
currently conducting an investigation regarding the former National Oil
Services, Inc. Superfund site in West Haven, Connecticut. National Oil Services,
Inc. was, prior to its bankruptcy, a contractor used by the Company and
Brunswick Corporation to treat and dispose non-hazardous waste oils from the FMP
plant. EPA has not issued any demands for reimbursement or performance of work
from the Company relating to this matter and there is not sufficient information
at this time to determine what, if any, action EPA may pursue and what, if any,
effect it may have on the Company's financial condition and results of
operations.
During the fiscal year ended May 31, 2000, the Company incurred
approximately $1.0 million in capital expense to upgrade the wastewater
treatment facilities at the FMP plant to comply with new EPA mandates on water
quality adopted by DEP. Upgrade of these systems is complete and was approved by
DEP in February 2000. The Company does not anticipate significant additional
cost related to the upgrade of these systems.
During the fiscal year ended May 31, 2000, the Company expended
approximately $74,000 on the treatment, storage and disposal of hazardous waste
at the FMP plant. Regulatory fees for various environmental permits and costs
during the year were approximately $11,000.
EMPLOYEES
As of May 31, 2000, the Company had 328 employees. Approximately 70% of the
Company's work force is covered by a collective bargaining agreement which
expires in November 2002. The Company believes its relationship with its
employees is good.
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ITEM 2. DESCRIPTION OF PROPERTY.
The Company's golf club shaft manufacturing facility is located at 535
Migeon Avenue, Torrington, Connecticut and comprises approximately 230,000
square feet. The manufacturing facility is owned by the Company subject to an
open-end mortgage granted to Wells Fargo Business Credit, Inc. See note 7 of
Notes to Consolidated Financial Statements.
The Company's principal executive and administrative offices are located in
approximately 8,000 square feet of a leased facility at 15170 North Hayden Road,
Suite 1, Scottsdale, Arizona. The monthly payment under the lease is
approximately $16,000 and the term of the lease expires in May 2001.
In November 1999, the Company entered into a lease of approximately 9,000
square feet of warehouse space located at 7861 East Gray Road, Suites 107-111,
Scottsdale, Arizona. This facility serves as a distribution point from which
product is shipped to the Company's West Coast customers. The monthly payment
under the lease is approximately $7,600 and the term of the lease expires in
November 2001.
In the opinion of management, these facilities are suitable and adequate
for the Company's intended use and are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS.
The Company is from time to time a party to various routine legal
proceedings, incidental to the Company's business. Management believes that none
of the current routine proceedings will have a material adverse effect on the
Company's financial condition or future operating results.
On November 2, 1999, R. R. Donnelley & Sons Company, Plaintiff, vs. Royal
Precision, Inc., Defendant, was filed in Superior Court, Maricopa County,
Arizona. In the matter, R. R. Donnelley & Sons Company ("Donnelley") alleged
that the Company is liable under breach of contract for approximately $280,000
in printing costs arising from the preparation of a Joint Proxy
Statement/Prospectus related to a proposed merger agreement between the Company
and Coyote Sports, Inc. which was terminated prior to the effective date of the
merger. On April 17, 2000, the court granted the Company's motion to dismiss
this suit. However, the court has not yet signed a final judgment and it is
uncertain whether or not Donnelley will appeal the dismissal. Management
believes that the action is without merit and intends to defend any appeal
vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on The Nasdaq National Market under the trading
symbol "RIFL". The prices set forth below reflect the high and low sale prices
for shares of Common Stock for each quarter during the past two fiscal years as
reported by The Nasdaq National Market.
HIGH LOW
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FISCAL YEAR 1999
First Quarter $ 5.28 $3.88
Second Quarter 4.88 3.00
Third Quarter 3.50 1.28
Fourth Quarter 3.88 2.13
FISCAL YEAR 2000
First Quarter 4.00 1.75
Second Quarter 2.88 2.00
Third Quarter 3.50 2.31
Fourth Quarter 3.50 2.50
As of August 7, 2000, the Company had approximately 90 holders of Common
Stock of record.
The Company has not paid any dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain any earnings to finance the growth of its business.
Any determination as to the payment of dividends will depend upon the future
results of operations, capital requirements and financial condition of the
Company and such other facts as the Board of Directors of the Company may
consider, including any contractual or statutory restrictions on the Company's
ability to pay dividends. The Company's two credit facilities each limit the
Company's ability to pay dividends on its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below for, and as of,
each of the three years since the Company has been publicly traded is derived
from the Company's consolidated financial statements as of May 31, 2000, 1999
and 1998. This data should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8 of this Form 10-K.
ROYAL PRECISION, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED MAY 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998
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Net sales $29,925 $23,219 $24,722
Income from continuing operations 870 276 268
Income from continuing operations per share 0.15 0.05 0.05
Total assets 24,942 24,610 25,886
Long-term debt and capital lease obligations 6,027 6,191 3,171
Total liabilities 10,530 11,158 11,559
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW--
Royal Precision, Inc. ("RP" or the "Company") is a holding company which
carries on its business operations through its 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 (formerly known as Roxxi, Inc.,
"Roxxi"). 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 3 to the consolidated
financial statements, the Company disposed of the operating assets of Royal Grip
Headwear Company in March 1999. Results of operations for Roxxi in all periods
through May 31, 1999 are reflected as discontinued operations.
The Company designs, manufactures and distributes steel golf club shafts
and designs and distributes golf club grips and graphite golf club shafts for
sale to original equipment manufacturers ("OEMs") and to distributors and
retailers for use in the replacement market. The Company's products are sold
throughout the United States as well as internationally, primarily in Japan,
Australia, the United Kingdom and Canada.
The Company principally operates in the golf equipment industry which has
historically been seasonal in nature with consumer demand for product being the
strongest during the spring and summer months.
FISCAL YEAR ENDED MAY 31, 2000 COMPARED TO THE FISCAL YEAR ENDED MAY 31, 1999--
NET SALES. Net sales from continuing operations for the year ended May 31,
2000 were $29.9 million, an increase of $6.7 million or 29% over net sales from
continuing operations of $23.2 million in 1999. Net sales of golf club shafts
increased by $6.4 million or 33% and net sales of golf club grips increased by
$0.3 million or 8%. The increased golf club shaft sales reflect 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
$6.7 million or 43%. Sales of the Company's lower priced, commercial grade golf
club shafts decreased by $0.3 million or 10%. The increased golf club grip sales
reflect the success of a new buffed product introduced to the Japanese market in
November 1998. Sales of this product for the year ended May 31, 2000 were $1.7
million compared to $0.6 million in 1999.
COST OF SALES. Cost of goods sold from continuing operations for the year
ended May 31, 2000 was $20.5 million, an increase of $5.5 million or 37% over
cost of goods sold from continuing operations of $15.0 million in 1999. Golf
club shafts cost of goods sold increased by $4.7 million or 37% as a result of
higher total net sales. Golf club grips cost of goods sold increased by $0.8
million or 33% due to higher total net sales and additional costs associated
with the opening of a new West Coast distribution center in December 1999.
Acushnet Rubber Company ("Acushnet") had previously warehoused and distributed
RG's grips under a manufacturing and supply agreement. RG assumed responsibility
for these functions following the termination of the Acushnet contracts. (See
note 5 to the consolidated financial statements.) Approximately $0.1 million in
additional costs was incurred related to the new distribution facility during
the year ended May 31, 2000. Also, depreciation expense of $0.2 million was
recorded on the grip manufacturing equipment while in use by Acushnet during the
year ended May 31, 2000 whereas no depreciation expense was recorded in 1999
when the Acushnet capital lease contract was in effect.
GROSS PROFIT. Gross profit from continuing operations for the year ended
May 31, 2000 was $9.4 million, an increase of $1.2 million or 15% over gross
profit from continuing operations of $8.2 million in 1999. Gross profit from
sales of golf club shafts increased by $1.6 million or 26% to $8.0 million due
to higher total net sales. As a percentage of sales, the gross profit on sales
of golf club shafts decreased from 33% to 31% due to several factors,
principally the mix of products sold during the two periods. Sales of a
particular pro grade shaft which is not subject to the Company's Frequency
Coefficient Matching ("FCM") technology and is sold at a lower price and a lower
profit margin than the Company's other pro grade products totaled approximately
$4.3 million, or 17% of total shaft sales during fiscal 2000. Sales of this
product during fiscal 1999 were approximately $1.8 million, or 9% of total shaft
sales. Additionally, inventory write-downs of $0.3 million were recorded to
reduce the book value of certain graphite shafts purchased for resale prior to
the introduction of the "Rifle" Graphite, to estimated net realizable value.
Overtime pay and workers' compensation insurance premiums also increased
significantly during fiscal 2000 as production was increased to meet the higher
sales demand.
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Gross profit from sales of golf club grips decreased by $0.4 million or 23%
to $1.4 million despite an increase in net sales. As a percentage of sales, the
gross profit on sales of golf club grips decreased from 44% to 31%. This
decreased margin reflects the additional warehouse costs and depreciation
discussed above as well as a different mix of products sold during the two
periods. Beginning in November 1998, the Company introduced the new buffed
product for the Japanese market which is being manufactured at a higher cost and
is being sold at a lower profit margin than other RG products. Sales of this
product represented 38% of sales during the year ended May 31, 2000 compared to
only 14% in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended May 31, 2000 were $7.1 million, an
increase of 19% over selling, general and administrative expenses of $5.9
million during the corresponding period in 1999. The $1.1 million increase
primarily consists of additional marketing and advertising costs including a
television commercial campaign which first aired in January 2000 and management
bonuses earned under an incentive compensation plan based on the profitability
of the Company. As a percentage of sales, selling, general and administrative
expenses declined from 26% during year ended May 31, 1999 to 24% during the
corresponding period in 2000.
AMORTIZATION OF GOODWILL. Goodwill was reduced in the fourth quarter of
fiscal 1999 as a result of the utilization of net operating loss carryforwards
established prior to the FMP-RG Merger ("Pre-Merger NOLs") and partial reversal
of the valuation allowance on pre-merger deferred tax assets. Therefore,
amortization expense was reduced from $521,000 during the year ended May 31,
1999, to $486,000 in 2000.
GAIN ON TERMINATION OF MANUFACTURING SUPPLY CONTRACT. As discussed in note
5 to the consolidated financial statements, RG and Acushnet executed a mutual
release agreement terminating the manufacturing and supply agreement and capital
lease agreement in May 1999. RG recognized a one-time aggregate gain of $0.9
million during fiscal 1999 as a result of this Termination Agreement. See
Reliance on Third Party Suppliers under Business Environment and Future Results
below.
INTEREST EXPENSE. In October 1998, FMP entered into a new credit facility
with RG's lender and paid off all existing loans to FMP's previous lender. A
prepayment penalty of $75,000 was incurred related to this transaction and was
reflected as a component of the $0.8 million interest expense during the year
ended May 31, 1999. Interest expense in 2000 was $0.6 million.
TERMINATED MERGER EXPENSES. As discussed in note 6 to the consolidated
financial statements, the Company incurred professional fees of $1.0 million
during the year ended May 31, 1999 related to a terminated merger agreement with
Coyote Sports, Inc. (the "RP-Coyote Merger"). These expenses represent costs
incurred for due diligence, negotiation of agreements and preparation of a
registration statement for the contemplated merger.
OTHER INCOME. Other income of $267,000 for the year ended May 31, 2000 is
principally comprised of royalties earned on sales of Roxxi headwear products as
well as royalty fees from other contracts which license certain Company
technology and products. Other income of $243,000 for the year ended May 31,
1999 primarily represents interest income on the Acushnet capital lease
receivable.
PROVISION FOR INCOME TAXES. Provisions of $616,000 and $804,000 for taxes
on income from continuing operations were recorded during the years ended May
31, 2000 and 1999, respectively. During fiscal 2000, the Company utilized
approximately $0.5 million of Pre-Merger NOLs and also determined that
approximately $1.9 million of Pre-Merger NOLs were realizable. As such, the
Company reduced the valuation allowance on its deferred income tax assets by
approximately $0.7 million (see notes 2 and 10 to the consolidated financial
statements). During fiscal 2000, the Company also reduced the valuation
allowance on other deferred income tax assets, not related to the FMP-RG Merger,
by approximately $162,000. During fiscal 1999, the Company utilized
approximately $0.9 million of Pre-Merger NOLs and also determined that
approximately $1.0 million of Pre-Merger NOLs were realizable and, therefore,
reduced the valuation allowance on its deferred income tax assets by an
aggregate of $0.7 million. 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 3 to the consolidated
financial statements, the Company disposed of the operating assets of Roxxi in
March 1999. A loss of $0.8 million was recorded on this sale, net of a tax
benefit of $0.4 million, reflecting a write-down of the excess book value of
assets sold over the cash received. Losses from the operations of Roxxi for the
year ended May 31, 1999 were $0.4 million net of an income tax benefit of $0.2
million.
8
<PAGE>
FISCAL YEAR ENDED MAY 31, 1999 COMPARED TO THE FISCAL YEAR ENDED MAY 31, 1998--
NET SALES. Net sales from continuing operations for the year ended May 31,
1999 were $23.2 million, a decrease of $1.5 million or 6% from net sales from
continuing operations of $24.7 million in 1998. Net sales of golf club shafts
decreased by $1.9 million or 9% primarily due to a reduction in sales of the
Company's lower priced, commercial grade golf club shafts of $5.5 million or
61%. Sales of this product were significantly reduced following a price increase
instituted by the Company in the first fiscal quarter of 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. Net
sales of the Company's higher priced, pro grade golf club shafts increased by
$3.5 million or 29%. This increase reflects the strong demand for the Company's
proprietary "Rifle" shafts. Net sales of golf club grips increased by $0.4
million or 12% primarily due to the inclusion of RG golf club grip sales of $1.0
million during the first quarter of fiscal 1999 compared to $0 during the
comparable period of 1998 which was prior to the effective date of the FMP-RG
Merger. RG's business with two significant OEM customers has decreased
significantly from sales of $440,000 during fiscal 1998 compared to $40,000
during fiscal 1999.
COST OF SALES. Cost of goods sold from continuing operations for the year
ended May 31, 1999 was $15.0 million, a decrease of 9% from cost of goods sold
from continuing operations of $16.5 million in 1998. The decrease in cost of
goods sold of $1.5 million is primarily attributable to the decline in sales of
commercial grade golf club shafts discussed above. Total golf club shafts cost
of goods sold decreased by $2.0 million. Golf club grips cost of goods sold
increased by $0.5 million primarily due to the inclusion of RG golf club grips
cost of goods sold of $0.5 million during the first quarter of fiscal 1999
compared to $0 during the comparable period of 1998 which was prior to the
effective date of the FMP-RG Merger.
GROSS PROFIT. Gross profit from continuing operations for both of the years
ended May 31, 1999 and 1998 was $8.2 million. Gross profit from sales of golf
club shafts was unchanged at $6.3 million despite the $1.9 million reduction in
net sales due to a favorable change in the mix of product sales from lower
margin, commercial grade shafts to higher margin, pro grade shafts. As a
percentage of sales, the gross profit on shaft sales increased from 30% to 33%.
Gross profit from sales of golf club grips was unchanged at $1.9 million despite
an increase in net sales of $0.4 million. Fiscal 1998 gross profit reflects a
$0.5 million credit received from Acushnet as compensation for production delays
and shortfalls which was recorded as a one-time reduction in golf club grips
cost of sales during the second quarter of fiscal 1998 (see note 5 to the
consolidated financial statements). Gross profit on sales of golf club grips
during the first quarter of fiscal 1999 was $0.5 million compared to $0 during
the comparable period of 1998 which was prior to the effective date of the
FMP-RG Merger.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended May 31, 1999 were $5.9 million, a
decrease of 5% from selling, general and administrative expenses of $6.3 million
in 1998. This net reduction of $0.4 million was achieved despite the inclusion
of selling, general and administrative expenses of $0.2 million from RG
operations and goodwill amortization of $0.1 million during the first fiscal
quarter of 1999 compared to $0 during the comparable period of 1998 which was
prior to the effective date of the FMP-RG Merger. The Company began a cost
cutting program following the FMP-RG Merger which resulted in reductions of
corporate overhead costs.
AMORTIZATION OF GOODWILL. Amortization expense of $0.5 million was recorded
for the year ended May 31, 1999 compared to an expense of $0.4 million in 1998
which included only nine months of amortization following the effective date of
the FMP-RG Merger.
GAIN ON TERMINATION OF MANUFACTURING SUPPLY CONTRACT. As discussed in note
5 to the consolidated financial statements, RG and Acushnet executed a mutual
release agreement terminating the manufacturing and supply agreement and capital
lease agreement in May 1999. RG recognized a one-time aggregate gain of $0.9
million during fiscal 1999 as a result of this Termination Agreement. See
Reliance on Third Party Suppliers under Business Environment and Future Results
below.
NONRECURRING MERGER RELATED EXPENSES. In conjunction with the FMP-RG
Merger, expenses of $0.8 million were incurred during the year ended May 31,
1998. Significant components of this expense are costs related to terminate a
computer software conversion, relocation of certain employees and severance pay.
INTEREST EXPENSE. In October 1998, FMP entered into a new credit facility
with RG's lender and paid off all existing loans to FMP's previous lender. A
prepayment penalty of $75,000 was incurred related to this transaction and was
reflected as a component of the $0.8 million interest expense during the year
ended May 31, 1999. Interest expense in 1998 was $0.6 million.
9
<PAGE>
TERMINATED MERGER EXPENSES. As discussed in note 6 to the consolidated
financial statements, the Company incurred professional fees of $1.0 million
during the year ended May 31, 1999 related to the RP-Coyote Merger. These
expenses represent costs incurred for due diligence, negotiation of agreements
and preparation of a registration statement for the contemplated merger.
OTHER INCOME. Other income for the year ended May 31, 1999 was $243,000,
compared to $168,000 in 1998. These amounts include interest income of $154,000
and $168,000 from the RG equipment capital lease with Acushnet during fiscal
1999 and 1998, respectively. The equipment capital lease with Acushnet was
terminated in May 1999 and, therefore, RG will not recognize any related
interest income in future periods. Additional income during fiscal 1999
primarily represents FMP royalty fees from new contracts which license certain
technology and products.
PROVISION FOR INCOME TAXES. Provisions of $804,000 and $28,000 for taxes on
income from continuing operations were recorded during the years ended May 31,
1999 and 1998, respectively. During fiscal 1999, the Company utilized
approximately $0.9 million of Pre-Merger NOLs and also determined that
approximately $1.0 million of Pre-Merger NOLs were realizable. As such, the
Company reduced the valuation allowance on its deferred income tax assets by an
aggregate of $0.7 million (see notes 2 and 10 to the consolidated financial
statements). 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 3 to the consolidated
financial statements, the Company disposed of the operating assets of Roxxi in
March 1999. A loss of $0.8 million was recorded on this sale, net of a tax
benefit of $0.4 million, reflecting a write-down of the excess book value of
assets sold over the cash received. Losses from the operations of Roxxi for the
years ended May 31, 1999 and 1998 were $0.4 million and $0.5 million,
respectively. Fiscal 1999 Roxxi operating losses are net of an income tax
benefit of $0.2 million whereas no income tax benefit was provided for the
fiscal 1998 operating losses due to the inability to utilize NOLs.
LIQUIDITY AND CAPITAL RESOURCES--
At May 31, 2000, the Company had working capital of $6.0 million and a
current ratio of 2.3 to 1 as compared to working capital of $5.8 million and a
current ratio of 2.2 to 1 at May 31, 1999.
FMP has a credit facility consisting of a term loan and a revolving
line-of-credit. The FMP term loan of $2.7 million at May 31, 2000 is due in
monthly principal installments of $65,000 until its maturity in September 2002.
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 a maximum borrowing of $5.0 million. As of May 31, 2000, FMP had $3.7
million outstanding under its revolving line-of-credit and $1.1 million
available for additional borrowings. The FMP line-of-credit expires in September
2002.
RG has a credit facility consisting of a term loan and a revolving
line-of-credit. The RG term loan of $0.4 million at May 31, 2000 is due in
monthly principal installments of $10,500 until its maturity in September 2002.
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 a maximum borrowing of $1.5 million. As of May 31, 2000, RG had $0.1
million outstanding under its revolving line-of-credit and $0.8 million
available for additional borrowings. The RG line-of-credit expires in September
2002.
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
(9.5% at May 31, 2000) plus 0.75% and 0.25%, respectively, and are secured by
substantially all of the Company's assets.
The FMP and RG credit facilities contain certain 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 compliance with all financial
loan covenants at May 31, 2000.
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 year ended May 31, 2000, net cash provided by operating
activities was $2.5 million which primarily resulted from net income of $0.9
million, depreciation and amortization of $1.2 million and deferred income taxes
of $0.6 million. Net cash provided by operating activities was reduced by an
increase in accounts receivable of $0.3 million.
10
<PAGE>
Net cash used in investing activities for the year ended May 31, 2000 was
$2.2 million for the purchase of property, plant and equipment. The Company
estimates that capital expenditures for the fiscal year ending May 31, 2001 will
be approximately $1.6 million. The Company is assessing its steel golf club
shaft manufacturing capacities compared to the current and anticipated future
volume of customer orders. Based on this assessment and the success of ongoing
projects to increase production volumes, significant future capital expenditures
may be required at the FMP manufacturing facility to increase production
capacity for pro grade steel golf club shafts.
Net cash used in financing activities for the year ended May 31, 2000, was
$0.5 million resulting from repayments of long term debt and capital lease
obligations of $1.2 million and net borrowings under lines-of-credit of $0.7
million. The Company is investigating certain potential acquisitions. Any
potential acquisitions may require the use of existing capital resources,
assumption of debt or issuance of new debt instruments, any of which could
impact the Company's liquidity and capital resources.
YEAR 2000 ASSESSMENT --
During the two year period ended December 31, 1999, the Company expended
approximately $100,000 to purchase and install new computer hardware and
software resulting in all Company hardware and software being Year 2000
compliant and approximately $20,000 to evaluate the Company's internal systems
for Year 2000 problems.
The Company did not experience any disruptions in its ability to conduct
business due to Year 2000 problems. Also, no customers, suppliers, or financial
institutions have informed the Company of any Year 2000 issues that would
materially affect the Company.
BUSINESS ENVIRONMENT AND FUTURE RESULTS --
RELIANCE ON THIRD PARTY SUPPLIERS. In December 1996, RG and Acushnet
entered into a manufacturing and supply agreement whereby RG outsourced the
manufacturing of its golf club grips to Acushnet. Additionally, the two parties
entered into an agreement resulting in the transfer of RG's manufacturing
equipment to Acushnet under a capital lease. Since January 1997, RG has
purchased the majority of its supply of non-cord, injected grips from Acushnet.
In May 1999, RG and Acushnet executed a mutual release agreement terminating
their manufacturing and supply agreement and capital lease agreement (the
"Termination Agreement"). Pursuant to the Termination Agreement, RG received
$1.5 million in cash and $1.0 million in purchase credits from Acushnet in May
1999. Additionally, Acushnet's obligation to make additional payments to RG
under the capital lease was terminated but Acushnet was required to continue
producing grips through February 2000 at which time RG received the
manufacturing equipment which was previously leased to Acushnet. RG recognized
an aggregate gain of $865,000 during the fiscal year ended May 31, 1999 as a
result of the Termination Agreement. At May 31, 2000, the manufacturing
equipment returned to RG is classified as equipment held for sale.
The Company believes that its current inventory of grips is sufficient to
satisfy customer demand through December 31, 2000. The Company is currently
purchasing grips from various suppliers and believes it has an adequate source
of supply to meet its current and anticipated future customer needs. However,
there can be no assurance that the transition to new suppliers will not result
in production delays or the loss of sales and key customers which would have a
material adverse effect on the Company'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 manufacturing
equipment, finished goods inventory and raw materials to another company for
$0.3 million and a royalty of 2% of the buyer's net sales until the buyer has
paid an additional $0.2 million. Subsequently, Roxxi's name was changed to Royal
Grip Headwear Company.
In fiscal 1999, the Company recorded a loss on disposal of assets of Roxxi
of $0.8 million, net of a tax benefit of $0.4 million. This expense represents a
$1.1 million write-down of the excess of the carrying value of inventory and
fixed assets over the cash received and $0.1 million for estimated transaction
costs and estimated operating expenses to be incurred during the phase-out
period of this business segment. The Company is accounting for royalties as
income is earned during the two year period beginning May 1, 1999. For the years
ended May 31, 2000 and 1999, royalties of $151,000 and $20,000 were recorded,
respectively, and are reflected as other income in the accompanying consolidated
statements of operations.
ENVIRONMENTAL MATTERS. In May 1996, the Company acquired substantially all
the assets of the golf club shaft manufacturing business of Brunswick
Corporation (the "Brunswick Acquisition"). Included in the acquired assets were
land, buildings and equipment at the Company's Torrington, Connecticut
manufacturing facility (the "FMP plant"). In conjunction with the Brunswick
Acquisition, Brunswick Corporation agreed to indemnify the Company from
11
<PAGE>
potential liability arising from certain environmental matters and to remediate
certain environmental conditions which existed at the FMP plant on the date of
acquisition. Brunswick Corporation has engaged an environmental consulting firm
to perform testing at the FMP plant and is in the process of developing a plan
of remediation. Failure of Brunswick Corporation to fulfill its obligations
under the asset purchase contract could have a material adverse effect on the
Company's financial condition and results of operations. The Company has
retained legal counsel for representation on various environmental matters
related to the Brunswick Acquisition. Total legal fees incurred related to these
matters during the fiscal year ended May 31, 2000 were approximately $0.1
million.
The Company received a notice of violation ("NOV") from the State of
Connecticut Department of Environmental Protection ("DEP") alleging violation of
certain provisions of a permit related to the discharge of treated wastewater at
the FMP plant. This permit was issued to the Company in February 1997 based on
an application prepared by Brunswick Corporation in April 1996. In April 2000,
the Company reached a settlement agreement with DEP discharging the Company from
any civil liability with respect to the allegations in the NOV, subject to
completion and approval of certain remedial measures at the FMP plant. The
Company incurred approximately $0.2 million in capital expense to complete these
remedial measures during the fiscal year ended May 31, 2000 and, in June 2000,
obtained a certification from DEP that the work was satisfactorily completed.
The Company is seeking reimbursement from Brunswick Corporation for the cost of
remediation and legal fees incurred in conjunction with this matter.
In April 2000, the Company received a request for information from the U.S.
Environmental Protection Agency ("EPA") related to disposal and treatment of
waste materials from the FMP plant during a period from 1982 to 1997. The EPA is
currently conducting an investigation regarding the former National Oil
Services, Inc. Superfund site in West Haven, Connecticut. National Oil Services,
Inc. was, prior to its bankruptcy, a contractor used by the Company and
Brunswick Corporation to treat and dispose non-hazardous waste oils from the FMP
plant. EPA has not issued any demands for reimbursement or performance of work
from the Company relating to this matter and there is not sufficient information
at this time to determine what, if any, action EPA may pursue and what, if any,
effect it may have on the Company's financial condition or results of
operations.
During the fiscal year ended May 31, 2000, the Company incurred
approximately $1.0 million in capital expense to upgrade the wastewater
treatment facilities at the FMP plant to comply with new EPA mandates on water
quality adopted by DEP. Upgrade of these systems is complete and was approved by
DEP in February 2000. The Company does not anticipate significant additional
cost related to the upgrade of these systems.
During the fiscal year ended May 31, 2000, the Company expended
approximately $74,000 on the treatment, storage and disposal of hazardous waste
at the FMP plant. Regulatory fees for various environmental permits and costs
during the year were approximately $11,000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
COMMODITY INSTRUMENTS--
At May 31, 2000, the Company did not participate in any derivative
financial instruments or other financial and commodity instruments for which
fair value disclosure would be required under Statement of Financial Accounting
Standards No. 107. The Company holds no investment securities that would require
disclosure of market risk.
PRIMARY MARKET RISK EXPOSURE --
The Company's primary market risk exposure relates to its variable rate
debt obligations which are described in note 7 of the Notes to Consolidated
Financial Statements. A one percent change in the prime lending rate would have
an effect of $69,500 and $78,500 on interest expense for the years ended May 31,
2000 and 1999, respectively.
The Company has entered into a contract of approximately $0.4 million to
purchase certain manufacturing equipment. This contract is denominated in German
Deutsche Marks. The Company expects to take delivery of this equipment and make
final payment under the contract in October 2000. The Company has not hedged
this transaction as of May 31, 2000 and, accordingly, will be impacted by any
change in the exchange rate prior to the ultimate settlement date of the
contract.
12
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Royal Precision, Inc.:
We have audited the accompanying consolidated balance sheets of Royal Precision,
Inc. (a Delaware corporation) and subsidiaries as of May 31, 2000 and 1999 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the three years in the period ended May 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Royal Precision,
Inc. and subsidiaries as of May 31, 2000 and 1999, and the results of their
operations and their cash flows for the three years in the period ended May 31,
2000 in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona
July 21, 2000
13
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MAY 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
-------- --------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 36 $ 184
Accounts receivable, net of allowance for doubtful accounts of $274
and $433 at May 31, 2000 and 1999, respectively 5,100 4,617
Inventories 5,124 4,514
Other current assets 155 783
Deferred income taxes 106 647
-------- --------
Total current assets 10,521 10,745
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 123 123
Furniture, fixtures and office equipment 455 499
Buildings and improvements 840 670
Machinery and equipment 4,278 4,144
Equipment held for sale 500 --
Construction in progress 1,081 402
-------- --------
7,277 5,838
Less - Accumulated depreciation (1,264) (929)
-------- --------
6,013 4,909
-------- --------
GOODWILL, net 7,629 8,857
-------- --------
DEFERRED INCOME TAXES 701 70
-------- --------
OTHER ASSETS 78 29
-------- --------
Total assets $ 24,942 $ 24,610
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital
lease obligations $ 906 $ 1,203
Accounts payable 1,714 1,839
Accrued salaries and benefits 1,290 595
Accrued pension liability 176 251
Other accrued expenses 417 1,079
-------- --------
Total current liabilities 4,503 4,967
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
net of current portion 6,027 6,191
-------- --------
Total liabilities 10,530 11,158
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 1,000,000 shares authorized
(reduced from 5,000,000 shares on October 19, 1999); no shares issued -- --
Common stock, $0.001 par value; 10,000,000 shares authorized (reduced
from 50,000,000 shares on October 19, 1999); 5,678,956 and 5,667,375
shares issued and outstanding at May 31, 2000 and 1999, respectively 6 6
Additional paid-in capital 13,940 13,897
Retained earnings (accumulated deficit) 466 (404)
Accumulated other comprehensive loss -- (47)
-------- --------
Total stockholders' equity 14,412 13,452
-------- --------
Total liabilities and stockholders' equity $ 24,942 $ 24,610
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
14
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES:
Golf club shafts $ 25,433 $ 19,075 $ 21,023
Golf club grips 4,492 4,144 3,699
----------- ----------- -----------
29,925 23,219 24,722
----------- ----------- -----------
COST OF SALES:
Golf club shafts 17,436 12,710 14,683
Golf club grips 3,089 2,318 1,805
----------- ----------- -----------
20,525 15,028 16,488
----------- ----------- -----------
Gross profit 9,400 8,191 8,234
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,051 5,929 6,269
AMORTIZATION OF GOODWILL 486 521 390
GAIN ON TERMINATION OF MANUFACTURING SUPPLY CONTRACT -- (865) --
NONRECURRING MERGER RELATED EXPENSES -- -- 842
----------- ----------- -----------
Operating income 1,863 2,606 733
INTEREST EXPENSE 644 794 605
TERMINATED MERGER EXPENSES -- 975 --
OTHER INCOME (267) (243) (168)
----------- ----------- -----------
Income from continuing operations before provision
for income taxes 1,486 1,080 296
PROVISION FOR INCOME TAXES 616 804 28
----------- ----------- -----------
Income from continuing operations 870 276 268
----------- ----------- -----------
DISCONTINUED OPERATIONS:
Loss from operations of Roxxi, Inc., net of tax benefit of $164
and $0 for the years ended May 31, 1999 and 1998, respectively -- 352 531
Loss on disposal of assets of Roxxi, Inc., net of tax benefit of
$386 for the year ended May 31, 1999 -- 828 --
----------- ----------- -----------
Loss from discontinued operations -- 1,180 531
----------- ----------- -----------
Net income (loss) $ 870 $ (904) $ (263)
=========== =========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 0.15 $ 0.05 $ 0.05
Loss from discontinued operations -- (0.21) (0.10)
----------- ----------- -----------
Net income (loss) $ 0.15 $ (0.16) $ (0.05)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED TO
COMPUTE PER SHARE INFORMATION:
BASIC 5,672,580 5,649,756 5,246,857
=========== =========== ===========
DILUTED 5,814,862 5,649,756 5,246,857
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
15
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 2000, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL EARNINGS OTHER
--------------- PAID-IN (ACCUMULATED COMPREHENSIVE COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT) INCOME (LOSS) TOTAL INCOME (LOSS)
------ ------ ------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 1, 1997 4,175 $ 4 $ 1,421 $ 763 $ -- $ 2,188
Issuance of common stock and stock
options in connection with
merger, net 1,371 2 12,385 -- -- 12,387
Exercise of common stock options
and warrants 56 -- 15 -- -- 15
Net loss -- -- -- (263) -- (263) $(263)
-----
Comprehensive loss -- -- -- -- -- -- (263)
----- --- ------- ----- ---- -------- =====
Balance, May 31, 1998 5,602 6 13,821 500 -- 14,327
Exercise of common stock options 65 -- 16 -- -- 16
Tax benefit from exercise of
common stock options -- -- 45 -- -- 45
Stock based compensation -- -- 15 -- -- 15
Minimum pension liability
adjustment, net of tax benefit
of $31 -- -- -- -- (47) (47) (47)
Net loss -- -- -- (904) -- (904) (904)
-----
Comprehensive loss -- -- -- -- -- -- (951)
----- --- ------- ----- ---- -------- =====
Balance, May 31, 1999 5,667 6 13,897 (404) (47) 13,452
Exercise of common stock options 12 -- 4 -- -- 4
Tax benefit from exercise of
common stock options -- -- 11 -- -- 11
Stock based compensation -- -- 28 -- -- 28
Minimum pension liability
adjustment, net of tax
expense of $31 -- -- -- -- 47 47 47
Net income -- -- -- 870 -- 870 870
-----
Comprehensive income -- -- -- -- -- -- $ 917
----- --- ------- ----- ---- -------- =====
Balance, May 31, 2000 5,679 $ 6 $13,940 $ 466 $ -- $ 14,412
===== === ======= ===== ==== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
16
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 2000, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 870 $ (904) $ (263)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities of continuing operations:
Depreciation and amortization 1,158 939 749
Deferred income taxes 603 779 7
Loss on retirement and sale of fixed assets 14 -- 360
Stock based compensation 28 -- --
Changes in operating assets and liabilities -
Accounts receivable, net (293) (575) 509
Inventories (110) (970) (130)
Other assets 79 (19) 57
Accounts payable and accrued expenses 110 102 (650)
Supply agreement credits -- -- (472)
Loss from discontinued operations -- 352 531
Loss on sale of discontinued operations -- 828 --
Gain on termination of manufacturing supply contract -- (865) --
Terminated merger expenses -- 975 --
-------- -------- --------
Net cash provided by operating activities
of continuing operations 2,459 642 698
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, net (2,165) (940) (1,038)
Merger costs -- (975) (1,031)
Payments from net investment in capital lease -- 198 148
Payments from termination of manufacturing supply contract -- 1,500 --
Proceeds from sale of assets of discontinued operations -- 300 --
Proceeds from sale of fixed assets 15 -- 49
Cash acquired from Royal Grip, Inc. -- -- 18
-------- -------- --------
Net cash (used in) provided by investing activities
of continuing operations (2,150) 83 (1,854)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options and warrants 4 16 15
Proceeds from issuance of long-term debt -- 5,140 1,600
Borrowings (repayments) under lines-of-credit, net 742 (359) 1,438
Repayments of long-term debt and capital lease obligations (1,203) (5,067) (1,607)
-------- -------- --------
Net cash (used in) provided by financing activities of
continuing operations (457) (270) 1,446
-------- -------- --------
NET CASH USED IN DISCONTINUED OPERATIONS -- (299) (290)
-------- -------- --------
(DECREASE) INCREASE IN CASH (148) 156 --
CASH, beginning of year 184 28 28
-------- -------- --------
CASH, end of year $ 36 $ 184 $ 28
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 633 $ 870 $ 687
======== ======== ========
Income taxes $ 48 $ 40 $ 61
======== ======== ========
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Reduction in goodwill due to utilization of pre-merger
net operating loss carryforwards and reversal of valuation
allowance on pre-merger deferred income tax assets $ 742 $ 650 $ --
======== ======== ========
Issuance of common stock options and warrants in
connection with FMP-RG Merger $ -- $ -- $ 12,995
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
17
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
ORGANIZATION -
The accompanying consolidated financial statements include Royal Precision, Inc.
(formerly FM Precision Golf Corp.) and its three wholly-owned subsidiaries
(collectively, "RP" or the "Company") 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
(formerly known as Roxxi, Inc., "Roxxi"). As discussed in Note 3, the Company
disposed of the operating assets of Roxxi in March 1999.
Results of operations for RG are included in the Company's consolidated
statements of operations since August 29, 1997, the effective date of the
business combination described below. Results of operations for Roxxi are
reflected as discontinued operations for all periods presented.
BUSINESS -
RP is a holding company which carries on its business operations through its
subsidiaries. The Company designs, manufactures and distributes steel golf club
shafts and designs and distributes golf club grips and graphite golf club shafts
for sale to original equipment manufacturers ("OEMs") and to distributors and
retailers for use in the replacement market. The Company's products are sold
throughout the United States as well as internationally, primarily in Japan,
Australia, the United Kingdom and Canada (See Note 12).
ACQUISITION -
On May 14, 1997, RP 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 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. In the FMP-RG Merger, each outstanding share of
RG common stock was converted into one-half share of RP common stock. As a
result of the FMP-RG Merger, the pre-merger stockholders and option and warrant
holders of RG owned or had the right to acquire an aggregate of 30% of RP's
common stock on a fully diluted basis.
The aggregate purchase price of $13,883,122 represents the sum of (i) the fair
value of the 1,371,058 shares of RP common stock issued in exchange for
2,742,116 of the shares of RG common stock outstanding as of the merger date at
$3.925 per share (the average closing bid price of RG common stock
(pre-conversion) for the period from two days before until the two days after
the announcement of the merger terms) of $10,763,000, (ii) cash of $122 paid to
RG stockholders in lieu of 31 fractional shares, (iii) the fair value of the
options and warrants to purchase 982,250 shares of RG common stock outstanding
as of the merger date (which were converted into options and warrants to
purchase 491,124 shares of RP common stock in connection with the merger) of
$2,232,000, which amount was determined using the Black Scholes option pricing
model, and (iv) RP Merger expenses of $888,000 (RG's merger costs of
approximately $637,000 were expensed and RG's registration statement costs of
approximately $143,000 were charged to stockholders' equity by RG prior to the
acquisition). RP also incurred expenses of $608,000 associated with the
registration statement which were charged to stockholders' equity.
18
<PAGE>
The FMP-RG Merger was accounted for as a purchase, and the purchase price was
allocated based on the fair value of the assets acquired and liabilities assumed
as follows (in thousands):
Cash $ 18
Accounts receivable 1,293
Inventories 710
Net investment in capital lease 2,981
Prepaid expenses and other current assets 68
Property and equipment 1,670
Goodwill 10,418
Accounts payable and accrued expenses (1,501)
Supply agreement credits (472)
Debt and capital lease obligations (1,166)
Other, net (136)
--------
$ 13,883
========
In connection with the FMP-RG Merger, RG issued warrants to purchase 50,000
shares of RG common stock to an investment banker. Such warrants are included in
the 982,250 RG options and warrants outstanding as of the Merger date referred
to above. The warrants were exercisable at a price of $0.02 per share. Such
warrants were exercised in September 1997 for $1,000.
RP recorded a charge of $842,000 during the year ended May 31, 1998 for
nonrecurring expenses related to the FMP-RG Merger. The components of this
expense are $348,000 related to a computer software installation that was
abandoned as a result of the FMP-RG Merger, $100,000 related to certain headwear
related contracts, $150,000 of relocation expenses and $244,000 of severance as
a result of organizational changes in connection with the FMP-RG Merger.
DEPENDENCE ON "RIFLE" SHAFT SALES -
Sales of the "Rifle" shaft were $18.7 million, $13.1 million and $9.8 million
for the years ended May 31, 2000, 1999 and 1998, respectively. While management
believes that demand for the "Rifle" shaft should remain high for the next
several years, there can be no assurance that sales of the "Rifle" shaft will
continue to grow or that the product will retain its profitability. If sales or
profitability of the "Rifle" shaft decrease without the Company's introduction
of new profitable products, the Company's overall financial performance would be
materially adversely affected.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION -
All significant intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
INVENTORIES -
Inventories are valued at the lower of cost or market. Cost is determined on the
first-in, first-out method.
19
<PAGE>
PROPERTY, PLANT AND EQUIPMENT -
Property, plant and equipment are carried at acquired cost. Major additions and
betterments are capitalized, while replacements, maintenance and repairs which
do not extend the useful lives of the assets are charged to operations as
incurred. Upon the disposition of property, plant and equipment, any resulting
gain or loss is recognized in income.
Depreciation of plant and equipment is provided for, commencing when such assets
are placed in service, using the straight-line basis over the following
estimated useful lives:
USEFUL LIVES
------------
Buildings and improvements 27.5-40 years
Machinery and equipment 3-12 years
Furniture, fixtures and office equipment 3-12 years
GOODWILL -
Goodwill, prior to accumulated amortization, of $9,026,000, which is net of
$1,392,000 of reductions related to utilization of pre-merger net operating loss
("NOL") carryforwards and reversal of related deferred tax assets, related to
the FMP-RG Merger (see Note 1), is being amortized over 20 years. At May 31,
2000, accumulated amortization of goodwill was $1,397,000.
LONG-LIVED ASSETS -
The Company reviews long-lived assets and certain identifiable intangible assets
to be held and used or disposed of for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment losses are recognized when the undiscounted future cash
flows, excluding interest costs, exceed the carrying value of the related
assets.
The Company evaluates the goodwill asset for impairment by reviewing the
estimated future cash flows of the acquired operations on a quarterly basis. As
of May 31, 2000, the Company believes no impairment exists.
INCOME TAXES -
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." This
statement requires the Company to recognize deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities and
tax NOL carryforwards available for tax reporting purposes, using applicable tax
rates for the years in which the differences are expected to reverse. A
valuation allowance is recorded on deferred tax assets unless realization is
more likely than not.
STOCK-BASED COMPENSATION -
The Company accounts for stock-based compensation for employees under Accounting
Principles Board Opinion No. 25 and has elected the disclosure-only alternative
under SFAS No. 123, "Accounting for Stock Based Compensation."
REVENUE RECOGNITION -
Revenue is recorded upon the passage of title to the customers which generally
occurs upon shipment.
RESEARCH AND DEVELOPMENT -
The Company expenses costs of research and development as incurred. Research and
development expense was approximately $0.7 million, $0.6 million and $0.5
million for the years ended May 31, 2000, 1999 and 1998, respectively.
ADVERTISING -
The Company expenses production costs of advertising the first date the
advertisements take place. Advertising and marketing costs were approximately
$2.3 million, $1.6 million and $1.7 million for the years ended May 31, 2000,
1999 and 1998, respectively. As of May 31, 2000, deferred production and prepaid
advertising costs totaling $115,000 are included in other current assets related
to television commercials which had not yet aired.
20
<PAGE>
NET 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 year. Diluted earnings
(loss) per share assumes, in addition to the above, a dilutive effect of common
share equivalents during the year. Common share equivalents represent dilutive
stock options using the treasury stock method.
For the years ended May 31, 2000, 1999 and 1998, options to purchase
approximately 620,000, 147,000 and 437,000 shares of common stock, respectively,
were excluded from the computation of diluted earnings per share because the
exercise prices of those options were greater than the average market price of
the Company's common stock. Loss per share for the years ended May 31, 1999 and
1998 were not affected by stock options because their effect was anti-dilutive.
COMPREHENSIVE INCOME -
Under SFAS No. 130, "Reporting Comprehensive Income," the Company is required to
report comprehensive income (loss) and its components in its consolidated
financial statements in addition to net income (loss). Comprehensive loss is
included in the accompanying consolidated statements of stockholders' equity.
RECLASSIFICATIONS -
Certain prior year balances have been reclassified to conform with the current
year presentation.
NEW ACCOUNTING PRONOUNCEMENTS -
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 (as amended by SFAS No. 138), "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, as amended, during the fiscal year ending May 31, 2001.
The Company does not anticipate any material impact resulting from the adoption
of SFAS No. 133, as amended.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which was subsequently updated by SAB 101A. SAB 101 and SAB 101A
summarize certain of the SEC's views in applying accounting principles generally
accepted in the United States to revenue recognition in financial statements.
The Company is required to adopt SAB 101 no later than the fourth quarter of its
fiscal year ending May 31, 2001. The Company is currently evaluating the impact
of the adoption of SAB 101 on its results of operations and financial position.
3. 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 manufacturing equipment, finished goods inventory and
raw materials to another company for $0.3 million and a royalty of 2% of the
buyer's net sales until the buyer has paid an additional $0.2 million.
Subsequently, Roxxi's name was changed to Royal Grip Headwear Company.
In fiscal 1999, the Company recorded a loss on disposal of assets of Roxxi of
$0.8 million, net of a tax benefit of $0.4 million. This expense represents a
$1.1 million write-down of the excess of the carrying value of inventory and
fixed assets over the cash received and $0.1 million for estimated transaction
costs and estimated operating expenses to be incurred during the phase-out
period of this business segment. The Company is accounting for royalties as
income is earned during the two year period beginning May 1, 1999. For the years
ended May 31, 2000 and 1999, royalties of $151,000 and $20,000 were recorded,
respectively, and are reflected as other income in the accompanying consolidated
statements of operations.
21
<PAGE>
Selected financial data for the discontinued operations is as follows for the
years ended May 31, 1999 and 1998 (in thousands):
1999 1998
------- -------
Net sales $ 2,381 $ 2,899
======= =======
Loss from operations before income taxes $ (516) $ (531)
Income tax benefit 164 --
------- -------
Loss from operations $ (352) $ (531)
======= =======
Cash flow $ (299) $ (290)
======= =======
4. INVENTORIES:
Inventories as of May 31, 2000 and 1999 consisted of the following (in
thousands):
2000 1999
------ ------
Raw materials $ 525 $ 471
Work-in-process 1,655 1,566
Finished goods 2,944 2,477
------ ------
$5,124 $4,514
====== ======
5. MANUFACTURING SUPPLY CONTRACTS:
In December 1996, RG and Acushnet Rubber Company ("Acushnet") entered into a
manufacturing and supply agreement whereby RG outsourced the manufacturing of
its golf club grips to Acushnet. Additionally, the two parties entered into an
agreement resulting in the transfer of RG's manufacturing equipment to Acushnet
under a capital lease. Since January 1997, RG has purchased the majority of its
supply of non-cord, injected grips from Acushnet. During the first calendar
quarter of 1997, Acushnet experienced startup delays in the production of grips
and was unable to satisfy its obligation under the contracts. In light of these
difficulties, RG and Acushnet renegotiated their manufacturing and supply
agreement, and Acushnet provided RG with purchase credits totaling $472,000 to
be applied against current and future amounts owed to Acushnet for the
production of grips. RG recorded $472,000 during the year ended May 31, 1998 as
a reduction in golf club grips cost of sales when these credits were not earned
back by Acushnet under certain provisions of the amended contract.
In May 1999, RG and Acushnet executed a mutual release agreement terminating
their manufacturing and supply agreement and capital lease agreement (the
"Termination Agreement"). Pursuant to the Termination Agreement, RG received
$1.5 million in cash and $1.0 million in purchase credits from Acushnet.
Additionally, Acushnet's obligation to make additional payments to RG under the
capital lease was terminated but Acushnet was required to continue producing
grips through February 2000 at which time RG received the manufacturing
equipment which was previously leased to Acushnet. RG recognized an aggregate
gain of $865,000 during the fiscal year ended May 31, 1999 as a result of the
Termination Agreement. At May 31, 2000, the manufacturing equipment returned to
RG is classified as equipment held for sale.
The Company believes that its current inventory of grips is sufficient to
satisfy customer demand through December 31, 2000. The Company is currently
purchasing grips from various suppliers and believes it has an adequate source
of supply to meet its current and anticipated future customer needs. However,
there can be no assurance that the transition to new suppliers will not result
in production delays or the loss of sales and key customers which would have a
material adverse effect on the Company's financial condition and results of
operations.
FMP uses one vendor to supply primarily all of the strip steel utilized in the
manufacture of steel golf club shafts, but has no supply contract with the
vendor. Should the vendor fail to deliver steel, there may be a disruption of
operations at FMP until an alternate supplier is procured. The vendor provides
steel from two separate plant locations. If one plant becomes unable to fill the
necessary requirements, orders could be filled from the alternate location.
Although FMP has elected to use this vendor as its primary supplier of strip
steel, management believes that there are other acceptable supply sources at
comparable prices and that the loss of the supplier would not have a significant
adverse impact on the Company.
22
<PAGE>
6. 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 $1.0 million related to the
RP-Coyote Merger which have been reflected as terminated merger expenses in the
accompanying consolidated statement of operations for the year ended May 31,
1999.
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
FMP has a credit facility consisting of a term loan and a revolving
line-of-credit. The FMP term loan of $2.7 million at May 31, 2000 is due in
monthly principal installments of $65,000 until its maturity in September 2002.
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 a maximum borrowing of $5.0 million. As of May 31, 2000, FMP had $3.7
million outstanding under its revolving line-of-credit and $1.1 million
available for additional borrowings. The FMP line-of-credit expires in September
2002.
RG has a credit facility consisting of a term loan and a revolving
line-of-credit. The RG term loan of $0.4 million at May 31, 2000 is due in
monthly principal installments of $10,500 until its maturity in September 2002.
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 a maximum borrowing of $1.5 million. As of May 31, 2000, RG had $0.1
million outstanding under its revolving line-of-credit and $0.8 million
available for additional borrowings. The RG line-of-credit expires in September
2002.
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 (9.5% at
May 31, 2000) plus 0.75% and 0.25%, respectively, and are secured by
substantially all of the Company's assets.
The FMP and RG credit facilities contain certain 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 compliance with all financial loan
covenants at May 31, 2000.
Total indebtedness of the Company as of May 31, 2000 and 1999 consisted of the
following (in thousands):
2000 1999
------- -------
FMP:
----
Line-of-credit $ 3,740 $ 3,103
Term loan 2,657 3,607
RG:
---
Line-of-credit 105 --
Term loan 431 644
Capital lease obligations -- 40
------- -------
6,933 7,394
Less - Current portion (906) (1,203)
------- -------
Total long-term debt and capital lease obligations $ 6,027 $ 6,191
======= =======
23
<PAGE>
Scheduled maturities of the Company's indebtedness at May 31, 2000 are as
follows (in thousands):
YEARS ENDING
MAY 31,
-------
2001 $ 906
2002 906
2003 5,121
------
$6,933
======
As of May 31, 2000 and 1999, the carrying value of the line-of-credit and term
loans approximated their fair market value since the obligations bear interest
at a variable rate of interest.
8. OPERATING LEASES:
The Company leases its corporate offices, its West Coast distribution center and
various office equipment under operating lease agreements. Minimum annual rental
commitments under noncancellable leases are as follows (in thousands):
YEARS ENDING
MAY 31,
-------
2001 $ 294
2002 53
------
$ 347
======
Rental expense under operating leases totaled approximately $230,000, $256,000
and $204,000 for the years ended May 31, 2000, 1999 and 1998, respectively.
9. STOCK OPTION PLANS:
In connection with the FMP-RG Merger, options to purchase 41 shares of FM
Precision Golf Corp. common stock outstanding as of the FMP-RG Merger date were
converted into options to purchase 169,761 shares of RP common stock. As of May
31, 2000, 90,308 shares of common stock are reserved for issuance upon the
exercise of the remaining options outstanding.
In connection with the FMP-RG Merger, options and warrants to purchase 982,250
shares of RG common stock outstanding as of the FMP-RG Merger date were
converted into options and warrants to purchase 491,124 shares of RP common
stock. As of May 31, 2000, 269,874 shares of common stock are reserved for
issuance upon the exercise of the remaining options outstanding.
In October 1997, the Company adopted the Royal Precision, Inc. Stock Option Plan
(the "RP Plan"). The RP Plan is administered by the Board of Directors and
provides for the granting of nonqualified or incentive stock options to purchase
up to 750,000 shares of the Company's common stock to certain employees,
consultants and directors. As of May 31, 2000, 695,173 shares of common stock
are reserved for issuance upon the exercise of options outstanding under the RP
Plan. As of May 31, 2000, an additional 54,266 shares of common stock are
reserved for options not yet granted under the RP Plan.
In December 1999, warrants to purchase 25,000 shares were granted to a firm
which provides consulting services to the Company. These warrants were not
issued under the RP plan, however, they are included in the detail below. None
of the warrants had been exercised as of May 31, 2000.
24
<PAGE>
Stock option and warrant activity for the years ended May 31, 1998, 1999 and
2000 is as follows:
<TABLE>
<CAPTION>
FM PRECISION WEIGHTED-
GOLF CORP. RG AVERAGE
CONVERTED CONVERTED RP PLAN OTHER TOTAL EXERCISE
SHARES SHARES SHARES SHARES SHARES PRICE
------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at June 1, 1997 69,761 -- -- -- 169,761 $ 0.24
Converted from RG options
and warrants
in connection with
FMP-RG merger -- 491,124 -- -- 491,124 7.53
Granted -- -- 250,000 -- 250,000 6.75
Exercised (2,755) (52,500) -- -- (55,255) 0.28
Cancelled -- -- (250,000) -- (250,000) 6.75
Expired -- (1,875) -- -- (1,875) 13.00
------- --------- -------- ------ ---------
Outstanding at May 31, 1998 167,006 436,749 -- -- 603,755 6.13
Granted -- 178,083 104,980 -- 283,063 3.25
Exercised (65,678) -- -- -- (65,678) 0.24
Cancelled -- (323,833) (1,000) -- (324,833) 7.47
Expired -- (21,125) -- -- (21,125) 19.15
------- --------- -------- ------ ---------
Outstanding at May 31, 1999 101,328 269,874 103,980 -- 475,182 3.73
Granted -- -- 615,933 25,000 640,933 2.53
Exercised (11,020) -- (561) -- (11,581) 0.32
Cancelled -- -- (24,179) -- (24,179) 2.03
------- --------- ------- ------ ---------
Outstanding at May 31, 2000 90,308 269,874 695,173 25,000 1,080,355 3.10
======= ========= ======== ====== =========
</TABLE>
A summary of information about stock options outstanding at May 31, 2000 is as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT MAY 31, CONTRACTUAL EXERCISE AT MAY 31, EXERCISE
PRICES 2000 LIFE PRICE 2000 PRICE
------------- --------- --------- ------ ------- ------
$ 0.24 90,308 6.8 years $ 0.24 90,308 $ 0.24
1.81 42,740 8.6 years 1.81 14,104 1.81
1.88 25,000 4.2 years 1.88 25,000 1.88
2.06 148,600 9.1 years 2.06 -- 2.06
2.13 1,000 9.4 years 2.13 -- 2.13
2.38 27,500 7.0 years 2.38 25,000 2.38
2.63 125,000 7.7 years 2.63 20,000 2.63
2.75 - 6.75 587,707 8.0 years 3.41 258,457 3.88
8.00 - 24.50 32,500 1.3 years 15.09 32,500 15.09
--------- -------
1,080,355 465,369
========= =======
The Company has computed the pro forma disclosures required under SFAS No. 123
for all of the options it has using the Black Scholes option pricing model as
prescribed by SFAS No. 123. The weighted average assumptions used are as follows
for the years ended May 31, 2000 and 1999:
2000 1999
---- ----
Risk free interest rate 6.6% 5.8%
Expected dividend yield None None
Expected life 10 years 7 years
Expected volatility 55% 83%
25
<PAGE>
The only options granted during the year ended May 31, 1998 were also cancelled.
Since the Company accounts for cancellations on an actual basis for SFAS No. 123
disclosure purposes, the grant and cancellation had no effect on net loss for
the year ended May 31, 1998. Had compensation cost for the Company's stock plan
been determined consistent with SFAS No. 123, the Company's net income (loss)
and basic and diluted net income (loss) per share would have been the following
pro forma amounts for the years ended May 31, 2000 and 1999 (in thousands,
except per share data):
2000 1999
----- -------
Net income (loss):
As reported $ 870 $ (904)
Pro forma $ 555 $(1,384)
Basic and diluted net income (loss) per share:
As reported $0.15 $ (0.16)
Pro forma $0.10 $ (0.24)
The resulting pro forma compensation cost may not be representative of that to
be expected in future years because the pro forma amounts do not consider
options granted prior to fiscal 1997 or in future years.
During March 2000, the FASB issued Interpretation 44, "Accounting for Certain
Transactions Involving Stock Compensation--an Interpretation of APB Opinion No.
25" ("FIN 44"), which among other issues, addresses repricing and other
modifications made to previously issued stock options. The Company will be
required to adopt FIN 44 in the first quarter of its fiscal year ending May 31,
2001. As of May 31, 2000, there are outstanding options to purchase 170,583
shares at an exercise price of $3.19 per share which will be subject to variable
plan accounting until they are exercised or expire in January 2004.
10. INCOME TAXES:
The components of the provision for income taxes from continuing operations are
as follows for the years ended May 31, 2000, 1999 and 1998 (in thousands):
2000 1999 1998
---- ---- ---
Current $ 13 $ 25 $21
Deferred 603 779 7
---- ---- ---
$616 $804 $28
==== ==== ===
The Company's effective income tax rate, as a percent of pretax income from
continuing operations, differs from the statutory federal rate as follows
for the years ended May 31, 2000, 1999 and 1998:
2000 1999 1998
--- --- ---
Statutory federal income tax rate 34% 34% 34%
State taxes, net of federal benefit 6 -- 7
Nondeductible goodwill amortization 11 16 53
Change in valuation allowance (11) 28 (85)
Other 1 (4) --
--- --- ---
Effective income tax rate 41% 74% 9%
=== === ===
26
<PAGE>
The components of deferred income tax assets (liabilities) as of May 31, 2000
and 1999 are as follows (in thousands):
2000 1999
------- -------
Current asset (liability) -
Financial reserves and accruals not
currently deductible $ 582 $ 1,518
Other (72) (210)
Valuation allowance (404) (661)
------- -------
106 647
------- -------
Long-term asset (liability) -
Tax effect of net operating loss carryforwards 2,230 1,900
Book basis in excess of tax for property, plant
and equipment (441) (472)
Compensation expense related to grant of
stock options 94 262
Other 159 368
Valuation allowance (1,341) (1,988)
------- -------
701 70
------- -------
$ 807 $ 717
======= =======
As of May 31, 2000, the Company has federal and state NOL carryforwards of
approximately $5.6 million of which $4.9 million relate to RG for periods prior
to the FMP-RG Merger ("Pre-Merger NOLs"). The use of such Pre-Merger NOLs is
limited to $764,000 per annum under Section 382 of the Internal Revenue Code. As
of May 31, 2000, approximately $1.1 million of Pre-Merger NOLs are available for
usage under Section 382. The NOLs, if unused, expire in 2009 through 2019.
As of May 31, 1998, a valuation allowance of $2,821,000 was recorded to fully
offset NOL carryforwards and other net deferred tax assets as of such date, due
to uncertainty of their realization. During fiscal 1999, the Company utilized
approximately $942,000 of Pre-Merger NOLs and also determined that approximately
$970,000 of Pre-Merger NOLs were realizable. As such, the Company reduced the
valuation allowance by an aggregate of $650,000 (see Note 2). The effect of this
benefit, as well as any future reductions in the valuation allowance related to
the Pre-Merger NOLs, was recorded as a reduction of goodwill. During the year
ended May 31, 1999, the Company also increased the valuation allowance on
certain other deferred tax assets by approximately $478,000, resulting in a
valuation allowance of $2,649,000 as of May 31, 1999.
During fiscal 2000, the Company utilized approximately $437,000 of Pre-Merger
NOLs and also determined that approximately $1.9 million of Pre-Merger NOLs were
realizable. The Company accordingly reduced the valuation allowance by $742,000
and recorded a corresponding reduction of goodwill (see Note 2). Subsequent
recognition of additional amounts of Pre-Merger NOLs would result in further
reductions of goodwill of up to $1.4 million. During fiscal 2000, the Company
also reduced the valuation allowance on other deferred income tax assets, not
related to the FMP-RG Merger, by approximately $162,000.
11. RELATED PARTY TRANSACTIONS:
In connection with the RP-Coyote Merger (see Note 6), fees of approximately
$85,000 were paid to related parties during the year ended May 31, 1999 and in
connection with the FMP-RG Merger (see Note 1), fees of approximately $607,000
were paid to related parties during the year ended May 31, 1998.
Professional and advisory fees and expense reimbursements of approximately
$291,000, $316,000 and $416,000 were paid to certain shareholders or their
affiliates during the years ended May 31, 2000, 1999 and 1998, respectively.
12. FOREIGN SALES:
The Company has export sales to customers located primarily throughout Japan,
Australia, the United Kingdom and Canada. Foreign sales were approximately 33%,
29% and 20% of the Company's sales for the years ended May 31, 2000, 1999 and
1998, respectively. The following table summarizes the Company's sales by major
worldwide regions for the years ended May 31, 2000, 1999 and 1998 (in
thousands):
2000 1999 1998
------- ------- -------
United States $20,160 $16,431 $19,777
Japan 8,210 5,797 3,950
Other 1,555 991 995
------- ------- -------
Total $29,925 $23,219 $24,722
======= ======= =======
27
<PAGE>
13. BENEFIT PLANS:
401(k) PLAN -
The Company maintains a defined contribution benefit plan under Section 401(k)
of the Internal Revenue Code. Each year, eligible participants may elect to make
salary reduction contributions on their behalf up to a maximum of the lesser of
15% of compensation or the annual maximum contribution established by the
Internal Revenue Service. Participants may also make voluntary after-tax
contributions to the defined contribution benefit plan. Employer contributions
are discretionary and, to date, the Company has not contributed to the defined
contribution benefit plan.
PENSION PLAN -
Approximately 70% of the Company's work force is covered by a collective
bargaining agreement. FMP maintains the FM Precision Golf Manufacturing Corp.
Pension Plan for Represented Hourly Wage Employees (the "Union Plan") for the
benefit of FMP's union employees. The Company contributes such amounts as are
necessary on an actuarial basis to provide the Union Plan with assets sufficient
to meet the benefits to be paid to participants. Contributions are intended to
provide not only for benefits attributed to service to date but also for those
expected to be earned in the future.
For the years ended May 31, 2000 and 1999, the reconciliation of the projected
benefit obligation was (in thousands):
2000 1999
----- ----
Beginning of year projected benefit obligation $ 382 $181
Service cost 98 88
Interest cost 22 13
Actuarial (gain) loss (61) 100
----- ----
End of year projected benefit obligation $ 441 $382
===== ====
The reconciliation of the funded status of the Union Plan as of May 31, 2000 and
1999 was (in thousands):
2000 1999
---- ----
Projected benefit obligation $(441) $(382)
Plan assets at fair value 265 131
----- -----
Funded status (accrued benefit cost) (176) (251)
Minimum pension liability adjustment -- 78
----- -----
Net amount recognized $(176) $(173)
===== =====
The reconciliation of fair value of assets of the Union Plan as of May 31, 2000
and 1999 was (in thousands):
2000 1999
---- ----
Beginning of year fair value of assets $131 $120
Employer contributions 119 --
Actual return on plan assets 15 11
---- ----
End of year fair value of assets $265 $131
==== ====
The components of net pension cost for the years ended May 31, 2000, 1999 and
1998 were (in thousands):
2000 1999 1998
----- ---- ----
Service cost $ 98 $ 88 $ 85
Interest cost 22 13 7
Expected return on assets (4) (3) 10
----- ---- ----
Net periodic pension cost $ 116 $ 98 $102
===== ==== ====
28
<PAGE>
A summary of the Company's key actuarial as sumptions as of May 31, 2000, 1999
and 1998 were as follows:
2000 1999 1998
---- ---- ----
Discount rate 7.75% 6.75% 7.50%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
14. 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. 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 (in thousands):
YEAR ENDED MAY 31, 2000
---------------------------------
GOLF CLUB GOLF CLUB
SHAFTS GRIPS TOTAL
------ ----- -----
Net sales $ 25,433 $ 4,492 $ 29,925
Interest expense 575 69 644
Depreciation and amortization 384 774 1,158
Operating income (loss) 2,004 (141) 1,863
Assets 13,488 17,475 30,963
Capital expenditures 1,838 327 2,165
Total assets for reportable segments $ 30,963
Assets of discontinued operations 43
Elimination of investment in subsidiary (6,064)
--------
Consolidated total assets $ 24,942
========
YEAR ENDED MAY 31, 1999
---------------------------------
GOLF CLUB GOLF CLUB
SHAFTS GRIPS TOTAL
------ ----- -----
Net sales $ 19,075 $ 4,144 $ 23,219
Interest expense 708 86 794
Depreciation and amortization 288 651 939
Operating income 1,494 1,112 2,606
Assets 11,815 18,927 30,742
Capital expenditures 789 151 940
Total assets for reportable segments $ 30,742
Assets of discontinued operations 162
Elimination of investment in subsidiary (6,294)
--------
Consolidated total assets $ 24,610
========
YEAR ENDED MAY 31, 1998
---------------------------------
GOLF CLUB GOLF CLUB
SHAFTS GRIPS TOTAL
------ ----- -----
Net sales $ 21,023 $ 3,699 $ 24,722
Interest expense 573 32 605
Depreciation and amortization 215 534 749
Operating income 294 439 733
Assets 9,276 22,277 31,553
Capital expenditures 828 210 1,038
Total assets for reportable segments $ 31,553
Assets of discontinued operations 1,956
Elimination of investment in subsidiary (7,623)
--------
Consolidated total assets $ 25,886
========
29
<PAGE>
15. CONCENTRATION OF CREDIT RISK:
The Company is subject to a concentration of credit risk as a result of sales to
its significant customers including its exclusive Japanese distributor and an
original equipment manufacturer. These two largest customers each accounted for
more than 10% and in the aggregate accounted for 46%, 40% and 35% of the
Company's net sales for the years ended May 31, 2000, 1999 and 1998,
respectively. The Japanese distributor purchases both golf club shafts and golf
club grips and accounted for 19%, 17% and 11% of shaft sales and 73%, 61% and
73% of grip sales during the years ended May 31, 2000, 1999 and 1998,
respectively. The outstanding receivable balances for this customer were
approximately $0.6 million and $0.7 million at May 31, 2000 and 1999,
respectively. The OEM customer purchases only golf club shafts and accounted for
22%, 18% and 18% of shaft sales during the years ended May 31, 2000, 1999 and
1998, respectively. The outstanding receivable balances for this customer were
approximately $0.8 million and $0.3 million at May 31, 2000 and 1999,
respectively. To reduce its credit risk, the Company requires letter of credit
agreements from its Japanese distributor.
16. COMMITMENTS AND CONTINGENCIES:
The Company is from time to time a party to various routine legal proceedings
which are incidental to the Company's business. Management consults with legal
counsel on all such matters and believes that none of the current routing
proceedings will have a material adverse effect on the Company's financial
condition or future operating results.
On November 2, 1999, R. R. Donnelley & Sons Company, Plaintiff, vs. Royal
Precision, Inc., Defendant, was filed in Superior Court, Maricopa County,
Arizona. In the matter, R. R. Donnelley & Sons Company ("Donnelley") alleged
that the Company is liable under breach of contract for approximately $280,000
in printing costs arising from the preparation of a Joint Proxy
Statement/Prospectus related to a proposed merger agreement between the Company
and Coyote Sports, Inc. which was terminated prior to the effective date of the
merger. On April 17, 2000, the court granted the Company's motion to dismiss
this suit. However, the court has not yet signed a final judgment and it is
uncertain whether or not Donnelley will appeal the dismissal. Management
believes that the action is without merit and intends to defend any appeal
vigorously.
In May 1996, the Company acquired substantially all the assets of the golf club
shaft manufacturing business of Brunswick Corporation (the "Brunswick
Acquisition"). Included in the acquired assets were land, buildings and
equipment at the Company's Torrington, Connecticut manufacturing facility (the
"FMP plant"). In conjunction with the Brunswick Acquisition, Brunswick
Corporation agreed to indemnify the Company from potential liability arising
from certain environmental matters and to remediate certain environmental
conditions which existed at the FMP plant on the date of acquisition. Brunswick
Corporation has engaged an environmental consulting firm to perform testing at
the FMP plant and is in the process of developing a plan of remediation. Failure
of Brunswick Corporation to fulfill its obligations under the asset purchase
contract could have a material adverse effect on the Company's financial
condition and results of operations. The Company has retained legal counsel for
representation on various environmental matters related to the Brunswick
Acquisition. Total legal fees incurred related to these matters during the
fiscal year ended May 31, 2000 were approximately $0.1 million.
The Company received a notice of violation ("NOV") from the State of Connecticut
Department of Environmental Protection ("DEP") alleging violation of certain
provisions of a permit related to the discharge of treated wastewater at the FMP
plant. This permit was issued to the Company in February 1997 based on an
application prepared by Brunswick Corporation in April 1996. In April 2000, the
Company reached a settlement agreement with DEP discharging the Company from any
civil liability with respect to the allegations in the NOV, subject to
completion and approval of certain remedial measures at the FMP plant. The
Company incurred approximately $0.2 million in capital expense to complete these
remedial measures during the fiscal year ended May 31, 2000 and, in June 2000,
obtained a certification from DEP that the work was satisfactorily completed.
The Company is seeking reimbursement from Brunswick Corporation for the cost of
remediation and legal fees incurred in conjunction with this matter.
30
<PAGE>
In April 2000, the Company received a request for information from the U.S.
Environmental Protection Agency ("EPA") related to disposal and treatment of
waste materials from the FMP plant during a period from 1982 to 1997. The EPA is
currently conducting an investigation regarding the former National Oil
Services, Inc. Superfund site in West Haven, Connecticut. National Oil Services,
Inc. was, prior to its bankruptcy, a contractor used by the Company and
Brunswick Corporation to treat and dispose non-hazardous waste oils from the FMP
plant. EPA has not issued any demands for reimbursement or performance of work
from the Company relating to this matter and there is not sufficient information
at this time to determine what, if any, action EPA may pursue and what, if any,
effect it may have on the Company's financial condition and results of
operations.
17. QUARTERLY FINANCIAL DATA (UNAUDITED):
Provided below is selected unaudited quarterly financial data for the fiscal
years ended May 31, 2000, 1999 and 1998 (in thousands except per share data):
<TABLE>
<CAPTION>
2000
--------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Net sales $ 6,516 $ 6,420 $ 7,015 $ 9,974 $ 29,925
Net income $ 294 $ 64 $ 35 $ 477 $ 870
======= ======= ======= ======= ========
Per share information:
Basic and diluted -
Net income $ 0.05 $ 0.01 $ 0.01 $ 0.08 $ 0.15
======= ======= ======= ======= ========
1999
--------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----- ------ ----- ------ -----
Net sales $ 6,038 $ 3,851 $ 5,118 $ 8,212 $ 23,219
Income (loss) from continuing operations 213 (112) (812) 987 276
Income (loss) from discontinued operations (210) (179) (127) 164(a) (352)
Loss on sale of discontinued operations -- -- (1,214) 386(a) (828)
------- ------- ------- ------- --------
Net income (loss) $ 3 $ (291) $(2,153) $ 1,537 $ (904)
======= ======= ======= ======= ========
Per share information:
Basic and diluted -
Income (loss) from continuing
operations $ 0.04 $ (0.02) $ (0.14) $ 0.17 $ 0.05
======= ======= ======= ======= ========
Net income (loss) $ 0.00 $ (0.05) $ (0.38) $ 0.27 $ (0.16)
======= ======= ======= ======= ========
</TABLE>
(a) Represents tax benefits realized from discontinued operations which were
not available prior to the fourth quarter of fiscal 1999.
31
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the Company's directors and executive officers is set
forth under the heading "ELECTION OF DIRECTORS" in the Company's Proxy Statement
for its 2000 Annual Meeting of Stockholders (the "2000 Proxy Statement") which
information is incorporated herein by reference.
Information relating to compliance with Section 16(a) of the Exchange Act is set
forth under the heading "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE" in the 2000 Proxy Statement which information is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is set forth under the headings
"COMPENSATION OF MANAGEMENT" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION" in the 2000 Proxy Statement which information is incorporated
herein by reference; provided, however, that the information set forth under the
headings "STOCK PERFORMANCE GRAPH" and "REPORT OF PERSONNEL AND COMPENSATION
COMMITTEE" contained in the 2000 Proxy Statement is not incorporated by
reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of beneficial owners and management is
set forth under the heading "SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS,
DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS" in the 2000 Proxy Statement which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain transactions and relationships of management is
set forth under the heading "CERTAIN TRANSACTIONS" in the 2000 Proxy Statement
which information is incorporated herein by reference.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements
Report of Independent Public Accountants ........................... 13
Consolidated Balance Sheets ........................................ 14
Consolidated Statements of Operations .............................. 15
Consolidated Statements of Stockholders' Equity .................... 16
Consolidated Statements of Cash Flows .............................. 17
Notes to Consolidated Financial Statements ......................... 18
(b) Reports on Form 8-K.
No current reports on Form 8-K were filed during the last quarter of
the period covered by this report.
(c) Exhibits.
The Index to Exhibits and required Exhibits are included following the
Financial Statement Schedule beginning on page 37 of this report.
(d) Financial Statement Schedules.
Report of Independent Public Accountants .......................... S-1
Schedule II -- Valuation and Qualifying Accounts
and Reserves ..................................................... S-2
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: August 11, 2000 ROYAL PRECISION, INC.
(the "Registrant")
By /s/ Thomas A. Schneider
-----------------------------------
Thomas A. Schneider, President and
Chief Operating Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated on the 11th day of August, 2000.
NAME TITLE (CAPACITY)
---- ----------------
/s/ Thomas A. Schneider President and Chief Operating Officer
----------------------------- (principal executive officer)
Thomas A. Schneider
/s/ Kevin L. Neill* Vice President-Finance, Chief Financial
----------------------------- Officer (principal financial and
Kevin L. Neill accounting officer)
/s/ Richard P. Johnston * Director
-----------------------------
Richard P. Johnston
/s/ David E. Johnston * Director
-----------------------------
David E. Johnston
/s/ Raymond J. Minella * Director
-----------------------------
Raymond J. Minella
/s/ Charles S. Mechem, Jr. * Director
-----------------------------
Charles S. Mechem, Jr.
/s/ Danny Edwards * Director
-----------------------------
Danny Edwards
* Thomas A. Schneider, by signing his name hereto, does sign this document on
behalf of the persons indicated above pursuant to a Power of Attorney duly
executed by such persons.
By: /s/ Thomas A. Schneider
-------------------------------------
Thomas A. Schneider, Attorney in Fact
34
<PAGE>
ITEM 14D. FINANCIAL STATEMENT SCHEDULES.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Royal Precision, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the financial statements included in Royal Precision, Inc. and
subsidiaries' (the Company) Form 10-K, and have issued our report thereon dated
July 21, 2000. Our audits were made for the purpose of forming an opinion on
those statements taken as a whole. The schedule shown on page S-2 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona
July 21, 2000
S-1
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED MAY 31, 1998, 1999 AND 2000
<TABLE>
<CAPTION>
Charged to
Balance at (Deducted Balance at
Beginning of from) Costs Other Other End of
Period and Expenses Additions Deductions Period
------ ------------ --------- ---------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended May 31, 1998 $ 541 $ 124 $ -- $ (63) $ 602
Year ended May 31, 1999 602 24 -- (193) 433
Year ended May 31, 2000 433 40 -- (199) 274
Charged to
Balance at (Deducted Balance at
Beginning of from) Costs Other Other End of
Period and Expenses Additions Deductions Period
------ ------------ --------- ---------- ------
(in thousands)
Deferred tax asset valuation
allowance:
Year ended May 31, 1998 $ -- $ -- $ 2,821(a) $ -- $2,821
Year ended May 31, 1999 2,821 478 -- (650)(b) 2,649
Year ended May 31, 2000 2,649 (162) -- (742)(b) 1,745
</TABLE>
(a) Created as part of acquisition accounting related to the FMP-RG Merger.
(b) Reduction in goodwill related to preacquisition net operating loss
carryforwards.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
-------
<S> <C> <C>
(3) Certificate of Incorporation and Bylaws *
3.1 Amended and Restated Certificate of Incorporation of registrant
(incorporated by reference to Exhibit 3.1 to the registrant's Form
10-QSB for the quarter ended November 30, 1999; the "November 1999
10-QSB"). *
3.2 Bylaws of Royal Precision, Inc. (incorporated by reference to Exhibit
3.2 to Form S-4, No. 333-28841; the "Form S-4"). *
(4) Instruments defining the rights of holders *
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 November 1999 10-QSB). *
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 *
10.1 Asset Purchase Agreement dated May 31, 1996 with Brunswick
Corporation. (incorporated by reference to Exhibit 10.1.1 of the
Form S-4). *
10.2 1997 Stock Option Plan dated March 13, 1997 (incorporated by reference
to Exhibit 10.2.5 of the Form S-4).** *
10.2 Form of Option Agreement with those not parties to the Management
Stockholders Agreement (incorporated by reference to Exhibit 10.2.6 of
the Form S-4).** *
10.4 Form of Option Agreement with those who are parties to the Management
Stockholders Agreement (incorporated by reference to Exhibit 10.2.7 of
the Form S-4).** *
10.5 Credit and Security Agreement dated as of October 8, 1998 among FM
Precision Golf Manufacturing Corp., FM Precision Golf Sales Corp. and
Norwest Business Credit, Inc. (incorporated by reference to Exhibit
10.1 of the Form 10-QSB for the quarter ended August 31, 1998 (the
"August 1998 10-QSB")). *
10.6 Amended and Restated Credit and Security Agreement dated as of October
8, 1998 among Royal Grip, Inc., Roxxi, Inc. and Norwest Business
Credit, Inc. (incorporated by reference to Exhibit 10.2 of the August
1998 10-QSB). *
10.7 Agreement between Royal Grip, Inc. and Precision Japan Ltd. dated July
12, 1991 (incorporated by reference to Exhibit 10.7 to RG's 1996 Form
10-K). *
10.8 Manufacturers' Representative Agreement dated March 1, 1979 with Union
Tubular Products, Brunswick Corporation and M.A. Clark (incorporated
by reference to Exhibit 10.4.6 of the Form S-4). *
10.9 Distributor Agreement effective August 20, 1990 with Brunswick and
Infiniti Golf (incorporated by reference to Exhibit 10.4.7 of the Form
S-4). *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
-------
<S> <C> <C>
10.10 Royal Precision, Inc. Stock Option Plan dated October 5, 1997
(incorporated by reference to Exhibit 10.32 of the Form 10-KSB for the
year ended May 31, 1998).** *
10.11 Amendment No. 1 to the Stockholder Agreement, dated as of May 12,
1997, among Danny Edwards, Drew M. Brown, DMB Property Ventures
Limited Partnership, Mark N. Sklar, Bennett Dorrance, Trustee of the
Bennett Dorrance Trust dated April 21, 1989, as amended, Christopher
A. Johnston, Richard P. Johnston and Jayne A. Johnston Charitable
Remainder Trust #3 (Richard P. Johnston Trustee), as successor to
RPJ/JAJ Partners, Ltd., a Wyoming partnership, David E. Johnston,
Berenson Minella & Company, L.P., Kenneth J. Warren and Royal
Precision, Inc. (incorporated by reference to Exhibit 99.4 of Form 8-K
dated February 3, 1999.) *
10.12 Asset Purchase Agreement dated February 26, 1999 between Roxxi, Inc.
and Paramount Headwear, Inc. (incorporated by reference to Exhibit 2.1
of the Form 8-K dated March 22, 1999). *
10.13 Asset Purchase Agreement dated March 11, 1999 between Roxxi, Inc. and
Big Play, Inc. (incorporated by reference to Exhibit 2.2 of the Form
8-K dated March 22, 1999). *
10.14 Guaranty by the Registrant dated March 11, 1999 (incorporated by
reference to Exhibit 2.3 of the Form 8-K dated March 22, 1999). *
10.15 First Amendment to Amended and Restated Credit and Security Agreement
and Waiver of Defaults between Royal Grip, Inc., Roxxi, Inc. and
Norwest Business Credit, Inc. and Acknowledgment and Agreement of
Guarantor dated March 16, 1999 (incorporated by reference to Exhibit
10.16 of the registrant's Form 10-KSB for the year ended May 31, 1999;
the "1999 Form 10-KSB"). *
10.16 Second Amendment to Credit and Security Agreement and Waiver of
Defaults between Royal Grip, Inc., Roxxi, Inc. and Wells Fargo
Business Credit, Inc. (formerly known as Norwest Business Credit,
Inc.) dated as of April 13, 1999 (incorporated by reference to Exhibit
10.17 of the 1999 Form 10-KSB). *
10.17 Amendment to Credit and Security Agreement and Waiver of Defaults
between FM Precision Golf Manufacturing Corp., FM Precision Golf Sales
Corp. and Wells Fargo Business Credit, Inc. (formerly known as Norwest
Business Credit, Inc.) dated as of April 13, 1999 (incorporated by
reference to Exhibit 10.18 of the 1999 Form 10-KSB). *
10.18 Personal Services Agreement entered into as of August 31, 1999 between
Danny Edwards and Royal Precision, Inc. (incorporated by reference to
Exhibit 10.1 of the registrant's Form 10-Q for the quarter ended
August 31, 1999).** *
10.19 Royal Precision Stock Option Plan (restated to reflect amendments
adopted by the Board of Directors on November 30, 1999) (incorporated
by reference to Exhibit 10.1 of the November 1999 10-QSB).** *
10.20 Second Amendment to Credit and Security Agreement between FM Precision
Golf Manufacturing Corp., FM Precision Golf Sales Corp and Wells Fargo
Business Credit, Inc. dated November 10, 1999 (incorporated by
reference to Exhibit 10.2 of the November 1999 10-QSB). *
10.21 Third Amendment to Amended and Restated Credit and Security Agreement
between Royal Grip, Inc., Royal Grip Headwear Company and Wells Fargo
Business Credit, Inc. dated November 10, 1999 (incorporated by
reference to Exhibit 10.3 of the November 1999 10-QSB). *
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EXHIBIT
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<S> <C> <C>
10.22 Third Amendment to Credit and Security Agreement between FM Precision
Golf Manufacturing Corp., FM Precision Golf Sales Corp. and Wells
Fargo Business Credit, Inc., dated March 24, 2000 (incorporated by
reference to Exhibit 10.1 of registrant's Form 10-QSB for the quarter
ended February 29, 2000; the "February 2000 10-QSB"). *
10.23 Fourth Amendment to Amended and Restated Credit and Security Agreement
between Royal Grip, Inc., Royal Grip Headwear Company and Wells Fargo
Business Credit, Inc. dated March 24, 2000 (incorporated by reference
to Exhibit 10.3 of the February 2000 10-QSB). *
10.24 Fourth Amendment to Credit and Security Agreement between FM Precision
Golf Manufacturing Corp., FM Precision Golf Sales Corp. and Wells
Fargo Business Credit, Inc. dated August 3, 2000.
10.25 Fifth Amendment to Amended and Restated Credit and Security Agreement
between Royal Grip, Inc., Royal Grip Headwear Company and Wells Fargo
Business Credit, Inc. dated August 3, 2000.
21 Subsidiaries of the Registrant.
(23) Consents
23.1 Consent of Arthur Andersen LLP.
(24) Power of Attorney
24.1 Powers of Attorney
24.2 Certified resolution of the Registrant's Board of Directors
authorizing officers and directors signing on behalf of the Company to
sign pursuant to a power of attorney.
27 Financial Data Schedule (submitted for SEC purposes only)
99.1 Private Securities Litigation Reform Act of 1995 safe harbor
compliance statement for forward-looking statements
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* Incorporated by reference.
** Compensatory plan for executive officers and directors.
The Registrant will furnish a copy of any exhibit to a beneficial owner of its
securities or to any person from whom a proxy was solicited in connection with
the Registrant's most recent Annual Meeting of Stockholders upon the payment of
a fee of fifty cents ($0.50) per page.
