U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended February 29, 2000 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to _________.
Commission File Number: 0-22889
ROYAL PRECISION, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1453896
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
15170 North Hayden Road, Suite 1, Scottsdale, AZ 85260
(Address of Principal Executive Offices) (Zip code)
(480) 627-0200
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal
Year if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of each class Outstanding at April 7, 2000
------------------- ----------------------------
Common Stock, par value $0.001 5,676,201 Shares
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
FEBRUARY 29, MAY 31,
2000 1999
-------- --------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 21 $ 184
Accounts receivable, net of allowance for doubtful accounts of $217
at February 29, 2000 and $433 at May 31, 1999, respectively 3,986 4,617
Inventories 6,041 4,514
Other current assets 103 783
Deferred income taxes 647 647
-------- --------
Total current assets 10,798 10,745
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 123 123
Furniture, fixtures and office equipment 500 499
Buildings and improvements 840 670
Machinery and equipment 4,246 4,144
Equipment held for sale 500 --
Construction in progress 524 402
-------- --------
6,733 5,838
Less - Accumulated depreciation (1,165) (929)
-------- --------
5,568 4,909
-------- --------
GOODWILL, net 8,493 8,857
-------- --------
DEFERRED INCOME TAXES 70 70
-------- --------
OTHER ASSETS 77 29
-------- --------
Total assets $ 25,006 $ 24,610
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations $ 906 $ 1,203
Accounts payable 1,792 1,839
Accrued salaries and benefits 957 595
Accrued pension liability 224 251
Other accrued expenses 1,013 1,079
-------- --------
Total current liabilities 4,892 4,967
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
net of current portion 6,260 6,191
-------- --------
Total liabilities 11,152 11,158
-------- --------
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
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); 5,676,201 and 5,667,375 shares
issued and outstanding at February 29, 2000 and May 31, 1999, respectively 6 6
Additional paid-in capital 13,906 13,897
Accumulated deficit (11) (404)
Accumulated other comprehensive loss (47) (47)
-------- --------
Total stockholders' equity 13,854 13,452
-------- --------
Total liabilities and stockholders' equity $ 25,006 $ 24,610
======== ========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- ---------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES:
Golf club shafts $ 6,066 $ 4,178 $ 16,938 $ 12,220
Golf club grips 949 940 3,013 2,787
----------- ----------- ----------- -----------
7,015 5,118 19,951 15,007
----------- ----------- ----------- -----------
COST OF SALES:
Golf club shafts 4,337 3,075 11,587 8,295
Golf club grips 691 589 2,106 1,566
----------- ----------- ----------- -----------
5,028 3,664 13,693 9,861
----------- ----------- ----------- -----------
Gross profit 1,987 1,454 6,258 5,146
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,695 1,486 4,819 4,610
MERGER RELATED EXPENSES -- 503 -- 503
AMORTIZATION OF GOODWILL 121 129 364 387
----------- ----------- ----------- -----------
Operating income (loss) 171 (664) 1,075 (354)
INTEREST EXPENSE 159 206 457 595
OTHER INCOME 76 74 186 199
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before provision for (benefit from) income taxes 88 (796) 804 (750)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 53 16 411 (39)
----------- ----------- ----------- -----------
Income (loss) from continuing operations 35 (812) 393 (711)
DISCONTINUED OPERATIONS:
Loss from operations of Roxxi, Inc. -- (127) -- (516)
Loss on disposal of assets of Roxxi, Inc. -- (1,214) -- (1,214)
----------- ----------- ----------- -----------
Net income (loss) $ 35 $ (2,153) $ 393 $ (2,441)
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations $ 0.01 $ (0.14) $ 0.07 $ (0.13)
Loss from discontinued operations -- (0.24) -- (0.30)
----------- ----------- ----------- -----------
Net income (loss) $ 0.01 $ (0.38) $ 0.07 $ (0.43)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
USED IN COMPUTING DILUTED PER SHARE INFORMATION 5,843,157 5,667,375 5,807,007 5,643,818
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
FEBRUARY 29, FEBRUARY 28,
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 393 $(2,441)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities of continuing
operations--
Loss from discontinued operations -- 516
Loss on sale of discontinued operations -- 1,214
Depreciation and amortization 901 703
Loss on retirement and sale of fixed assets 18 --
Changes in operating assets and liabilities--
Accounts receivable, net 811 965
Inventories (1,027) (1,682)
Other assets 132 (47)
Accounts payable and accrued expenses 392 399
Other liabilities -- (44)
------- -------
Net cash provided by (used in) operating
activities of continuing operations 1,620 (417)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, net (1,564) (754)
Payments from net investment in capital lease -- 198
Merger costs -- (162)
------- -------
Net cash used in investing activities of
continuing operations (1,564) (718)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt -- 5,140
Proceeds from exercise of common stock options 9 17
Borrowings under lines-of-credit, net 749 515
Repayments of long-term debt and capital
lease obligations (977) (4,245)
------- -------
Net cash (used in) provided by financing
activities of continuing operations (219) 1,427
------- -------
NET CASH USED IN DISCONTINUED OPERATIONS -- (299)
------- -------
DECREASE IN CASH (163) (7)
CASH, beginning of period 184 28
------- -------
CASH, end of period $ 21 $ 21
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest $ 473 $ 649
======= =======
Income taxes $ 41 $ 82
======= =======
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION --
The condensed consolidated financial statements of Royal Precision, Inc. and
subsidiaries (collectively, "RP" or the "Company") presented herein have been
prepared pursuant to the rules of the Securities and Exchange Commission for
quarterly reports on Form 10-Q and do not include all of the information and
note disclosures required by accounting principles generally accepted in the
United States. These condensed consolidated financial statements should be
read in conjunction with the Company's consolidated financial statements and
notes thereto for the fiscal year ended May 31, 1999 included in the
Company's Form 10-KSB. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements include all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the consolidated financial position, results of operations and
cash flows of the Company. Quarterly operating results are not necessarily
indicative of the results that would be expected for the full year.
ORGANIZATION --
The accompanying condensed consolidated financial statements include Royal
Precision, Inc. and its three wholly-owned subsidiaries, FM Precision Golf
Manufacturing Corp. ("FMP"), FM Precision Golf Sales Corp. ("FMP Sales") and
Royal Grip, Inc. ("RG") which has a wholly-owned subsidiary, Royal Grip
Headwear Company. All significant intercompany balances and transactions have
been eliminated in consolidation. As discussed in Note 7, the Company
disposed of the operating assets of Royal Grip Headwear Company (formerly
known as Roxxi, Inc. "Roxxi") in March 1999. Results of operations for Roxxi
for all periods through May 31, 1999 are reflected as discontinued
operations.
BUSINESS --
RP is a holding company which carries on its business operations through its
subsidiaries. The Company 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. RP's products are sold
throughout the United States as well as internationally, primarily in Japan,
Australia, the United Kingdom and Canada.
USE OF ESTIMATES --
The preparation of financial statements in conformity with 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.
2. EARNINGS (LOSS) PER SHARE:
The Company accounts for earnings (loss) per share in accordance with SFAS
No. 128, "Earnings Per Share." Basic earnings (loss) per share are based on
the average number of common shares outstanding during the period. Diluted
earnings (loss) per share assumes, in addition to the above, a dilutive
effect of common share equivalents during the period. Common share
equivalents represent dilutive stock options using the treasury stock method.
The number of shares used in computing income (loss) from continuing
operations per share for the three and nine months ended February 29, 2000
and February 28, 1999 were as follows (in thousands):
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<PAGE>
THREE MONTHS ENDED
----------------------------
FEBRUARY 29, FEBRUARY 28,
2000 1999
------------ ------------
Basic:
Average common shares outstanding 5,675 5,667
Diluted:
Dilutive effect of stock options 168 --
----- -----
Average common shares outstanding 5,843 5,667
===== =====
NINE MONTHS ENDED
----------------------------
FEBRUARY 29, FEBRUARY 28,
2000 1999
------------ ------------
Basic:
Average common shares outstanding 5,671 5,644
Diluted:
Dilutive effect of stock options 136 --
----- -----
Average common shares outstanding 5,807 5,644
===== =====
For the three and nine months ended February 28, 1999, basic average common
shares outstanding for discontinued operations were 5,667,375 and 5,643,818,
respectively. Basic and diluted earnings (loss) per share were the same for
all periods presented. Loss per share for the three and nine months ended
February 28, 1999 was not affected by stock options because their effect was
anti-dilutive.
3. NEW ACCOUNTING PRONOUNCEMENT:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In June 1999,
the FASB issued SFAS No. 137 which deferred the effective date of SFAS No.
133. The Company will be required to adopt SFAS No. 133 during the fiscal
year ending May 31, 2001. The Company does not anticipate any material impact
resulting from the adoption of SFAS No. 133.
4. INVENTORIES:
Inventories are valued at the lower of cost or market. Cost is determined on
the first-in, first-out method. Inventories as of February 29, 2000 and May
31, 1999 consisted of the following (in thousands):
FEBRUARY 29, 2000 MAY 31, 1999
----------------- ------------
Raw materials $ 525 $ 471
Work-in-process 2,121 1,566
Finished goods 3,395 2,477
------ ------
$6,041 $4,514
====== ======
5. BORROWING ARRANGEMENTS:
FMP has a credit facility consisting of a term loan and a revolving
line-of-credit. The FMP term loan of $2.9 million at February 29, 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
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<PAGE>
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 February
29, 2000, FMP had $3.5 million outstanding under its revolving line-of-credit
and $1.0 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 $0.5 million at February 29, 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 February
29, 2000, RG had $0.4 million outstanding under its revolving line-of-credit
and $0.3 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 (8.75%
at February 29, 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 February 29, 2000.
On March 24, 2000, the FMP and RG credit facilities were amended and
restated. The amount available for borrowings under the FMP facility was
increased by $0.5 million. This additional borrowing capacity will be reduced
by $0.1 million monthly beginning April 2000 and will expire on July 31,
2000. Also, an additional FMP term loan of up to $0.4 million was established
to finance certain capital expenditures currently in process to increase the
existing manufacturing capacity of pro grade steel golf club shafts. Funds
under this loan can be advanced upon the completion of the capital project
which is anticipated to be in the second quarter of fiscal year 2001.
6. INFORMATION ON SEGMENTS:
The Company has two reportable segments in continuing operations: golf club
shafts and golf club grips. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies in
Form 10-KSB for the fiscal year ended May 31, 1999. 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):
THREE MONTHS ENDED FEBRUARY 29, 2000
------------------------------------
GOLF CLUB GOLF CLUB
SHAFTS GRIPS TOTAL
------ ----- -----
Net sales $ 6,066 $ 949 $ 7,015
Operating income (loss) 263 (92) 171
Depreciation and amortization 87 211 298
Total assets for reportable segments $13,390 $17,674 $31,064
Assets of discontinued operation 34
Elimination of investment in subsidiaries (6,092)
-------
Consolidated total assets $25,006
=======
-8-
<PAGE>
THREE MONTHS ENDED FEBRUARY 28, 1999
------------------------------------
GOLF CLUB GOLF CLUB
SHAFTS GRIPS TOTAL
------ ----- -----
Net sales $ 4,178 $ 940 $ 5,118
Operating loss (521) (143) (664)
Depreciation and amortization 76 162 238
Total assets for reportable segments $10,752 $21,054 $31,806
Assets of discontinued operation 630
Elimination of investment in subsidiaries (7,213)
-------
Consolidated total assets $25,223
=======
NINE MONTHS ENDED FEBRUARY 29, 2000
------------------------------------
GOLF CLUB GOLF CLUB
SHAFTS GRIPS TOTAL
------ ----- -----
Net sales $16,938 $3,013 $19,951
Operating income (loss) 1,260 (185) 1,075
Depreciation and amortization 260 641 901
NINE MONTHS ENDED FEBRUARY 28, 1999
------------------------------------
GOLF CLUB GOLF CLUB
SHAFTS GRIPS TOTAL
------ ----- -----
Net sales $12,220 $2,787 $ 15,007
Operating loss (239) (115) (354)
Depreciation and amortization 213 490 703
7. DISCONTINUED OPERATIONS:
In March 1999, the operating assets of Roxxi were disposed of through two
separate transactions. Roxxi sold its trade name, customer list, design
database and related computer software and hardware for a royalty of 16% of
the buyer's net sales of Roxxi-licensed products for the two-year period
beginning May 1, 1999. Roxxi also sold its manufacturing equipment, finished
goods inventory and raw materials to another company for $300,000 and a
royalty of 2% of the buyer's net sales until the buyer has paid an additional
$200,000. Subsequently, Roxxi's name was changed to Royal Grip Headwear
Company. The Company is accounting for royalties as income is earned during
the two year period beginning May 1, 1999. For the three and nine months
ended February 29, 2000, royalties of $30,000 and $119,000 were recorded,
respectively, and are reflected as other income in the accompanying condensed
consolidated statements of operations.
8. TERMINATION OF MANUFACTURING SUPPLY CONTRACT:
In May 1999, RG and Acushnet Rubber Company ("Acushnet") executed a mutual
release agreement terminating their manufacturing and supply agreement and
capital lease agreement (the "Termination Agreement"). Since January 1997, RG
has purchased the majority of its supply of non-cord, injected grips from
Acushnet. The Company believes that its current inventory of grips together
with purchases from other existing vendors will provide a sufficient supply
of grips to satisfy customer demand through December 31, 2000. The Company
has identified and is in various stages of negotiations with three separate
grip manufacturers which the Company believes can maintain RG's standard of
product quality and will facilitate a smooth transition from Acushnet. There
can be no assurances that the Company will be able to secure a source for
grips on as favorable terms or with the same or better quality as Acushnet.
In addition, there can be no assurances that a transition to new suppliers
will not result in production delays, the loss of sales and key customers
which would materially affect RG's financial condition and results of
operations.
-9-
<PAGE>
During the three months ended February 29, 2000, Acushnet completed the
production requirements of the Termination Agreement. Finished goods totaling
approximately $1.2 million were transported from Acushnet to RG's warehouses.
RG utilized a $0.5 million purchase credit it received in conjunction with
the Termination Agreement to acquire the grips from Acushnet. Additionally,
the grip manufacturing equipment was removed from Acushnet's plant and
transported to storage on RG's property. This equipment is no longer being
used and is held for sale with a book value of $0.5 million.
9. TERMINATED MERGER AGREEMENT:
In February 1999, the Company and Coyote Sports, Inc. ("Coyote") entered into
a merger agreement pursuant to which RP would become a wholly-owned
subsidiary of Coyote (the "RP-Coyote Merger"). In June 1999, the RP-Coyote
Merger agreement was terminated at the request of the Company due to a
material change in the business of Coyote resulting in an inability to obtain
suitable long-term financing. The Company incurred professional fees of
$503,000 related to the RP-Coyote Merger during the three months ended
February 28, 1999.
10. LITIGATION:
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") alleges
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. Management believes that the action is without merit and
intends to defend it vigorously.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS --
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. The Company believes it has made forward-looking
statements within the meaning of the Litigation Reform Act in this Form 10-Q,
Forms 10-QSB, Forms 10-KSB, Forms 8-K, and other written or oral statements made
by or on behalf of RP which reflect RP's current views with respect to future
events and financial performance. These forward-looking statements are subject
to uncertainties and other factors that could cause actual results to differ
materially from such statements. These uncertainties and other factors include,
but are not limited to, uncertainties relating to international, national, and
local economic conditions, RP's dependence on discretionary consumer spending,
customer concentration and their plans and commitments, RP's cost and available
supply of raw materials, the competitive environment in which RP operates, the
timeliness and market acceptance of RP's new product introductions, RP's limited
operating history, RP's ability to protect its intellectual property rights,
seasonality of sales, fluctuations in operating results, and changes in the
financial markets relating to RP's capital structure and cost of capital.
Statements in this Form 10-Q, including the Notes to the Condensed Consolidated
Financial Statements ("Financial Statements") and Management's Discussion and
Analysis of Financial Condition and Results of Operations describe factors,
among others, that could contribute to or cause such differences. Additional
factors that could cause actual results to differ materially from those
expressed in such forward looking statements are detailed in RP's Form 10-KSB
for the fiscal year ended May 31, 1999. Please refer to "Risk Factors" therein.
The words "believe," "expect," "anticipate," "project," and similar expressions
identify forward looking statements, which speak only as of the date the
statement was made.
OVERVIEW --
Royal Precision, Inc. ("RP" or the "Company") is a holding company 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. RP acquired RG on August 29, 1997 by means of a
merger whereby FMPSUB, Inc. (a wholly-owned subsidiary of RP created for such
purpose) merged with and into RG (the "FMP-RG Merger"). RG was the surviving
corporation and became a wholly-owned subsidiary of RP. As discussed in Note 7
to the Financial Statements, the Company disposed of the operating assets of
Royal Grip Headwear Company (formerly known as Roxxi, Inc. "Roxxi") in March
1999. Results of operations for Roxxi in all periods through May 31, 1999 are
reflected as discontinued operations.
The Company 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. RP'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.
THREE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THE THREE MONTHS ENDED FEBRUARY
28, 1999 --
NET SALES. Net sales from continuing operations for the three months ended
February 29, 2000 were $7.0 million, an increase of $1.9 million or 37% over net
sales from continuing operations of $5.1 million during the corresponding period
in 1999. Net sales of golf club shafts increased by $1.9 million or 45% and net
sales of golf club grips were consistent at $0.9 million. 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 $1.7 million or 44%. Sales of the
Company's lower priced, commercial grade golf club shafts increased by $0.2
million or 57%.
COST OF SALES. Cost of goods sold from continuing operations for the three
months ended February 29, 2000 was $5.0 million, an increase of $1.3 million or
37% over cost of goods sold from continuing operations of $3.7 million during
the corresponding period in 1999. Golf club shafts cost of goods sold increased
by $1.3 million or 41% as a result of higher total net sales. Golf club grips
cost of goods sold increased by $0.1 million or 17% due to additional costs
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<PAGE>
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 the manufacturing and supply agreement. RG has
assumed responsibility for these functions following the termination of the
Acushnet contracts. Approximately $50,000 in additional costs was incurred
related to the new distribution facility during the three months ended February
29, 2000 compared to the corresponding period of 1999. Also, depreciation
expense of $60,000 was recorded on the grip manufacturing equipment while in use
by Acushnet during the three months ended February 29, 2000 whereas no
depreciation expense was recorded during the corresponding period in 1999 when
the Acushnet capital lease contract was in effect.
GROSS PROFIT. Gross profit from continuing operations for the three months ended
February 29, 2000 was $2.0 million, an increase of $0.5 million or 37% over
gross profit from continuing operations of $1.5 million for the corresponding
period in 1999. Gross profit from sales of golf club shafts increased by $0.6
million or 57% to $1.7 million due to higher total net sales. As a percentage
of sales, the gross profit on sales of golf club shafts increased from 26% to
29%. Gross profit from sales of golf club grips decreased by $0.1 million or 27%
to $0.3 million despite consistent net sales. As a percentage of sales, the
gross profit on sales of golf club grips decreased from 37% to 27%. The
decreased margin reflects additional costs incurred related to the new
distribution facility and additional depreciation expense recorded during the
three months ended February 29, 2000 compared to the corresponding period in
1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended February 29, 2000 were $1.7
million, an increase of 14% over selling, general and administrative expenses of
$1.5 million during the corresponding period in 1999. The $0.2 million increase
reflects additional marketing and advertising costs associated with a television
commercial campaign which was developed and first aired during the three months
ended February 29, 2000. As a percentage of sales, selling, general and
administrative expenses declined from 29% during the three months ended February
28, 1999 to 24% during the corresponding period in 2000.
MERGER RELATED EXPENSES. The Company incurred professional fees of $503,000
related to the RP-Coyote Merger during the three months ended February 28, 1999.
In June 1999, the 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.
AMORTIZATION OF GOODWILL. Goodwill was reduced in the fourth quarter of fiscal
1999 as a result of the utilization of pre-merger NOL carryforwards and partial
reversal of the valuation allowance on pre-merger deferred tax assets.
Therefore, amortization expense was reduced from $129,000 during the three
months ended February 28, 1999 to $121,000 during the corresponding period ended
February 29, 2000.
INTEREST EXPENSE. Average outstanding borrowings were comparable during the
three month periods ended February 29, 2000 and February 28, 1999 and,
therefore, interest expense was consistent at $0.2 million.
OTHER INCOME. Other income of $76,000 for the three months ended February 29,
2000 is principally comprised of royalties earned on sales of Roxxi headwear
products. Other income of $74,000 for the three months ended February 28, 1999
is principally comprised of interest income on the Acushnet capital lease
receivable.
PROVISION FOR INCOME TAXES. Provisions of $53,000 and $16,000 were recorded for
taxes on income from continuing operations during the three month periods ended
February 29, 2000 and February 28, 1999, respectively. Taxes are provided based
on the estimated effective tax rate for the year which considers the effect of
nondeductible goodwill amortization.
DISCONTINUED OPERATIONS. As discussed in Note 7 to the Financial Statements, the
Company disposed of the operating assets of Roxxi in March 1999 and recorded a
loss provision of $1.2 million during the three months ended February 28, 1999.
Losses from the operations of Roxxi for the three months ended February 28, 1999
were $0.1 million.
NINE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THE NINE MONTHS ENDED FEBRUARY
28, 1999 --
NET SALES. Net sales from continuing operations for the nine months ended
February 29, 2000 were $20.0 million, an increase of $5.0 million or 33% over
net sales from continuing operations of $15.0 million during the corresponding
period in 1999. Net sales of golf club shafts increased by $4.8 million or 39%
and net sales of golf club grips increased by $0.2 million or 8%. The increased
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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 $5.2 million or 53%. Sales
of the Company's lower priced, commercial grade golf club shafts decreased by
$0.5 million or 22%. Sales of these shafts were negatively impacted when the
Company instituted a significant price increase during the first quarter of
fiscal 1999. In response to these unfavorable results, the Company subsequently
modified its pricing structure in an effort to increase sales of these shafts in
future periods. These efforts resulted in increased sales of commercial grade
shafts of $0.2 million during the three months ended February 29, 2000 compared
to the corresponding period of 1999. 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 nine months ended February 29, 2000
were $1.0 million compared to $0.2 million during the corresponding period in
1999.
COST OF SALES. Cost of goods sold from continuing operations for the nine months
ended February 29, 2000 was $13.7 million, an increase of $3.8 million or 39%
over cost of goods sold from continuing operations of $9.9 million during the
corresponding period in 1999. Golf club shafts cost of goods sold increased by
$3.3 million or 40% and golf club grips cost of goods sold increased by $0.5
million or 35%, both as a result of higher total net sales.
GROSS PROFIT. Gross profit from continuing operations for the nine months ended
February 29, 2000 was $6.3 million, an increase of $1.1 million or 22% over
gross profit from continuing operations of $5.2 million for the corresponding
period in 1999. Gross profit from sales of golf club shafts increased by $1.4
million or 36% to $5.4 million due to higher total net sales. As a percentage
of sales, the gross profit on sales of golf club shafts was unchanged at 32%.
Gross profit from sales of golf club grips decreased by $0.3 million or 26% to
$0.9 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 30%. This
decreased margin reflects 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 34% of sales during the nine months ended February 29, 2000
compared to only 8% during the corresponding period in 1999. Additionally,
depreciation expense of approximately $0.2 million was recorded on the grip
manufacturing equipment while in use by Acushnet during the nine months ended
February 29, 2000 whereas no depreciation expense was recorded during the
corresponding period in 1999 when the Acushnet capital lease contract was in
effect.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine months ended February 29, 2000 were $4.8
million, an increase of 5% over selling, general, and administrative expenses of
$4.6 million during the corresponding period in 1999. The $0.2 million increase
reflects additional marketing and advertising costs associated with a television
commercial campaign which was developed and first aired during the three months
ended February 29, 2000. As a percentage of sales, selling, general and
administrative expenses declined from 31% during the nine months ended February
28, 1999 to 24% during the corresponding period in 2000.
MERGER RELATED EXPENSES. The Company incurred professional fees of $503,000
related to the RP-Coyote Merger during the nine months ended February 28, 1999.
In June 1999, the 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.
AMORTIZATION OF GOODWILL. Goodwill was reduced in the fourth quarter of fiscal
1999 as a result of the utilization of pre-merger NOL carryforwards and partial
reversal of the valuation allowance on pre-merger deferred tax assets.
Therefore, amortization expense was reduced from $387,000 during the nine months
ended February 28, 1999 to $364,000 during the corresponding period in 2000.
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 $0.6 million interest expense during the nine
months ended February 28, 1999. Interest expense during the corresponding period
in 2000 was $0.5 million.
OTHER INCOME. Other income of $186,000 for the nine months ended February 29,
2000 is principally comprised of royalties earned on sales of Roxxi headwear
products. Other income of $199,000 for the nine months ended February 28, 1999
is principally comprised of interest income on the Acushnet capital lease
receivable.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. A provision of $411,000 was recorded
for taxes on income from continuing operations during the nine months ended
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February 29, 2000 and a benefit of $39,000 was recorded on the loss from
continuing operations during the corresponding period in 1999. Taxes are
provided based on the estimated effective tax rate for the year which considers
the effect of nondeductible goodwill amortization.
DISCONTINUED OPERATIONS. As discussed in Note 7 to the Financial Statements, the
Company disposed of the operating assets of Roxxi in March 1999 and recorded a
loss provision of $1.2 million during the nine months ended February 28, 1999.
Losses from the operations of Roxxi for the nine months ended February 28, 1999
were $0.5 million.
LIQUIDITY AND CAPITAL RESOURCES --
At February 29, 2000, RP had working capital of $5.9 million and a current ratio
of 2.2 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 $2.9 million at February 29, 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 February 29, 2000, FMP had
$3.5 million outstanding under its revolving line-of-credit and $1.0 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 $0.5 million at February 29, 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 February 29, 2000, RG had
$0.4 million outstanding under its revolving line-of-credit and $0.3 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 (8.75% at
February 29, 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 February 29, 2000.
On March 24, 2000, the FMP and RG credit facilities were amended and restated.
The amount available for borrowings under the FMP facility was increased by $0.5
million. This additional borrowing capacity will be reduced by $0.1 million
monthly beginning April 2000 and will expire on July 31, 2000. Also, an
additional FMP term loan of up to $0.4 million was established to finance
certain capital expenditures currently in process to increase the existing
manufacturing capacity of pro grade steel golf club shafts. Funds under this
loan can be advanced upon the completion of the capital project which is
anticipated to be in the second quarter of fiscal year 2001.
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 nine months ended February 29, 2000, net cash provided by operating
activities was $1.6 million which primarily resulted from net income of $0.4
million, depreciation and amortization of $0.9 million, a decrease in accounts
receivable of $0.8 million and an increase in accounts payable and accrued
expenses of $0.4 million. Cash provided by operating activities was reduced by
an increase in inventories of $1.0 million.
Net cash used in investing activities for the nine months ended February 29,
2000 was $1.6 million for the purchase of property, plant and equipment. The
Company estimates that capital expenditures for the fiscal year ending May 31,
2000 will be approximately $2.2 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.
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<PAGE>
Net cash used in financing activities for the nine months ended February 29,
2000, was $0.2 million resulting from repayments of long term debt and capital
lease obligations of $1.0 million and net borrowings under lines-of-credit of
$0.8 million.
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 May 1999, RG and Acushnet executed a
mutual release agreement terminating their manufacturing and supply agreement
and capital lease agreement (the "Termination Agreement"). Since January 1997,
RG has purchased the majority of its supply of non-cord, injected grips from
Acushnet. The Company believes that its current inventory of grips together with
purchases from other existing vendors will provide a sufficient supply of grips
to satisfy customer demand through December 31, 2000. The Company has identified
and is in various stages of negotiations with three separate grip manufacturers
which the Company believes can maintain RG's standard of product quality and
will facilitate a smooth transition from Acushnet. There can be no assurances
that the Company will be able to secure a source for grips on as favorable terms
or with the same or better quality as Acushnet. In addition, there can be no
assurances that a transition to new suppliers will not result in production
delays, the loss of sales and key customers which would materially affect RG's
financial condition and results of operations.
During the three months ended February 29, 2000, Acushnet completed the
production requirements of the Termination Agreement. Finished goods totaling
approximately $1.2 million were transported from Acushnet to RG's warehouses. RG
utilized a $0.5 million purchase credit it received in conjunction with the
Termination Agreement to acquire the grips from Acushnet. Additionally, the grip
manufacturing equipment was removed from Acushnet's plant and transported to
storage on RG's property. This equipment is no longer being used and is held for
sale with a book value of $0.5 million.
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
$300,000 and a royalty of 2% of the buyer's net sales until the buyer has paid
an additional $200,000. Subsequently, Roxxi's name was changed to Royal Grip
Headwear Company. The Company is accounting for royalties as income is earned
during the two year period beginning May 1, 1999. For the three and nine months
ended February 29, 2000, royalties of $30,000 and $119,000 were recorded,
respectively, and are reflected as other income in the accompanying condensed
consolidated statements of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
COMMODITY INSTRUMENTS.
At February 29, 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 fully described in Note 5 to the Financial Statements. A
one percent change in the prime lending rate would have an effect of $18,000 and
$51,000 on interest expense for the three and nine months ended February 29,
2000, 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 February 29, 2000 and, accordingly, will be impacted by
any change in the exchange rate prior to the ultimate settlement date of the
contract.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On November 2, 1999, R. R. Donnelley & Sons Company, Plaintiff, vs. Royal
Precision, Inc., Defendant, was filed in Superior Court, Maricopa County,
Arizona. This matter was first reported in the registrant's Form 10-Q filing for
the period ended November 30, 1999. There were no material developments in this
matter during the quarter ended February 29, 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
(3) Certificate of Incorporation and Bylaws
Exhibit 3.1. Amended and Restated Certificate of Incorporation of
Royal Precision, Inc. (restated to reflect amendment filed with the
Secretary of State of Delaware on October 19, 1999) (incorporated by
reference to Exhibit 3.1 of the Company's Form 10-Q for the period ended
November 30, 1999).
Exhibit 3.2. Bylaws of Royal Precision, Inc. (incorporated by
reference to Annex IV to the Company's Form S-4; No. 333-28841 (the "Form
S-4")).
(4) Instruments Defining the Rights of Security Holders
Exhibit 4. 1. See Articles FOUR, FIVE and SEVEN of the Amended and
Restated Certificate of Incorporation at Exhibit 3.1.
Exhibit 4.2. See Article I, Sections 2.1 and 2.2 of Article II and
Section 7.3 of Article VII of the Bylaws of Royal Precision, Inc.
(incorporated by reference to Exhibit 3.2 to the Form S-4).
(10) Material Agreements.
Exhibit 10.1. 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.
Exhibit 10.2. 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.
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Exhibit 27.
Financial Data Schedule (submitted electronically for SEC information
only)
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Registrant during the
quarter ended February 29, 2000.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ROYAL PRECISION, INC.
Date April 7, 2000 By /s/ Thomas Schneider
------------- -------------------------------------
Thomas Schneider, President
and Chief Operating Officer
By /s/ Kevin Neill
-------------------------------------
Kevin Neill, Vice President - Finance
and Chief Financial Officer
(chief accounting officer)
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EXHIBIT INDEX
Page in
Sequentially
Numbered
Exhibit Copy
- ------- ----
3.1 Amended and Restated Certificate of Incorporation
of Royal Precision, Inc. (restated to reflect
amendment filed with the Secretary of State of
Delaware on October 19, 1999). *
3.2 Bylaws of Royal Precision, Inc. (incorporated by
reference to Annex IV to the Company's Form S-4;
No. 333-28841 (the "Form S-4)). *
4.1 See Articles FOUR, FIVE and SEVEN of the Amended
and Restated Certificate of Incorporation of the
registrant at Exhibit 3.1.
4.2 See Article I, Sections 2.1 and 2.2 of Article II
and Section 7.3 of Article VII of the Bylaws of
Royal Precision, Inc. (incorporated by reference
to Exhibit 3.2 to the Form S-4).
10.1 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. 20
10.2 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. 35
27. Financial Data Schedule (submitted electronically
for SEC information only).
- ----------
* Incorporated by reference
THIRD AMENDMENT TO CREDIT AND
SECURITY AGREEMENT
This Amendment, dated as of March 24, 2000, is made by and between FM
PRECISION GOLF MANUFACTURING CORP., a Delaware corporation, and FM PRECISION
GOLF SALES CORP., a Delaware corporation (collectively, jointly and severally,
the "Borrower"), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation,
formerly known as Norwest Business Credit, Inc. (the "Lender").
Recitals
The Borrower and the Lender have entered into a Credit and Security
Agreement dated as of October 9, 1998, as amended by that certain Amendment to
Credit and Security Agreement and Waiver of Defaults dated April 13, 1999, as
amended by that certain Second Amendment to Credit and Security Agreement dated
November 10, 1999 (collectively, the "Credit Agreement"). Capitalized terms used
in these recitals have the meanings given to them in the Credit Agreement unless
otherwise specified.
The Borrower has requested that certain amendments be made to the Credit
Agreement, which the Lender is willing to make pursuant to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. Defined Terms. Capitalized terms used in this Amendment which are
defined in the Credit Agreement shall have the same meanings as defined therein,
unless otherwise defined herein.
2. Amendments. The Credit Agreement is hereby amended as follows:
(a) The definition of "Advance" contained in Section 1.1 of the Credit
Agreement is hereby deleted and replaced as follows:
"Advance" means a Revolving Advance, the Term Advance or the
Capital Expenditures Advance.
(b) The definition of "Borrowing Base" contained in Section 1.1 of the
Credit Agreement is hereby deleted in its entirety and replaced as follows:
"Borrowing Base" means, at any time the lesser of:
(a) the Maximum Line; or
(b) subject to change from time to time in the Lender's sole
discretion, the sum of:
(A) the lesser of (x) 85% of Eligible Accounts, or (y)
$5,000,000.00, plus
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<PAGE>
(B) the lesser of (x) 60% of Eligible Inventory (exclusive
of Eligible Raw Materials Inventory), or (y) $2,500,000.00
from March 1 through September 30 of each year and
$3,500,000.00 from October 1 of each year through February
28 of each subsequent year, plus
(C) the lesser of (x) 50% of Eligible Raw Materials
Inventory, or (y) $2,500,000.00 from March 1 through
September 30 of each year and $3,500,000.00 from October 1
of each year through February 28 of each subsequent year,
plus
(D) an overadvance in the amount not to exceed $500,000.00
(the "Overadvance Limit), which Overadvance Limit shall be
automatically reduced by $100,000.00 on each of April 1,
2000, May 1, 2000, June 1, 2000, July 1, 2000, and August 1,
2000. On or after August 1, 2000, the Overadvance Limit
shall be equal to $0.00.
(c) The definition of "Debt Service Coverage Ratio" contained in
Section 1.1 of the Credit Agreement is hereby deleted and replaced as follows:
"Debt Service Coverage Ratio" means the ratio of (i) the sum of
(A) Funds from Operations plus (estimated taxes less cash tax
payments) plus (B) Interest Expense minus (C) unfinanced portion
of Capital Expenditures to (ii) the sum of (A) Current Maturities
of Long Term Debt (actually paid during the period) plus (B)
Interest Expense.
(d) The percentage "25%" contained in subsection (xiv) of the
definition of "Eligible Accounts" contained in Section 1.1 of the Credit
Agreement is hereby deleted and replaced with the percentage "50%".
(e) The definition of "Note" contained in Section 1.1 of the Credit
Agreement is hereby deleted and replaced as follows:
"Note" means the Revolving Note, the Term Note or the Capital
Expenditures Note, and "Notes" means the Revolving Note, the Term
Note and the Capital Expenditures Note.
(f) There is hereby added to Section 1.1 of the Credit Agreement a new
definition for "Capital Expenditures Advance" which provides as follows:
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<PAGE>
"Capital Expenditures Advance" has the meaning specified in
Section 2.6.2.
(g) There is hereby added to Section 1.1 of the Credit Agreement a new
definition for "Capital Expenditures Note" which provides as follows:
"Capital Expenditures Note" means the Borrower's promissory note,
payable to the order of the Lender in substantially the form of
Exhibit B-2 hereto and any note or notes issued in substitution
therefor, as the same may hereafter be amended, supplemented or
restated from time to time.
(h) Section 2.6 of the Credit Agreement is hereby renumbered as
Section 2.6.1 and each reference to Section 2.6 contained in the Credit
Agreement is hereby deleted and replaced with a reference to Section 2.6.1.
(i) There is hereby added a new Section 2.6.2 to the Credit Agreement
which provides as follows:
Section 2.6.2 Capital Expenditures Advance.
(a) The Lender agrees, on the terms and subject to the
conditions herein set forth (including without limitation Section
4.2 and 4.3 below), to make a one time non-revolving advance to
the Borrower in the amount equal to the lesser of (i)
$400,000.00; or (ii) the Lendable Cost, as hereafter defined (the
"Capital Expenditures Advance").
(b) The Borrower's obligation to pay the Capital
Expenditures Advance shall be evidenced by the Capital
Expenditures Note and shall be secured by the Collateral as
provided in Article III.
(c) The request for the disbursement of the Capital
Expenditures Advance shall be by an individual authorized
pursuant to Section 2.1(a).
(d) Upon fulfillment of the applicable conditions set forth
in Section 4.2 and 4.3, the Lender shall apply the proceeds of
the Capital Expenditures Advance by crediting the same to the
Borrower's demand deposit account specified in Section 2.1(b)
unless the Lender and the Borrower shall agree in writing to
another manner of disbursement. Upon the Lender's request, the
Borrower shall promptly confirm the telephonic request for the
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<PAGE>
Capital Expenditures Advance by executing and delivering an
appropriate confirmation certificate to the Lender. The Borrower
shall be obligated to repay the Capital Expenditures Advance
notwithstanding the Lender's failure to receive such confirmation
and notwithstanding the fact that the person requesting the same
was not in fact authorized to do so. The request for the Capital
Expenditures Advance, whether written or telephonic, shall be
deemed to be a representation by the Borrower that the conditions
set forth in Section 4.2 and 4.3 have been satisfied as of the
time of the request.
(j) Section 2.7 of the Credit Agreement is hereby renumbered as
Section 2.7.1 and each reference to Section 2.7 contained in the Credit
Agreement is hereby deleted and replaced with a reference to Section 2.7.1.
(k) There is hereby added a new Section 2.7.2 to the Credit Agreement
which provides as follows:
Section 2.7.2 Payment of Capital Expenditures Note. The
outstanding principal balance of the Capital Expenditures Note
shall be due and payable as follows:
(a) Beginning on the first day of the first full month
following the disbursement of the Capital Expenditures Advance
and on the first day of each month thereafter in equal monthly
installments in an amount sufficient to fully amortize the
Capital Expenditures Advance over an assumed term of 60 months;
(b) On the Termination Date, the entire unpaid principal
balance of the Capital Expenditures Note, and all unpaid interest
accrued thereon, shall in any event be due and payable.
(l) Subsection (b) of Section 2.8 of the Credit Agreement is hereby
deleted and replaced as follows:
(b) TERM NOTE/CAPITAL EXPENDITURES NOTE. Except as set forth in
Sections 2.8(d), 2.8(f) and 2.8(g), the outstanding principal
balance of each of the Term Note and the Capital Expenditures
Note shall bear interest at the Term Floating Rate.
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<PAGE>
(m) Section 2.12 of the Credit Agreement is hereby deleted and
replaced as follows:
Section 2.12 VOLUNTARY PREPAYMENT; REDUCTION OF THE MAXIMUM LINE;
TERMINATION OF THE CREDIT FACILITY BY THE BORROWER. Except as
otherwise provided herein, the Borrower may prepay the Revolving
Advances in whole at any time or from time to time in part. The
Borrower may prepay the Term Advance and the Capital Expenditures
Advance (other than in accordance with Section 2.7.1(a) and
2.7.2(a)), and terminate the Credit Facility or reduce the
Maximum Line at any time if it (i) gives the Lender at least 30
days' prior written notice and (ii) pays the Lender the
prepayment, termination or line reduction fees in accordance with
Section 2.13. Any prepayment of the Term Advance and the Capital
Expenditure Advance (other than in accordance with Section
2.7.1(a) and 2.7.2(a)) or reduction in the Maximum Line must be
in an amount not less than $250,000.00 or an integral multiple
thereof. No reduction of the Maximum Line shall in any way affect
the Minimum Interest Charges. If the Borrower reduces the Maximum
Line to zero, all Obligations shall be immediately due and
payable. Any partial prepayments of the Term Note and the Capital
Expenditures Note (other than in accordance with Section 2.7.1(a)
and 2.7.2(a)) shall be applied to principal payments due and
owing in inverse order of their maturities. Upon termination of
the Credit Facility and payment and performance of all
Obligations, the Lender shall release or terminate the Security
Interest and the Security Documents to which the Borrower is
entitled by law.
(n) Section 2.13(b) of the Credit Agreement is hereby deleted and
replaced as follows:
(b) PREPAYMENT FEES. If the Term Note or the Capital Expenditures
Note are prepaid as of a date other than the Maturity Date for
any reason except in accordance with Section 2.7, the Borrower
shall pay to the Lender a fee in an amount equal to a percentage
of the amount prepaid as follows: (i) three percent (3%) if
prepayment occurs on or before September 30, 2000; (ii) two
percent (2%) if prepayment occurs after September 30, 2000 but on
or before September 30, 2001; and (iii) one percent (1%) if
prepayment occurs after September 30, 2001.
5
<PAGE>
(o) Section 2.14 of the Credit Agreement is hereby deleted and
replaced as follows:
Section 2.14 Mandatory Prepayment. Without notice or demand, if
the sum of the outstanding principal balance of the Revolving
Advances plus the L/C Amount shall at any time exceed the
Borrowing Base, the Borrower shall (i) first, immediately prepay
the Revolving Advances to the extent necessary to eliminate such
excess; and (ii) if prepayment in full of the Revolving Advances
is insufficient to eliminate such excess, pay to the Lender in
immediately available funds for deposit in the Special Account an
amount equal to the remaining excess. Any payment received by the
Lender under this Section 2.14 or under Section 2.12 may be
applied to the Obligations, in such order and in such amounts as
the Lender, in its discretion, may from time to time determine;
provided that any prepayment under Section 2.12 which the
Borrower designates as a partial prepayment of the Term Note or
the Capital Expenditures Note shall be applied to principal
installments of the Term Note or the Capital Expenditures Note,
as applicable, in inverse order of maturity. For each day or
portion thereof that the Revolving Advances shall exceed the
Borrowing Base, the Borrower shall pay to the Lender an
overadvance charge (which charge shall be in addition to and not
in lieu of any other interest, fees or charges payable by
Borrower hereunder) in the amount of $100.00; provided however,
that if such day occurs during a Default Period, the overadvance
charge for such day shall be $200.00.
(p) There is hereby added a new Section 4.3 to the Credit Agreement
which provides as follows:
Section 4.3 CONDITIONS PRECEDENT TO DISBURSEMENT OF THE CAPITAL
EXPENDITURES ADVANCE. The obligation of the Lender to make the
disbursement of the Capital Expenditures Advance shall be subject
to the further conditions precedent:
6
<PAGE>
(a) The request for the disbursement of the Capital
Expenditure Advance is made on or before the earlier of May 31,
2001 or the Termination Date;
(b) Lender's prior review and approval of the documentation
supporting the Borrower's Capital Expenditures, including but not
limited to invoices and shipping documents, and Lender's
determination (i) that such purchase is made by Borrower in an
arms-length transaction with a reputable dealer, and (ii) that
such purchase is for an item approved by the Lender in its sole
discretion;
(c) The amount of the disbursement is less than or equal to
80% of the invoice cost of Capital Expenditures, exclusive of
cost of installation, set-up costs, taxes, shipping and other
non-purchase price costs (the "Lendable Cost"); and
(d) Lender shall have a first priority perfected security
interest in all equipment purchased with disbursement of the
Capital Expenditures Advance.
(q) Section 6.1(c) of the Credit Agreement is hereby deleted and
replaced as follows:
(c) within 15 days after the end of the month, agings of the
Borrower's accounts receivable and its accounts payable and an
inventory certification report as at the end of such month,
provided however, in the event that Advances are made under the
Overadvance Limit, the Borrower shall submit inventory ineligible
certifications and associated inventory reports on a weekly
basis. The obligation to submit such weekly reports shall cease
at such time as there have been no Advances outstanding under the
Overadvance Limit for 30 consecutive days. The weekly reporting
requirement shall be reinstated in the event that at some point
in the future, Advances are made under the Overadvance Limit.
(r) Section 6.12 of the Credit Agreement is hereby deleted and
replaced as follows:
DEBT SERVICE COVERAGE RATIO. The Borrower covenants that FMM and
FMS and the Covenant Entities shall, as of the last day of each
7
<PAGE>
fiscal quarter, on and after February 29, 2000, maintain a
consolidated average minimum debt service coverage ratio (based
upon the period set forth below) as follows:
Quarter Ending Debt Service Coverage Ratio
.15 to 1 based upon the immediately
February 29, 2000 preceding nine month period
.50 to 1 based upon the immediately
May 31, 2000 preceding twelve month period
.75 to 1 based upon the immediately
August 31, 2000 preceding three month period
.50 to 1 based upon the immediately
November 30, 2000 preceding six month period
.50 to 1 based upon the immediately
February 28, 2001 preceding nine month period
1.0 to 1 based upon the immediately
May 31, 2001 preceding twelve month period
August 31, 2001 and each 1.0 to 1 based upon the immediately
August 31 thereafter preceding three month period
November 30, 2001 and .75 to 1 based upon the immediately
each November 30 preceding six month period
thereafter
February 28, 2002 and .75 to 1 based upon the immediately
each February 28 preceding nine month period
thereafter
May 31, 2002 and each 1.05 to 1 based upon the immediately
May 31 thereafter preceding twelve month period
(s) Section 7.10 of the Credit Agreement is hereby deleted and
replaced as follows:
8
<PAGE>
CAPITAL EXPENDITURES. During each fiscal year, FMM, FMS and the
Covenant Entities will not incur or contract to incur Capital
Expenditures in the aggregate of more than $2,000,000.00. In
addition, FMM, FMS and the Covenant Entities will not incur or
contract to incur Capital Expenditures paid with working capital
in the aggregate of more than $1,900,000.00 during Borrower's
2000 fiscal year or $1,250,000.00 during any fiscal year
thereafter.
3. NO OTHER CHANGES. Except as explicitly amended by this Amendment, all of
the terms and conditions of the Credit Agreement shall remain in full force and
effect and shall apply to any advance or letter of credit thereunder.
4. FEES. The Borrower shall pay the Lender the following fees in
consideration of the Lender's execution of this Amendment:
(a) An origination fee equal in amount to 0.5% of the Capital
Expenditures Advance, which fee shall be due and payable upon the disbursement
of the Capital Expenditures Advance.
(b) An accommodation fee in the amount of $2,500.00, which
accommodation fee shall be due and payable upon the Lender's execution of this
Amendment.
(c) Additional accommodation fees shall be charged as follows:
Overadvance
Amount of Fee Threshold Date Due and Payable
------------- --------- --------------------
$250.00 $250,000.00 The date at which the Advances
outstanding under the Overadvance
Limit are in excess of the
Overadvance Threshold.
$250.00 $300,000.00 The date at which the Advances
outstanding under the Overadvance
Limit are in excess of the
Overadvance Threshold.
$250.00 $350,000.00 The date at which the Advances
outstanding under the Overadvance
Limit are in excess of the
Overadvance Threshold.
9
<PAGE>
Overadvance
Amount of Fee Threshold Date Due and Payable
------------- --------- --------------------
$250.00 $400,000.00 The date at which the Advances
outstanding under the Overadvance
Limit are in excess of the
Overadvance Threshold.
$250.00 $450,000.00 The date at which the Advances
outstanding under the Overadvance
Limit are in excess of the
Overadvance Threshold.
The fees detailed in this Section 4(c) are onetime fees only. By
way of example, in the event that the Advances outstanding under
the Overadvance Limit are $251,000.00, a $250.00 fee would
immediately be due and payable. If thereafter, the Advances under
the Overadvance Limit are reduced below $250,000.00 and then
again rise above $250,000.00, no fee would be owed.
5. CONDITIONS PRECEDENT. This Amendment shall be effective when the Lender
shall have received an executed original hereof, together with each of the
following, each in substance and form acceptable to the Lender in its sole
discretion:
(a) The Capital Expenditures Note substantially in the form of Exhibit
B-2 hereto, duly executed on behalf of the Borrower (the "Capital Expenditures
Note").
(b) The Acknowledgment and Agreement of Guarantor set forth at the end
of this Amendment, duly executed by the Guarantor.
(c) A Certificate of the Secretary of the Borrower certifying as to
(i) the resolutions of the board of directors of the Borrower approving the
execution and delivery of this Amendment, (ii) the fact that the articles of
incorporation and bylaws of the Borrower, which were certified and delivered to
the Lender pursuant to the Certificate of Authority of the Borrower's secretary
or assistant secretary dated as of October 9, 1998 in connection with the
execution and delivery of the Credit Agreement continue in full force and effect
and have not been amended or otherwise modified except as set forth in the
Certificate to be delivered, and (iii) certifying that the officers and agents
of the Borrower who have been certified to the Lender, pursuant to the
Certificate of Authority of the Borrower's secretary or assistant secretary
dated as of October 9, 1998, as being authorized to sign and to act on behalf of
10
<PAGE>
the Borrower continue to be so authorized or setting forth the sample signatures
of each of the officers and agents of the Borrower authorized to execute and
deliver this Amendment and all other documents, agreements and certificates on
behalf of the Borrower.
(d) An opinion of the Borrower's counsel as to the matters set forth
in paragraphs 6(a) and 6(b) hereof and as to such other matters as the Lender
shall require.
(e) Payment of the fees as required in Paragraph 4.
(f) Such other matters as the Lender may require.
6. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and
warrants to the Lender as follows:
(a) The Borrower has all requisite power and authority to execute this
Amendment and the Capital Expenditures Note and to perform all of its
obligations hereunder, and this Amendment and the Capital Expenditures Note have
been duly executed and delivered by the Borrower and constitute the legal, valid
and binding obligation of the Borrower, enforceable in accordance with its
terms.
(b) The execution, delivery and performance by the Borrower of this
Amendment and the Capital Expenditures Note have been duly authorized by all
necessary corporate action and do not (i) require any authorization, consent or
approval by any governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any law,
rule or regulation or of any order, writ, injunction or decree presently in
effect, having applicability to the Borrower, or the articles of incorporation
or by-laws of the Borrower, or (iii) result in a breach of or constitute a
default under any indenture or loan or credit agreement or any other agreement,
lease or instrument to which the Borrower is a party or by which it or its
properties may be bound or affected.
(c) All of the representations and warranties contained in Article V
of the Credit Agreement are correct on and as of the date hereof as though made
on and as of such date, except to the extent that such representations and
warranties relate solely to an earlier date.
7. REFERENCES. All references in the Credit Agreement to "this Agreement"
shall be deemed to refer to the Credit Agreement as amended hereby; and any and
all references in the Security Documents to the Credit Agreement shall be deemed
to refer to the Credit Agreement as amended hereby.
8. NO WAIVER. The execution of this Amendment and acceptance of the Capital
Expenditures Note and any documents related hereto shall not be deemed to be a
waiver of any Default or Event of Default or Default Period under the Credit
Agreement or breach, default or event of default under any Security Document or
other document held by the Lender, whether or not known to the Lender and
whether or not existing on the date of this Amendment.
9. RELEASE. The Borrower, and each Guarantor by signing the Acknowledgment
and Agreement of Guarantor set forth below, each hereby absolutely and
unconditionally releases and forever discharges the Lender, and any and all
participants, parent corporations, subsidiary corporations, affiliated
11
<PAGE>
corporations, insurers, indemnitors, successors and assigns thereof, together
with all of the present and former directors, officers, agents and employees of
any of the foregoing, from any and all claims, demands or causes of action of
any kind, nature or description, whether arising in law or equity or upon
contract or tort or under any state or federal law or otherwise, which the
Borrower or such Guarantor has had, now has or has made claim to have against
any such person for or by reason of any act, omission, matter, cause or thing
whatsoever arising from the beginning of time to and including the date of this
Amendment, whether such claims, demands and causes of action are matured or
unmatured or known or unknown.
10. COSTS AND EXPENSES. The Borrower hereby reaffirms its agreement under
the Credit Agreement to pay or reimburse the Lender on demand for all costs and
expenses incurred by the Lender in connection with the Credit Agreement, the
Security Documents and all other documents contemplated thereby, including
without limitation all reasonable fees and disbursements of legal counsel.
Without limiting the generality of the foregoing, the Borrower specifically
agrees to pay all fees and disbursements of counsel to the Lender for the
services performed by such counsel in connection with the preparation of this
Amendment and the documents and instruments incidental hereto. The Borrower
hereby agrees that the Lender may, at any time or from time to time in its sole
discretion and without further authorization by the Borrower, make a loan to the
Borrower under the Credit Agreement, or apply the proceeds of any loan, for the
purpose of paying any such fees, disbursements, costs and expenses and the fees
required under Paragraph 4 hereof.
11. MISCELLANEOUS. This Amendment and the Acknowledgment and Agreement of
Guarantors may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed an original and all of which
counterparts, taken together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first written above.
WELLS FARGO BUSINESS CREDIT, INC.
By /s/ Clifton Moschnik
------------------------------------
Its Assistant Vice President
FM PRECISION GOLF MANUFACTURING CORP.,
a Delaware corporation
By /s/ Thomas Schneider
------------------------------------
Its President
FM PRECISION GOLF SALES CORP.,
a Delaware corporation
By /s/ Thomas Schneider
------------------------------------
Its President
12
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR
The undersigned, a guarantor of the indebtedness of FM Precision Golf
Manufacturing Corp., and FM Precision Golf Sales Corp., each Delaware
corporations (collectively, jointly and severally, the "Borrowers") to Wells
Fargo Business Credit, Inc., formerly known as Norwest Business Credit, Inc.
(the "Lender") pursuant to a Guaranty dated as of October 9, 1998 (the
"Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii)
consents to the terms (including without limitation the release set forth in
paragraph 9 of the Amendment) and execution thereof; (iii) reaffirms its
obligations to the Lender pursuant to the terms of its Guaranty; and (iv)
acknowledges that the Lender may amend, restate, extend, renew or otherwise
modify the Credit Agreement and any indebtedness or agreement of the Borrower,
or enter into any agreement or extend additional or other credit accommodations,
without notifying or obtaining the consent of the undersigned and without
impairing the liability of the undersigned under the Guaranty for all of the
Borrowers' present and future indebtedness to the Lender.
ROYAL PRECISION, INC.,
a Delaware corporation
By /s/ Thomas Schneider
------------------------------------
Its President
13
<PAGE>
EXHIBIT B-2
CAPITAL EXPENDITURES NOTE
$400,000.00 Phoenix, Arizona
____________, 2000
For value received, the undersigned, FM PRECISION GOLF MANUFACTURING CORP.,
a Delaware corporation, and FM PRECISION GOLF SALES CORP., a Delaware
corporation (collectively, jointly and severally, "Borrower"), hereby jointly
and severally promise to pay on the Termination Date under the Credit Agreement
(defined below), to the order of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota
corporation (the "Lender"), at its main office in Phoenix, Arizona, or at any
other place designated at any time by the holder hereof, in lawful money of the
United States of America and in immediately available funds, the principal sum
of FOUR HUNDRED THOUSAND DOLLARS ($400,000.00) or, if less, the aggregate unpaid
principal amount of all Capital Expenditures Advances made by the Lender to the
Borrower under the Credit Agreement (defined below) together with interest on
the principal amount hereunder remaining unpaid from time to time, computed on
the basis of the actual number of days elapsed and a 360-day year, from the date
hereof until this Note is fully paid at the rate from time to time in effect
under the Credit and Security Agreement dated October 9, 1998, as amended from
time to time (as the same may hereafter be further amended, supplemented or
restated from time to time, the "Credit Agreement") by and between the Lender
and the Borrower. The principal hereof and interest accruing thereon shall be
due and payable as provided in the Credit Agreement. This Note may be prepaid
only in accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Capital Expenditures Note referred to in the Credit Agreement. This Note is
secured, among other things, pursuant to the Credit Agreement and the Security
Documents as therein defined, and may now or hereafter be secured by one or more
other security agreements, mortgages, deeds of trust, assignments or other
instruments or agreements.
Both entities constituting the Borrower hereby jointly and severally agree
to pay all costs of collection, including attorneys' fees and legal expenses in
the event this Note is not paid when due, whether or not legal proceedings are
commenced.
14
<PAGE>
Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.
FM PRECISION GOLF MANUFACTURING CORP.,
a Delaware corporation
By
------------------------------------
Its
--------------------------------
FM PRECISION GOLF SALES CORP.,
a Delaware corporation
By
------------------------------------
Its
--------------------------------
15
FOURTH AMENDMENT TO AMENDED AND RESTATED
CREDIT AND SECURITY AGREEMENT
This Amendment, dated as of March 24, 2000, is made by and between ROYAL
GRIP, INC., a Nevada corporation, and ROYAL GRIP HEADWEAR COMPANY, a Nevada
corporation (collectively, jointly and severally, the "Borrower"), and WELLS
FARGO BUSINESS CREDIT, INC., a Minnesota corporation, formerly known as Norwest
Business Credit, Inc. (the "Lender").
Recitals
The Borrower and the Lender have entered into that certain Amended and
Restated Credit and Security Agreement dated as of October 9, 1998, as amended
by that certain Amendment to an Amended and Restated Credit and Security
Agreement and Waiver of Defaults dated March 16, 1999, as amended by that
certain Second Amendment to Amended and Restated Credit and Security Agreement
and Waiver of Defaults dated April 14, 1999 as amended by that certain Third
Amendment to Credit and Security Agreement dated November 10, 1999
(collectively, the "Credit Agreement"). Capitalized terms used in these recitals
have the meanings given to them in the Credit Agreement unless otherwise
specified.
The Borrower has requested that certain amendments be made to the Credit
Agreement, which the Lender is willing to make pursuant to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. DEFINED TERMS. Capitalized terms used in this Amendment which are
defined in the Credit Agreement shall have the same meanings as defined therein,
unless otherwise defined herein.
2. AMENDMENTS. The Credit Agreement is hereby amended as follows:
(a) The definition of "Debt Service Coverage Ratio" contained in
Section 1.1 of the Credit Agreement is hereby deleted and replaced as
follows:
"Debt Service Coverage Ratio" means the ratio of (i) the sum of
(A) Funds from Operations plus (estimated taxes less cash tax
payments) plus (B) Interest Expense minus (C) unfinanced portion
of Capital Expenditures to (ii) the sum of (A) Current Maturities
of Long Term Debt (actually paid during the period) plus (B)
Interest Expense.
(b) Section 6.12 of the Credit Agreement is hereby deleted and
replaced as follows:
DEBT SERVICE COVERAGE RATIO. The Borrower covenants that Royal
Grip and Royal Headwear and the Covenant Entities shall, as of
1
<PAGE>
the last day of each fiscal quarter, on and after February 29,
2000, maintain a consolidated average minimum debt service
coverage ratio (based upon the period set forth below) as
follows:
Quarter Ending Debt Service Coverage Ratio
-------------- ---------------------------
February 29, 2000 .15 to 1 based upon the immediately
preceding nine month period
May 31, 2000 .50 to 1 based upon the immediately
preceding twelve month period
August 31, 2000 .75 to 1 based upon the immediately
preceding three month period
November 30, 2000 .50 to 1 based upon the immediately
preceding six month period
February 28, 2001 .50 to 1 based upon the immediately
preceding nine month period
May 31, 2001 1.0 to 1 based upon the immediately
preceding twelve month period
August 31, 2001 and each 1.0 to 1 based upon the immediately
August 31 thereafter preceding three month period
November 30, 2001 and .75 to 1 based upon the immediately
each November 30 preceding six month period
thereafter
February 28, 2002 and .75 to 1 based upon the immediately
each February 28 preceding nine month period
thereafter
May 31, 2002 and each 1.05 to 1 based upon the immediately
May 31 thereafter preceding twelve month period
(c) Section 7.10 of the Credit Agreement is hereby deleted and
replaced as follows:
2
<PAGE>
Capital Expenditures. During each fiscal year, Royal Grip, Royal
Headwear and the Covenant Entities will not incur or contract to
incur Capital Expenditures in the aggregate of more than
$2,000,000.00. In addition, Royal Grip, Royal Headwear and the
Covenant Entities will not incur or contract to incur Capital
Expenditures paid with working capital in the aggregate of more
than $1,900,000.00 during Borrower's 2000 fiscal year or
$1,250,000.00 during any fiscal year thereafter.
3. No Other Changes. Except as explicitly amended by this Amendment, all of
the terms and conditions of the Credit Agreement shall remain in full force and
effect and shall apply to any advance or letter of credit thereunder.
4. Conditions Precedent. This Amendment shall be effective when the Lender
shall have received an executed original hereof, together with each of the
following, each in substance and form acceptable to the Lender in its sole
discretion:
(a) The Acknowledgment and Agreement of Guarantor set forth at the end
of this Amendment, duly executed by the Guarantor.
(b) A Certificate of the Secretary of the Borrower certifying as to
(i) the resolutions of the board of directors of the Borrower
approving the execution and delivery of this Amendment, (ii) the fact
that the articles of incorporation and bylaws of the Borrower, which
were certified and delivered to the Lender pursuant to the Certificate
of Authority of the Borrower's secretary or assistant secretary dated
as of October 9, 1998 in connection with the execution and delivery of
the Credit Agreement continue in full force and effect and have not
been amended or otherwise modified except as set forth in the
Certificate to be delivered, and (iii) certifying that the officers
and agents of the Borrower who have been certified to the Lender,
pursuant to the Certificate of Authority of the Borrower's secretary
or assistant secretary dated as of October 9, 1998, as being
authorized to sign and to act on behalf of the Borrower continue to be
so authorized or setting forth the sample signatures of each of the
officers and agents of the Borrower authorized to execute and deliver
this Amendment and all other documents, agreements and certificates on
behalf of the Borrower.
(c) An opinion of the Borrower's counsel as to the matters set forth
in paragraphs 5(a) and 5(b) hereof and as to such other matters as the
Lender shall require.
(d) Such other matters as the Lender may require.
5. Representations and Warranties. The Borrower hereby represents and
warrants to the Lender as follows:
(a) The Borrower has all requisite power and authority to execute this
Amendment and to perform all of its obligations hereunder, and this
Amendment has been duly executed and delivered by the Borrower and
constitutes the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
3
<PAGE>
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate action
and do not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of
any law, rule or regulation or of any order, writ, injunction or
decree presently in effect, having applicability to the Borrower, or
the articles of incorporation or by-laws of the Borrower, or (iii)
result in a breach of or constitute a default under any indenture or
loan or credit agreement or any other agreement, lease or instrument
to which the Borrower is a party or by which it or its properties may
be bound or affected.
(c) All of the representations and warranties contained in Article V
of the Credit Agreement are correct on and as of the date hereof as
though made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date.
6. References. All references in the Credit Agreement to "this Agreement"
shall be deemed to refer to the Credit Agreement as amended hereby; and any and
all references in the Security Documents to the Credit Agreement shall be deemed
to refer to the Credit Agreement as amended hereby.
7. No Waiver. The execution of this Amendment and acceptance of any
documents related hereto shall not be deemed to be a waiver of any Default or
Event of Default or Default Period under the Credit Agreement or breach, default
or event of default under any Security Document or other document held by the
Lender, whether or not known to the Lender and whether or not existing on the
date of this Amendment.
8. Release. The Borrower, and each Guarantor by signing the Acknowledgment
and Agreement of Guarantor set forth below, each hereby absolutely and
unconditionally releases and forever discharges the Lender, and any and all
participants, parent corporations, subsidiary corporations, affiliated
corporations, insurers, indemnitors, successors and assigns thereof, together
with all of the present and former directors, officers, agents and employees of
any of the foregoing, from any and all claims, demands or causes of action of
any kind, nature or description, whether arising in law or equity or upon
contract or tort or under any state or federal law or otherwise, which the
Borrower or such Guarantor has had, now has or has made claim to have against
any such person for or by reason of any act, omission, matter, cause or thing
whatsoever arising from the beginning of time to and including the date of this
Amendment, whether such claims, demands and causes of action are matured or
unmatured or known or unknown.
9. Costs and Expenses. The Borrower hereby reaffirms its agreement under
the Credit Agreement to pay or reimburse the Lender on demand for all costs and
expenses incurred by the Lender in connection with the Credit Agreement, the
Security Documents and all other documents contemplated thereby, including
without limitation all reasonable fees and disbursements of legal counsel.
Without limiting the generality of the foregoing, the Borrower specifically
agrees to pay all fees and disbursements of counsel to the Lender for the
services performed by such counsel in connection with the preparation of this
Amendment and the documents and instruments incidental hereto. The Borrower
hereby agrees that the Lender may, at any time or from time to time in its sole
discretion and without further authorization by the Borrower, make a loan to the
Borrower under the Credit Agreement, or apply the proceeds of any loan, for the
purpose of paying any such fees, disbursements, costs and expenses.
4
<PAGE>
10. Miscellaneous. This Amendment and the Acknowledgment and Agreement of
Guarantors may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed an original and all of which
counterparts, taken together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first written above.
WELLS FARGO BUSINESS CREDIT, INC.
By /s/ Clifton Moschnik
-------------------------------------
Its Assistant Vice President
-------------------------------------
ROYAL GRIP, INC., a Nevada corporation
By /s/ Thomas Schneider
-------------------------------------
Its President
-------------------------------------
ROYAL GRIP HEADWEAR COMPANY,
a Nevada corporation
By /s/ Thomas Schneider
-------------------------------------
Its President
-------------------------------------
5
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR
The undersigned, a guarantor of the indebtedness of Royal Grip, Inc., and
Royal Grip Headwear, each Nevada corporations (collectively, jointly and
severally, the "Borrowers") to Wells Fargo Business Credit, Inc., formerly known
as Norwest Business Credit, Inc. (the "Lender") pursuant to a Guaranty dated as
of October 9, 1998 (the "Guaranty"), hereby (i) acknowledges receipt of the
foregoing Amendment; (ii) consents to the terms (including without limitation
the release set forth in paragraph 8 of the Amendment) and execution thereof;
(iii) reaffirms its obligations to the Lender pursuant to the terms of its
Guaranty; and (iv) acknowledges that the Lender may amend, restate, extend,
renew or otherwise modify the Credit Agreement and any indebtedness or agreement
of the Borrower, or enter into any agreement or extend additional or other
credit accommodations, without notifying or obtaining the consent of the
undersigned and without impairing the liability of the undersigned under the
Guaranty for all of the Borrowers' present and future indebtedness to the
Lender.
ROYAL PRECISION, INC.,
a Delaware corporation
By /s/ Thomas Schneider
-------------------------------------
Its President
-------------------------------------
6
<TABLE> <S> <C>
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