U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended August 31, 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 October 6, 2000
------------------- -------------------------------
Common Stock, par value $0.001 5,678,956 Shares
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROYAL PRECISION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
2000 2000
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 470 $ 36
Accounts receivable, net of allowance for
doubtful accounts of $313 at August 31, 2000
and $274 at May 31, 2000, respectively 3,031 5,100
Inventories 5,688 5,124
Other current assets 96 155
Deferred income taxes 104 106
-------- --------
Total current assets 9,389 10,521
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 123 123
Furniture, fixtures and office equipment 546 455
Buildings and improvements 920 840
Machinery and equipment 4,414 4,278
Equipment held for sale 500 500
Construction in progress 1,102 1,081
-------- --------
7,605 7,277
Less - Accumulated depreciation (1,388) (1,264)
-------- --------
6,217 6,013
-------- --------
GOODWILL, net 7,519 7,629
-------- --------
DEFERRED INCOME TAXES 701 701
-------- --------
OTHER ASSETS 73 78
-------- --------
Total assets $ 23,899 $ 24,942
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations $ 906 $ 906
Accounts payable 1,248 1,714
Accrued salaries and benefits 704 1,290
Accrued pension liability 206 176
Other accrued expenses 715 417
-------- --------
Total current liabilities 3,779 4,503
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, net of current portion 5,575 6,027
-------- --------
Total liabilities 9,354 10,530
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 1,000,000 shares authorized;
no shares issued -- --
Common stock, $0.001 par value; 10,000,000 shares authorized;
5,678,956 shares issued and outstanding at August 31, 2000 and May 31, 2000 6 6
Additional paid-in capital 13,968 13,940
Retained earnings 571 466
-------- --------
Total stockholders' equity 14,545 14,412
-------- --------
Total liabilities and stockholders' equity $ 23,899 $ 24,942
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
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<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(dollars in thousands, except per share amounts)
THREE MONTHS ENDED
-------------------------
AUGUST 31, AUGUST 31,
2000 1999
---------- ----------
NET SALES:
Golf club shafts $ 5,807 $ 5,313
Golf club grips 1,171 1,246
---------- ----------
6,978 6,559
---------- ----------
COST OF SALES:
Golf club shafts 3,749 3,246
Golf club grips 822 866
---------- ----------
4,571 4,112
---------- ----------
Gross profit 2,407 2,447
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,997 1,640
AMORTIZATION OF GOODWILL 110 121
---------- ----------
Operating income 300 686
INTEREST EXPENSE 178 151
OTHER INCOME 87 55
---------- ----------
Income before provision for income taxes 209 590
PROVISION FOR INCOME TAXES 104 296
---------- ----------
Net income $ 105 $ 294
========== ==========
BASIC AND DILUTED EARNINGS PER SHARE $ 0.02 $ 0.05
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED
TO COMPUTE PER SHARE INFORMATION:
BASIC 5,678,956 5,667,555
========== ==========
DILUTED 5,861,306 5,805,795
========== ==========
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
(dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
AUGUST 31, AUGUST 31,
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 105 $ 294
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 250 304
(Gain) loss on retirement or sale of fixed assets (3) 7
Stock based compensation 28 --
Changes in operating assets and liabilities:
Accounts receivable, net 2,069 2,340
Inventories (564) (711)
Other assets 66 207
Accounts payable and accrued expenses (724) (596)
------- -------
Net cash provided by operating activities 1,227 1,845
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of machinery and equipment (371) (546)
Proceeds from sale of fixed assets 30 --
------- -------
Net cash used in investing activities (341) (546)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under lines-of-credit, net (225) (1,036)
Repayments of long-term debt and capital lease obligations (227) (399)
------- -------
Net cash used in financing activities (452) (1,435)
------- -------
INCREASE (DECREASE) IN CASH 434 (136)
CASH, beginning of period 36 184
------- -------
CASH, end of period $ 470 $ 48
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest $ 177 $ 204
======= =======
Income taxes $ 1 $ 31
======= =======
</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
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, 2000 included in the Company's Form 10-K. 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.
BUSINESS --
RP is a holding company which carries on its business operations through
its subsidiaries. The Company designs, manufactures and distributes steel
golf club shafts and designs and distributes golf club grips and graphite
golf club shafts for sale to original equipment manufacturers ("OEMs") and
to distributors and retailers for use in the replacement market. The
Company's products are sold throughout the United States as well as
internationally, primarily in Japan, Australia, the United Kingdom and
Canada.
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 PER SHARE:
The Company accounts for earnings per share in accordance with SFAS No.
128, "Earnings Per Share." Basic earnings per share are based on the
average number of common shares outstanding during the period. Diluted
earnings 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 earnings per share for the three months
ended August 31, 2000 and August 31, 1999 were as follows (in thousands):
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<PAGE>
THREE MONTHS ENDED
----------------------
AUGUST 31, AUGUST 31,
2000 1999
----- -----
Basic:
Average common shares outstanding 5,679 5,668
Diluted:
Dilutive effect of stock options 182 138
----- -----
Average common shares outstanding 5,861 5,806
===== =====
3. NEW ACCOUNTING PRONOUNCEMENTS:
During March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25" ("FIN 44"), which
among other issues, addresses repricing and other modifications made to
previously issued stock options. The Company adopted FIN 44 during the
quarter ended August 31, 2000. As of August 31, 2000, there were
outstanding options to purchase 170,583 shares at an exercise price of
$3.19 per share which are subject to variable plan accounting until they
are exercised or expire in January 2004. No compensation costs were
recognized during the quarter ended August 31, 2000 related to these
options.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," which was subsequently updated by SAB 101B. SAB 101
summarizes certain of the SEC's views in applying accounting principles
generally accepted in the United States to revenue recognition in financial
statements. The Company is required to adopt SAB 101 no later than the
fourth quarter of its fiscal year ending May 31, 2001. The Company is
currently evaluating the impact of the adoption of SAB 101 on its results
of operations and financial position.
In July 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees
and Costs" ("EITF No. 00-10"). When adopted, EITF No. 00-10 requires that
all amounts billed to customers in sale transactions related to shipping
and handling be classified as revenue. In addition, EITF No. 00-10 requires
that shipping and handling fees and costs in financial statements for prior
periods presented for comparative purposes be reclassified. EITF No. 00-10
must be adopted prior to, or concurrent with, the adoption of SAB 101. The
Company has elected to early adopt EITF No. 00-10 during its quarter ended
August 31, 2000. As such, the condensed consolidated statement of
operations for the three months ended August 31, 1999 has been restated to
reflect the adoption of EITF No. 00-10.
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133 (as amended by SFAS No. 138), "Accounting for Derivative
Instruments and Hedging Activities," which requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. In June
1999, the FASB issued SFAS No. 137 which deferred the effective date of
SFAS No. 133. The Company will be required to adopt SFAS No. 133 during the
fiscal year ending May 31, 2002. The Company does not anticipate any
material impact resulting from the adoption of SFAS No. 133.
4. INVENTORIES:
Inventories are valued at the lower of cost or market. Cost is determined
on the first-in, first-out method. Inventories as of August 31, 2000 and
May 31, 2000 consisted of the following (in thousands):
AUGUST 31, 2000 MAY 31, 2000
--------------- ------------
Raw materials $ 495 $ 525
Work-in-process 2,255 1,655
Finished goods 2,938 2,944
------ ------
$5,688 $5,124
====== ======
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<PAGE>
5. BORROWING ARRANGEMENTS:
FMP has a credit facility consisting of a term loan and a revolving
line-of-credit. The FMP term loan of $2.5 million at August 31, 2000 is due
in monthly principal installments of $65,000 until its maturity in
September 2002. The amount available for borrowings under the revolving
line-of-credit is based upon the levels of eligible FMP accounts receivable
and inventories, as defined, subject to a maximum borrowing of $4.5
million. As of August 31, 2000, FMP had $3.3 million outstanding under its
revolving line-of-credit and $0.6 million available for additional
borrowings. The FMP line-of-credit expires in September 2002.
RG has a credit facility consisting of a term loan and a revolving
line-of-credit. The RG term loan of $0.4 million at August 31, 2000 is due
in monthly principal installments of $10,500 until its maturity in
September 2002. The amount available for borrowings under the revolving
line-of-credit is based upon the levels of eligible RG accounts receivable
and inventories, as defined, subject to a maximum borrowing of $1.5
million. As of August 31, 2000, RG had $0.3 million outstanding under its
revolving line-of-credit and $0.5 million available for additional
borrowings. The RG line-of-credit expires in September 2002.
Borrowings under the term loans and revolving lines-of-credit of both
credit facilities bear interest at a rate per annum equal to the prime rate
(9.5% at August 31, 2000) plus 0.75% and 0.25%, respectively, and are
secured by substantially all of the Company's assets.
The FMP and RG credit facilities contain certain financial and other
covenants which, among other things, limit annual capital expenditures and
dividends and require the maintenance of minimum monthly and quarterly
earnings and minimum quarterly debt service coverage ratios, as defined.
The Company was in compliance with all financial loan covenants at August
31, 2000.
6. INFORMATION ON SEGMENTS:
The Company has two reportable segments: 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-K
for the fiscal year ended May 31, 2000. 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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, 2000
-------------------------------------
GOLF CLUB GOLF CLUB
SHAFTS GRIPS TOTAL
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 5,807 $ 1,171 $ 6,978
Operating income 239 61 300
Depreciation and amortization 128 122 250
Total assets for reportable segments $ 12,925 $ 16,990 $ 29,915
Elimination of investment in subsidiaries (6,016)
--------
Consolidated total assets $ 23,899
========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, 1999
-------------------------------------
GOLF CLUB GOLF CLUB
SHAFTS GRIPS TOTAL
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 5,313 $ 1,246 $ 6,559
Operating income 603 83 686
Depreciation and amortization 87 217 304
Total assets for reportable segments $ 10,922 $ 18,144 $ 29,066
Elimination of investment in subsidiaries (6,193)
--------
Consolidated total assets $ 22,873
========
</TABLE>
7. ENVIRONMENTAL MATTERS:
In May 1996, the Company acquired substantially all the assets of the golf
club shaft manufacturing business of Brunswick Corporation (the "Brunswick
Acquisition"). Included in the acquired assets were land, buildings and
equipment at the Company's Torrington, Connecticut manufacturing facility
(the "FMP plant"). In conjunction with the Brunswick Acquisition, Brunswick
Corporation agreed to indemnify the Company from potential liability
arising from certain environmental matters and to remediate certain
environmental conditions which existed at the FMP plant on the date of
acquisition. Brunswick Corporation has engaged an environmental consulting
firm to perform testing at the FMP plant and is in the process of
developing a plan of remediation. Failure of Brunswick Corporation to
fulfill its obligations under the asset purchase contract could have a
material adverse effect on the Company's financial condition and results of
operations.
The Company received a notice of violation ("NOV") from the State of
Connecticut Department of Environmental Protection ("DEP") alleging
violation of certain provisions of a permit related to the discharge of
treated wastewater at the FMP plant. This permit was issued to the Company
in February 1997 based on an application prepared by Brunswick Corporation
in April 1996. In April 2000, the Company reached a settlement agreement
with DEP discharging the Company from any civil liability with respect to
the allegations in the NOV, subject to completion and approval of certain
remedial measures at the FMP plant. The Company incurred approximately $0.2
million in capital expenditure to complete these remedial measures during
the fiscal year ended May 31, 2000 and, in June 2000, obtained a
certification from DEP that the work was satisfactorily completed. The
Company is seeking reimbursement from Brunswick Corporation for the cost of
remediation and legal fees incurred in conjunction with this matter.
In April 2000, the Company received a request for information from the U.S.
Environmental Protection Agency ("EPA") related to disposal and treatment
of waste materials from the FMP plant during a period from 1982 to 1997.
The EPA is currently conducting an investigation regarding the former
National Oil Services, Inc. Superfund site in West Haven, Connecticut.
National Oil Services, Inc. was, prior to its bankruptcy, a contractor used
by the Company and Brunswick Corporation to treat and dispose of
non-hazardous waste oils from the FMP plant. EPA has not issued any demands
for reimbursement or performance of work from the Company relating to this
matter and there is not sufficient information at this time to determine
what, if any, action EPA may pursue and what, if any, effect it may have on
the Company's financial condition and results of operations.
8. ACQUISITION LETTER OF INTENT:
On September 18, 2000, the Company signed a letter of intent to acquire PH
Group Inc. ("PHG"), a manufacturer of hydraulic presses and injection
molding machines. Under the terms of the transaction, PHG shareholders
would receive $1.00 worth of Royal Precision, Inc. common stock for each
share of PHG common stock they own. The proposed acquisition is subject to
a number of conditions including the execution and delivery of definitive
agreements acceptable to both parties, approval of the boards of the
Company and PHG, and the approval of PHG shareholders. In connection with
the execution of the letter of intent, PHG granted the Company an option to
acquire 500,000 shares of PHG common stock at an exercise price of $0.50
per share.
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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 has made forward-looking statements
within the meaning of the Litigation Reform Act in this Form 10-Q which reflect
the Company'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, the Company's dependence on discretionary consumer spending,
customer concentration and their plans and commitments, the Company's cost and
available supply of raw materials, the competitive environment in which the
Company operates, the timeliness and market acceptance of the Company's new
product introductions, the Company's limited operating history, the Company's
ability to protect its intellectual property rights, seasonality of sales,
fluctuations in operating results, and changes in the financial markets relating
to the Company'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 the Company's Form 10-K for the fiscal year ended May
31, 2000 (refer to Exhibit 99.1 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.
The Company designs, manufactures and distributes steel golf club shafts and
designs and distributes golf club grips and graphite golf club shafts for sale
to original equipment manufacturers ("OEMs") and to distributors and retailers
for use in the replacement market. The Company's products are sold throughout
the United States as well as internationally, primarily in Japan, Australia, the
United Kingdom and Canada.
The Company principally operates in the golf equipment industry which has
historically been seasonal in nature with consumer demand for product being the
strongest during the spring and summer months.
THREE MONTHS ENDED AUGUST 31, 2000 COMPARED TO THE THREE MONTHS ENDED AUGUST 31,
1999--
NET SALES. Net sales for the three months ended August 31, 2000 were $7.0
million, an increase of $0.4 million or 6% over net sales of $6.6 million during
the corresponding period in 1999. Net sales of golf club shafts increased by
$0.5 million or 9% and net sales of golf club grips were consistent at $1.2
million.
COST OF SALES. Cost of goods sold for the three months ended August 31, 2000 was
$4.6 million, an increase of $0.5 million or 11% over cost of goods sold of $4.1
million during the corresponding period in 1999. The cost of golf club shafts
sold increased by $0.5 million or 16% as a result of higher total net sales and
a change in the mix of products sold during the two periods. The cost of golf
club grips sold was consistent at $822,000 and $866,000 during the three-month
periods ended August 31, 2000 and 1999, respectively.
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<PAGE>
GROSS PROFIT. Gross profit for the three months ended August 31, 2000 and 1999
was consistent at $2.4 million. Gross profit from sales of golf club shafts was
consistent at $2.1 million. As a percentage of sales, the gross profit on sales
of golf club shafts decreased from 39% to 35% due principally to the mix of
products sold during the two periods. Sales of a pro grade shaft, which is not
subject to the Company's Frequency Coefficient Matching ("FCM") technology, and
is sold at a lower price and a lower profit margin than the Company's other pro
grade products totaled approximately $1.0 million, or 18% of total shaft sales
during the three months ended August 31, 2000. Sales of this product during the
corresponding period in 1999 were approximately $0.4 million, or 7% of total
shaft sales. Gross profit from sales of golf club grips was consistent at
$349,000 and $380,000 during the three-month periods ended August 31, 2000 and
1999, respectively. As a percentage of sales, the gross profit on sales of golf
club grips was consistent at 30%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended August 31, 2000 were $2.0
million, an increase of 22% over selling, general and administrative expenses of
$1.6 million during the corresponding period in 1999. The $357,000 increase is
primarily due to costs associated with a television commercial advertising
campaign which commenced in January 2000. Costs of purchased airtime and
development of commercials totaled approximately $219,000 during the three
months ended August 31, 2000 compared to $0 during the corresponding period in
1999.
AMORTIZATION OF GOODWILL. Amortization of goodwill was consistent at $0.1
million during the three-month periods ended August 31, 2000 and 1999.
INTEREST EXPENSE. Interest expense increased from $151,000 during the three
months ended August 31, 1999 to $178,000 during the three months ended August
31, 2000 primarily due to a 1.25% increase in the prime lending rate.
OTHER INCOME. Other income of $87,000 and $55,000 for the three months ended
August 31, 2000 and 1999, respectively, is principally comprised of royalties
earned on sales of headwear products as well as royalty fees from other
contracts which license certain Company technology and products.
PROVISION FOR INCOME TAXES. Provisions of $0.1 million and $0.3 million were
recorded for income taxes during the three-month periods ended August 31, 2000
and 1999, respectively. Taxes are provided based on the estimated effective tax
rate for the year which considers the effect of nondeductible goodwill
amortization.
LIQUIDITY AND CAPITAL RESOURCES--
At August 31, 2000, RP had working capital of $5.6 million and a current ratio
of 2.5 to 1 as compared to working capital of $6.0 million and a current ratio
of 2.3 to 1 at May 31, 2000.
FMP has a credit facility consisting of a term loan and a revolving
line-of-credit. The FMP term loan of $2.5 million at August 31, 2000 is due in
monthly principal installments of $65,000 until its maturity in September 2002.
The amount available for borrowings under the revolving line-of-credit is based
upon the levels of eligible FMP accounts receivable and inventories, as defined,
subject to a maximum borrowing of $4.5 million. As of August 31, 2000, FMP had
$3.3 million outstanding under its revolving line-of-credit and $0.6 million
available for additional borrowings. The FMP line-of-credit expires in September
2002.
RG has a credit facility consisting of a term loan and a revolving
line-of-credit. The RG term loan of $0.4 million at August 31, 2000 is due in
monthly principal installments of $10,500 until its maturity in September 2002.
The amount available for borrowings under the revolving line-of-credit is based
upon the levels of eligible RG accounts receivable and inventories, as defined,
subject to a maximum borrowing of $1.5 million. As of August 31, 2000, RG had
$0.3 million outstanding under its revolving line-of-credit and $0.5 million
available for additional borrowings. The RG line-of-credit expires in September
2002.
Borrowings under the term loans and revolving lines-of-credit of both credit
facilities bear interest at a rate per annum equal to the prime rate (9.5% at
August 31, 2000) plus 0.75% and 0.25%, respectively, and are secured by
substantially all of the Company's assets.
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<PAGE>
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 and minimum
quarterly debt service coverage ratios, as defined. The Company was in
compliance with all financial loan covenants at August 31, 2000.
The Company believes that its existing capital resources and credit lines
available are sufficient to fund its operations and capital requirements of
current business segments as presently planned over the next twelve months.
During the three months ended August 31, 2000, net cash provided by operating
activities was $1.2 million which primarily resulted from net income of $0.1
million, depreciation and amortization of $0.3 million and a net collection of
accounts receivable of $2.1 million. Cash provided by operating activities was
reduced by an increase in inventories of $0.6 million and a decrease in accounts
payable and accrued expenses of $0.7 million.
Net cash used in investing activities for the three months ended August 31, 2000
was $0.3 million primarily for the purchase of machinery and equipment. The
Company estimates that capital expenditures for the fiscal year ending May 31,
2001 will be approximately $1.6 million. The Company is assessing its steel golf
club shaft manufacturing capacities compared to the current and anticipated
future volume of customer orders. Based on this assessment and the success of
ongoing projects to increase production volumes, significant future capital
expenditures may be required at the FMP manufacturing facility to increase
production capacity for pro grade steel golf club shafts.
Net cash used in financing activities for the three months ended August 31,
2000, was $0.5 million resulting from repayments of long term debt and capital
lease obligations of $0.2 million and net repayments under lines-of-credit of
$0.2 million. The Company is investigating certain potential acquisitions
including the acquisition of PH Group Inc. (see Note 8). Any potential
acquisitions may require the use of existing capital resources, assumption of
debt or issuance of new debt instruments, any of which could impact the
Company's liquidity and capital resources.
ENVIRONMENTAL MATTERS --
In May 1996, the Company acquired substantially all the assets of the golf club
shaft manufacturing business of Brunswick Corporation (the "Brunswick
Acquisition"). Included in the acquired assets were land, buildings and
equipment at the Company's Torrington, Connecticut manufacturing facility (the
"FMP plant"). In conjunction with the Brunswick Acquisition, Brunswick
Corporation agreed to indemnify the Company from potential liability arising
from certain environmental matters and to remediate certain environmental
conditions which existed at the FMP plant on the date of acquisition. Brunswick
Corporation has engaged an environmental consulting firm to perform testing at
the FMP plant and is in the process of developing a plan of remediation. Failure
of Brunswick Corporation to fulfill its obligations under the asset purchase
contract could have a material adverse effect on the Company's financial
condition and results of operations.
The Company received a notice of violation ("NOV") from the State of Connecticut
Department of Environmental Protection ("DEP") alleging violation of certain
provisions of a permit related to the discharge of treated wastewater at the FMP
plant. This permit was issued to the Company in February 1997 based on an
application prepared by Brunswick Corporation in April 1996. In April 2000, the
Company reached a settlement agreement with DEP discharging the Company from any
civil liability with respect to the allegations in the NOV, subject to
completion and approval of certain remedial measures at the FMP plant. The
Company incurred approximately $0.2 million in capital expenditure to complete
these remedial measures during the fiscal year ended May 31, 2000 and, in June
2000, obtained a certification from DEP that the work was satisfactorily
completed. The Company is seeking reimbursement from Brunswick Corporation for
the cost of remediation and legal fees incurred in conjunction with this matter.
In April 2000, the Company received a request for information from the U.S.
Environmental Protection Agency ("EPA") related to disposal and treatment of
waste materials from the FMP plant during a period from 1982 to 1997. The EPA is
currently conducting an investigation regarding the former National Oil
Services, Inc. Superfund site in West Haven, Connecticut. National Oil Services,
Inc. was, prior to its bankruptcy, a contractor used by the Company and
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Brunswick Corporation to treat and dispose of non-hazardous waste oils from the
FMP plant. EPA has not issued any demands for reimbursement or performance of
work from the Company relating to this matter and there is not sufficient
information at this time to determine what, if any, action EPA may pursue and
what, if any, effect it may have on the Company's financial condition or results
of operations.
ACQUISITION LETTER OF INTENT --
On September 18, 2000, the Company signed a letter of intent to acquire PH Group
Inc. ("PHG"), a manufacturer of hydraulic presses and injection molding
machines. Under the terms of the transaction, PHG shareholders would receive
$1.00 worth of Royal Precision common stock for each share of PHG common stock
they own. The proposed acquisition is subject to a number of conditions
including the execution and delivery of definitive agreements acceptable to both
parties, approval of the boards of the Company and PHG, and the approval of PHG
shareholders. In connection with the execution of the letter of intent, PHG
granted the Company an option to acquire 500,000 shares of PHG common stock at
an exercise price of $0.50 per share.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
COMMODITY INSTRUMENTS.
At August 31, 2000, the Company did not participate in any derivative financial
instruments or other financial and commodity instruments for which fair value
disclosure would be required under Statement of Financial Accounting Standards
No. 107. The Company holds no investment securities that would require
disclosure of market risk.
PRIMARY MARKET RISK EXPOSURE.
The Company's primary market risk exposure relates to its variable rate debt
obligations that are described in note 5 to the condensed consolidated financial
statements. A one- percent change in the prime lending rate would have an effect
of approximately $17,000 on interest expense for the three months ended August
31, 2000.
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 November 2000. The Company has not hedged
this transaction as of August 31, 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. In the matter, R. R. Donnelley & Sons Company ("Donnelley") alleged
that the Company is liable under breach of contract for approximately $280,000
in printing costs arising from the preparation of a Joint Proxy
Statement/Prospectus related to a proposed merger agreement between the Company
and Coyote Sports, Inc. which was terminated prior to the effective date of the
merger. On April 17, 2000, the court granted the Company's motion to dismiss
this suit. On August 14, 2000, a court judgment was signed which provided for
the Company to receive reimbursement from Donnelley for its legal fees related
to the suit. In September 2000, the Company received payment of approximately
$24,000 from Donnelley and on September 14, 2000, the appeal period expired,
bringing a close to this matter.
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.
(a) The annual meeting of stockholders was held on September 26, 2000.
(b) Raymond J. Minella and Danny Edwards were elected as directors, each to
serve a term of three years and Richard P. Johnston was elected as a director to
serve for a term of one year. Other directors whose terms of office continued
after the annual meeting are Charles S. Mechem, Jr., David E. Johnston, and
Thomas A. Schneider.
(c) The only matters voted on at the annual meeting were the election of
directors and approval of an amendment to the Royal Precision Stock Option Plan
to increase the aggregate number of shares in respect to which options may be
granted under the Plan from 750,000 to 1,500,000. Results of the voting were as
follows:
Total number of shares entitled to vote present or represented at the
annual meeting: 3,408,956
Election of Directors:
For Authority Withheld
--- ------------------
Raymond J. Minella 3,342,426 66,530
Danny Edwards 3,342,426 66,530
Richard P. Johnston 3,342,426 66,530
Approval of amendment to Royal Precision, Inc. Stock Option Plan:
For Against Abstain Not Voted
--- ------- ------- ---------
2,630,206 85,652 767 692,331
ITEM 5. OTHER INFORMATION.
None.
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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 Contracts
Exhibit 10.1. Royal Precision, Inc. Stock Option Plan (restated to
reflect amendment adopted by the stockholders on September 26, 2000).
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 August 31, 2000.
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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 October 6, 2000 By /s/ Thomas A. Schneider
-------------------------------------
Thomas A. Schneider, President
(duly authorized officer)
By /s/ Kevin L. Neill
-------------------------------------
Kevin L. Neill, Vice President -
Finance (chief financial 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) (incorporated by reference to Exhibit
3.1 of the Company's Form 10-Q for the quarter ended
November 30, 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 Royal Precision, Inc. Stock Option Plan (restated to
reflect amendment adopted by the stockholders on
September 26, 2000). 17
27. Financial Data Schedule (submitted electronically for
SEC information only). 38
--------
* Incorporated by reference
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