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 November 30, 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 January 11, 2001
------------------- --------------------------------
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>
NOVEMBER 30, MAY 31,
2000 2000
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 94 $ 36
Accounts receivable, net of allowance for doubtful accounts of $299
and $274 at November 30, 2000 and May 31, 2000, respectively 3,133 5,100
Inventories 6,495 5,124
Other current assets 85 155
Deferred income taxes 676 106
-------- --------
Total current assets 10,483 10,521
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 123 123
Furniture, fixtures and office equipment 622 455
Buildings and improvements 920 840
Machinery and equipment 4,685 4,278
Equipment held for sale 140 500
Construction in progress 852 1,081
-------- --------
7,342 7,277
Less - Accumulated depreciation (1,540) (1,264)
-------- --------
5,802 6,013
-------- --------
GOODWILL, net 7,408 7,629
-------- --------
DEFERRED INCOME TAXES 701 701
-------- --------
OTHER ASSETS 80 78
-------- --------
Total assets $ 24,474 $ 24,942
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations $ 7,861 $ 906
Accounts payable 1,951 1,714
Accrued salaries and benefits 595 1,290
Accrued pension liability 122 176
Other accrued expenses 595 417
-------- --------
Total current liabilities 11,124 4,503
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, net of current portion -- 6,027
-------- --------
Total liabilities 11,124 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 November 30, 2000 and May 31, 2000 6 6
Additional paid-in capital 13,975 13,940
Retained earnings (accumulated deficit) (631) 466
-------- --------
Total stockholders' equity 13,350 14,412
-------- --------
Total liabilities and stockholders' equity $ 24,474 $ 24,942
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
2
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
2000 1999 2000 1999
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
NET SALES:
Golf club shafts $ 4,757 $ 5,601 $ 10,564 $ 10,914
Golf club grips 735 842 1,906 2,088
----------- ---------- ----------- ----------
5,492 6,443 12,470 13,002
----------- ---------- ----------- ----------
COST OF SALES:
Golf club shafts 4,203 4,046 7,952 7,292
Golf club grips 649 573 1,471 1,439
----------- ---------- ----------- ----------
4,852 4,619 9,423 8,731
----------- ---------- ----------- ----------
Gross profit 640 1,824 3,047 4,271
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,604 1,475 3,586 3,114
AMORTIZATION OF GOODWILL 111 121 221 243
NONRECURRING EXPENSES 617 10 632 10
----------- ---------- ----------- ----------
Operating income (loss) (1,692) 218 (1,392) 904
INTEREST EXPENSE 185 147 363 298
OTHER EXPENSE 79 -- 79 --
OTHER INCOME 78 55 165 110
----------- ---------- ----------- ----------
Income (loss) before provision for
(benefit from) income taxes (1,878) 126 (1,669) 716
PROVISION FOR (BENEFIT FROM) INCOME TAXES (676) 62 (572) 358
----------- ---------- ----------- ----------
Net income (loss) $ (1,202) $ 64 $ (1,097) $ 358
=========== ========== =========== ==========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
BASIC $ (0.21) $ 0.01 $ (0.19) $ 0.06
=========== ========== =========== ==========
DILUTED $ (0.21) $ 0.01 $ (0.19) $ 0.06
=========== ========== =========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED TO
COMPUTE PER SHARE INFORMATION:
BASIC 5,678,956 5,670,953 5,678,956 5,669,001
=========== ========== =========== ==========
DILUTED 5,678,956 5,795,719 5,678,956 5,798,600
=========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
NOVEMBER 30, NOVEMBER 30,
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,097) $ 358
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 513 603
Deferred income taxes (570) --
(Gain) loss on retirement or sale of fixed assets (3) 7
Stock based compensation 35 --
Write-down of equipment and inventories 954 --
Changes in operating assets and liabilities--
Accounts receivable, net 1,967 1,104
Inventories (1,848) (1,019)
Other assets 68 201
Accounts payable and accrued expenses (334) (252)
------- -------
Net cash provided by (used in) operating activities (315) 1,002
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of machinery and equipment (585) (861)
Proceeds from sale of fixed assets 30 --
------- -------
Net cash used in investing activities (555) (861)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options -- 1
Borrowings under lines-of-credit, net 1,381 482
Repayments of long-term debt and capital lease obligations (453) (746)
------- -------
Net cash provided by (used in) financing activities 928 (263)
------- -------
INCREASE (DECREASE) IN CASH 58 (122)
CASH, beginning of period 36 184
------- -------
CASH, end of period $ 94 $ 62
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest $ 352 $ 316
======= =======
Income taxes $ 1 $ 31
======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 (LOSS) PER SHARE:
The Company accounts for earnings (loss) per share in accordance with the
Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("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. Loss per share for the three and
six month periods ended November 30, 2000 were not affected by 1.3 million
outstanding stock options because their effect was anti-dilutive. The
number of shares used in computing earnings (loss) per share for the three
and six months ended November 30, 2000 and November 30, 1999 were as
follows (in thousands):
5
<PAGE>
THREE MONTHS ENDED
----------------------------
NOVEMBER 30, NOVEMBER 30,
2000 1999
---- ----
Basic:
Average common shares outstanding 5,679 5,671
Diluted:
Dilutive effect of stock options -- 125
----- -----
Average common shares outstanding 5,679 5,796
===== =====
SIX MONTHS ENDED
----------------------------
NOVEMBER 30, NOVEMBER 30,
2000 1999
---- ----
Basic:
Average common shares outstanding 5,679 5,669
Diluted:
Dilutive effect of stock options -- 130
----- -----
Average common shares outstanding 5,679 5,799
===== =====
3. NEW ACCOUNTING PRONOUNCEMENTS:
In March 2000, the FASB issued FASB Interpretation No. 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
November 30, 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 three and six month
periods ended November 30, 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 does not
anticipate any material impact on its results of operations and financial
position resulting from the adoption of SAB 101.
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 statements of
operations for the three and six month periods ended November 30, 1999 have
been reclassified to reflect the adoption of EITF No. 00-10.
In June 1998, the FASB issued SFAS No. 133 (as amended by SFAS No. 138),
"Accounting for Derivative Instruments and Hedging Activities," which
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
6
<PAGE>
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 on June 1, 2001. The Company does not anticipate any
material impact on its results of operations and financial position
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 November 30, 2000 and
May 31, 2000 consisted of the following (in thousands):
NOVEMBER 30, 2000 MAY 31, 2000
----------------- ------------
Raw materials $ 438 $ 525
Work-in-process 1,650 1,655
Finished goods 4,407 2,944
------ ------
$6,495 $5,124
====== ======
During the three months ended November 30, 2000, the Company recorded
write-downs totaling $477,000 to reduce the carrying value of finished
goods inventory to estimated net realizable value. These write-downs are
reflected as a component of cost of sales in the statements of operations
for the three and six month periods ended November 30, 2000. A write-down
of $280,000 was recorded on certain steel golf club shafts including
$98,000 for proprietary product manufactured to the unique specifications
of an OEM customer that recently developed financial difficulties and
$72,000 for steel shafts which the Company had contracted with an outside
vendor to bend for putter applications. The Company recently acquired
manufacturing equipment to bend steel shafts for putters based on customer
specifications and will be undertaking a concerted sales effort to expand
this business in the calendar 2001 golf season. Therefore, the potential
sales value of existing stock inventory of putter shafts has diminished. A
write-down of $130,000 was recorded on certain graphite golf club shafts
manufactured or purchased prior to the development of Rifle Graphite.
Various efforts to sell this inventory at higher prices have been
unsuccessful and the Company believes that the introduction of new product
lines including the Rifle Graphite will continue to diminish the potential
sales value of these items during the calendar 2001 golf season. A
write-down of $67,000 was recorded on golf club grips primarily for product
lines that the Company and its Japanese distributor will discontinue during
the calendar 2001 golf season and for proprietary products developed for an
OEM customer which were recently identified as defective.
5. EQUIPMENT WRITE-DOWN:
During the three months ended November 30, 2000, the Company took efforts
to actively market its equipment held for sale which represents the rubber
injection presses previously used to manufacture golf club grips. A general
decline in the market for rubber molding equipment has recently occurred
due to a slow-down in the automotive manufacturing sector. Responses to the
marketing efforts resulted in offers significantly below book value.
Therefore, an impairment write-down of $360,000 was recorded to reduce the
carrying value of the equipment from $500,000 to $140,000. This write-down
is reflected as a component of nonrecurring expenses in the statements of
operations for the three and six month periods ended November 30, 2000.
During the three months ended November 30, 2000, the Company identified
various projects under development to design and construct tooling for the
manufacture of golf club grips which would not result in a productive
asset. Several of these projects had commenced prior to the termination
date of the Company's exclusive manufacturing supply agreement with
Acushnet Rubber Company. Efforts were undertaken to modify the design of
this tooling so that it could be utilized by the various new manufacturers
which are currently producing the Company's grip inventory. However, it was
recently determined that the equipment utilized by the new manufacturers is
incompatible with the design of the tooling under development. Additional
projects to develop prototype samples for potential customers did not
result in a salable product. Therefore, an expense of $117,000 was recorded
to write-off the accumulated cost related to the various tooling projects.
This item is included as a component of nonrecurring expenses in the
statements of operations for the three and six month periods ended November
30, 2000.
7
<PAGE>
6. BORROWING ARRANGEMENTS:
FMP has a credit facility consisting of a term loan and a revolving
line-of-credit. The FMP term loan of $2.3 million at November 30, 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 November 30, 2000, FMP had $4.5 million outstanding under
its revolving line-of-credit and $0.5 million available for additional
borrowings. The FMP line-of-credit expires in September 2002.
In November 2000, FMP amended its credit facility to provide up to $600,000
of additional borrowing capacity under the revolving line-of-credit
beginning annually on November 1 and continuing through February 28 of the
following year. This available over-advance is reduced to $500,000 each
March 1 and is reduced each month thereafter until it is extinguished each
year on June 1. Because the eligible FMP accounts receivable and
inventories, as defined, were in excess of $5.0 million at November 30,
2000, none of the $600,000 over-advance was available for borrowing as of
that date.
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 November 30, 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 November 30, 2000, RG had $0.7 million outstanding under its
revolving line-of-credit and $0.1 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 November 30, 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.
Due to the substantial loss incurred during the three months ended November
30, 2000, the Company is not in compliance with several financial
covenants. Therefore, all amounts borrowed at November 30, 2000 are
classified as current liabilities in the consolidated balance sheet as of
that date. The Company is currently negotiating with its lender to modify
the FMP and RG credit facilities, to obtain waivers of these covenant
violations and to fund an additional term loan in the amount of $1.0
million. The Company believes that this financing agreement will be
completed during the fiscal quarter ending February 28, 2001.
In December 2000, RP entered into a revolving subordinated promissory note
with the Johnston Family Charitable Remainder Unitrust #3 ("Johnston
Trust"), of which Richard P. Johnston, a director and Chairman of the Board
of the Company, is Trustee. In December 2000, RP borrowed $1.0 million
under this revolving note which represents the maximum available funding
amount. The note bears interest at a fixed annual rate of 13% and is
subordinate to both the FMP and RG bank credit facilities. The Johnston
Trust has an option to convert the indebtedness into RP common stock at an
exchange ratio of $1.00 per share if all outstanding principal and accrued
interest is not repaid in full on or before May 31, 2001, which would
constitute an event of default by RP. The Company anticipates that
additional bank financing will be utilized to retire the indebtedness to
the Johnston Trust prior to May 31, 2001. If the Company is unsuccessful in
obtaining additional bank financing, the Company believes that sufficient
cash flow from operations will be generated to retire the indebtedness to
the Johnston Trust prior to May 31, 2001.
8
<PAGE>
7. 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 NOVEMBER 30, 2000
--------------------------------------------
GOLF CLUB GOLF CLUB
SHAFTS GRIPS TOTAL
------ ----- -----
<S> <C> <C> <C>
Net sales $ 4,757 $ 735 $ 5,492
Operating loss (973) (719) (1,692)
Depreciation and amortization 136 126 262
Total assets for reportable segments $ 13,700 $ 16,754 $ 30,454
Elimination of investment in subsidiaries (5,980)
--------
Consolidated total assets $ 24,474
========
THREE MONTHS ENDED NOVEMBER 30, 1999
--------------------------------------------
GOLF CLUB GOLF CLUB
SHAFTS GRIPS TOTAL
------ ----- -----
Net sales $ 5,601 $ 842 $ 6,443
Operating income (loss) 263 (45) 218
Depreciation and amortization 87 213 300
Total assets for reportable segments $ 12,311 $ 18,262 $ 30,573
Elimination of investment in subsidiaries (6,120)
--------
Consolidated total assets $ 24,453
========
SIX MONTHS ENDED NOVEMBER 30, 2000
--------------------------------------------
GOLF CLUB GOLF CLUB
SHAFTS GRIPS TOTAL
------ ----- -----
Net sales $ 10,564 $ 1,906 $ 12,470
Operating loss (645) (747) (1,392)
Depreciation and amortization 265 248 513
SIX MONTHS ENDED NOVEMBER 30, 1999
--------------------------------------------
GOLF CLUB GOLF CLUB
SHAFTS GRIPS TOTAL
------ ----- -----
Net sales $ 10,914 $ 2,088 $ 13,002
Operating income (loss) 996 (92) 904
Depreciation and amortization 174 429 603
</TABLE>
9
<PAGE>
8. 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 ("Brunswick") 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 has engaged an environmental consulting firm to
perform testing at the FMP plant and is in the process of developing a plan
of remediation. In October 2000, the Company engaged an environmental
consulting firm to assist in the development of a plan of remediation at an
estimated cost of $75,000. This expense is reflected as a component of
nonrecurring expenses in the statements of operations for the three and six
month periods ended November 30, 2000. Failure of Brunswick 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 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 expenditures 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 for the cost of remediation
and legal fees incurred in conjunction with this matter.
In October 2000, the Company received another NOV from the DEP alleging
that various effluent discharge samples during the period from January 2000
to September 2000 were in violation of authorized limits under an existing
permit for the discharge of treated wastewater at the FMP plant. In
December 2000, the Company submitted its response to the NOV. There is not
sufficient information at this time to determine what action, if any, the
DEP may pursue and what effect, if any, it may have on the Company's
financial condition and results of operations.
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 to treat and dispose of non-hazardous waste
oils from the FMP plant. The 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 action, if any, the EPA may pursue and what effect, if any, it may
have on the Company's financial condition and results of operations.
Prior to the Brunswick Acquisition, the FMP plant was listed on the EPA's
Comprehensive Environmental Response and Liability Information System
("CERCLIS"). A contractor for the EPA performed a preliminary assessment of
the FMP plant in January 1992. In June 1992, the site was deferred from the
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<PAGE>
CERCLIS inventory to the EPA's Resource Conservation and Recovery Act
("RCRA") program. The EPA recently reviewed the status of the property and
concluded that the FMP plant is not subject to corrective action under RCRA
and returned the site to its active CERCLIS inventory. In November 2000, a
contractor for the EPA performed another site assessment of the FMP plant.
The Company has been informed that the contractor will return to perform
sampling of the property in early 2001. The Company anticipates that a
report from the EPA will be received approximately one year following the
completion of the sampling. The Company believes that, pursuant to the
Brunswick Acquisition agreement, Brunswick has an obligation under the
Connecticut Transfer Act ("the Act") to remediate any environmental issues
that fall within the scope of the Act. The Company expects that, if any
environmental issues are identified by the EPA, they would be ones that
fall within the scope of the Act. There is not sufficient information at
this time to determine what action, if any, the EPA may pursue and what
effect, if any, it may have on the Company's financial condition and
results of operations.
Legal and professional fees related to the various environmental matters
discussed above totaled $65,000 and $80,000 during the three and six month
periods ended November 30, 2000, respectively, and are reflected as a
component of nonrecurring expenses in the statements of operations.
9. TERMINATION OF 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. The Company terminated the letter of intent and ceased
negotiations to acquire PHG effective November 27, 2000. Legal and other
professional fees associated with the due diligence efforts of the proposed
acquisition totaled $79,000 and are reflected as other expense in the
statements of operations for the three and six month periods ended November
30, 2000.
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. Specific
forward-looking statements made in this Form 10-Q include, among others, the
anticipated completion of an additional financing agreement, the anticipated
generation of sufficient cash flow from operations to repay indebtedness, the
anticipated future capital expenditures and anticipated costs of enviromental
matters at the FMP manufacturing facility and the Company's belief regarding the
sufficiency of its capital resources to fund its operations.
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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 NOVEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
NOVEMBER 30, 1999--
NET SALES. Net sales for the three months ended November 30, 2000 were $5.5
million, a decrease of $0.9 million or 15% from net sales of $6.4 million during
the corresponding period in 1999. Net sales of golf club shafts decreased by
$0.8 million or 15% and net sales of golf club grips decreased by $0.1 million
or 13%. The decrease in shaft sales is primarily attributable to declines in
orders from two of the Company's significant customers. Sales to a domestic
distributor declined $0.4 million or 68% and sales to the Company's exclusive
Japanese distributor declined $0.3 million or 23%. The domestic distributor has
experienced a decline in its business which it attributes to difficulties during
an internal computer conversion that caused delays in processing and fulfilling
customer orders. The Japanese distributor has experienced a decline in its
business which it attributes to the slow general economic conditions in Asia and
declines in orders from certain of its Japanese OEM customers.
COST OF SALES. Cost of goods sold for the three months ended November 30, 2000
was $4.9 million, an increase of $0.3 million or 5% over cost of goods sold of
$4.6 million during the corresponding period in 1999. As discussed in Note 4,
the Company recorded write-downs totaling $477,000 to reduce the carrying value
of finished goods inventory to estimated net realizable value during the three
months ended November 30, 2000. Excluding an inventory write-down of $0.4
million, the cost of golf club shaft sales decreased by $0.3 million or 6% as a
result of lower total net sales. Excluding an inventory write-down of $0.1
million, the cost of golf club grip sales was consistent at $0.6 million.
GROSS PROFIT. Gross profit for the three months ended November 30, 2000 was $0.6
million, a decrease of $1.2 million or 65% from gross profit of $1.8 million
during the corresponding period in 1999. Gross profit from sales of golf club
shafts decreased by $1.0 million or 64% and gross profit from sales of golf club
grips decreased by $0.2 million or 68%. Excluding an inventory write-down of
$0.4 million, gross profit from sales of golf club shafts decreased by $0.6
million to 20% of sales from 28% of sales. This decline in margin is
attributable to fixed costs being spread over lower unit sales volume and lower
production rates due to the initial manufacture and sale of several new
pro-grade product lines. Excluding an inventory write-down of $0.1 million,
gross profit from sales of golf club grips decreased by $0.1 million to 21% of
sales from 32% of sales. This decline in margin is attributable to fixed costs
being spread over lower unit sales volume and operating costs of the West Coast
distribution center which opened in December 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended November 30, 2000 were $1.6
million, an increase of 9% over selling, general and administrative expenses of
$1.5 million during the corresponding period in 1999. The $129,000 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 $74,000 during the three months
ended November 30, 2000 compared to $0 during the corresponding period in 1999.
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AMORTIZATION OF GOODWILL. Amortization of goodwill was consistent at $0.1
million during the three-month periods ended November 30, 2000 and 1999.
NONRECURRING EXPENSES. As discussed in Note 5, an impairment write-down of
$360,000 was recorded during the three months ended November 30, 2000 to reduce
the carrying value of Equipment Held for Sale to estimated net realizable value.
As discussed in Note 5, an expense of $117,000 was recorded during the three
months ended November 30, 2000 to write-off the accumulated costs related to
various projects under development to design and construct tooling for the
manufacture of golf club grips. As discussed in Note 8, legal and consulting
expenses totaling $140,000 were incurred during the three months ended November
30, 2000 related to various environmental issues. Similar legal expenses
incurred during the corresponding period in 1999 were $10,000.
INTEREST EXPENSE. Interest expense increased from $147,000 during the three
months ended November 30, 1999 to $185,000 during the three months ended
November 30, 2000 primarily due to a 1% increase in the prime lending rate.
OTHER EXPENSE. As discussed in Note 9, legal and other professional fees
associated with the proposed PH Group, Inc. acquisition totaled $79,000 during
the three months ended November 30, 2000.
OTHER INCOME. Other income of $78,000 and $55,000 for the three months ended
November 30, 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 (BENEFIT FROM) INCOME TAXES. A tax benefit of $0.7 million was
recorded on the loss during the three months ended November 30, 2000 and a
provision of $0.1 million was recorded for taxes on the income 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. A benefit has not been recorded on the nonrecurring
inventory and equipment write-downs discussed in Notes 4 and 5 in accordance
with the provisions of the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 109.
SIX MONTHS ENDED NOVEMBER 30, 2000 COMPARED TO THE SIX MONTHS ENDED NOVEMBER 30,
1999--
NET SALES. Net sales for the six months ended November 30, 2000 were $12.5
million, a decrease of $0.5 million or 4% from net sales of $13.0 million during
the corresponding period in 1999. Net sales of golf club shafts decreased by
$0.4 million or 3% and net sales of golf club grips decreased by $0.2 million or
9%. The decrease in shaft sales is primarily attributable to declines in orders
from two of the Company's significant customers. Sales to a domestic distributor
declined $0.4 million or 44% and sales to the Company's exclusive Japanese
distributor declined $0.7 million or 28%. The domestic distributor has
experienced a decline in its business which it attributes to difficulties during
an internal computer conversion that caused delays in processing and fulfilling
customer orders. The Japanese distributor has experienced a decline in its
business which it attributes to the slow general economic conditions in Asia and
declines in orders from certain of its Japanese OEM customers. The decrease in
grip sales is primarily attributable to declines in orders from the Company's
exclusive Japanese distributor due to slow general economic conditions in Asia.
COST OF SALES. Cost of goods sold for the six months ended November 30, 2000 was
$9.4 million, an increase of $0.7 million or 8% over cost of goods sold of $8.7
million during the corresponding period in 1999. As discussed in Note 4, the
Company recorded write-downs totaling $477,000 to reduce the carrying value of
finished goods inventory to estimated net realizable value during the six months
ended November 30, 2000. Excluding an inventory write-down of $0.4 million, the
cost of golf club shaft sales increased by $0.3 million or 3%. Excluding an
inventory write-down of $0.1 million, the cost of golf club grip sales was
consistent at $1.4 million.
GROSS PROFIT. Gross profit for the six months ended November 30, 2000 was $3.1
million, a decrease of $1.2 million or 29% from gross profit of $4.3 million
during the corresponding period in 1999. Gross profit from sales of golf club
shafts decreased by $1.0 million or 28% and gross profit from sales of golf club
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grips decreased by $0.2 million or 33%. Excluding an inventory write-down of
$0.4 million, gross profit from sales of golf club shafts decreased by $0.6
million to 29% of sales from 33% of sales. This decline in margin is
attributable to fixed costs being spread over lower unit sales volume and lower
production rates due to the initial manufacture and sale of several new
pro-grade product lines. Excluding an inventory write-down of $0.1 million,
gross profit from sales of golf club grips decreased by $0.1 million to 26% of
sales from 31% of sales. This decline in margin is attributable to fixed costs
being spread over lower unit sales volume and operating costs of the West Coast
distribution center which opened in December 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended November 30, 2000 were $3.6
million, an increase of 15% over selling, general and administrative expenses of
$3.1 million during the corresponding period in 1999. The $0.5 million 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 $0.3 million during the six
months ended November 30, 2000 compared to $0 during the corresponding period in
1999.
AMORTIZATION OF GOODWILL. Amortization of goodwill was consistent at $0.2
million during the six-month periods ended November 30, 2000 and 1999.
NONRECURRING EXPENSES. As discussed in Note 5, an impairment write-down of
$360,000 was recorded during the six months ended November 30, 2000 to reduce
the carrying value of Equipment Held for Sale to estimated net realizable value.
As discussed in Note 5, an expense of $117,000 was recorded during the six
months ended November 30, 2000 to write-off the accumulated costs related to
various projects under development to design and construct tooling for the
manufacture of golf club grips. As discussed in Note 8, legal and consulting
expenses totaling $155,000 were incurred during the six months ended November
30, 2000 related to various environmental issues. Similar legal expenses
incurred during the corresponding period in 1999 were $10,000.
INTEREST EXPENSE. Interest expense increased from $298,000 during the six months
ended November 30, 1999 to $363,000 during the six months ended November 30,
2000 primarily due to a 1% increase in the prime lending rate.
OTHER EXPENSE. As discussed in Note 9, legal and other professional fees
associated with the proposed PH Group, Inc. acquisition totaled $79,000 during
the six months ended November 30, 2000.
OTHER INCOME. Other income of $165,000 and $110,000 for the six months ended
November 30, 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 (BENEFIT FROM) INCOME TAXES. A tax benefit of $0.6 million was
recorded on the loss during the six months ended November 30, 2000 and a
provision of $0.4 million was recorded for taxes on the income 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. A benefit has not been recorded on the nonrecurring
inventory and equipment write-downs discussed in Notes 4 and 5 in accordance
with the provisions of SFAS No. 109.
LIQUIDITY AND CAPITAL RESOURCES--
At November 30, 2000, RP had negative working capital of $0.6 million and a
current ratio of 0.9 to 1 as compared to working capital of $6.0 million and a
current ratio of 2.3 to 1 at May 31, 2000. This decline in working capital is
primarily the result of a reclassification of $7.0 million long-term debt to
current liabilities due to various loan covenant violations discussed below.
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FMP has a credit facility consisting of a term loan and a revolving
line-of-credit. The FMP term loan of $2.3 million at November 30, 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 November 30, 2000, FMP had
$4.5 million outstanding under its revolving line-of-credit and $0.5 million
available for additional borrowings. The FMP line-of-credit expires in September
2002.
In November 2000, FMP amended its credit facility to provide up to $600,000 of
additional borrowing capacity under the revolving line-of-credit beginning
annually on November 1 and continuing through February 28 of the following year.
This available over-advance is reduced to $500,000 each March 1 and is reduced
each month thereafter until it is extinguished each year on June 1. Because the
eligible FMP accounts receivable and inventories, as defined, were in excess of
$5.0 million at November 30, 2000, none of the $600,000 over-advance was
available for borrowing as of that date.
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 November 30, 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 November 30, 2000, RG had
$0.7 million outstanding under its revolving line-of-credit and $0.1 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
November 30, 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. Due to the substantial loss
incurred during the three months ended November 30, 2000, the Company is not in
compliance with several financial covenants. Therefore, all amounts borrowed at
November 30, 2000 are classified as current liabilities in the consolidated
balance sheet as of that date. The Company is currently negotiating with its
lender to modify the FMP and RG credit facilities, to obtain waivers of these
covenant violations and to fund an additional term loan in the amount of $1.0
million. The Company believes that this financing agreement will be completed
during the fiscal quarter ending February 28, 2001.
In December 2000, RP entered into a revolving subordinated promissory note with
the Johnston Family Charitable Remainder Unitrust #3 ("Johnston Trust"), of
which Richard P. Johnston, a director and Chairman of the Board of the Company,
is Trustee. In December 2000, RP borrowed $1.0 million under this revolving note
which represents the maximum available funding amount. The note bears interest
at a fixed annual rate of 13% and is subordinate to both the FMP and RG bank
credit facilities. The Johnston Trust has an option to convert the indebtedness
into RP common stock at an exchange ratio of $1.00 per share if all outstanding
principal and accrued interest is not repaid in full on or before May 31, 2001,
which would constitute an event of default by RP. The Company anticipates that
additional bank financing will be utilized to retire the indebtedness to the
Johnston Trust prior to May 31, 2001. If the Company is unsuccessful in
obtaining additional bank financing, the Company believes that sufficient cash
flow from operations will be generated to retire the indebtedness to the
Johnston Trust prior to May 31, 2001.
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The Company believes that its existing capital resources and credit lines
available, together with the anticipated funding of additional term loans of
$1.0 million, are sufficient to fund its operations and capital requirements of
current business segments as presently planned over the next twelve months.
During the six months ended November 30, 2000, net cash used in operating
activities was $0.3 million which primarily resulted from a net loss of $1.1
million, an increase in inventories of $1.8 million, an increase in deferred
taxes of $0.6 million, and a decrease in accounts payable and accrued expenses
of $0.3 million. Non-cash expenses during the period include depreciation and
amortization of $0.5 million and $1.0 million for inventory and equipment
write-downs as described in Notes 4 and 5. Cash used in operating activities was
reduced by a net collection of accounts receivable of $2.0 million.
Net cash used in investing activities for the six months ended November 30, 2000
was $0.6 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, the Company believes that
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 provided by financing activities for the six months ended November 30,
2000, was $0.9 million resulting from net borrowings under lines-of-credit of
$1.4 million offset by repayments of long term debt and capital lease
obligations of $0.5 million. The Company is investigating certain potential
acquisitions. Any potential acquisitions may require the use of existing capital
resources, assumption of debt or issuance of new debt instruments, any of which
could impact the Company's liquidity and capital resources.
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 ("Brunswick") 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 has engaged an environmental consulting firm to perform
testing at the FMP plant and is in the process of developing a plan of
remediation. In October 2000, the Company engaged an environmental consulting
firm to assist in the development of a plan of remediation at an estimated cost
of $75,000. This expense is reflected as a component of nonrecurring expenses in
the statements of operations for the three and six month periods ended November
30, 2000. Failure of Brunswick 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 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 expenditures 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 for the cost of remediation and legal
fees incurred in conjunction with this matter.
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In October 2000, the Company received another NOV from the DEP alleging that
various effluent discharge samples during the period from January 2000 to
September 2000 were in violation of authorized limits under an existing permit
for the discharge of treated wastewater at the FMP plant. In December 2000, the
Company submitted its response to the NOV. There is not sufficient information
at this time to determine what action, if any, the DEP may pursue and what
effect, if any, it may have on the Company's financial condition and results of
operations.
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 to treat and dispose of non-hazardous waste oils from the FMP plant.
The 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 action, if any, the EPA may pursue and what effect,
if any, it may have on the Company's financial condition or results of
operations.
Prior to the Brunswick Acquisition, the FMP plant was listed on the EPA's
Comprehensive Environmental Response and Liability Information System
("CERCLIS"). A contractor for the EPA performed a preliminary assessment of the
FMP plant in January 1992. In June 1992, the site was deferred from the CERCLIS
inventory to the EPA's Resource Conservation and Recovery Act ("RCRA") program.
The EPA recently reviewed the status of the property and concluded that the FMP
plant is not subject to corrective action under RCRA and returned the site to
its active CERCLIS inventory. In November 2000, a contractor for the EPA
performed another site assessment of the FMP plant. The Company has been
informed that the contractor will return to perform sampling of the property in
early 2001. The Company anticipates that a report from the EPA will be received
approximately one year following the completion of the sampling. The Company
believes that, pursuant to the Brunswick Acquisition agreement, Brunswick has an
obligation under the Connecticut Transfer Act ("the Act") to remediate any
environmental issues that fall within the scope of the Act. The Company expects
that, if any environmental issues are identified by the EPA, they would be ones
that fall within the scope of the Act. There is not sufficient information at
this time to determine what action, if any, the EPA may pursue and what effect,
if any, it may have on the Company's financial condition and results of
operations.
TERMINATION OF 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. The Company terminated the letter of intent and ceased negotiations to
acquire PHG effective November 27, 2000. Legal and other professional fees
associated with the due diligence efforts of the proposed acquisition totaled
$79,000 and are reflected as other expense in the statements of operations for
the three and six month periods ended November 30, 2000.
17
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
COMMODITY INSTRUMENTS.
At November 30, 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 6 to the condensed consolidated financial
statements. A one- percent change in the prime lending rate would have an effect
of approximately $18,000 and $35,000 on interest expense for the three and six
months ended November 30, 2000, respectively.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In December 2000, the Company entered into a revolving subordinated
promissory note with the Johnston Family Charitable Remainder Unitrust #3
("Johnston Trust"), of which Richard P. Johnston, a director and Chairman of the
Board of the Company, is Trustee. In December 2000, RP borrowed $1.0 million
under this revolving note which represents the maximum available funding amount.
These funds were utilized for working capital to support the ongoing operations
of the Company. The note bears interest at a fixed annual rate of 13% and is
subordinate to the Company's bank credit facilities. The Johnston Trust has an
option to convert the indebtedness into RP common stock at an exchange ratio of
$1.00 per share if all outstanding principal and accrued interest is not repaid
in full on or before May 31, 2001, which would constitute an event of default by
RP. The transaction is exempt under 4(2) of the Securities Exchange Act of 1933.
The Company anticipates that additional bank financing will be utilized to
retire the indebtedness to the Johnston Trust prior to May 31, 2001. If the
Company is unsuccessful in obtaining additional bank financing, the Company
believes that sufficient cash flow from operations will be generated to retire
the indebtedness to the Johnston Trust prior to May 31, 2001.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Due to the substantial loss incurred during the three months ended November
30, 2000, the Company is not in compliance with several financial loan covenants
of its bank credit facilities. These covenant violations include covenants
requiring the maintenance of minimum monthly and quarterly earnings and minimum
quarterly debt service coverage ratios, as defined. The covenant violations
impact all of the Company's outstanding term loans and lines-of-credit which, in
the aggregate, totaled $7.9 million at November 30, 2000. Therefore, all amounts
borrowed at November 30, 2000 are classified as current liabilities in the
consolidated balance sheet as of that date. The Company is currently negotiating
with its lender to modify the credit facilities, to obtain waivers of these
covenant violations and to fund an additional term loan in the amount of $1.0
million. The Company believes that this financing agreement will be completed
during the fiscal quarter ending February 28, 2001.
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).
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(10) Material Contracts
Exhibit 10.1. Fifth Amendment to Credit and Security Agreement between FM
Precision Golf Manufacturing Corp., FM Precision Golf Sales Corp. and Wells
Fargo Business Credit, Inc. dated November 8, 2000.
Exhibit 10.2. Sixth Amendment to Amended and Restated Credit and Security
Agreement between Royal Grip, Inc., Royal Grip Headwear Company and Wells Fargo
Business Credit, Inc. dated November 8, 2000.
Exhibit 10.3. Revolving Subordinated Promissory Note from Royal Precision,
Inc. to the Johnston Family Charitable Remainder Unitrust #3 dated December 7,
2000.
Exhibit 10.4. Subordination Agreement dated December 7, 2000 by the
Johnston Family Charitable Remainder Unitrust #3 for the benefit of Wells Fargo
Business Credit, Inc.
(b) Reports on Form 8-K.
The Company filed current reports on Form 8-K on September 28, 2000 and
November 29, 2000 in response to Item 5, Other Events.
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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: January 11, 2001 By /s/ Thomas A. Schneider
---------------------- ------------------------------------
Thomas A. Schneider, President
(duly authorized officer)
By /s/ Kevin L. Neill
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Kevin L. Neill, Vice President -
Finance (chief financial officer)
21
<PAGE>
EXHIBIT INDEX
PAGE IN
SEQUENTIALLY
NUMBERED
EXHIBIT COPY
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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 Fifth Amendment to Credit and Security Agreement between FM
Precision Golf Manufacturing Corp., FM Precision Golf Sales
Corp. and Wells Fargo Business Credit, Inc. dated November
8, 2000. 23
10.2 Sixth Amendment to Amended and Restated Credit and Security
Agreement between Royal Grip, Inc., Royal Grip Headwear
Company and Wells Fargo Business Credit, Inc. dated November
8, 2000. 31
10.3 Revolving Subordinated Promissory Note from Royal Precision,
Inc. to the Johnston Family Charitable Remainder Unitrust #3
dated December 7, 2000. 36
10.4 Subordination Agreement dated December 7, 2000 by the
Johnston Family Charitable Remainder Unitrust #3 for the
benefit of Wells Fargo Business Credit, Inc. 48
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* Incorporated by reference
