<PAGE>
As filed with the Securities and Exchange Commission on May , 1999
Registration No. 333-73309
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
COYOTE SPORTS, INC.
(Exact name of registrant as specified in its charter)
Nevada 3949 88-0326730
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization)
Coyote Sports, Inc.
2291 Arapahoe Avenue
Boulder, Colorado 80302
(303) 932-8794
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
James M. Probst
c/o Coyote Sports, Inc.
2291 Arapahoe Avenue
Boulder, Colorado 80302
(303) 932-8794
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
Mark B. Segall, Esq. William F. Wynne, Jr., Esq.
Peter G. Smith, Esq. White & Case LLP
Kramer Levin Naftalis & Frankel LLP 1155 Avenue of the Americas
919 Third Avenue New York, New York 10036
New York, New York 10022 (212) 819-8236
(212) 715-9100
Approximate date of commencement of proposed sale of securities to the
public: As soon as practicable after this Registration Statement becomes
effective and all other conditions to the merger contemplated by the Amended
and Restated Agreement and Plan of Merger, dated as of February 2, 1999,
described in the Joint Proxy Statement/Prospectus included in this Registration
Statement have been satisfied or waived.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
COYOTE SPORTS, INC.
(a Nevada Corporation)
2291 Arapahoe Avenue
Boulder, Colorado 80302
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [ ] , 1999
----------------
To the Stockholders of Coyote Sports, Inc.:
Notice is hereby given that a special meeting of stockholders of Coyote
Sports, Inc. ("Coyote") will be held on [ ], 1999 at 10:00 a.m., local
time, at [ ], to vote on a proposal recommended by the board of directors of
Coyote to approve an amendment to the amended and restated articles of
incorporation of Coyote to increase the number of authorized preferred shares
from 4,000,000 to 10,000,000, and to create, and approve the issuance of, a new
series of shares, the Coyote series C preferred stock, par value $.001 per
share, to be delivered in connection with the merger contemplated by the
amended and restated agreement and plan of merger, dated as of February 2,
1999, by and among Coyote, RP Acquisition Corp. ("Merger Sub"), a wholly owned
subsidiary of Coyote, and Royal Precision, Inc. ("RP") and to transact such
other business as may be properly brought before the special meeting.
THE BOARD OF DIRECTORS OF COYOTE HAS UNANIMOUSLY DECLARED THAT THE PROPOSAL
TO AMEND COYOTE'S AMENDED AND RESTATED ARTICLES OF INCORPORATION TO INCREASE
THE NUMBER OF SHARES OF AUTHORIZED PREFERRED STOCK FROM 4,000,000 TO 10,000,000
AND TO CREATE, AND APPROVE THE ISSUANCE OF, A NEW SERIES OF SHARES, THE SERIES
C PREFERRED STOCK, TO BE DELIVERED IN CONNECTION WITH THE MERGER, IS ADVISABLE
AND IN THE BEST INTERESTS OF THE COYOTE STOCKHOLDERS AND RECOMMENDS THAT THE
HOLDERS OF COYOTE COMMON STOCK VOTE IN FAVOR OF THE APPROVAL OF THIS PROPOSAL.
The board of directors of Coyote has fixed the close of business on ,
1999 as the record date for the determination of stockholders of Coyote
entitled to vote at the special meeting. Only stockholders of record at the
close of business on , 1999 are entitled to notice of and to vote at the
special meeting or any adjournments or postponements of the special meeting.
All shares represented by properly executed proxies will be voted in
accordance with the specifications on the proxy card. If no such specifications
are made, proxies will be voted FOR approval and adoption of the proposal
above.
You are urged to read the attached material carefully. It is important that
your shares be represented at the Coyote special meeting. Whether or not you
plan to attend the Coyote special meeting, you are requested to complete, date,
sign and return the enclosed proxy card promptly in the enclosed pre-addressed
and pre-paid envelope so that it will be received no later than [ ], 1999.
If you attend the special meeting, you may vote in person if you wish, even
though you have previously returned your proxy. Any action may be taken on the
foregoing proposal at the Coyote special meeting on the date specified above or
on any dates to which the original or any later adjournment of the special
meeting may be adjourned or postponed.
By Order of the Board of Directors
Mel S. Stonebraker
Secretary
Coyote Sports, Inc.
Boulder, CO
, 1999
<PAGE>
ROYAL PRECISION, INC.
(a Delaware Corporation)
15170 North Hayden Road, Suite 1
Scottsdale, Arizona 85260
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [ ], 1999
----------------
To the Stockholders of Royal Precision, Inc.:
Notice is hereby given that a special meeting of stockholders of Royal
Precision, Inc. ("RP") will be held on [ ], 1999, at 10:00 a.m., local
time, at [ ] to vote on the following proposals:
(1) The approval and adoption of the amended and restated agreement and
plan of merger dated as of February 2, 1999, by and among Coyote Sports,
Inc. ("Coyote"), RP Acquisition Corp. ("Merger Sub") and RP, a copy of
which is attached as Annex A to the joint proxy statement/prospectus
accompanying this notice, and the approval of the merger and the other
transactions contemplated by the merger agreement. The merger agreement
provides for the merger of Merger Sub into RP resulting in RP becoming a
wholly owned subsidiary of Coyote. In the merger, each outstanding share of
RP common stock will be converted into a number of shares of Coyote series
C preferred stock equal to the ratio obtained by dividing the number of
shares of common stock of Coyote issued and outstanding on the effective
date of the merger by the number of shares of common stock of RP issued and
outstanding on the effective date of the merger. Based on the number of
shares of Coyote common stock and RP common stock issued and outstanding on
the date of this joint proxy statement/prospectus, RP stockholders will
receive just over one (1.0195) share of series C preferred stock for each
share of RP common stock that they own.
(2) The transaction of such other business as may be properly brought
before the special meeting.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF RP HAS UNANIMOUSLY
DETERMINED THAT THE EXCHANGE RATIO AND THE MERGER CONSIDERATION TO BE RECEIVED
BY THE RP STOCKHOLDERS IN THE MERGER ARE FAIR TO, AND THAT THE MERGER
AGREEMENT, THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER
AGREEMENT ARE FAIR TO, AND OTHERWISE ADVISABLE AND IN THE BEST INTERESTS OF,
RP AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS OF RP RECOMMENDS THAT YOU VOTE
"FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE APPROVAL OF
THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT.
The board of directors of RP has fixed the close of business on , 1999
as the record date for the determination of stockholders of RP entitled to
vote at the special meeting. Only stockholders of record at the close of
business on , 1999 are entitled to notice of and to vote at the special
meeting or any adjournments or postponements of the special meeting.
All shares represented by properly executed proxies will be voted in
accordance with the specifications on the proxy card. If no such
specifications are made, proxies will be voted FOR approval and adoption of
the proposal described in (1) above.
You are urged to read the attached material carefully. It is important that
your shares be represented at the RP special meeting. Whether or not you plan
to attend the RP special meeting, you are requested to complete, date, sign
and return the enclosed proxy card promptly in the enclosed pre-addressed and
pre-paid envelope so
<PAGE>
that it will be received no later than [ ], 1999. If you attend the special
meeting, you may vote in person if you wish, even though you have previously
returned your proxy. Any action may be taken on the foregoing proposal at the
RP special meeting on the date specified above or on any dates to which the
original or any later adjournment of the special meeting may be adjourned or
postponed.
Stockholders opposed to the merger are entitled to assert dissenters' rights
under Section 262 of the Delaware General Corporation Law in connection with
the merger described above, as more fully described in the joint proxy
statement/prospectus of which this notice is a part. A copy of Section 262 is
included in the joint proxy statement/prospectus as Annex D. Stockholders who
do not satisfy the requirements for asserting dissenters' rights will forfeit
their right to demand and receive payment of a judicially determined "fair
value" for their shares under Section 262.
By Order of the Board of Directors
Kenneth J. Warren
General Counsel and Corporate
Secretary
Scottsdale, AZ
, 1999
2
<PAGE>
PRELIMINARY JOINT PROXY STATEMENT/PROSPECTUS
SUBJECT TO COMPLETION, , 1999
[COYOTE LOGO] [RP LOGO]
MERGER PROPOSED -- YOUR VOTE IS IMPORTANT
The boards of directors of Coyote Sports, Inc. ("Coyote") and Royal
Precision, Inc. ("RP") have agreed on a merger. The merger is structured so
that Coyote will be the surviving publicly traded company and RP will become a
wholly owned subsidiary of Coyote. If the merger is completed, RP stockholders
will receive a number of shares of Coyote series C preferred stock equal to
the exchange ratio obtained by dividing the number of outstanding shares of
Coyote common stock by the number of outstanding shares of RP common stock on
the effective date of the merger. We estimate that the number of shares of
series C preferred stock to be issued to RP stockholders will be approximately
equal to the number of shares of Coyote common stock outstanding after the
merger. The RP common stock held by RP stockholders prior to the merger will
all be converted into series C preferred stock, or into cash in the case of
any fractional share, immediately at the time of the merger.
The merger cannot be completed unless the matters proposed in this joint
proxy statement/prospectus are approved by both the Coyote stockholders and
the RP stockholders. Both RP and Coyote have scheduled special meetings for
their stockholders to vote on these matters. Approval by both the RP
stockholders and the Coyote stockholders is assured because, in connection
with the merger, holders of a majority of the outstanding shares of each
company have agreed to approve the necessary proposals.
Your vote is still important to us. Whether or not you plan to attend your
company's stockholders meeting, please take the time to vote by completing and
mailing the enclosed proxy card. If you sign, date and mail your proxy card
without indicating how you want to vote, your proxy will be counted as a vote
in favor of the merger.
Coyote common stock is traded under the symbol "COYT" on The Nasdaq Stock
Market, Inc. ("Nasdaq") Small Cap Market and RP common stock is traded under
the symbol "RIFL" on the Nasdaq National Market System.
Only stockholders of record of RP as of , 1999, and stockholders
of record of Coyote as of , 1999, are entitled to attend and vote at the
meetings. The dates, times and places of the meetings are as follows:
For Coyote stockholders:
, 1999 ( Time)
[ ]
[ ]
[ ]
For RP stockholders:
, 1999 ( Time)
[ ]
[ ]
[ ]
This document provides you with detailed information about the proposed
merger. We encourage you to read this entire document carefully. In addition,
you may obtain information about our companies from documents that we have
filed with the Securities and Exchange Commission.
Mel S. Stonebraker
Chairman of the Board of Directors
Coyote Sports, Inc.
Raymond J. Minella
Chairman of the Board of Directors
Royal Precision, Inc.
See "Risk Factors" beginning on page 7 for a discussion of certain risks
which should be considered by stockholders with respect to the proposed
merger. Neither the SEC nor any state securities regulators have approved
the Coyote series C preferred stock or the underlying Coyote common stock to
be issued under this document or determined if this document is accurate or
adequate. Any representation to the contrary is a criminal offense.
Joint proxy statement/prospectus dated , 1999 and first mailed to
stockholders on or about [ ] [ ], 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE COYOTE/RP MERGER......................... iii
SUMMARY.................................................................. 1
RISK FACTORS............................................................. 7
WHERE TO FIND MORE INFORMATION........................................... 13
COMPARATIVE PER SHARE DATA OF COYOTE AND RP.............................. 14
COMPARATIVE MARKET VALUE INFORMATION..................................... 15
FORWARD-LOOKING INFORMATION.............................................. 16
RP SPECIAL MEETING....................................................... 17
Date, time and place..................................................... 17
Matters to be considered at the RP special meeting....................... 17
RP board recommendation.................................................. 17
Vote required............................................................ 17
Voting of proxies........................................................ 17
Revocability of proxies.................................................. 18
Record date; stock entitled to vote; quorum.............................. 18
COYOTE SPECIAL MEETING................................................... 19
Date, time and place..................................................... 19
Matters to be considered at the Coyote special meeting................... 19
Coyote board recommendation.............................................. 19
Vote required............................................................ 19
Voting of proxies........................................................ 19
Revocability of proxies.................................................. 20
Record date; stock entitled to vote; quorum.............................. 20
Solicitation of proxies.................................................. 21
THE MERGER............................................................... 22
Background of the merger................................................. 22
Reasons of RP for the merger............................................. 26
Recommendation of the board of directors of RP........................... 27
Opinion of NatCity Investments, Inc...................................... 28
Reasons of Coyote for the merger......................................... 31
Recommendation of the board of directors of Coyote....................... 33
Opinion of Lehman Brothers............................................... 33
Interests of certain persons in the merger............................... 39
Dissenters' rights....................................................... 42
Material U.S. federal income tax consequences............................ 43
Other legal matters...................................................... 44
U.S. federal securities law consequences................................. 45
Dividends on Coyote common stock......................................... 45
The exchange ratio and its effect on RP securities and equity-based
benefit plans........................................................... 45
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Stock exchange listing................................................... 46
FINANCING................................................................ 47
THE MERGER AGREEMENT..................................................... 49
General.................................................................. 49
Effective time........................................................... 49
Exchange of RP common stock.............................................. 49
Representations and warranties........................................... 49
Conduct of business pending the merger................................... 50
No-solicitation -- Coyote................................................ 51
No-solicitation -- RP.................................................... 52
Other covenants.......................................................... 54
Conditions to the merger................................................. 55
Affiliate agreements..................................................... 57
Termination.............................................................. 57
Amendment and waiver; parties in interest................................ 59
STOCKHOLDER AGREEMENT.................................................... 61
VOTING AND OTHER AGREEMENTS.............................................. 63
The Coyote voting agreements............................................. 63
The RP voting agreements................................................. 64
Edwards option re-pricing agreement...................................... 65
Certain undertakings with respect to resale.............................. 65
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS.............. 66
COYOTE SPORTS, INC. AND ROYAL PRECISION, INC. UNAUDITED PRO FORMA
COMBINED CONDENSED BALANCE SHEET........................................ 67
COYOTE SPORTS, INC. AND ROYAL PRECISION, INC. UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS.............................. 68
COYOTE SPORTS, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED
CONDENSED STATEMENT OF OPERATIONS....................................... 69
ROYAL PRECISION, INC. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF
OPERATIONS.............................................................. 70
COYOTE SPORTS, INC. AND ROYAL PRECISION, INC. NOTES TO UNAUDITED PRO
FORMA COMBINED CONDENSED FINANCIAL STATEMENTS........................... 71
BUSINESS OF COYOTE....................................................... 74
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Apollo Group and Unifiber............................................ 74
Reynolds Cycle Technology Limited--Reynolds Products..................... 76
Sierra Materials......................................................... 78
Unggul................................................................... 79
Principal suppliers and customers........................................ 80
Government Regulations................................................... 80
Properties............................................................... 81
Legal proceedings........................................................ 81
Employees................................................................ 81
Executive Officers of the Registrant..................................... 82
Intellectual property.................................................... 82
Research and development................................................. 83
COYOTE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 84
Year 2000 issue.......................................................... 89
BUSINESS OF RP........................................................... 94
Principal products; markets.............................................. 94
Competition.............................................................. 95
Principal suppliers and customers........................................ 95
Disagreements with accountants........................................... 96
Patents and trademarks................................................... 96
Regulations.............................................................. 96
Research and development................................................. 96
Environmental............................................................ 97
Employees................................................................ 97
RP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 98
Liquidity and capital resources.......................................... 100
Business Environment and Future Results.................................. 101
DESCRIPTION OF SHARE CAPITAL OF COYOTE................................... 103
Authorized share capital................................................. 103
Coyote common stock...................................................... 103
Preferred stock.......................................................... 103
Coyote series C preferred stock.......................................... 104
Stock exchange listing................................................... 106
COMPARISON OF STOCKHOLDER RIGHTS......................................... 107
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
COMPARISON OF SERIES C PREFERRED STOCK, RP COMMON STOCK AND COYOTE COMMON
STOCK................................................................... 108
STOCK HOLDINGS OF CERTAIN OWNERS AND MANAGEMENT.......................... 114
DIRECTORS AND OFFICERS................................................... 116
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.................. 117
COMMITTEES OF THE BOARD OF DIRECTORS..................................... 117
COMPENSATION OF MANAGEMENT............................................... 118
SUMMARY COMPENSATION TABLE............................................... 118
AGGREGATE OPTION EXERCISES IN THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND
FISCAL YEAR-END OPTION VALUES........................................... 119
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
AGREEMENTS.............................................................. 120
DIRECTOR COMPENSATION.................................................... 121
OTHER MATTERS............................................................ 121
LEGAL MATTERS............................................................ 121
EXPERTS.................................................................. 122
FUTURE STOCKHOLDERS PROPOSALS............................................ 122
REPORT OF INDEPENDENT ACCOUNTANTS........................................ F-1
COYOTE SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS... F-2
REPORT OF INDEPENDENT ACCOUNTANTS........................................ F-25
ROYAL PRECISION, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS.............................................................. F-26
Annex A--Amended and Restated Agreement and Plan of Merger
Annex B--Opinion of Lehman Brothers, Inc.
Annex C--Opinion of NatCity Investments, Inc.
Annex D--Section 262 of the Delaware General Corporation Law
</TABLE>
ii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE COYOTE/RP MERGER
Q. Why are Coyote and RP proposing to merge? How will stockholders benefit?
A. Coyote and RP believe that the combination of the two companies will
create a more competitive company than either Coyote or RP would be on its own.
Coyote and RP are engaged in complementary businesses in the golf and sports
equipment industry, and the merger should create a financially stronger company
better able to compete, to provide superior products and services to its
customers, to pursue attractive business opportunities and to achieve cost
savings and synergies. By synergies we mean that the companies will be able to
sell to one another's customers, offer customers a more comprehensive product
line, use a combined worldwide distribution network and jointly pursue future
acquisitions. Overall, Coyote and RP believe that the merger has the potential
to provide added value to all of their respective stockholders.
Q. When are the special meetings and what proposals am I being asked to vote
upon?
A. The RP special meeting will be held on [ , 1999] at 10:00 a.m., local
time at [ ]. Stockholders of RP will be asked to vote on the RP proposal to
approve and adopt the merger agreement and approve the merger and the other
transactions contemplated by the merger agreement. The Coyote special meeting
will be held on [ ], 1999, at 10:00 a.m., local time at [ ].
Stockholders of Coyote will be asked to vote on the Coyote proposal to amend
Coyote's amended and restated articles of incorporation to increase the number
of authorized preferred shares from 4,000,000 to 10,000,000 and to create, and
approve the issuance of, a new series of shares, the series C preferred stock,
to be delivered in connection with the merger contemplated by the merger
agreement.
Q. What vote is required?
A. The affirmative vote of a majority of the RP common stock which is issued
and outstanding and entitled to vote at the RP special meeting is required to
approve the RP proposal. Approval of the RP proposal is assured because, in
connection with the merger, holders of approximately 53% of the RP common stock
have already agreed to vote to approve the RP proposal. The affirmative vote of
a majority of the shares of Coyote common stock actually voted at the Coyote
special meeting is required to approve the Coyote proposal. Approval of the
Coyote proposal is assured because, in connection with the merger, holders of
approximately 69% of the Coyote common stock have already agreed to vote to
approve the Coyote proposal.
Q. What will RP stockholders receive in the merger?
A. RP stockholders will receive just over one share of series C preferred
stock in exchange for each of their shares of RP common stock. The actual
exchange ratio will be determined based on the number of shares of Coyote
common stock and RP common stock actually issued and outstanding on the day the
merger is consummated. Based on the number of shares of Coyote common stock and
RP common stock outstanding on the date of this joint proxy
statement/prospectus, RP stockholders will receive just over one (1.0195) share
of series C preferred stock for each share of RP common stock that they own. As
both RP and Coyote are subject to restrictions on issuing any additional
capital stock between the date of the merger agreement and the date of the
consummation of the merger, it is unlikely that any change in the exchange
ratio will be substantial.
Q. When do you expect the merger to be completed?
A: We hope to complete the merger as quickly as possible. We expect to
complete the merger on or shortly after [ ] 1999.
Q. How will stockholders know what the final exchange ratio is?
A. Stockholders can call toll-free [ ] at any time beginning [ ],
1999, for a voice recording providing the number of outstanding shares of
Coyote and outstanding shares of RP and the ratio between the two. Coyote and
RP will calculate the exchange ratio under the merger agreement by dividing the
number of outstanding shares of Coyote by the number of outstanding shares of
RP.
iii
<PAGE>
Q. What will happen to any fractional shares of series C preferred stock to
which stockholders may be entitled under the merger agreement?
A. For the sake of simplicity, the merger agreement provides that there will
be no fractional shares of Coyote's series C preferred stock issued once shares
of RP are exchanged for series C preferred stock. RP stockholders will be
entitled to receive cash in an amount specified in the merger agreement instead
of any fractional shares to which they may be entitled. For example, using the
exchange ratio calculated above, a holder of 100 shares of RP common stock
would be entitled to 101.95 shares of series C preferred stock. Instead of
receiving 101.95 shares, that RP stockholder would receive 101 shares of series
C preferred stock and a cash payment of $5.60 instead of the remaining 0.95
shares of series C preferred stock.
Q. What are the tax consequences of the merger?
A. The receipt of series C preferred stock in the merger will generally be
tax free to RP stockholders for United States federal income tax purposes,
except for tax imposed on cash received instead of fractional shares.
Q. What should stockholders do now?
A. Stockholders should complete, sign, date and mail their proxy card in the
enclosed postage paid envelope as soon as possible so that their shares will be
voted at the meetings. RP stockholders can also vote by transmitting both sides
of their proxy card by facsimile to [ ]. Coyote stockholders can also vote by
transmitting both sides of their proxy card by facsimile to [ ].
The board of directors of RP recommends voting FOR approval and adoption of
the merger agreement and approval of the merger and the other transactions
contemplated by the merger agreement. The board of directors of Coyote
recommends voting FOR the amendment of the amended and restated articles of
incorporation to increase the number of authorized preferred shares from
4,000,000 to 10,000,000, and to create, and approve the issuance of, a new
series of shares, the series C
preferred stock, to be delivered in connection with the merger.
RP stockholders should not send in their share certificates now. After the
merger is completed, Coyote will send RP stockholders written instructions for
exchanging their share certificates.
Q. Can stockholders change their vote?
A. Yes. Stockholders can change their vote at any time before the taking of
a vote at their company's special meeting by filing with the company's
secretary a written notice of revocation bearing a later date than their proxy,
by delivering by mail a later-dated signed proxy card, by submitting via
facsimile both sides of a later-dated signed proxy card or by attending their
meeting and voting in person. RP and Coyote stockholders can fax their vote
changes to the numbers provided above.
Q. What are "dissenters' rights" and how are they exercised?
A: If a stockholder of RP dissents from the merger, he or she may be
entitled to receive, instead of series C preferred stock, a judicially
determined "fair value" of the RP shares he or she owns. This is called an
"appraisal right" or a "dissenters' right". That fair value will be determined
exclusive of any element of value arising from the accomplishment or
expectation of the merger. RP stockholders should note that voting against the
merger is not the same as exercising dissenters' rights. Coyote stockholders,
who will retain their shares of Coyote common stock in the merger, do not have
appraisal rights.
Q. What should stockholders do if they have questions?
A: RP stockholders who have questions about the merger should call [ ]
at [ ] (toll-free in the United States).
Coyote stockholders who have questions about the merger should call [ ]
at [ ] (toll-free in the United States).
iv
<PAGE>
SUMMARY
In this joint proxy statement/prospectus, unless the context otherwise
requires, the term "Coyote" refers to Coyote Sports, Inc. and its subsidiaries
and the term "RP" refers to Royal Precision, Inc. and its subsidiaries. This
summary highlights selected information from this document and may not contain
all of the information that is important to you. To better understand the
merger and for a more complete description of its legal terms, you should
carefully read this entire document and the documents to which you have been
referred. Some of the most important information appears under "Questions and
Answers about the Coyote/RP Merger" on pages iii, and under "Risk Factors" on
page 7.
The companies
Coyote designs, engineers, manufactures, markets and distributes brand name
sports equipment and recreational products including steel and graphite golf
shafts, premium grade cycle tubing and javelins. Coyote also produces graphite
and other advanced composite materials for use in the production of sporting
goods products.
Coyote's business objective is to be a leading provider of sports equipment
and recreational products. Coyote intends to build a consolidated group of
companies engaged in related and complimentary businesses that work together to
compete effectively in the sports equipment and recreational products industry.
RP develops, produces and markets on a worldwide basis steel and graphite
golf shafts, including the "Rifle," the first modern stepless steel golf shaft.
RP also markets on a worldwide basis technology related to frequency
coefficient matching, a process which insures uniformity of flex among all
shafts in a set of golf clubs, and develop and market on a worldwide basis golf
club grips for the replacement market and for original equipment manufacturers.
RP's shafts are sold worldwide to manufacturers of golf clubs and component
retailers through RP's direct sales staff and a network of independent
distributors. RP's marketing strategy for its grips has been to use a single-
tier distribution structure in which its independent sales representatives deal
directly with thousands of golf club professionals and off-course specialty
store operators. RP distributes a substantial portion of its shafts and grips
in Japan through Precision Japan, a distributor for over 15 years.
The meetings
The meetings of the RP stockholders and the Coyote stockholders will be held
on , 1999 at [ ].
The record date for RP stockholders entitled to receive notice of and to
vote at the RP special meeting is the close of business on [ ] , 1999. On
that date there were [ ] shares of RP common stock outstanding.
The record date for Coyote stockholders entitled to receive notice of and to
vote at the Coyote special meeting is the close of business on [ ], 1999. On
that date there were [ ] shares of Coyote common stock outstanding.
The merger
The legal document that governs the merger is the amended and restated
agreement and plan of merger, dated as of February 2, 1999. Other agreements
entered into in connection with that merger agreement include the stockholder
agreement, the Coyote voting agreements and the RP voting agreements. The
merger agreement is attached to the back of this document as Annex A. The
stockholder agreement, the Coyote voting agreements and the RP voting
agreements are filed with the SEC as exhibits to the registration statement of
which this document is a part. You are encouraged to read these documents.
1
<PAGE>
What the stockholders of RP and Coyote will receive in the merger
The merger agreement provides that the stockholders of RP will receive a
number of shares of series C preferred stock equal to the exchange ratio
obtained by dividing the number of shares of common stock of Coyote
outstanding on the date of the merger by the number of shares of common stock
of RP outstanding on the date of the merger. Based on the number of shares of
Coyote common stock and RP common stock outstanding on the date of this joint
proxy statement/prospectus, RP stockholders will receive just over one
(1.0195) share of series C preferred stock for each share of RP common stock
that they own. This number is derived by dividing 5,777,692 shares of Coyote
by 5,667,375 shares of RP. As both RP and Coyote are subject to restrictions
on issuing any additional capital stock before the date of the merger, it is
unlikely that any change in the exchange ratio will be substantial.
The merger agreement provides that no fractional shares of series C
preferred stock will be issued when shares of RP common stock are exchanged
for shares of series C preferred stock in connection with the merger. Instead
of any fractional shares to which they may be entitled RP stockholders will be
entitled to receive cash in an amount per whole share of series C preferred
stock equal to $6.00 multiplied by the reciprocal of the exchange ratio. Based
on the exchange ratio calculated above, the amount per whole share of series C
preferred stock payable in respect of fractional shares would be $5.89.
RP STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES FOR EXCHANGE
UNTIL THEY ARE INSTRUCTED TO DO SO AFTER THE COMPLETION OF THE MERGER.
Coyote stockholders will retain their shares of Coyote common stock in the
merger.
The series C preferred stock
The features of the series C preferred stock will include:
. A liquidation preference per share equal to $6.00 multiplied by the
reciprocal of the exchange ratio. Based on the exchange ratio calculated
above, the liquidation preference per share would be $5.89.
. A cumulative preferential dividend per share, payable quarterly, when
and if declared, at an annual rate equal to 6.00% of the liquidation
preference.
. The right, on three days' notice, to convert each share of series C
preferred stock into one share of the common stock of Coyote, plus an
amount equal to all declared or accrued but unpaid dividends related to
the converted shares of series C preferred stock. These dividends, if
any, are to be paid in cash. However, to the extent cash payment is not
then permitted by the terms of Coyote's debt agreements or applicable
law, Coyote may, at its option, either deliver a subordinated promissory
note in a principal amount equal to the amount of those dividends or
deliver shares of Coyote common stock with a value equal to the amount
of those dividends. For this purpose, the value of Coyote common stock
will be determined based on the average closing market price of the
Coyote common stock over the twenty-day period immediately preceding
conversion.
. The shares of series C preferred stock to be issued in connection with
the merger will not be listed on any stock exchange or automated
quotation system. The shares of Coyote common stock issuable upon
conversion will be listed on the Nasdaq Small Cap Market.
. Each share of the series C preferred stock will be redeemable by Coyote
on thirty days' notice to the holder at a cash redemption price equal to
the liquidation preference plus all accrued and unpaid dividends
thereon.
. The right to vote with the Coyote common stock on all matters submitted
to a vote of the stockholders of Coyote and to vote separately as a
class on certain matters affecting the rights of the holders of the
series C preferred stock.
2
<PAGE>
Stockholder vote requirement -- approval assured
The affirmative vote of a majority of the RP common stock outstanding and
entitled to vote at the RP special meeting is required to approve and adopt the
merger agreement and approve the merger and the other transactions contemplated
by the merger agreement.
The affirmative vote of a majority of the Coyote common stock actually voted
at the Coyote special meeting is required to approve the proposal to amend the
amended and restated articles of incorporation of Coyote, to increase the
number of authorized preferred shares and to create, and approve the issuance
of, a new series of shares, the series C preferred stock, to be delivered in
connection with the merger. A quorum of a majority of the issued and
outstanding shares of Coyote common stock must be represented at the Coyote
special meeting.
Approval by the stockholders of each company is assured due to voting
agreements entered into by the largest stockholders of each company.
Voting agreements
Stockholders of RP representing 3,085,113 shares of RP common stock, or
approximately 53% of the issued and outstanding shares, namely Kenneth J.
Warren, David E. Johnston, Danny Edwards, Lawrence Bain, the Jayne A. Johnston
and Richard P. Johnston Charitable Remainder Trust #3, Berenson Minella and
Ronald L. Chalmers, have entered into voting agreements in which they have
agreed to vote in favor of the RP proposal. As a result, the approval of the RP
stockholders is assured.
Stockholders of Coyote representing 3,987,792 shares of Coyote common stock,
or approximately 69% of the issued and outstanding shares, namely James M.
Probst, Mel. S. Stonebraker and Paragon Coyote Texas, Ltd., have entered into
voting agreements in which they have agreed to vote in favor of the Coyote
proposal. As a result, the approval of the Coyote stockholders is assured.
Interests of certain persons in the merger
In considering the merger and the recommendations of the boards of directors
of RP and Coyote in favor of the merger, stockholders should be aware that some
members of the companies' boards and management will receive certain benefits
as a result of the merger, and certain stockholders of RP and Coyote have
interests in the merger that are different from or in addition to the interests
of stockholders generally.
The merger agreement
Conditions to the merger
The consummation of the merger depends upon satisfaction of a number of
conditions, including:
. approval and adoption of the RP proposal by the RP stockholders and
approval of the Coyote proposal by the Coyote stockholders;
. the absence of any law or court order preventing the consummation of the
merger;
. approval of the Coyote common stock issuable upon conversion of the
series C preferred stock for listing on the Nasdaq National Market, if
qualified, or otherwise for quotation on the Nasdaq Small Cap Market;
. the receipt by Coyote of sufficient financing to satisfy ongoing working
capital needs of Coyote and RP following the merger and to refinance
existing indebtedness of both Coyote and RP on terms reasonably
satisfactory to each of Coyote and RP;
. the absence of a material adverse change to the consolidated business,
financial condition or results of operations of RP or Coyote; and
. the accuracy of each party's representations and warranties and the
substantial performance by each party of its obligations under the
merger agreement.
3
<PAGE>
Termination of the merger agreement
Either RP or Coyote may call off the merger if:
. both parties consent in writing;
. the merger is not completed by June 2, 1999 -- however this right is not
available to the party whose failure to fulfill its obligations under
the merger agreement caused the merger not to be completed;
. there exists any law or court order preventing the merger;
. the stockholders of Coyote or RP do not give the required approvals at
the special meetings; or
. the other party breaches, in a significant way, its representations,
warranties, covenants or agreements under the merger agreement and that
breach is not curable or if it is curable, it is not cured within 30
days after written notice from the other party.
RP may call off the merger if:
. the board of directors of Coyote withdraws or adversely modifies its
approval or recommendation of the merger or recommends a business
combination transaction with a third party; or
. the board of directors of RP reasonably determines that a third party
proposal constitutes a RP superior proposal -- that is, a proposal which
the board of directors of RP reasonably believes (upon the advice of an
independent financial advisor) to be more favorable from a financial
point of view to its stockholders than the merger, and RP enters into a
definitive agreement to effect the RP superior proposal.
Coyote may call off the merger if:
. the board of directors of RP withdraws or adversely modifies its
approval or recommendation of the merger or recommends a business
combination transaction with a third party; or
. the board of directors of Coyote reasonably determines that a third
party proposal constitutes a Coyote superior proposal -- that is, a
proposal which the board of directors of Coyote reasonably believes
(upon the advice of an independent financial advisor) to be more
favorable from a financial point of view to its stockholders than the
merger, and Coyote enters into a definitive agreement to effect the
Coyote superior proposal.
Certain non-solicitation provisions; termination fee and expenses
The merger agreement generally restricts each of Coyote and RP from directly
or indirectly soliciting or encouraging any alternative transactions for the
sale of itself or any significant portion of its assets beyond what is required
by its fiduciary duties. Either party may be obligated to make certain
substantial payments to the other if it withdraws support for the merger or
supports an alternative transaction instead of the merger.
Specifically, if either party terminates the merger agreement because the
other party (1) withdraws, modifies or changes its approval or recommendation,
(2) approves or recommends to its stockholders an alternative acquisition
proposal, or (3) approves or recommends that its stockholders tender their
shares into any tender offer in connection with an alternative acquisition
proposal, then the other party must pay the terminating party up to $1.0
million of the terminating party's actual, reasonable and documented expenses
relating to the transactions contemplated by the merger agreement and incurred
since January 18, 1999.
Similarly, if either party terminates the merger agreement because it has
received an alternative acquisition proposal from a third party which is
superior to the transactions contemplated by the merger agreement and that
party's board of directors reasonably determines in good faith that the
superior proposal requires it to terminate the merger agreement and enter into
an agreement with the third party making that superior proposal, the party
terminating the merger agreement on that basis must make a comparable payment
of the other party's expenses. Moreover, the party whose change of
4
<PAGE>
approval or recommendation or pursuit of an alternative transaction occasioned
the termination of the merger agreement under any of the circumstances
described above will be required to pay the other party an additional fee of
$750,000, if, within 365 days after the termination of the merger agreement,
that party enters into an alternative transaction with a third party which
directly or indirectly initiated or otherwise had any contact with that party
regarding any alternate transaction prior to the termination of the merger
agreement.
In general, an alternative transaction for these purposes would be one
involving the acquisition of control of a majority of a party's common stock or
all or substantially all of a party's assets. In addition, if either Coyote or
RP terminates the merger agreement because of Coyote's inability to obtain
financing sufficient to satisfy the combined working capital needs of Coyote
and RP on terms reasonably acceptable to each of Coyote and RP, despite the
reasonable best efforts of RP to cooperate in satisfying that condition, Coyote
will be obligated to reimburse RP for its actual, reasonable and documented
expenses relating to the transactions contemplated by the merger agreement and
incurred since January 18, 1999.
The termination fee and expenses and the no-solicitation provisions of the
merger agreement may have the effect of discouraging persons who might be
interested in entering into a business combination with RP or Coyote from
proposing such a transaction, even where the consideration payable to RP or
Coyote stockholders in such a transaction would exceed the value that might be
realized from the merger.
Anticipated tax consequences
The merger will generally qualify as a tax-free reorganization for U.S.
federal income tax purposes.
There is a limited secondary market for Coyote common stock, and there will be
no secondary market for the series C preferred stock
Coyote's common stock, which is quoted on the Nasdaq Small Cap Market, has
been subject to a limited volume of trading. As a result, the prices received
by selling stockholders may have been depressed. Coyote is actively taking
measures to improve the liquidity of its stock. However, development of an
active secondary trading market for Coyote common stock will depend on many
factors, not all of which are within Coyote's control. These factors include
Coyote's financial performance, the number of shares of Coyote common stock
held by persons other than parties to the stockholders agreement, the ability
to attract coverage offered by financial analysts and the number of dealers
making a market in the Coyote common stock.
Therefore, RP stockholders should not assume that there will be an active
secondary market for the series C preferred stock or that there will be
liquidity in any trading market that does develop, or in the market for Coyote
common stock into which series C preferred stock is convertible. Coyote does
not plan to list the series C preferred stock on any stock exchange or inter-
dealer quotation system and Coyote is not aware of any person who intends to
make a market in the series C preferred stock.
Restrictions on resales of series C preferred stock and Coyote common stock by
affiliates of RP
The federal securities laws impose restrictions on the resale of shares of
the series C preferred stock received in the merger, and any shares of Coyote
common stock issued upon conversion of that series C preferred stock, by
persons who are affiliates of RP at the time of the RP special meeting.
Opinion of NatCity Investments, Inc.
NatCity Investments, Inc. has given a written opinion to the board of
directors of RP as to the fairness to RP stockholders, from a financial point
of view, of the exchange ratio set forth in the merger agreement and of the
merger consideration to be received by the RP stockholders in the merger. The
full text of the written opinion of NatCity dated January 29, 1999, is attached
to the back of this document as Annex C and should be read carefully in its
entirety. The opinion of NatCity is directed to the RP board of directors and
does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the merger.
5
<PAGE>
Opinion of Lehman Brothers, Inc.
Lehman Brothers, Inc., has given a written opinion to the board of directors
of Coyote as to the fairness to Coyote stockholders, from a financial point of
view, of the consideration to be delivered to RP's stockholders in the merger.
The full text of the written opinion of Lehman Brothers dated January 28, 1999
is attached to the back of this document as Annex B and should be read
carefully in its entirety. The opinion of Lehman Brothers is directed to the
Coyote board of directors and does not constitute a recommendation to any
stockholder as to how such stockholder should vote on the amendment to Coyote's
amended and restated articles of incorporation to increase the number of
authorized preferred shares and to create,
and approve the issuance of, a new series of shares, the series C preferred
stock.
RP dissenters' rights
If you are a RP stockholder opposed to the merger, you may request an
appraisal and seek payment of the "fair value" of your shares of RP common
stock. The notion of "fair value" excludes any element of value arising from
the fact of, or expectation of the merger. If you vote for the merger you will
not be entitled to appraisal rights. You must instead follow the following
steps:
. Before the vote by the stockholders of RP on the merger agreement, you
must notify the board of directors of RP in writing of your intent to
demand appraisal of your shares, and you must not vote in favor of the
proposal.
. NOTE: a vote against the merger will not by itself constitute a request
for appraisal rights.
. If you have demanded appraisal rights, within 10 days after the
effective date of the merger, you will be notified by the surviving
corporation that you are entitled to appraisal of your shares.
. You may within 20 days after being notified by the surviving corporation
that you are entitled to appraisal, demand in writing the appraisal of
your shares.
. Any time within 60 days following the effective date of the merger, you
may withdraw your demand for appraisal and accept the series C preferred
stock in the merger.
The fair value of your stock determined through the statutory appraisal
process may be more or less than the value of the series C preferred stock
being offered in the merger.
Stockholders are encouraged to consider the data included in the pro forma
financial statements reflecting the effect of the merger, which appear on p.[].
In addition, stockholders should consider the consolidated financial statements
of RP and its subsidiaries as of May 31, 1998 and for the years ended May 31,
1998 and 1997 included in RP's most recent annual report on Form 10-KSB, and as
of February 28, 1999 and for the nine months then ended included in RP's most
recent quarterly report on Form 10-QSB, as well as the consolidated financial
statements of Coyote and its subsidiaries as of December 31, 1998 and for the
years ended December 31, 1998 and 1997 included in Coyote's most recent annual
report on Form 10-KSB, all of which are included in this joint proxy
statement/prospectus.
6
<PAGE>
RISK FACTORS
In evaluating the merger and the merger agreement, stockholders of Coyote
and RP should take into account the following risks, as well as other
information included in this document:
Difficulties integrating Coyote and RP may prevent the achievement of the
anticipated benefits of the merger. Coyote cannot assure that the merger and
integration of RP will be successful and profitable. Coyote's financial success
after the merger depends substantially upon the successful integration of
Coyote's and RP's operations. It could take several fiscal quarters to
accomplish complete integration of the operations, management, sales and
marketing, research and development, personnel and procedures of the two
companies. In addition, the process of combining Coyote and RP could seriously
disrupt the ongoing business activities of the companies and could prevent the
achievement of the anticipated benefits of the merger.
The combined companies may lose present or potential customers following the
merger. In the past Coyote has occasionally experienced a significant reduction
in order volume from some customers after making acquisitions. A similar
reduction in order volume may occur after the merger.
Continued net losses may undermine the companies' ability to execute their
strategy. On a stand alone historical basis, both Coyote and RP have
experienced net losses and they may experience additional losses in the future.
If the companies continue to experience net losses, or if their cash flow and
capital resources are insufficient to pay their debt obligations, they may be
forced to reduce or delay planned expansion or capital expenditures, sell
assets, obtain additional equity capital or restructure their indebtedness, any
of which could depress the market price of Coyote's capital stock after the
merger.
Coyote incurred a net loss of $2,700,459, excluding a nonrecurring charge of
$11,341,332 associated with the write-off of goodwill and other assets and
excluding an extraordinary gain of $346,581, for the year ended December 31,
1998 and a net loss of $4,167,574 for the year ended December 31, 1997. After
the nonrecurring charge and extraordinary gain, net loss for the year ended
December 31, 1998 was $13,695,210. As of December 31, 1998, Coyote had an
accumulated deficit of $19,188,377. RP reported a net loss of $2,441,000 for
the nine months ended February 28, 1999 and a net loss of $263,000 for the
fiscal year ended May 31, 1998.
Although Coyote and RP anticipate economies of scale and more efficient use
of plant capacities after the merger, they cannot assure that these benefits
will be achieved or that the combined companies will attain profitability.
The combined companies will have increased indebtedness after the merger and
may have difficulty meeting their debt obligations. After the merger, the
combined companies will have significantly more debt outstanding than the
aggregate amount of debt the two companies currently owe separately. For
example, the combined companies will have a total of $38,000,000 in debt
outstanding after the merger compared to the existing debt of approximately
$20,000,000 of Coyote and approximately $9,000,000 of RP as of December 31,
1998 and February 28, 1999, respectively. Although Coyote and RP believe that
the combined companies will realize synergies from the merger, achieve
economies of scale, and improve profitability, there can be no assurances that
these goals will be achieved or that cash flows will be sufficient to pay the
interest and the principal of the combined companies' debt obligations. Any
default of its debt obligations could adversely affect Coyote and significantly
depress the market price of its capital stock.
Coyote may have difficulty implementing its post-merger acquisition
strategy. Coyote's future financial success will depend substantially upon its
ability to increase sales through acquisitions. Coyote cannot assure that it
will be able to (1) identify appropriate acquisition opportunities, (2) finance
and complete such acquisitions on acceptable terms, or (3) integrate the
acquired businesses into its existing operations. In particular, there can be
no assurance that the combined companies will have the financial resources
necessary to pursue their growth strategy and also meet their debt obligations.
Coyote's failure to achieve these goals could
7
<PAGE>
cause a material adverse effect on its operating results and financial
condition, and a decline in the market value of its outstanding securities.
The combined companies must compete with better known and better financed
sporting goods manufacturers. Many of RP's and Coyote's competitors have
greater name recognition, more extensive engineering, manufacturing and
marketing capabilities, and greater financial, technological and personnel
resources than RP and Coyote. In addition, some companies in the golf equipment
industry have expanded their product lines which compete with the products of
RP and Coyote in recent years as a result of acquisitions. The combined
companies' success will depend on their ability to remain competitive with
these rival sports equipment manufacturers. The competitive environment may
cause the combined companies to accept lower profit margins, which could
adversely impact the combined companies' operating results and financial
condition. Both Coyote and RP expect that by combining their operations, they
will be more competitive than they were on a stand alone basis. However, there
can be no assurance that the combined companies will be able to compete
successfully in the future with existing or new competitors.
Coyote may have difficulty managing its current rate of growth. Coyote has
experienced significant growth in the past two years and expects that growth to
continue. Continued growth at the current rate may significantly strain
Coyote's future management, working capital and operating and financial control
systems. Coyote cannot assure you that its management, working capital and
operating and financial control systems can adequately support future
anticipated growth. If Coyote is unable to continue to upgrade its operating
and financial control systems, recruit qualified staff or respond effectively
to difficulties that arise during expansion, Coyote's operating results and
financial position could be significantly harmed.
The companies' businesses are dependent on sales to a limited number of
customers. The golf shaft business of RP's subsidiary, FM Precision Golf
Manufacturing Corp. ("FMP"), is significantly dependent on sales to Taylor Made
and Precision Japan. FMP does not have a supply agreement with Taylor Made, and
its supply agreement with Precision Japan expires in 2002. The Precision Japan
agreement is terminable by either FMP or Precision Japan, or automatically
should Precision Japan fail to meet minimum purchase requirements specified in
the supply agreement. Sales to these customers represented approximately 28% of
FMP's sales for the fiscal year ended May 31, 1998. The loss of sales to either
of these companies could adversely affect RP's business.
Coyote is significantly dependent on sales to Callaway and Cobra. Although
Coyote has approximately 400 customers principally located in the United States
and Europe, sales to Callaway and Cobra for the year ended December 31, 1998,
represented 20.7% and 15.2%, respectively, of Coyote's net sales. Coyote has a
five-year supply agreement with Cobra which expires December 31, 2003. Either
party may terminate the supply agreement in the event that the other party is
in material breach of that supply agreement or of the asset sale agreement
between Coyote's Unifiber subsidiary and Cobra. Coyote anticipates a
substantial increase in sales to Cobra and a substantial decrease in sales to
Callaway for the year ended December 31, 1999. Because of the historical
volatility of consumer demand for specific clubs, as well as continued
competition from alternative suppliers, sales to a given customer in a prior
period may not necessarily be indicative of future sales. The loss of a
significant customer or a substantial decrease in sales to a significant
customer could adversely affect the combined companies' business or operating
results.
RP is substantially dependent on "Rifle" shaft sales, which decreased in
fiscal 1998. RP is substantially dependent on sales of "Rifle" shafts, which
constituted 35.5% of its revenues for the fiscal year ended May 31, 1998 and
54.3% for the fiscal year ended May 31, 1997. The Rifle shaft also has a
substantially higher margin than RP's other shaft products.
Sales of the Rifle shaft for RP's fiscal year ended May 31, 1998 decreased
by $2.0 million from sales levels for RP's fiscal year ended May 31, 1997. RP
received a high concentration of customer orders during fiscal year 1997. Due
to production capacity limitations, RP's lead times for processing these orders
were longer than RP's typical lead times. As a result of the longer lead times,
RP lost some significant customers. In order to reduce lead times and prevent
the loss of additional customers, and in an effort to obtain new customers, RP
installed additional manufacturing equipment in September and October of 1998.
RP believes
8
<PAGE>
that the new equipment has enabled RP to manufacture Rifle shafts at a greater
rate, projected to reach approximately 1.38 million more Rifle shafts per year
than RP could previously manufacture, an increase of approximately 42%. Based
on results through the third quarter of its 1999 fiscal year, RP's management
believes sales of Rifle shafts should return to 1997 levels. There can be no
assurance that the new equipment will increase RP's production capacity to the
extent management has estimated or reduce RP's lead times, that RP will not
lose additional customers, or that the new equipment will help RP regain lost
customers or acquire additional customers.
While RP's management believes that demand for the Rifle shaft should remain
high for the next several years, there can be no assurance that sales of the
Rifle shaft will not decline or that the Rifle shaft will maintain its
profitability. If sales or profitability of the Rifle shaft continue to
decrease without the combined companies' introduction of new profitable
products, the combined companies' performance and financial position would be
harmed.
Demand for the companies' products depends on economic conditions and
consumer trends in the golf equipment sector. The businesses of Coyote and RP
are subject to economic cycles and changing consumer golf trends. Their
customers are generally manufacturers of finished goods sold primarily to
sporting goods stores and specialty retailers of golf equipment and
recreational products. Any period of economic uncertainty or decline that
impacts consumer spending could significantly harm Coyote's business, results
of operations and financial condition. In addition, any general decline in the
size of the market for golf grips and shafts, bicycle tubing or graphite and
other advanced composite materials due to market conditions or otherwise, would
substantially harm Coyote's business, results of operations and financial
condition.
The companies depend on intellectual property that may not be adequately
protected. RP and Coyote currently rely upon a combination of patents,
copyrights, trademarks and trade secret laws to establish and protect some of
their proprietary rights in their products. There can be no assurance that the
efforts of RP or Coyote to protect their intellectual property will be adequate
to prevent misappropriation of proprietary property rights or that competitors
will not independently develop proprietary property that is substantially
equivalent or superior.
Demand for the companies' products is directly affected by seasonality in
golf equipment sales which reduces working capital and harms financial
results. Coyote and RP are dependent on golf-related product sales and so
management expects that for the foreseeable future business will be seasonal.
As a result of the seasonal nature of the business, the combined companies may
be subject to substantial seasonal swings in liquidity, resulting in cash
management challenges and the risk of a substantial build-up in inventory prior
to peak selling periods. Coyote's and RP's customers have historically built
inventory in anticipation of golf club purchases by golfers in the spring and
summer, the principal selling seasons for golf clubs.
RP's principal supplier of non-cord grips has terminated their contract and
RP may not be able to find an adequate replacement. RP's subsidiary, Royal
Grip, Inc. ("RG"), currently purchases a majority of its supply of non-cord
grips from Acushnet Rubber Company. During March 1999, RG received a letter
from Acushnet terminating the existing manufacturing and supply agreement with
RG. In the notice of termination, Acushnet agreed to pay RG a $2.5 million
termination fee at the end of the transition period, to continue to produce
grips until January 9, 2000 and to pay up to $100,000 for shipping and
installing the manufacturing equipment at a new location. RG currently has no
back-up source of supply; however, RP is currently in discussions with a number
of grip manufacturers which RP believes can maintain RG's standard of product
quality and will facilitate a smooth transition. There can be no assurance that
RP will be able to secure a source for grips on as favorable terms or with the
same quality as Acushnet. In addition, there can be no assurance that a
transition to a new supplier will not result in production delays or the loss
of sales and key customers, which would harm the combined companies' financial
condition and results of operations.
Environmental considerations at the companies' manufacturing
facilities. Both Coyote and RP are subject to environmental laws and
regulations, including the laws of the United States and the United Kingdom
that impose workplace standards and limitations on the discharge of pollutants
into the environment and
9
<PAGE>
establish standards for the handling and disposal of waste products. The nature
of Apollo Sports Technologies, Limited's manufacturing and assembly operations
in Oldbury and Birmingham, England, and RP's Torrington, Connecticut facility,
could expose the companies to the risk of claims with regard to environmental
matters. Although compliance with current governmental requirements relating to
the protection of the environment has not had a material adverse effect on
Coyote's or RP's business or results of operations, there can be no assurance
that material costs or liabilities will not be incurred in connection with
these matters in the future or that governmental requirements will not change
in a manner that imposes material costs or liabilities on the combined
companies.
During its fiscal year ended May 31, 1998, RP expended $179,000 in
environmental remediation fees and permitting costs and expects to incur in
calendar year 1999 an additional $900,000 in capital expense to upgrade FMP's
wastewater treatment facilities at its Torrington, Connecticut facility. During
its fiscal year ended December 31, 1998, Coyote expended $85,000 in connection
with environmental remediative and permitting costs and expects to incur an
additional $95,000 in fiscal 1999. Under the terms of the purchase of the
Torrington facility from Brunswick Corporation, RP is indemnified by Brunswick
for the possible leakage of environmentally dangerous compounds which may be
present on, under or around the Torrington facility. However, indemnification
by Brunswick would only be available if RP can prove that any leakage was the
result of Brunswick's operations.
A small group of principal stockholders will be able to elect the entire
board of directors for up to five years after the merger. A small group of
principal stockholders of RP and Coyote who will control a majority of Coyote's
outstanding voting stock after the merger have entered into a stockholder
agreement with Coyote with a duration of five years. This stockholder agreement
is effective upon consummation of the merger and entitles these stockholders as
a group to designate all of the members of the board of directors of Coyote
after the merger, thereby reducing or limiting the ability of other
stockholders to affect or change the composition of Coyote's management or
board of directors. This group of principal stockholders includes Mel S.
Stonebraker, James M. Probst and Paragon Coyote Texas, Ltd., who will
collectively hold approximately [ ]% of the Coyote common stock immediately
after the merger. Also included in this group are Kenneth J. Warren, David E.
Johnston, The Richard P. Johnston and Jayne A. Johnston Charitable Remainder
Trust #3 and Berenson Minella, of which Raymond J. Minella, the chairman of the
RP Board of Directors, is a managing general partner, who will collectively own
approximately [ ]% of the outstanding series C preferred stock.
Overseas operations subject the companies to additional risks. Coyote's and
RP's businesses are subject to additional risks inherent in doing business
abroad. These risks include, but are not limited to:
. delays in shipment
. export controls, embargoes, tariffs and other trade barriers
. foreign government regulation, political instability, and changes in
economic conditions
. adverse fluctuations in foreign exchange rates and exchange controls
In addition, RP is significantly dependent on international sales. Eighteen
percent of RP's total net sales during the fiscal year ended May 31, 1998 were
derived from international sales, primarily consisting of sales of golf club
shafts and grips. Sales to Precision Japan, RP's exclusive distributor for
Japan, account for a substantial percentage of RP's international sales. The
Japanese economy has been relatively stagnant and future sales may be adversely
affected. Coyote has a manufacturing facility in England in which all of its
steel golf shafts are manufactured. In addition, approximately 20% of Coyote's
sales are derived from markets in Europe, Asia and Australia. Fluctuation in
international exchange rates may have a material adverse effect on results of
these operations.
The combined companies may not be able to maintain good relations with their
unionized employees. Employees of the combined companies at their plants in
Oldsbury and Tyseley, England and Torrington, Connecticut, respectively, are
represented by several trade unions for collective bargaining purposes.
Although Coyote and RP presently believe their relations with employees are
good, there is no assurance that work stoppages or slowdowns will not be
experienced in the future. Any work stoppage or slowdown could have a
10
<PAGE>
material adverse effect on the business, results of operations and financial
condition of the combined companies. In addition, there is no assurance that
Coyote's and RP's current non-union facilities will not at some time in the
future become subject to labor disputes and union organizational efforts.
The secondary market for Coyote's common stock may remain illiquid, which
may continue to depress the price received by selling stockholders. Coyote's
common stock, which is quoted on the Nasdaq Small Cap Market, has been subject
to a limited volume of trading. As a result, the prices received by selling
stockholders may have been depressed. Although Coyote is actively taking
measures to improve the liquidity of its stock, the development of an active
secondary trading market for Coyote common stock will depend on many factors,
not all of which are within Coyote's control. These factors include the
financial performance of Coyote and its subsidiaries, the number of shares of
Coyote common stock held by persons other than stockholders party to the
stockholders agreement, the ability to attract coverage offered by financial
analysts, and the number of dealers making a market in the Coyote common stock.
There can be no assurances that the trading market for the common stock will
not remain illiquid or that the price selling stockholders receive for their
stock will not be depressed as a result.
There will likely be no secondary market for the series C preferred stock.
RP stockholders should not assume that there will be an active secondary market
for the series C preferred stock or that there will be liquidity in any trading
market that does develop. Coyote does not plan to list the series C preferred
stock on any stock exchange or inter-dealer quotation system and Coyote is not
aware of any person who intends to make a market in the series C preferred
stock.
The present Coyote stockholders will have significantly less control of
Coyote after the merger. The percentage of the total voting securities of
Coyote held by the present Coyote stockholders will be cut in half as a result
of the merger and so they will have less influence over the management and
policies of Coyote than they currently exercise. After the consummation of the
merger, Coyote and RP estimate that there will be outstanding approximately
[5,777,692] million shares of Coyote common stock, and [ ] million shares of
series C preferred stock, which will be entitled to vote with the common stock
on a share-for-share basis. Immediately following the merger, the former RP
stockholders will control approximately 50% of the outstanding voting
securities of Coyote and the present Coyote stockholders will control the
remaining outstanding voting securities.
Some rights of the present Coyote stockholders will be junior to the rights
of the holders of the series C preferred stock. The rights of the holders of
Coyote common stock will be junior to the rights of the holders of series C
preferred stock with respect to dividends and upon liquidation.The terms of the
series C preferred stock provide for payment of dividends at a rate of 6% of
the stated liquidation preference per year whether or not any dividends are
paid on the Coyote common stock. Moreover, the holders of the series C
preferred stock will receive their dividends prior to the payment of any
dividends on the Coyote common stock. In any dissolution or winding up of
Coyote's affairs, the holders of series C preferred stock will receive
distributions, if any, made to the extent of the liquidation preference plus
accrued dividends of the series C preferred stock before the holders of the
Coyote common stock receive any distributions in liquidation.
The employment contracts of some key Coyote executives expire in less than
one year. Coyote has depended on the continued service of some key executive
officers, including James M. Probst, chief executive officer, and John Paul
McNeill, chief financial officer. Both of these officers have employment
contracts which expire on May 31, 2000. If one or both of these executives
decides to end his employment with Coyote, it could have a negative impact on
Coyote's business operations and financial condition.
The companies depend on computer systems which are vulnerable to the Year
2000 computer problems. Coyote and RP have not finalized upgrading their
existing computer systems to resolve the issues arising from the year 2000. The
combined companies' failure to resolve outstanding Year 2000 compliance issues
on or before December 31, 1999 could result in system failures or
miscalculations causing disruption in operation including,
11
<PAGE>
among other things, a temporary inability to process transactions, send
invoices, send and/or receive e-mail and voice mail, or engage in similar
normal business activities. Coyote is aware of the issues associated with the
programming code in existing computer systems and is working to resolve the
potential impact of the year 2000 by August 1999.
RP believes that its critical internal systems including versions of Macola,
Oracle, Microsoft Exchange, and Microsoft Office 97 products are Year 2000
compliant. In addition, RP tracks the version and available updates for these
products to ensure Year 2000 compliance. RP has completed a comprehensive
evaluation of its internal systems and equipment that addresses information
technology and business systems, the software development environment and non-
information technology systems such as elevator, building security and HVAC
systems including hardware, software and firmware. In addition, RP has
completed the upgrade of some of its critical systems to meet with Year 2000
requirements. RP believes that any future internal Year 2000 costs will be
immaterial.
Coyote and RP rely on third parties for many products and services which may
be affected by the Year 2000. RP may be adversely impacted if these companies
are unable to address this issue in a timely manner, which could result in a
significant financial risk to the combined companies. The failure of third
parties upon whom the combined companies' business relies to timely remediate
their Year 2000 issues could result in disruptions in the combined companies'
supply of parts and materials, late, missed or unapplied payments, temporary
disruptions in order processing and other general problems related to their
daily operation. Coyote has not performed an assessment on the state of
readiness and/or compliance of key suppliers and customers. Coyote has to
identified key suppliers and customers and plans on performing an assessment by
August 1999. Coyote expects that completion of its Year 2000 compliance project
will result in additional expenditures of approximately $100,000.
RP is in the process of conducting a review of its suppliers to ensure that
those suppliers' operations, products and services are Year 2000 compliant. All
significant suppliers and utilities have indicated that they are Year 2000
compliant, except for one of RP's golf grip suppliers which has indicated that
it is in the last phase of its Year 2000 compliance plan and expects to be Year
2000 compliant by the end of June 1999.
While Coyote believes its Year 2000 compliance actions will adequately
address its internal Year 2000 compliance issues, until Coyote completes its
assessment of its suppliers and customers, the overall risks cannot be
accurately described and quantified, and there can be no guarantee that the
Year 2000 issue will not adversely impact the combined companies and their
operations. Coyote has not, to date, implemented a Year 2000 contingency plan.
Coyote's goal is to have the major Year 2000 compliance issues resolved by mid-
1999. Final verification and validation is scheduled to occur by August 1999.
However, Coyote intends to develop and implement a contingency plan by mid-
1999, in the event that its Year 2000 plan should fall behind schedule.
The tax free nature of the merger may be challenged by the Internal Revenue
Service if the factual representations and assumptions made in connection with
the transaction are not correct. As described below, RP and Coyote will receive
an opinion from Fabian & Clendenin, as tax counsel, based upon certain
representations and assumptions, that the merger will qualify as a tax-free
reorganization for U.S. federal income tax purposes, but no ruling from the
Internal Revenue Service to that effect has been or will be sought. If the
merger does not qualify as a tax-free reorganization, then, in general,
although the matter is not entirely certain, for U.S. federal income tax
purposes it is likely that each RP stockholder would recognize gain measured by
the excess, if any, of the fair market value of the series C preferred stock
received in the merger plus the amount of cash received instead of any
fractional share over the RP stockholder's tax basis in that stockholder's RP
common stock. In particular, Fabian & Clendenin has assumed that less than 20%
of the aggregate consideration paid in connection with the merger will be in
the form of cash. If holders of more than 20% of the outstanding RP common
stock exercise their dissenters' rights and receive cash rather than series C
preferred stock, this assumption would change and the merger would fail to
qualify as a tax-free reorganization for federal income tax purposes.
12
<PAGE>
WHERE TO FIND MORE INFORMATION
Coyote and RP file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information filed by Coyote or RP at the SEC's public
reference rooms in Washington, D.C. at 450 Fifth Street, N.W., Washington, D.C.
20549, in New York, New York at 7 World Trade Center, 13th Floor, New York, New
York 10048 and in Chicago, Illinois at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at 1-
800-SEC-0330 for further information on the public reference rooms. The filings
of Coyote and RP with the SEC are also available to the public from commercial
document retrieval services and at the world wide web site maintained by the
SEC at "http://www.sec.gov." The Securities Exchange Act file numbers for SEC
filings by Coyote and RP are 000-23085 and 000-22889, respectively.
Coyote filed a registration statement on Form S-4 to register with the SEC
the series C preferred stock to be delivered in connection with the merger and
the shares of Coyote common stock issuable upon conversion of the series C
preferred stock. This joint proxy statement/prospectus is a part of that
registration statement and constitutes a prospectus of Coyote in addition to
being a proxy statement of Coyote and RP for the special meetings.
You may find further information about Coyote in the following filings (SEC
Exchange Act File number 000-23085):
. Annual Report on Form 10-KSB for the fiscal year ended December 31,
1998;
. Current Reports on Form 8-K and 8-K/A filed January 26, 1999 and
February 11, 1999, respectively;
. Proxy Statement on Schedule 14A filed April 12, 1999.
You may find further information about RP in the following filings (SEC
Exchange Act File number 000-22889):
. Annual Report on Form 10-KSB for the fiscal year ended May 31, 1998 and
quarterly periods ended August 31, 1998, November 30, 1998 and February
28, 1999, respectively;
. Current Reports on Form 8-K filed January 20, 1999, February 5, 1999,
March 24, 1999 and April 7, 1999, respectively;
. Proxy Statement on Schedule 14A filed September 9, 1998.
Coyote has supplied all information contained in this document relating to
Coyote, and RP has supplied all information relating to RP.
If you are a stockholder of Coyote or RP you can obtain any of the documents
containing information about Coyote or RP and referred to in this registration
statement through Coyote, RP or the SEC. Stockholders may obtain, without
charge, documents containing information about Coyote or RP and referred to in
this document by requesting them in writing or by telephone from the
appropriate party at the following address:
<TABLE>
<S> <C>
Coyote Sports, Inc. Royal Precision Inc.
2291 Arapahoe Avenue 15170 North Hayden Road, Suite 1
Boulder, Colorado 80302 Scottsdale, Arizona 85260
(303) 932-8794 (602) 627-0200
</TABLE>
If you would like to request documents from Coyote or RP, please do so by
, 1999 to receive them before the special meetings. You should rely only on
the information contained or referred to in this document to vote on the
matters submitted to you. Neither Coyote nor RP has authorized anyone to
provide you with information that is different from what is contained in this
document. This document is dated , 1999. You should not assume that the
information contained in the document is accurate as of any date other than
such date, and neither the mailing of this document to stockholders nor the
delivery of series C preferred stock pursuant to the merger shall create any
implication to the contrary.
13
<PAGE>
COMPARATIVE PER SHARE DATA OF COYOTE AND RP
The market value of Coyote common stock and RP common stock may fluctuate
based upon general market and economic conditions, the two companies' business
and prospects and other factors both within and beyond the control of Coyote
and RP. The common stock of Coyote has been traded on the Nasdaq Small Cap
Market since September 18, 1997 under the symbol "COYT." The common stock of RP
has been traded on the Nasdaq National Market since September 2, 1997 under the
symbol "RIFL." The following table sets forth the high and low sales prices for
the common stock of both companies, as reported by the Nasdaq Small Cap Market
and the Nasdaq National Market, for the periods indicated below since September
1997. Coyote's fiscal year ends on December 31 each year and RP's fiscal year
ends on May 31 each year.
<TABLE>
<CAPTION>
Coyote RP
------------- -------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1997:
Third Quarter............................. $6 1/4 $5 13/16 $10 1/4 $ 8
Fourth Quarter............................ 5 13/16 4 9 7/8 6 5/8
1998:
First Quarter............................. 6 3/8 4 3/8 7 1/4 4 1/2
Second Quarter............................ 6 3/16 4 9/16 6 1/16 4 5/8
Third Quarter............................. 5 7/16 3 5/8 4 15/16 3 7/8
Fourth Quarter............................ 5 3 4 7/8 5/8
1999:
First Quarter............................. 4 13/16 3 1/8 3 7/16 1 5/8
Second (through April 27, 1999)........... 4 7/16 2 15/32 2 15/16 2 1/8
</TABLE>
On April [ ], 1999, the last reported sale price of the common stock of each
company on its respective market was $ [ ] per share in the case of Coyote and
$ [ ] per share in the case of RP. On April [ ], 1999, there were
approximately holders of record of the common stock of Coyote and holders
of record of common stock of RP.
14
<PAGE>
COMPARATIVE MARKET VALUE INFORMATION
The following table sets forth the closing prices per share and aggregate
market values of Coyote common stock and RP common stock on the Nasdaq Small
Cap Market and the Nasdaq National Market, respectively, on January 15, 1999,
the last trading day prior to the public announcement of the proposed merger,
and on , 1999, the most recent date for which prices were available prior
to printing this document.
The RP "equivalent" data shown represents the value per share and aggregate
market value of RP common stock as though:
. the RP common stock were exchanged for Coyote series C preferred stock
(as it will be in the merger) at the exchange ratio determined under the
merger agreement; and
. that Coyote series C preferred stock were converted into Coyote common
stock in accordance with its terms on a one-for-one basis, and the
resulting Coyote common stock received by former RP stockholders were
valued at the closing price per share of Coyote common stock on the
dates indicated.
The data does not reflect actual prices for RP common stock or actual or
projected prices for Coyote series C preferred stock, for which no active
trading market exists or is anticipated.
<TABLE>
<CAPTION>
Coyote RP RP
Historical Historical Equivalent
<S> <C> <C> <C>
On January 15, 1999
Closing price per share of common
stock............................... $ 4.5000 $ 2.5625 $ 4.5876
Market value of common stock......... $25,999,614 $14,522,648 $25,999,614
On , 1999
Closing price per share of common
stock...............................
Market value of common stock.........
</TABLE>
The RP equivalent data for January 15, 1999 corresponds to an exchange ratio
of 1.0195, and the RP equivalent data for [ ], 1999 corresponds to an
exchange ratio of .
Market value is based on 5,777,692 shares of Coyote common stock and
5,667,375 shares of RP common stock outstanding as of January 15, 1999, and
shares of Coyote common stock and shares of RP common stock outstanding as
of , 1999.
15
<PAGE>
FORWARD-LOOKING INFORMATION
Coyote and RP have made forward-looking statements in this document and in
the documents to which we have referred you. These statements are subject to
risks and uncertainties, and therefore may prove not to be correct. Forward-
looking statements may include assumptions as to how the combined companies
will perform after the merger and, accordingly, it is uncertain whether any of
the events anticipated by the forward-looking statements will occur, or if so,
what impact, if any, they will have on the results of operations and financial
condition of Coyote or the price of the series C preferred stock or the Coyote
common stock.
When words like "believes", "expects", "anticipates" or similar expressions
are used, they indicate that the statement in which the word is used
constitutes a forward-looking statement. For these statements Coyote and RP
claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
You should understand that the following important factors, in addition to
those discussed elsewhere in this document, and in our other public filings and
press releases, could affect the future results of the combined companies and
could cause actual results to differ materially from those expressed in the
forward-looking statements. These factors include, among other things:
. the ability to integrate the operations of RP and Coyote;
. the ability of Coyote and RP to reverse net losses and return to
profitability;
. inadequate capital, unexpected costs, and lower revenues and net income
than forecasted;
. the timing, impact and other uncertainties of future acquisitions by
Coyote, and the ability to integrate such acquisitions and to achieve
anticipated synergies and other cost savings in connection with such
acquisitions;
. loss of significant customers;
. general decreases in consumer spending for sports equipment and
recreational products;
. overall economic and business conditions;
. the demand for Coyote's and RP's goods and services;
. competitive factors in the golf products industries in which Coyote and
RP compete;
. changes in government regulation;
. interest rate fluctuations, foreign currency rate fluctuations and other
capital market conditions;
. economic and political conditions in international markets, including
governmental changes and restrictions on the ability to transfer capital
across borders;
. dependence upon key management personnel;
. the ability of Coyote and RP, and the ability of their respective
customers and suppliers, to replace, modify or upgrade computer programs
in order to adequately address the Year 2000 issue;
. changes in tax requirements, including tax rate changes, new tax laws
and revised tax law interpretations; and
. price increases for raw materials.
16
<PAGE>
RP SPECIAL MEETING
Date, time and place
This document is being furnished to the holders of RP common stock with the
solicitation of proxies by the RP board of directors for use at the RP special
meeting to be held on , 1999 at [ ], commencing at 10:00 a.m., local time.
Matters to be considered at the RP special meeting
At the RP special meeting, RP stockholders will be asked to consider and
vote upon a proposal to approve and adopt the merger agreement, a copy of which
is attached as Annex A to this joint proxy statement/prospectus, and to approve
the merger and the other transactions contemplated by the merger agreement.
RP board recommendation
After careful consideration, the board of directors of RP has unanimously
determined that the exchange ratio and the merger consideration to be received
by RP stockholders in the merger are fair to, and that the merger agreement,
the merger and the other transactions contemplated by the merger agreement are
fair to and otherwise advisable and in the best interests of, RP and its
stockholders. The board of directors of RP recommends that you vote "FOR" the
approval and adoption of the merger agreement and the approval of the merger
and the other transactions contemplated by the merger agreement.
Vote required
The approval and adoption of the merger agreement requires an affirmative
vote by the holders of a majority of the shares of RP common stock entitled to
vote on such proposal at the RP special meeting. The consummation of the merger
is conditioned upon the approval of this proposal by the RP stockholders.
Approval of this proposal is assured because holders of approximately 53% of
the RP common stock have agreed to vote to approve the merger.
A broker nonvote, which occurs when a nominee holding shares for a
beneficial owner does not vote on a proposal because the nominee does not have
the discretionary voting power and has not received instructions from the
beneficial owner, or a failure to vote will have the effect of a vote against
the approval and adoption of the merger agreement. An abstention with respect
to this proposal will have the effect of a vote against this proposal.
Voting of proxies
All shares of RP common stock which are entitled to vote and are represented
at the RP special meeting by the properly executed proxies received prior to or
at the RP special meeting, and not revoked, will be voted at the RP special
meeting in accordance with the instructions indicated on such proxies. If no
instructions are indicated, such proxies will be voted for approval and
adoption of the merger agreement.
If any other matters are properly presented at the RP special meeting for
consideration, including, among other things, consideration of a motion to
adjourn the RP special meeting to another time or place the persons named in
the enclosed forms of proxy and acting thereunder will have discretion to vote
on such matters in accordance with their best judgment. Such a motion to
adjourn may be, without limitation, for the purposes of soliciting additional
proxies or allowing additional time for the satisfaction of conditions of the
merger. Shares voted against the approval and adoption of the merger agreement
will not be voted in favor of adjournment for the purpose of the continued
solicitation of proxies.
17
<PAGE>
Revocability of proxies
Any proxy given by a RP stockholder pursuant to this solicitation may be
revoked by the person giving it at any time before it is voted. Proxies may be
revoked by:
. filing with the secretary of RP, at or before the taking of the vote at
the RP special meeting, a written notice of revocation bearing a later
date than the proxy;
. duly executing a later-dated proxy relating to the same shares and
delivering it to the secretary of RP by mail or by facsimile before the
taking of the vote at the RP special meeting; or
. attending the RP special meeting and voting in person; attendance at the
meeting will not, in and of itself, constitute a revocation of a proxy.
Any written notice of revocation or subsequent proxy should be sent to Royal
Precision, Inc., 15170 North Hayden Road, Suite 1, Scottsdale, Arizona 85260,
Attention: Secretary, transmitted by facsimile to the secretary of RP to [ ],
or hand delivered to the secretary of RP before the taking of the vote at the
RP special meeting.
Record date; stock entitled to vote; quorum
The RP board of directors has fixed the close of business on , 1999 as
the record date for the determination of the RP stockholders entitled to notice
of and to vote at the RP special meeting. Accordingly, only RP stockholders of
record as of the close of business on the record date will be entitled to
notice of and to vote at the RP special meeting. As of the record date, there
were outstanding and entitled to vote shares of RP common stock
(constituting all of the voting stock of RP), which shares were held by
approximately [ ] stockholders of record. Each holder of record of shares of
RP common stock as of the record date is entitled to cast one vote per share,
which may be cast either in person or by properly executed proxy, at the RP
special meeting.
The presence, in person, or by properly executed proxy, of the holders of a
majority of the outstanding shares of RP common stock entitled to vote at the
RP special meeting is necessary to constitute a quorum at the RP special
meeting. Shares of RP common stock represented in person or by proxy will be
counted for the purposes of determining whether a quorum is present at the RP
special meeting. Broker nonvotes and shares that are present and entitled to
vote which abstain from voting as to a particular matter will be treated as
shares that are present and entitled to vote at the RP special meeting for
purposes of determining whether a quorum exists.
18
<PAGE>
COYOTE SPECIAL MEETING
Date, time and place
This document is being furnished to the holders of Coyote common stock with
the solicitation of proxies by the Coyote board of directors for use at the
Coyote special meeting to be held on [ ], 1999 at [ ],
commencing at 10:00 a.m., local time.
Matters to be considered at the Coyote special meeting
At the Coyote special meeting, Coyote stockholders will be asked to consider
and vote upon a proposal to amend Coyote's amended and restated articles of
incorporation to increase the number of shares of authorized preferred stock
from 4,000,000 to 10,000,000 and to create, and approve the issuance of, a new
series of shares, the series C preferred stock, par value $.001 per share, to
be delivered in connection with the merger contemplated by the merger
agreement, dated as of February 2, 1999, by and among RP, Coyote and Merger
Sub, a wholly owned subsidiary of Coyote.
Coyote board recommendation
The board of directors of Coyote has unanimously declared that the proposal
to amend Coyote's amended and restated articles of incorporation to increase
the number of shares of authorized preferred stock from 4,000,000 to 10,000,000
and to create, and approve the issuance of, a new series of shares, the series
C preferred stock, par value $.001 per share, to be delivered in connection
with the merger, is advisable and in the best interests of the Coyote
stockholders and recommends that the holders of Coyote common stock vote in
favor of the approval of this proposal.
Vote required
The approval of the Coyote proposal requires the affirmative vote of a
majority of the shares of Coyote entitled to vote on such proposal at the
Coyote special meeting, provided that the total number of shares present at the
meeting represent more than 50% of all the shares of Coyote that are entitled
to vote on the proposal. The consummation of the merger is conditioned upon the
approval by the Coyote stockholders of an amendment to Coyote's amended and
restated articles of incorporation to increase the number of authorized
preferred shares and to create and approve the issuance of a new series of
shares, the series C preferred stock to be delivered to RP stockholders in
connection with the merger. If this proposal is not approved, the merger
agreement will not be implemented. Approval of this proposal is assured
because, in connection with the merger, holders of approximately 69% of the
Coyote common stock have agreed to vote to approve it.
A broker nonvote, which occurs when a nominee holding shares for a
beneficial owner does not vote on a proposal because the nominee does not have
the discretionary voting power and has not received instructions from the
beneficial owner, or a failure to vote will have the effect of a vote against
the amendment of the amended and restated articles of incorporation of Coyote.
An abstention will have the effect of a vote against this proposal.
Voting of proxies
All shares of Coyote common stock which are entitled to vote and are
represented at the Coyote special meeting by the properly executed proxies
received prior to or at the Coyote special meeting, and not revoked, will be
voting at the Coyote special meeting in the accordance with the instructions
indicated on such proxies. If no instructions are indicated, such proxies will
be voted for approval of the Coyote proposal.
If any other matters are properly presented at the Coyote special meeting
for consideration, including, among other things, consideration of a motion to
adjourn the Coyote special meeting to another time or place the persons named
in the enclosed forms of proxy and acting thereunder will have discretion to
vote on such
19
<PAGE>
matters in accordance with their best judgment. Such a motion to adjourn may
be, without limitation, for the purposes of soliciting additional proxies or
allowing additional time for the satisfaction of conditions of the merger.
Shares voted against the Coyote proposal will not be voted in favor of
adjournment for the purpose of the continued solicitation of proxies.
Revocability of proxies
Any proxy given by a Coyote stockholder pursuant to this solicitation may be
revoked by the person giving it at any time before it is voted. Proxies may be
revoked by:
. filing with the secretary of Coyote, at or before the taking of the vote
at the Coyote special meeting, a written notice of revocation bearing a
later date than the proxy;
. duly executing a later-dated proxy relating to the same shares and
delivering it to the secretary of Coyote by mail or by facsimile before
the taking of the vote at the Coyote special meeting; or
. attending the Coyote special meeting and voting in person; although
attendance at the meeting will not in and of itself constitute a
revocation of a proxy.
Any written notice of revocation or subsequent proxy should be sent to
Coyote Sports, Inc., 2291 Arapahoe Avenue, Boulder, Colorado 80302, Attention:
Secretary, transmitted by facsimile to the secretary of Coyote to (303) 417-
1700, or hand delivered to the secretary of Coyote, 2291 Arapahoe Avenue,
Boulder, Colorado 80302 before the taking of the vote at the Coyote special
meeting.
Record date; stock entitled to vote; quorum
The Coyote board of directors has fixed the close of business on , 1999
as the record date for the determination of the Coyote stockholders entitled to
notice of and to vote at the Coyote special meeting. Accordingly, only Coyote
stockholders as of the close of business on the record date will be entitled to
notice of and to vote at the Coyote special meeting. As of the record date,
there were outstanding and entitled to vote shares of Coyote common stock
which constitutes all of the voting stock of Coyote and, which shares were held
by approximately [ ] stockholders of record. Each holder of record of shares
of Coyote common stock as of the record date is entitled to cast one vote per
share, which may be cast either in person or by properly executed proxy, at the
Coyote special meeting.
The presence, in person, or by properly executed proxy, of the holders of a
majority of the outstanding shares of Coyote common stock entitled to vote at
the Coyote special meeting is necessary to constitute a quorum at the Coyote
special meeting. Shares of Coyote common stock represented in person or by
proxy will be counted for the purposes of determining whether a quorum is
present at the Coyote special meeting. Broker nonvotes and shares that are
present and entitled to vote which abstain from voting as to a particular
matter will be treated as shares that are present and entitled to vote at the
Coyote special meeting for purposes of determining whether a quorum exists.
20
<PAGE>
SOLICITATION OF PROXIES
The Coyote and RP boards of directors are soliciting proxies for their
respective special meetings in favor of the proposals submitted to Coyote and
RP stockholders. A proxy card is enclosed with this document. Coyote
stockholders are requested to complete and return the [ ] form of proxy as
soon as possible. RP stockholders are requested to complete and return the
[ ] form of proxy as soon as possible. In order to be valid, the proxy card
for the Coyote or RP special meeting must be completed in accordance with the
instructions on it and received by the times and dates set forth below by the
secretary of Coyote or RP, as the case may be, or at any of the offices of
MacKenzie Partners, Inc., whose name and address is set out below:
by 10:00 a.m. on , 1999 (Eastern Standard Time):
by hand delivery at:
156 Fifth Avenue
New York, NY 10010
by mail to:
156 Fifth Avenue
New York, NY 10010
As an alternative to appointing a proxy, a Coyote or RP stockholder which is
a corporation may appoint any person to act as its representative by delivering
written evidence of the appointment of the representative, by hand or mail, at
any of the offices of [MacKenzie Partners, Inc.], whose name and address is set
forth above, up to one hour before the time fixed for the commencement of the
Coyote or RP special meeting. A representative so authorized may exercise the
same powers, including voting rights, as the appointing corporation could
exercise if it were an individual stockholder.
The solicitation of the enclosed proxies from Coyote and RP stockholders is
made on behalf of the board of directors of Coyote and RP, respectively. The
expenses of the solicitation of proxies, including preparing, handling,
printing and mailing the proxy soliciting material, will be $6,000 plus
incidental expenses and will be borne by Coyote and RP equally. Solicitation
will be made primarily through the mail but may also be made, if necessary, by
electronic telecommunications or in person. Coyote and RP will reimburse banks,
brokers, nominees, custodians and fiduciaries for their expenses in forwarding
copies of the proxy soliciting material to the beneficial owners of the shares
held by such persons and in requesting authority for the execution of proxies.
21
<PAGE>
THE MERGER
Background of the merger
In July 1997, James M. Probst, president of Coyote, met with Christopher
Johnston, then chief executive officer of RP, and Raymond J. Minella, then a
member of the board of directors of RP, in Jackson, Wyoming. At that meeting
Mr. Johnston preliminarily raised, the possibility of an acquisition of Coyote
by RP. In November 1997, Mr. Probst met with members of the board of RP and
discussed the possibility of combining Coyote and RP. Mr. Probst responded that
Coyote would consider the prospect. Later that month, Coyote and RP entered
into a non-disclosure agreement providing for the mutual exchange of certain
confidential information in order to begin to evaluate the viability of
combining the two companies. During the winter of 1997-1998 and early spring of
1998, RP and Coyote continued to evaluate each other's businesses and the
advisability of a possible business combination, and there were sporadic
contacts among the senior management of the two companies. Separately, in
January 1998, Lehman Brothers approached Mr. Probst concerning a possible
business combination involving Coyote and an unrelated third party. Although
Coyote did not pursue that possible transaction, Mr. Probst began to consult
with Lehman Brothers from time to time concerning strategic matters as well as
with respect to a possible transaction with RP.
Thereafter, representatives of Coyote, RP and Lehman Brothers continued to
hold exploratory discussions about the possibility of combining the two
businesses. In April 1998, Mr. Probst met with Mr. Minella and other
representatives of RP at the offices of Berenson Minella in New York City.
Although those discussions primarily centered on the strategic logic of a
business combination and the synergies which might be generated, the parties
also had preliminary discussions concerning the relative possible valuations of
the two businesses. In May 1998, representatives of RP expressed a willingness,
subject to the approval of the RP board of directors, to consider a potential
offer by Coyote to acquire either RP or its business for $6.00 per share in
cash.
On May 9, 1998, following Coyote's annual stockholders' meeting, Mr. Probst
presented to the Coyote board of directors an analysis of the strategic logic
and potential synergies of a combination of Coyote and RP. The Coyote board of
directors authorized Mr. Probst to continue to pursue the possibility of such a
combination.
On June 8, 1998, Coyote delivered to RP a letter formally proposing to
acquire RP for a price of $6.00 per share of RP common stock in cash, common
stock or a combination of the two. Coyote's offer was subject to various
conditions, including the satisfactory completion of its diligence
investigation. On June 19, 1998, the board of directors of RP responded by
authorizing discussions with Coyote with respect to a cash transaction by RP's
Strategic Development Committee, comprised of Mr. Minella, Richard P. Johnston,
Allen Ritchie, Kenneth J. Warren and Christopher Johnston. Between June and
August 1998, representatives of Coyote commenced a diligence investigation of
RP, including matters relevant to a possible combination with Coyote. During
that period representatives of RP, Coyote and Lehman Brothers had intermittent
contacts regarding the possible terms and structure of a potential business
combination.
On September 24, 1998, Coyote retained CIBC Oppenheimer Corp. as placement
agent to assist Coyote in raising funds to finance the potential RP
transaction, to refinance the indebtedness of both companies, and to provide
for the prospective working capital needs of the combined companies. Under the
terms of that engagement, CIBC will be paid a fee of approximately $2.1 million
in connection with their services, conditioned upon consummation of the
transaction and the related financing. On October 9, 1998, Coyote formally
engaged Lehman Brothers to act as Coyote's financial advisor in respect of a
potential business combination with RP.
During the third and fourth quarters of 1998, Coyote and CIBC conducted a
diligence investigation of RP and Coyote and CIBC entered into discussions with
potential financing sources regarding the possibility of financing a
prospective business combination with RP. During this period there were
periodic discussions between representatives of RP and Coyote regarding the
basis on which any potential transaction would be
22
<PAGE>
pursued. On November 3, 1998, RP engaged Berenson Minella to act as RP's
financial advisor in respect of a potential business combination with Coyote.
In late December 1998, CIBC and Coyote concluded that Coyote would be
unlikely to raise sufficient funds on terms satisfactory to Coyote to finance a
cash offer for RP. On December 24, 1998, Mr. Probst telephoned Mr. Minella to
propose changing the terms of Coyote's proposal to provide for a stock-for-
stock merger of RP and a subsidiary of Coyote. From late December 1998 through
January 18, 1999, representatives of Coyote, RP and the parties' respective
legal and financial advisors held intensive negotiations concerning the
relative value of RP and Coyote and the basis on which a stock transaction
could be submitted to and approved by the boards of directors of both
companies. The negotiations centered upon such matters as the nature of the
security to be issued, the appropriate exchange ratios, the timing of a
transaction, and whether Coyote would go forward with certain other
contemplated transactions.
During this period members of the board of RP had informal discussions among
themselves regarding the merits of a stock-for-stock transaction and the terms
on which such a transaction would be advisable and in the best interest of RP's
stockholders.
Throughout the weekend of January 16-18, 1999, representatives of Coyote and
RP and their respective legal and financial advisors conducted extensive
negotiations regarding a proposed non-binding letter of intent between the
parties outlining the structure of the contemplated transaction.
On January 17, 1999, the board of directors of RP met to consider the
proposed letter of intent and discussed the status of the negotiations with
Coyote. Berenson Minella orally presented to the RP board of directors a
summary of certain analyses it had prepared regarding a potential transaction
with Coyote on the terms specified in the draft letter of intent that had been
presented to the RP board. The RP board of directors then authorized Mr.
Minella to continue his discussions with Coyote regarding the transaction set
forth in the letter of intent.
On January 18, 1999, the boards of directors of Coyote and RP, respectively,
unanimously approved the proposed letter of intent and that letter was executed
and delivered that evening. In addition, the executive committee of RP's board
of directors was directed to engage an additional financial advisor for
purposes of evaluating the proposed transaction and evaluating the fairness of
the contemplated merger consideration from a financial point of view.
The letter of intent contemplated a merger of RP with and into Coyote, or a
subsidiary of Coyote, in a tax-free transaction in which RP stockholders would
receive shares of series C preferred stock on terms substantially equivalent,
but not identical, to those later embodied in the definitive merger agreement.
On January 19, 1999, RP and Coyote issued a joint press release announcing
the execution and delivery of the letter of intent.
Between January 19, 1999 and January 28, 1999, the representatives of each
party concluded additional diligence with respect to the other company, and
negotiated the terms of a definitive merger agreement and related documents. On
January 20, 1999, RP engaged NatCity to advise the RP board of directors
regarding the fairness of the merger consideration and the exchange ratio to
RP's stockholders from a financial point of view.
Over the weekend of January 23-24, 1999, representatives of Coyote and RP
met together with their legal and financial advisors to negotiate the terms of
the merger agreement, the stockholder agreement and the voting agreements.
Although substantial progress was made in those discussions, areas of
disagreement remained, including the scope of the restrictions proposed by
Coyote on either party's solicitation or consideration of an alternative
transaction and the circumstances, if any, under which the merger agreement and
the proposed voting agreements could be terminated in that connection, as well
as the appropriate fees and expenses that might be payable as a result.
Differences also remained regarding the terms of the preferred stock terms and
other matters.
23
<PAGE>
On January 25, 1999, Mr. Minella telephoned Mr. Probst to discuss the
outstanding issues regarding the merger agreement. During that conversation,
Messrs. Probst and Minella agreed on a proposed resolution of the non-
solicitation, termination and termination fee and expense reimbursement issues
and other open matters.
On January 26, 1999, the parties' legal advisors prepared drafts of the
merger agreement, including the provisions of the certificate of designation
with respect to the preferred stock, for circulation to the boards of directors
of the respective companies.
On January 28, 1999, the board of directors of Coyote met to consider and
take action with respect to the merger agreement and related matters. All
directors participated either in person or by conference telephone. The
following actions were taken at that meeting:
. Presentations were made by Coyote's president and by its legal and
financial advisors. Lehman Brothers provided to the board of Coyote its
oral opinion that as of January 28, 1999, and based upon and subject to
certain matters stated therein, the consideration to be paid by Coyote
to RP stockholders in the merger was fair from a financial point of view
to Coyote.
. Following discussion among the directors, the board of directors of
Coyote unanimously authorized the execution and delivery on behalf of
Coyote of the merger agreement and related documents.
. The Coyote board also unanimously approved the amendment of Coyote's
amended and restated articles of incorporation to increase the number of
shares of authorized preferred stock from 4,000,000 to 10,000,000 and to
create a new series of shares, the series C preferred stock, to be
delivered in connection with the merger, and unanimously determined that
such action is advisable and in the best interests of the Coyote
stockholders and to recommend that the holders of Coyote common stock
vote in favor thereof.
. The Coyote board delegated to its president the authority to approve any
required changes in the terms of the merger agreement and related
documents.
On January 28, 1999, the board of directors of RP met to consider and take
action with respect to the merger agreement and related matters. At that
meeting all directors participated either in person or by telephone. The
following actions were taken at that meeting:
. The board of directors of RP received advice from its legal advisors
regarding its fiduciary duties under the law of the State of Delaware,
received an update regarding the history of the negotiations in respect
of the merger agreement and the merger and various related matters,
reviewed the terms of the merger agreement, the voting agreements, the
stockholder agreement and the certificate of designation in respect of
the series C preferred stock, received a report in respect of the
results of RP's diligence investigation of Coyote.
. The board of directors of RP received an oral financial presentation
from NatCity, including a discussion of the analyses performed in
evaluating the proposed transaction. NatCity provided to the board of
directors of RP an oral opinion, subject to the execution of definitive
documentation, that, as of January 28, 1999, and subject to the
assumptions and qualifications contained in its opinion, the exchange
ratio and the merger consideration that the RP stockholders will receive
in the merger pursuant to the merger agreement were fair, from a
financial point of view, to the stockholders of RP.
. During this meeting the board considered the risks and advantages of the
proposed merger transaction to RP and its stockholders.
. Subject to finalizing the wording of the merger agreement in a manner
approved by the board of directors of RP, the board of directors of RP:
(i) unanimously determined that the exchange ratio and the merger
consideration that the RP stockholders will receive in the merger were
fair to, and that the merger agreement, the merger and the other
transactions contemplated by the merger agreement were fair to and
otherwise advisable and in the best interests of, RP and its
stockholders; (ii) approved the
24
<PAGE>
merger agreement, the merger and the other transactions contemplated by
the merger agreement; and (iii) resolved to recommend that the
stockholders of RP vote "FOR" the approval and the adoption of the
merger agreement and the approval of the merger and the other
transactions contemplated by the merger agreement.
. The board of directors of RP delegated to its executive committee the
authority to approve the execution and delivery of the merger agreement,
subject to finalizing the wording of the merger agreement in a manner
approved by the board of directors of RP.
On January 31, 1999, the board of directors of RP held a further meeting at
which all directors participated either in person or by telephone. The RP
board took the following actions:
. The board of directors of RP considered the advisability of obtaining
the waiver of certain provisions of the existing RP stockholder
agreement and in connection with such cancellation considered the
cancellation and reissuance of certain options held by Danny Edwards, a
director of RP, and certain persons associated with him, including
Robert Burg II, a director of the Company, and Everen Securities, Inc,
and certain of its employees including Lawrence Bain, a director of the
Company. Mr. Edwards had required such cancellation and reissuance as a
condition to waiving certain contractual rights which he possessed under
the existing RP stockholder agreement.
. By a unanimous vote of all participating directors, with Messrs.
Edwards, Burg and Bain abstaining, the board of directors approved the
cancellation and reissuance of such options.
. By a unanimous vote, the board of RP then approved some amendments to
the existing RP stockholder agreement which were necessary to facilitate
the merger.
. The board of RP was then apprised by management of certain additional
developments regarding Coyote, including certain year-end and other
compensation and option information. NatCity then orally reaffirmed its
oral opinion delivered on January 28, 1999, subject to the receipt of an
executed copy of the merger agreement.
. The board of directors of RP then unanimously reaffirmed its
determinations made at its meeting of January 28, 1999, and again
authorized its executive committee to approve the execution and delivery
of the merger agreement, subject to finalizing the wording of the merger
agreement in a manner approved by the board of directors of RP.
On February 1, 1999, Coyote, RP and their respective advisors finalized the
terms of the merger agreement.
Early in the morning of February 2, 1999, Messrs. Probst and Minella
executed the definitive merger agreement on behalf of Coyote and RP,
respectively. Later that morning, the parties issued a joint press release
announcing the execution of the merger agreement. After this, on March 1,
1999, the board of directors of RP met to consider certain proposed amendments
to the merger agreement and form of certificate of designation for the series
C preferred stock attached as an exhibit to the merger agreement, including
provisions which would allow Coyote, at Coyote's option, to pay any accrued
and unpaid dividends payable to the holders of series C preferred stock upon
conversion of series C preferred stock into Coyote common stock or a
subordinated promissory note of Coyote to the extent that Coyote is not
permitted under the terms of its then outstanding debt agreements or
applicable law to pay such dividends in cash. At this board meeting the
following occurred:
. NatCity reaffirmed its opinion that the exchange ratio and the merger
consideration to be received by the holders of RP common stock are fair
from a financial point of view to the holders of the RP common stock.
. By a unanimous vote of all directors participating, the RP board of
directors reaffirmed its determinations made on January 28, 1999, and
authorized the execution and delivery of the amended and restated
agreement and plan of merger.
25
<PAGE>
On March 3, 1999, Messrs. Probst and Minella executed the amended and
restated merger agreement, dated as of February 2, 1999, on behalf of Coyote &
RP, respectively.
Reasons of RP for the merger
In reaching its decision to approve the merger at its meeting on January 28,
1999, and in reconfirming that determination at its meeting of January 31,
1999, the board of directors of RP carefully considered a number of factors,
including the following:
. Its belief the merger will result in a strong combined entity with (a)
complimentary businesses, corporate goals and management philosophies,
and (b) the financial and managerial resources necessary to compete in
the increasingly competitive market for golf products.
. Its view of (a) the business, assets, financial condition and results of
operation or RP, Coyote and the combined companies and (b) the strategic
fit between RP and Coyote, including the opportunities for synergies and
cost savings. The RP board of directors considered that:
. The merger should provide the combined companies with an enhanced
competitive position as one of the leading manufacturers of golf
club shafts and other related items. The merger will create a
company capable of offering a broader range of products than either
RP or Coyote can currently offer alone, including complete lines of
steel golf shafts, graphite golf shafts, and golf grips to both the
pro grade and commercial grade markets.
. The combined enterprise should have greater earnings and cash flows,
higher market capitalization and greater critical mass than RP
currently does. As a result, the combined companies will be better
able to realize their growth potential and pursue additional
business development opportunities than RP would on its own.
Further, the RP board of directors believes that the complimentary
nature of the two businesses should result in operational synergies
and cost savings. RP's board of directors believes that the combined
enterprise could realize significant reductions in corporate
overhead by integrating certain administrative and marketing
functions, and should be able to exploit the expertise of their
combined technical, operations, and sales and marketing personnel to
more efficiently run the existing operations and to pursue
additional business development opportunities.
. The merger would add strong European distribution networks to RP's
existing North American and Asian distribution networks and help
create a large global and diversified customer base for the combined
companies.
. The stated desire of stockholders of RP representing a majority of the
issued and outstanding shares of RP common stock that RP enter into the
merger and the fact that those stockholders were willing to agree to
vote all of their shares of RP common stock in favor of the merger
pursuant to the RP voting agreements.
. Its assessment of RP's strategic alternatives, which included remaining
a publicly owned independent company. In this regard, the board of
directors of RP concluded, following extensive analysis and discussion
that the terms of the merger agreement provide the best means for the
holders of RP's common stock to maximize the value of their holdings.
. The terms and conditions of the merger agreement, including the right of
RP to negotiate and provide information to third parties and terminate
the merger agreement in the event of an unsolicited acquisition
proposal, if such action were required in the exercise of the fiduciary
duties of the RP board of directors. If such fiduciary duty termination
provision were exercised, RP would be obligated to pay Coyote up to $1.0
million of its actual, reasonable and documented expenses and $750,000
upon completion of an alternative transaction. The board of directors of
RP did not view these obligations as unreasonably precluding any third
party from proposing an alternate transaction.
26
<PAGE>
. The terms of the series C preferred stock to be received by the holders
of RP common stock in the merger, including the liquidation preference,
preferred dividend and redemption features of the series C preferred
stock and the fact that the series C preferred stock will be convertible
into Coyote common stock on a share-for-share basis and, prior to
conversion, will vote as one class with the Coyote common stock.
. The ability of the RP stockholders to have an equal equity participation
with the present Coyote stockholders in the combined entity.
. The terms and provisions of the stockholder agreement and the voting
agreements.
. The ability to consummate the merger as a tax-free reorganization under
the Internal Revenue Code of 1986, as amended (the "Code").
. The current and historical trading prices and values of the RP common
stock and the Coyote common stock, the relative liquidity of the two
companies' common stocks, the prospective liquidity of the Coyote common
stock and the prospective liquidity of the series C preferred stock.
. The oral presentation of NatCity and its oral opinion (later confirmed
in writing) that as of January 28, 1999 and subject to the assumptions
and qualifications contained in its opinion the exchange ratio and the
merger consideration that the RP stockholders will receive in the merger
are fair from a financial point of view to the holders of RP common
stock.
In connection with its deliberations at its January 28, 1999, and January
31, 1999, meetings, the board of directors of RP was aware of the potential
benefits to be received in the merger by various directors, other than the
severance payments to certain managers of RP, which arrangements were approved
by the executive committee of the board of directors of RP with the consent of
Coyote subsequent to the execution of the merger agreement. The board of
directors awarded Tom Schneider, the president, chief operating officer and
chief financial officer of RP, a bonus of $100,000, and Kevin Neill, the vice
president of finance and corporate controller of RP, a bonus of $10,000, in
each case payable upon completion of the merger, as compensation for their
efforts on behalf of RP in connection with the merger. The compensation
committee of the RP board of directors also approved the award of new severance
benefits to each of thirteen RP employees including Mr. Schneider. These new
severance benefits include vesting on non-vested options, extension of all
stock options to one year after termination of employment and continued medical
and dental benefits after termination of employment. The total severance
obligation of RP with respect to these severance benefits is $357,000,
including $110,000 which would be received by Mr. Schneider. Subsequently, RP
has awarded severance benefits to an additional 12 people. The aggregate
severance obligation of RP under these additional benefits is $48,000.
In view of the wide variety of complex factors considered by the board of
directors of RP in connection with its evaluation of the merger, the board of
directors of RP did not consider it practicable to quantify, rank or otherwise
assign relative weights to the specific factors it considered in reaching its
decision. In addition, the board of directors of RP did not make any specific
determination as to whether any particular factor, was favorable or unfavorable
to its ultimate determination. Rather the RP board conducted a discussion of
the factors described above, including asking questions of RP's management and
its legal and financial advisors, and reached a general consensus that the
exchange ratio is fair to, and that the merger agreement, the merger and the
other transactions contemplated by the merger agreement are fair to and
otherwise advisable and in the best interests of, RP and its stockholders. In
considering the factors described above, individual members of the board of
directors of RP may have given different weight to different factors.
Recommendation of the board of directors of RP
After careful consideration, the board of directors of RP has unanimously
determined that the exchange ratio and the merger consideration that the RP
stockholders will receive in the merger are fair to, and that the merger
agreement, the merger and the other transactions contemplated by the merger
agreement are fair to and
27
<PAGE>
otherwise advisable and in the best interests of, RP and its stockholders. The
board of directors of RP recommends that you vote "FOR" the approval and
adoption of the merger agreement and the approval of the merger and the other
transactions contemplated by the merger agreement.
Opinion of NatCity Investments, Inc.
On January 29, 1999, NatCity Investments, Inc. delivered its opinion that,
as of such date, the exchange ratio and the merger consideration that the
holders of the shares of RP common stock will receive in the merger is fair to
them from a financial point of view.
The full text of the written opinion of NatCity, which sets forth the
assumptions made, procedures followed, matters considered and limitations on
the review undertaken by NatCity in connection with the opinion, is attached as
Annex C to this joint proxy statement/prospectus. The summary of the opinion
set forth in this joint proxy statement/prospectus is qualified in its entirety
by the full text of such opinion, which is incorporated herein by reference.
Shareholders of RP are urged to and should read such opinion in its entirety.
In connection with its opinion, NatCity reviewed, among other things:
. the form of merger agreement;
. the form of certificate of designation;
. the form of Coyote voting agreements;
. the form of stockholder agreement;
. RP's annual report to shareholders and annual report on Form 10-KSB for
the fiscal year ended May 31, 1998 and Quarterly Reports on Form 10-QSB
for the fiscal quarters ending August 31, 1998, and November 30, 1998,
RP's current report on Form 8-K dated January 20, 1999 and RP's proxy
statement dated September 9, 1998;
. Coyote's annual report to shareholders and annual report on Form 10-KSB
for the fiscal year ended December 31, 1997 and quarterly reports on
Form 10-QSB for the preceding three fiscal quarters, Coyote's current
report on Form 8-K dated January 26, 1999 and Coyote's proxy statement
dated April 20, 1998; and
. certain internal financial analyses and other information furnished to
it by RP and Coyote.
NatCity also:
. discussed the business and prospects of RP and Coyote with members of
the senior management of each company;
. visited the domestic manufacturing facilities of the respective
subsidiaries of RP and Coyote;
. reviewed the reported price and trading activity for the RP common stock
and for the Coyote common stock;
. compared certain financial and stock market information for RP and
Coyote with similar information for comparable publicly-traded companies
identified by NatCity;
. reviewed the financial terms of certain comparable recent business
combinations identified by NatCity; and
. reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as it
deemed appropriate, including its assessment of general economic,
market, monetary and other conditions existing on the date its opinion
was delivered to the RP board of directors.
28
<PAGE>
NatCity relied upon the accuracy and completeness of all of the financial
and other information reviewed by it and assumed the accuracy and completeness
of that information for purposes of its opinion. In addition, NatCity has not
made an independent evaluation or appraisal of the assets and liabilities of RP
or Coyote or any of their respective subsidiaries and NatCity has not been
furnished with any such evaluation or appraisal. No limitations were imposed by
RP's board of directors or management on the scope of NatCity's investigation
or analysis. NatCity did not determine or negotiate the exchange ratio or the
amount of the merger consideration payable to the holders of the RP common
stock. NatCity's opinion is based upon the economic and market conditions
existing on the date of its opinion. NatCity's opinion is provided for the
information and assistance of the board of directors of RP in connection with
its consideration of the transaction contemplated by the merger agreement.
The following is a summary of certain of the financial analyses conducted by
NatCity preparing its opinion. NatCity reviewed the assumptions upon which such
analyses were based and other factors, including the current financial results
of and future prospects for RP, with RP's management. NatCity did not assign
any particular weight to any factor or analysis it considered in preparing its
opinion.
Discounted cash flow analysis. NatCity performed a discounted cash flow
analysis using RP's management's projections. NatCity calculated a net present
value of free cash flows for the fiscal years 1999 through 2003 using discount
rates ranging from 18% to 26%. These discount rates were chosen as NatCity
believes they represent a viable range of internal rates of return required by
institutional equity investors. NatCity calculated RP's terminal values in
fiscal year 2003 based on multiples of 4.0 times earnings before interest and
taxes ("EBIT") to 6.0 times EBIT. These terminal values were then discounted to
present value using discount rates from 18% to 26%. Using RP's terminal values
in the year 2003 based on multiples ranging from 4.0 times EBIT to 6.0 times
EBIT and discounting these terminal values to present value using discount
rates ranging from 18% to 26%, the implied per share values ranged from $1.36
to $2.19 per outstanding share of RP common stock.
Comparable company analysis. NatCity also compared certain historical and
projected operating and financial information, ratios and public market
multiples for RP to the corresponding publicly-available operating and
financial information, ratios and public market multiples for four publicly-
traded North American manufacturers of golf products. The comparable companies
were Adams Golf, Inc., Aldila, Inc., Teardrop Golf Company and S2 Golf, Inc.
The comparable companies were chosen because they were publicly traded
companies with operations that, for the purposes of analysis, NatCity
considered similar to RP. NatCity analyzed, among other things, the market
value, market capitalization, and certain historical and forecasted operating
and financial data, ratios and public market multiples for each of the
comparable companies. The principal comparable company valuation indicators
produced these results:
. The latest twelve months ("LTM") earnings per share and the multiple for
each company. NatCity discounted this method of valuation because RP and
two of the comparable companies reported losses for the period.
. The estimates of earnings per share for the next twelve months and the
multiple for each company. This analysis produced multiples ranging from
5.35 times to 13.97 times, implying a per share price range of $1.04 to
$2.71 per outstanding share of RP common stock.
. The LTM earnings before interest, taxes, depreciation and amortization
("LTM EBITDA") and the multiple for each company. This analysis produced
a range in multiples of 5.2 times to 5.5 times, implying a per share
price range of $1.93 to $2.04 per outstanding share of RP common stock.
. The LTM net sales and the multiple for each company. NatCity discounted
the high multiple for Adams Golf, and this analysis produced multiples
ranging from 0.6 times to 1.7 times, implying a per share price range of
$2.81 and $8.40 per outstanding share of RP common stock.
NatCity derived average multiples for each method of valuation for the
comparable companies from its analysis. The average projected price/earnings
("P/E") multiple was 10.1 times. The average LTM EBITDA
29
<PAGE>
multiple was 5.3 times. Discounting the extreme of Adams Golf, the average LTM
net sales multiple was 0.8 times. These average multiples were applied to RP's
historical and projected financial information, to produce a range of equity
values for RP common stock of $1.95 to $4.13. NatCity also calculated multiples
for RP using a price of $3.13 per share, the closing price of RP common stock
on the Nasdaq National Market System as of January 28, 1999. RP's projected P/E
was calculated by averaging estimated earnings for both fiscal years 1999 and
2000 to create an estimate for calendar year 1999 which produced a projected
P/E ratio of 16.4 times. The LTM EBITDA multiple for RP was calculated to be
8.7 times. The net sales multiple for RP was calculated to be .64 times. The
multiples and ratios for RP were based on information provided by RP's
management and the multiples for each of the comparable companies were based on
the most recent publicly available information. NatCity based its estimated
results for the comparable companies on compilations of analysts' earnings
estimates.
NatCity also calculated 1999 projected P/E's for RP and Coyote. Coyote and
the comparable companies all report earnings on a calendar year basis. For
comparison purposes, RP 's projected P/E was calculated by averaging estimated
earnings for both fiscal years 1999 and 2000 to create an estimate for calendar
year 1999 which produced a projected P/E ratio of 16.4 times. Coyote's
projected 1999 P/E was 14.4 times. This analysis implies that the exchange
ratio is favorable to RP shareholders from a financial point of view.
Pricing and trading analysis. NatCity compared certain historical data for
RP and Coyote, respectively, including:
. daily share prices and trading ranges;
. daily trading volume; and
. market maker activity.
NatCity made specific comparisons including data through a range of 13
months prior to January 28, 1999. NatCity also compared data through a range of
two months prior to January 28, 1999. For the thirteen months ending January
28, 1999, RP's stock price achieved a high of $7.25 per share, a low of $1.63
per share and an average price of $4.63 per share. For the two months ending
January 28, 1999, RP's common stock achieved a high of $3.50 per share, a low
of $1.28 per share and an average of $2.44 per share.
NatCity made similar comparisons to the common stock of Coyote. For the
thirteen months prior to January 28, 1999, Coyote's common stock achieved a
high of $6.31 per share, a low of $3.00 per share and an average of $4.75 per
share. For the two months prior to January 28, 1999, Coyote's common stock
achieved a high of $4.88 per share, a low of $3.00 per share and an average of
$3.78 per share.
NatCity analyzed the daily trading volume for a date range through 13 months
prior to January 28, 1999. This analysis indicated that the common stock for
Coyote traded 5,126,700 shares and that RP 's common stock traded 783,800
shares for that period. This analysis of share prices and trading volume
implies that the exchange ratio is favorable to RP shareholders from a
financial point of view.
Comparable transaction analysis. NatCity is actively engaged in merger and
acquisition transactions as part of its normal investment banking business. In
such activities, NatCity typically represents "middle market companies", in
sale transactions. These companies are of a comparable size in terms of
revenues, EBIT, EBITDA and income to that expected for RP over the coming year.
For this transaction NatCity utilized a median middle market EBIT multiple of
8.8 times which implies a value of $2.33 per outstanding share of RP common
stock. In addition to comparing this transaction to such multiples as NatCity
sees in the marketplace for middle market companies, NatCity also reviewed four
recent merger transactions for North American manufacturers of golf products
that NatCity considered reasonably comparable to the merger for purposes of its
analysis . The comparable transactions included:
. The Parkside Group's acquisition of MacGregor Golf Co. in 1998;
. Callaway Golf Company's acquisition of Odyssey Sports, Inc. in 1997;
30
<PAGE>
. Teardrop Golf Company's acquisition of Tommy Armour Golf Company in
1998; and
. Teardrop Golf Company's acquisition of RAM Golf Corporation in 1998.
NatCity derived transaction multiples by comparing values to revenues for
each of these respective transactions. For the merger, NatCity used revenue
multiples ranging from .28 times to .84 times which implied a range of values
of $1.38 to $4.15 per outstanding share of RP common stock. For purposes of its
analysis, NatCity discounted Callaway's acquisition of Odyssey because, at the
time of the Callaway acquisition, Odyssey's products were considered to have
unusually strong growth potential.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
all of the analyses, could produce an incomplete view of the processes
underlying NatCity's opinion. In arriving at its fairness determination,
NatCity considered the results of all such analyses.
No company or transaction used in the above analyses as a comparison is
directly comparable to RP or Coyote or the merger. NatCity prepared its
analyses solely for purposes of providing its opinion to the RP board of
directors as to the fairness, from a financial point of view, of the exchange
ratio and the merger consideration to be received by the holders of RP shares
in the merger and such analyses do not purport to be appraisals or necessarily
reflect the prices at which businesses or securities actually may be sold.
Analyses based upon forecasts of future results do not necessarily indicate
actual future results, which may be significantly more or less favorable than
the analyses may suggest. Such analyses are based upon numerous factors or
events beyond the control of the parties or their advisors and are inherently
subject to uncertainty, and none of RP, Coyote, NatCity or any other person
assumes responsibility if future results are materially different from those
forecast. As described above, NatCity's opinion to the board of directors of RP
was one of many factors taken into consideration by the RP board of directors
in making its determination to approve the merger agreement. NatCity's opinion
to the RP board of directors addresses only the fairness, from a financial
point of view, of the consideration to be received by the RP stockholders in
the merger and does not constitute a recommendation to any stockholder of RP as
to how to vote at the RP special meeting.
This description of NatCity's opinion is a summary of the analysis performed
by NatCity and is qualified by reference to the written opinion of NatCity
attached as Annex C to this joint proxy statement/prospectus.
Pursuant to the terms of the engagement of NatCity, RP has paid NatCity,
upon delivery of its opinion to the RP board of directors, a fee of $100,000
for the preparation and delivery of its opinion without regard to the
conclusions set forth in the opinion. RP has agreed to reimburse NatCity for
its reasonable out-of-pocket expenses, including attorney's fees, and to
indemnify NatCity against certain liabilities, including certain liabilities
under the federal securities laws.
NatCity, as a customary part of its investment banking business, is engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, private placements and valuations
for estate, corporate and other purposes. RP selected NatCity to render a
fairness opinion to RP's board of directors because NatCity has substantial
experience in transactions similar to the merger.
Reasons of Coyote for the merger
At a meeting held on January 28, 1999, at which all directors participated
either in person or by telephone, the board of directors of Coyote reviewed and
discussed, among other things:
. its fiduciary duties as a board;
. a transaction overview including the history of the transaction, its
strategic rationale, the financial profile of the two companies, and key
terms of the transaction and the associated risks;
. the financial, operational and legal due diligence investigations of RP;
31
<PAGE>
. the financial opinion of Lehman Brothers and its supporting analyses;
and
. the specific provisions of the merger agreement.
In reaching its determination at the January 28, 1999 meeting, the board of
directors of Coyote consulted with Coyote's management as well as its financial
and legal advisors, and considered the following matters:
. Strategic rationale. Coyote believes the merger should provide it with
an enhanced competitive position as one of the leading manufacturers in
the sports equipment industry, particularly in the manufacture of golf
shafts and other related items. After the merger, Coyote will be capable
of supplying complete lines of steel golf shafts, graphite golf shafts,
and golf grips to both the pro grade and commercial grade markets. In
addition, the merger should enable Coyote to make significant progress
toward achieving other strategic goals, including maintaining market
leadership, improving profitability, and increasing the stability of
revenues and cash flows.
. Stronger company positioned to exploit growth opportunities. The
combined enterprise should have greater earnings and cash flows, higher
market capitalization and a stronger balance sheet. The resulting
improvement in financial flexibility should enhance the ability of
Coyote to realize its growth potential and pursue additional business
development opportunities.
. Ability to leverage manufacturing, technology and expertise over higher
margin branded products. The Company believes the acquisition of RP
combined with the acquisition of West Coast Composites ("West Coast")
and the consolidation with Unifiber creates a unique and substantial
platform to manufacture both golf shaft products and other specialty
branded products.
. Complementary distribution capabilities. Coyote management believes that
RP offers an opportunity to improve Coyote's distribution capability.
The combination of Apollo's strong presence in Europe and global OEM
relationships and RP's strong U.S. and Asian presence and aftermarket
distribution capability are believed to create an improved unique
platform to serve the Company's customers worldwide.
. Strong relationship with a diversified customer base. Coyote management
believes the acquisition of RP will help create a leading golf shaft
manufacturer with a large global diversified customer base. The combined
companies would be a significant supplier to virtually every major club
manufacturer, including: Callaway, Cobra, Dunlop, Goldwin, Hogan, Lynx,
MacGregor, Mizuno, Odyssey, PING, Ram, Slazenger, Spalding, Taylor Made,
Teardrop, Titleist and Wilson. Combined, Coyote and RP will have more
than 640 customers for steel and graphite shaft products, including more
than 600 golf club manufacturers, more than 40 distributors and various
custom club assemblers. In addition, RP has more than 3,000 customers of
golf grip products, including more than 300 golf club manufacturers,
more than 2,700 distributors and various custom club assemblers.
. Capitalize on perceived favorable trends affecting the golf equipment
industry. The combined companies would be better positioned to
meaningfully benefit from what management perceives as the positive
trends affecting the golf equipment industry. These trends include:
. increased consumer spending since 1990 on recreational activities in
general and on golf equipment in particular;
. growth in the number of golf courses;
. increased interest in golf by women, juniors and minority golfers;
. projected population growth of golfers who are 40 to 60 years old,
the segment of the population which generally plays the most rounds
and spends the most on golf equipment;
. projected population growth of individuals entering their 20s, the
age when golfers generally begin playing the game;
32
<PAGE>
. significant increases in consumer advertising by the golf equipment
industry; and
. the rapid evolution of golf club design and technology.
. Anticipated operating synergies and strategic benefits. Management
believes the complementary nature of the two businesses should result in
operational synergies and other strategic benefits which should provide
improved economies of scale. Coyote believes that the combined
enterprise could realize significant reductions in corporate overhead by
integrating administrative functions, and that Coyote could leverage the
expertise of the combined company's technical, operational, and sales
and marketing functions to more efficiently run the existing operations
and to pursue additional business development opportunities while
spreading the cost of these functions over a larger asset and revenue
base. Additionally, Coyote expects to achieve other cost and revenue
enhancing benefits from combining the proprietary technologies of RP and
Coyote.
. Potential earnings per share accretion. The transaction is believed to
have the potential to be accretive to Coyote's 1999 and 2000 earnings
per share because of anticipated operational savings and strategic
benefits associated with the merger.
. Opinion of Lehman Brothers. The receipt of the opinion from Coyote's
financial advisor, Lehman Brothers, described below, as to the fairness
to Coyote from a financial point of view of the consideration proposed
to be issued in the merger.
. Certain risks. The potential risks associated with the merger, including
the possibilities that the combined companies may not realize the
potential operational and financial synergies as and when anticipated,
and that the merger could be disruptive to the business or operations of
Coyote or RP.
In view of the wide variety of complex factors considered by the board of
directors of Coyote in connection with its evaluation of the merger, the board
of directors of Coyote did not consider it practicable to quantify, rank or
otherwise assign relative weights to the specific factors it considered in
reaching its decision. The board of directors of Coyote relied on the
experience of Lehman Brothers, its financial advisor, for quantitative analysis
of the financial terms of the merger. In addition, the board of directors of
Coyote did not make any specific determination as to whether any particular
factor, was determinative to its ultimate determination to assign any
particular weight to any factor. Rather, the Coyote board conducted a
discussion of the factors described above, including asking questions of
Coyote's management and legal and financial advisors, and reached a general
consensus that the merger was advisable and in the best interest of Coyote and
Coyote's stockholders. In considering the factors described above, individual
members of the board of directors of Coyote may have given different weight to
different factors.
Recommendation of the board of directors of Coyote
Based on the foregoing, and the opinion of Lehman Brothers referred to
above, the board of directors of Coyote unanimously approved the merger
agreement and the transactions contemplated thereby and the amendment of the
amended and restated articles of incorporation to increase the number of
authorized preferred shares and the creation and the issuance of a new series
of shares, the series C preferred stock to be delivered in connection with the
merger. The board of directors of Coyote believes that the merger is fair to
and in the best interest of the Coyote stockholders and recommends that
Coyote's stockholders vote FOR the proposal to amend the amended and restated
articles of incorporation to increase the number of authorized preferred shares
and to create and issue a new series of shares, the series C preferred stock,
to be delivered in connection with the merger.
Opinion of Lehman Brothers
General.
In October 1998, the Coyote board of directors engaged Lehman Brothers to
act as its financial advisor with respect to pursuing an acquisition of RP. On
January 28, 1999, Lehman Brothers rendered its oral opinion
33
<PAGE>
- -- subsequently confirmed in writing -- to the Coyote board of directors that
as of such date and, based upon and subject to certain matters stated therein,
the consideration to be paid by Coyote to the stockholders of RP in the merger
was fair from a financial point of view to Coyote.
The full text of the Lehman Brothers' written opinion, dated January 28,
1999, is attached as Annex B to this joint proxy statement/prospectus.
Stockholders may read the Lehman Brothers opinion for a discussion of the
assumptions made, procedures followed, factors considered and limitations on
the review undertaken by Lehman Brothers in rendering its opinion. The
following is a summary of the Lehman Brothers opinion.
Lehman Brothers advisory services and opinion were provided for the
information and assistance of the Coyote board in connection with its
consideration of the merger. The Lehman Brothers opinion is not intended to be
and does not constitute a recommendation to any shareholder of Coyote as to how
such shareholder should vote on the amendment to Coyote's amended and restated
articles of incorporation and the issuance of the series C preferred stock to
be delivered in connection with the merger. Lehman Brothers was not requested
to opine as to, and its opinion does not address, Coyote's underlying business
decision to proceed with or effect the merger.
In arriving at its opinion, Lehman Brothers reviewed and analyzed:
. the merger agreement and the specific terms of the proposed transaction
and the series C preferred stock;
. such publicly available information concerning Coyote and RP as it
believed to be relevant to its analysis, including Coyote and RP annual
reports on Form 10-KSB for the fiscal years ended December 31, 1997 and
May 31, 1998, respectively, and Coyote and RP Quarterly Reports on Form
10-QSB for the quarters ended September 30, 1998 and November 30, 1998,
respectively;
. financial and operating information with respect to the business,
operations and prospects of Coyote and RP furnished to it by Coyote and
RP, including information relating to the financial condition and
results of operations of Coyote for the fiscal year ended December 31,
1998;
. a trading history of RP common stock from September 2, 1997, to the
present and a comparison of that trading history with those of companies
that it deemed relevant;
. a trading history of Coyote common stock from September 18, 1997 to the
present and a comparison of that trading history with those of companies
that it deemed relevant;
. a comparison of the historical financial results and present financial
condition of Coyote with those of other companies that it deemed
relevant;
. a comparison of the historical financial results and present financial
condition of RP with those of other companies that it deemed relevant;
. a comparison of the financial terms of the proposed merger transaction
with the financial terms of certain other transactions that it deemed
relevant;
. the potential pro forma impact of the proposed merger transaction,
including cost savings, operating synergies and strategic benefits
expected by management of Coyote to result from the combination of the
businesses of Coyote and RP; and
. the results of efforts by Coyote and one of its financial advisors to
raise financing in connection with the proposed merger transaction.
In addition, Lehman Brothers had discussions with the management of Coyote
and RP concerning their business, operations, assets, financial condition and
prospects and undertook such other studies, analyses and investigations as it
deemed appropriate.
34
<PAGE>
Lehman Brothers assumed and relied upon the accuracy and completeness of the
financial and other information it used without assuming any responsibility for
independent verification of such information. Lehman Brothers also relied upon
the assurances of Coyote and RP management that they are not aware of any facts
or circumstances that would make such information inaccurate or misleading.
With respect to the financial projections of Coyote and RP, upon advice of
Coyote and RP, Lehman Brothers assumed that such projections were reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of Coyote and RP management as to their future financial performance
and that they would perform substantially in accordance with such projections.
With respect to the operating synergies and strategic benefits expected by
Coyote management to result from a combination of the businesses of Coyote and
RP, upon advice of Coyote, Lehman Brothers assumed that such estimated
operating synergies and strategic benefits will be achieved substantially in
accordance with such expectations. In arriving at its opinion, Lehman Brothers
did not make or obtain any evaluations or appraisals of the assets or
liabilities of RP and Coyote.
Upon advice of Coyote, Lehman Brothers assumed that the merger will be
accounted for as a purchase for accounting purposes, and based upon discussions
with RP and its advisors, Lehman Brothers assumed that the merger will qualify
as a tax-free reorganization within the meaning of Section 368(a) of the Code,
and therefore qualify for tax-free treatment for RP stockholders. The Lehman
Brothers opinion was necessarily based upon market, economic and other
conditions as they existed on, and could be evaluated as of, the date of such
opinion.
In its analyses, Lehman Brothers made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters. Many of these matters are beyond the control of Lehman Brothers,
Coyote and RP. The estimates contained in Lehman Brothers' analyses were not
necessarily indicative of actual values or predictive of future results, which
may be significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of businesses are not appraisals and
are not intended to reflect the prices at which businesses actually may be
sold.
The following is a summary of the material financial analyses used by Lehman
Brothers in connection with providing its opinion to the Coyote board of
directors. Certain of the summaries of financial analyses include information
presented in tabular format. In order to fully understand the financial
analyses used by Lehman Brothers, the tables must be read together with the
text of each summary. The tables alone do not constitute a complete description
of the financial analyses. In particular, you should note that in applying the
various valuation methods to the particular circumstances of the Coyote, RP and
the merger, Lehman Brothers made qualitative judgments as to the significance
and relevance of each analysis and factor. In addition, Lehman Brothers made
numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
the Coyote and RP. Accordingly, the analyses listed in the tables and described
below must be considered as a whole. Considering any portion of such analyses
and of the factors considered, without considering all analyses and factors,
could create a misleading or incomplete view of the process underlying the
Lehman Brothers opinion.
Purchase price ratio analysis. The purchase price ratio analysis provides
enterprise value multiples and equity value multiples of key operating
statistics for a range of transaction values. Assuming the conversion of the
series C preferred stock into Coyote common stock and using the average closing
stock price for Coyote's common stock for the five trading days prior to
announcement, the implied equity value to be received by holders of RP common
stock is $3.85 per share. Based on this implied equity value per share, Lehman
Brothers calculated the ratio of implied equity value to net income as well as
the ratio of enterprise value to revenue, earnings before interest and taxes
("EBIT") and earnings before interest, taxes, depreciation and amortization
("EBITDA") derived from RP's financial projections. RP's enterprise value was
obtained by adding the implied equity value and short- and long-term debt, and
subtracting its cash and cash equivalents.
35
<PAGE>
Based upon the purchase price ratio analysis, the implied equity value per
share yielded a premium to market price of 50.2% over the closing price of RP
shares of $2.563 on January 15, 1999, the last trading day prior to
announcement, and a 7.6% premium to RP's average closing price for the
preceding six month period commencing July 15, 1998. The following table
presents the ratios of implied equity value to estimated 1998 and projected
1999 net income and the ratios of enterprise value to estimated 1998 and
projected 1999 revenue, EBITDA and EBIT.
<TABLE>
<CAPTION>
With 50% of
Without Estimated
Synergies Synergies
--------- -----------
<S> <C> <C>
Equity Value Multiples
----------------------
1998 Net Income...................................... 24.9x 9.8x
1999 Net Income...................................... 19.0x 8.7x
Enterprise Value Multiples
--------------------------
1998 Revenue......................................... 1.17x 1.09x
1999 Revenue......................................... 1.07x 1.00x
1998 EBITDA.......................................... 9.5x 5.7x
1999 EBITDA.......................................... 7.6x 5.0x
1998 EBIT............................................ 14.9x 7.3x
1999 EBIT............................................ 11.2x 6.3x
</TABLE>
Comparable company trading analysis. The comparable company trading analysis
provides a market valuation benchmark based on the common stock trading
multiples of selected comparable companies. For this analysis, Lehman Brothers
reviewed the public stock market trading multiples for selected companies that
Lehman Brothers deemed comparable to RP. Using publicly available information,
Lehman Brothers calculated and analyzed the common equity market value
multiples of certain historical and projected financial criteria, such as net
income, and the enterprise value multiples of certain historical financial
criteria, such as revenues, EBITDA, and EBIT, as of January 15, 1999, the last
trading day prior to the announcement of the merger transaction. Net income for
the selected companies was based on research analysts' estimates published on
First Call, a service reporting equity analyst estimates.
The following table presents the net income, and LTM revenue, EBITDA, and
EBIT multiples.
<TABLE>
<CAPTION>
With 50% of
Mean Without Estimated
Comparables Synergies Synergies
----------- --------- -----------
<S> <C> <C> <C>
Equity Value Multiples
----------------------
1998 Net Income.......................... 9.4x 24.9x 9.8x
1999 Net Income.......................... 7.5x 19.0x 8.7x
Enterprise Value Multiples
--------------------------
LTM Revenue.............................. 0.70x 1.17x 1.09x
LTM EBITDA............................... 8.1x 9.5x 5.7x
LTM EBIT................................. 19.8x 14.9x 7.3x
</TABLE>
Because of the inherent differences between the businesses, operations,
financial conditions and prospects of RP and the businesses, operations,
financial conditions and prospects of the companies included in the comparable
company group, Lehman Brothers believed that it was inappropriate to, and
therefore did not, rely solely on the quantitative results of the analysis, and
accordingly, also made qualitative judgments concerning differences between the
financial and operating characteristics of RP and companies in the comparable
company group that would affect the public trading values of RP and such
comparable companies.
Comparable transaction analysis. The comparable transaction analysis
provides a market benchmark based on the consideration paid in selected
comparable transactions. For this analysis, Lehman Brothers
36
<PAGE>
reviewed publicly available information to determine the purchase prices and
multiples paid in certain transactions that were publicly announced since
January 1, 1992 in the golf equipment manufacturing industry involving target
companies which were similar to RP in terms of business mix, product portfolio,
and/or markets served.
Lehman Brothers calculated the enterprise value of the relevant
transactions, calculated as the consideration offered for the common equity and
short- and long-term debt, and subtracting the enterprise's cash and cash
equivalents, and applied it to certain historical financial criteria, including
revenue, EBITDA, and EBIT, of the acquired business for the LTM period. The
following table presents the LTM revenue, LTM EBITDA and LTM EBIT multiples for
the selected transactions.
<TABLE>
<CAPTION>
With 50% of
Mean Without Estimated
Enterprise Value Multiples Comparables Synergies Synergies
-------------------------- ----------- --------- -----------
<S> <C> <C> <C>
LTM Revenue.............................. 1.22x 1.17x 1.09x
LTM EBITDA............................... 8.8x 9.5x 5.7x
LTM EBIT................................. 19.0x 14.9x 7.3x
</TABLE>
Because the reasons for and the circumstances surrounding each of the
transactions analyzed were so diverse and because of the inherent differences
in the businesses, operations, financial conditions and prospects of RP and the
businesses, operations, and financial conditions of the companies included in
the comparable transactions group, Lehman Brothers believed that a purely
quantitative comparable transaction analysis would not be particularly
meaningful in the context of the merger. Lehman Brothers believed that the
appropriate use of a comparable transaction analysis in this instance would
involve qualitative judgments concerning the differences between the
characteristics of these transactions and the merger which would affect the
acquisition values of the acquired companies and RP.
Discounted cash flow analysis. The discounted cash flow analysis provides a
net present valuation of management projections of the projected after-tax
unlevered free cash flows based upon RP's financial projections and estimated
operating synergies and strategic benefits expected by Coyote to result from
the merger. Projected after-tax unlevered free cash flows are defined as
operating cash flow available after working capital, capital spending, tax and
other operating requirements. Utilizing such financial forecasts, Lehman
Brothers calculated a range of present values for RP using a range of after-tax
discount rates from 11% to 13% and a terminal value based upon a range of
multiples of estimated EBITDA in 2003 from 6.5x to 8.5x. The following table
presents the range of implied equity values per share of RP common stock based
upon the midpoint of the discount rates and the range of the terminal values.
<TABLE>
<CAPTION>
With 50% of
Without Estimated
Synergies Synergies
----------- -----------
<S> <C>
$3.50-$4.25 $4.75-$6.25
</TABLE>
Leveraged acquisition analysis. The leveraged acquisition analysis measures
the price which would be attractive to a potential financial buyer based upon
current market conditions. For this analysis, Lehman Brothers reviewed RP's
financial projections and assumed the following in performing this analysis:
. a capital structure comprised of approximately $23 million in senior
debt;
. an equity investment that would achieve a 20% to 30% rate of return over
a five year period; and
. an exit multiple of 6.5x to 8.5x projected 2003 EBITDA.
Based on these assumptions, the range of implied leveraged acquisition
prices per share of RP common stock was $3.50 to $4.00.
37
<PAGE>
Contribution analysis. The contribution analysis measures the relative
contribution of RP to the combined company for various measures such as EBITDA,
EBIT and net income. For this analysis, Lehman Brothers:
. analyzed the respective financial contributions of Coyote and RP to the
combined companies' estimated results for calendar year 1998 and
projected results for calendar year 1999 based on Coyote's financial
projections and RP's financial projections;
. prepared a contribution analysis, using the Coyote projections and RP
projections, that added estimated operating synergies and strategic
benefits expected by Coyote to result from the merger; and
. ran sensitivity scenarios assuming different levels of estimated
operating synergies and strategic benefits contributed by RP.
After the conversion of all series C preferred stock, but before dilution for
warrants attached to subordinated debt, if any, issued in connection with any
financing, RP stockholders would own approximately 50% of the equity of Coyote.
The following table presents the relative contribution of RP to the combined
company's 1998 and 1999 EBITDA and EBIT and the companies' 1999 Net Income
assuming different levels of estimated operating synergies contributed by RP.
<TABLE>
<CAPTION>
Assumed Level of
Synergies
Contributed by RP
Without -----------------
Synergies 50% 75% 100%
--------- ----- ----- -----
<S> <C> <C> <C> <C>
1998 EBITDA.................................... 57.2% 55.2% 62.1% 68.9%
1999 EBITDA.................................... 43.3% 44.5% 49.2% 53.9%
1998 EBIT...................................... 69.5% 61.3% 71.8% 82.3%
1999 EBIT...................................... 44.5% 45.9% 52.4% 58.8%
1999 Net Income................................ 45.7% 47.1% 55.6% 64.1%
</TABLE>
Pro forma merger analysis. Lehman Brothers analyzed the pro forma impact of
the merger on Coyote's earnings per share based on Coyote's financial
projections and RP's financial projections. In connection with these analyses,
management of Coyote provided Lehman Brothers with projections for estimated
operating synergies and strategic benefits expected by Coyote to result from
the merger and such projections were incorporated in Lehman Brothers' analyses.
Using Coyote's projections, Lehman Brothers concluded that the merger would be
accretive to Coyote's earnings in 1999 and 2000.
In arriving at its opinion, Lehman Brothers did not ascribe a specific range
of value to RP or Coyote, but rather made its determination as to the fairness,
from a financial point of view, to Coyote of the consideration to be paid by
Coyote in the proposed merger transaction on the basis of the financial and
comparative analyses described above. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial and comparative analysis and the application of those methods to
the particular circumstances, and therefore, such an opinion is not readily
susceptible to summary description. Furthermore, in arriving at its opinion,
Lehman Brothers did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Lehman
Brothers believes that its analyses must be considered as a whole and that
considering any portion of such analyses and factors, without considering all
analyses and factors as a whole, could create a misleading or incomplete view
of the process underlying its opinion.
Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
valuation of businesses and their securities in connection with the following:
38
<PAGE>
. mergers and acquisitions;
. negotiated underwritings;
. competitive bids;
. secondary distributions of listed and unlisted securities;
. private placements; and
. valuations for corporate and other purposes.
The Coyote board of directors selected Lehman Brothers because of its
expertise, reputation and familiarity with Coyote and the golf equipment
industry generally and because its investment banking professionals have
substantial experience in transactions comparable to the merger.
As compensation for its services in connection with the merger, Coyote has
agreed to the following:
. to pay Lehman Brothers a fee of $250,000, payable upon the delivery of
the fairness opinion;
. to reimburse Lehman Brothers for reasonable out-of-pocket expenses
incurred in connection with the merger; and
. to indemnify Lehman Brothers for certain liabilities that may arise out
of its engagement by Coyote and the rendering of the Lehman Brothers
opinion.
Lehman Brothers has previously rendered investment banking services to
Coyote and received customary fees for such services.
In the ordinary course of its business, Lehman Brothers may actively trade
in the debt or equity securities of RP and Coyote for its own account and for
the accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities.
Interests of certain persons in the merger
General.
In considering the recommendation of the RP board of directors with respect
to the merger agreement, and the recommendation of the Coyote board of
directors with regard to the amendment of Coyote's amended and restated
articles of incorporation and the creation and issuance of the series C
preferred stock in connection with the merger, RP and Coyote stockholders
should be aware that certain stockholders, directors and members of the
management of RP and certain stockholders, directors and members of the
management of Coyote have interests in the merger and the related transactions
which are different from, and in addition to, the interests of stockholders of
RP generally, or of stockholders of Coyote generally, as the case may be.
. Each of James M. Probst, Mel S. Stonebraker, Paragon, the Jayne A.
Johnston and Richard P. Johnston Charitable Remainder Trust #3, David E.
Johnston, Kenneth J. Warren, Berenson Minella and Coyote have entered
into a stockholder agreement dated as of February 2, 1999, and effective
as of the effective date of the merger, pursuant to which the parties
thereto will have the ability to designate certain nominees for election
as directors of Coyote. Pursuant to the stockholder agreement, Messrs.
Probst and Stonebraker and Paragon will have the right to designate four
persons to serve as directors of Coyote, Messrs. Johnston and Warren and
the Jayne A. Johnston and Richard P. Johnston Charitable Remainder Trust
#3 will have the right to designate three persons to serve as directors
of Coyote and Berenson Minella will have the right to designate one
person to serve as a director of Coyote. Each of Mr. Probst and Mr.
Stonebraker is a director and officer of Coyote and Mark Pappas, the
president of the general partner of Paragon, is a director of Coyote.
Each of Mr. David Johnston, Mr. Warren and Mr. Richard P. Johnston, the
trustee of the Jayne A. Johnston and Richard P.
39
<PAGE>
Johnston Charitable Remainder Trust #3, is a director and/or officer of
RP and Mr. Raymond J. Minella, a managing general partner in Berenson
Minella, is the chairman of the board of directors of RP. Each of the
parties to the stockholder agreement, other than Coyote, has agreed to
vote all Coyote voting securities owned by that party in favor of the
director nominees designated by the other parties. Collectively, the
parties to the stockholder agreement will control a majority of the
outstanding Coyote voting securities on the effective date of the merger
and, as a result, as of the effective date of the merger, will have the
ability to elect all of the directors of Coyote. The stockholder
agreement will terminate five years after the effective date of the
merger.
. In connection with obtaining the waiver of certain of his contractual
rights under RP's existing stockholders agreement, Danny Edwards, a
director of RP, required RP to cancel particular stock options of RP
held by Mr. Edwards and certain related parties, including Robert Burg
II, a director of RP, and Everen Securities, Inc. and certain of its
employees, including Lawrence D. Bain, a director of RP. As a result of
this arrangement, the following RP stock options were canceled: 53,033
RP stock options with an exercise price of $5.50 and 55,000 RP stock
options with an exercise price of $6.00 held by Mr. Burg; 2,357 RP stock
options with an exercise price of $5.50, 40,193 RP stock options with an
exercise price of $6.06 and 20,000 RP stock options with an exercise
price of $6.60 held by Mr. Edwards; and 7,500 RP stock options with an
exercise price of $13.00 held by Everen Securities. In place of these
canceled RP stock options, an equal amount of new RP stock options with
otherwise similar terms with an exercise price of $3.19 and an
expiration date five years from the date of grant were issued to Messrs.
Burg and Edwards and to Everen Securities.
. In order to induce Christopher Johnston, a major stockholder of RP, to
waive certain contractual rights under RP's existing stockholder
agreement, RP and certain of its stockholders agreed to release
Christopher Johnston from his obligations under that agreement and RP
agreed to assist Christopher Johnston in the sale of the shares of RP
common stock held by him to persons other than RP, Coyote or any person
related to RP or Coyote. As additional consideration for RP's agreements
in this regard, Christopher Johnston agreed to waive any appraisal
rights to which he may be entitled under Delaware law in connection with
the merger. In addition, Christopher Johnston and Coyote have agreed
that he will be entitled to a fee in the event that a certain future
acquisition opportunity identified by him is successfully pursued. Such
a fee, if paid, would amount to 1.5% of the aggregate value of that
possible transaction.
. As of March 19, 1998, Coyote entered into a $6,000,000 promissory note
and loan agreement, as amended December 30, 1998, with Paragon. Paragon
is an unrelated third party to Coyote, although as a condition of the
loan agreement, the Coyote board of directors appointed Mr. Mark Pappas,
the president of the general partner of Paragon, to Coyote's board of
directors, a capacity in which he currently serves. In the ordinary
course of business, this loan would be due September 19, 1999. Interest
is payable quarterly at an interest rate of 12% per year. The
consummation of the merger agreement would cause the Paragon note to be
due immediately.
Under the loan agreement, Coyote issued Paragon 163,265 shares of
Coyote common stock as of March 19, 1998, which represented $1,000,000
divided by the closing price of the common stock on the Nasdaq Small
Cap Market on the day immediately preceding the closing of the loan.
The loan agreement provides that the Issuer shall issue to Paragon such
additional number of shares of Coyote common stock, if any, as are
necessary to make the aggregate value of all shares of common stock
issued equal $1,000,000 on December 30, 1998, upon the maturity of the
loan and upon the prepayment, if any, of the loan. Pursuant to this
formula, and based on a December 29, 1998 closing price of the common
stock on the Nasdaq Small Cap Market of $3.25 per share, Coyote issued
Paragon an additional 144,427 shares of Coyote common stock effective
December 30, 1998. Coyote may be required to issue Paragon additional
shares of common stock under the referenced formula depending on the
price of the Coyote common stock at the maturity date (September 19,
1999) and on any date that the note is prepaid in full prior to the
maturity date.
40
<PAGE>
In connection with the loan, Coyote and Paragon entered into a
registration rights agreement pursuant to which Coyote generally has
granted Paragon the right at any time until March 19, 2003 to require
that Coyote register Paragon's shares of common stock under the
Securities Act at Coyote's expense.
The loan agreement provides that the note is secured by 1,430,000
shares of Coyote's common stock owned by Mel S. Stonebraker, director,
and by 1,170,000 shares of Coyote's common stock owned by James M.
Probst, president and chief executive officer. Under the loan
agreement, Messrs. Stonebraker and Probst retain the power to vote
their shares of Coyote common stock as long as Coyote is not in default
under the loan agreement.
. Under a consulting agreement entered into on October 7, 1998 between
Coyote and Paragon, Coyote issued Paragon 378,261 shares of the Coyote
common stock. In exchange for the issued shares, Paragon will provide
consulting services to assist Coyote in the operation of the business
for a period of ten years. The agreement also includes certain
representations, warranties and covenants with respect to listing,
registration and other matters.
. The board of directors of Coyote has awarded Messrs. John Paul McNeill
and Andrew Taylor, the chief financial officer of Coyote and the
managing director of Apollo, respectively, options to purchase 50,000
shares of Coyote common stock each, at a price equal to $2.55 and $3.00,
respectively.
. The board of directors of RP has awarded Thomas A. Schneider, the
president, chief operating officer and chief financial officer of RP, a
bonus of $100,000, and Kevin Neill, the vice president of finance and
corporate controller of RP, a bonus of $10,000, in each case payable
upon completion of the merger, as compensation for their efforts on
behalf of RP in connection with the merger and otherwise.
. On February 12, 1999, the compensation committee of the RP board of
directors approved the award of certain new severance benefits to each
of thirteen RP employees including Mr. Schneider. The new severance
benefits include the following:
. immediate vesting of all non-vested options;
. extension of the exercise period for all stock options to one year
after termination of employment; and
. severance pay and continued medical and dental benefits for periods
ranging from four to twelve months.
The new severance benefits are effective upon the employee's
termination by RP for any reason other than gross or willful
misconduct. The new severance benefits may also be triggered by
termination by the employee for any of the following reasons:
. RP requires the employee to relocate from the Phoenix metropolitan
area;
. RP reduces the employee's current rate of pay;
. RP demotes the employee from his or her current position;
. RP materially reduces the employee's authority or duties as they
existed prior to the merger; or
. RP requires the employee to travel more than 10 days per month.
. The total severance obligation of RP with respect to these severance
benefits is $357,000, including $110,000 which would be received by
Mr. Schneider. Subsequently, RP has awarded severance benefits to an
additional 12 people. The aggregate severance obligation of RP under
these additional benefits is $48,000.
. Raymond J. Minella, chairman of the board of directors of RP, is a
managing general partner of Berenson Minella. RP has engaged Berenson
Minella to provide financial advisory services in
41
<PAGE>
connection with the merger. Berenson Minella's fee for such services is
contingent upon the consummation of a sale transaction or other business
combination involving RP. Upon the consummation of the merger, Berenson
Minella will receive a fee equal to 1.5% of the sum of an amount equal
to the aggregate liquidation preference of the series C preferred stock
issued to the holders of the RP common stock plus an amount equal to the
aggregate debt of RP assumed, refinanced or renegotiated as part of the
merger, which fee is presently estimated to be in the range of
approximately $650,000.
Dissenters' rights
By reason of the merger, stockholders of RP are entitled to assert
dissenters' rights to demand the judicially determined "fair value" in cash
(exclusive of any element of value arising from the accomplishment or
expectation of the merger) of their shares of RP common stock under Section 262
of the Delaware General Corporation Law. A copy of Section 262 is included as
Annex D. The following discussion of dissenters' rights is qualified in its
entirety by reference to the provisions of Section 262, which is incorporated
in this document by reference.
It is important to note that dissent is not the same as voting against the
merger.
Notice of intent to demand payment. Any RP stockholder who wishes to assert
dissenters' rights must do both of the following:
. cause RP to receive, before the vote on the merger is taken at the RP
special meeting, written notice of the stockholder's intention to demand
payment for the stockholder's RP shares if the merger becomes effective;
and
. not vote the shares in favor of the merger.
Any RP stockholder who does not satisfy these requirements is not entitled
to demand payment for the stockholder's shares under Section 262.
Demanding payment for shares. If the merger is approved, RP will give a
written dissenters' notice to all stockholders who have satisfied the
requirements above and are entitled to demand payment for their shares. The
notice will be given no later than 10 days after the effective date of the
merger and will describe the procedures dissenting stockholders must follow to
demand payment for their shares. The notice will also inform dissenting
stockholders of any restrictions on the transfer of their shares after the
payment demand is received by RP. At any time within 60 days after the
effective date of the merger, any stockholder shall have the right to withdraw
his or her demand for appraisal and accept the shares of series C preferred
stock offered in the merger.
Stockholders who do not demand payment and deposit their share certificates
in the manner required, and by the date or dates set forth in the dissenter's
notice given by RP, are not entitled to payment for their shares under Section
262.
Payment for shares. Within 20 days of receiving notice from the surviving
corporation that the merger was effective, any stockholder entitled to
appraisal rights may demand in writing from the surviving corporation, payment
for the fair value of the dissenting stockholder's shares. The payment will be
accompanied by a statement of the surviving company's estimate of the fair
value of the shares and an explanation of how interest was calculated.
Procedure if dissatisfied with payment amount. Within 120 days after the
effective date of the merger, any stockholder who is entitled to appraisal
rights may file a petition in the Delaware Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
42
<PAGE>
Each dissenting stockholder who is made a party to the court action is
entitled to the amount, if any, by which the court finds the fair value of the
dissenting stockholder's shares, plus interest, exceeds the amount paid by the
surviving company. The fair value will be determined exclusive of any element
of value arising from the accomplishment or expectation of the merger.
The foregoing summary of the rights of objecting shareholders does not
purport to be a complete statement of the provisions of Section 262 or the
procedures to be followed by shareholders desiring to exercise any available
dissenter's rights and is qualified in its entirety by reference to Section
262. The preservation and exercise of dissenter's rights require strict
adherence to the applicable provisions of the Delaware Law.
THIS STATEMENT IS MEANT TO SERVE AS A SUMMARY ONLY AND SHOULD NOT BE TAKEN
AS A DEFINITIVE STATEMENT OF STOCKHOLDERS' APPRAISAL RIGHTS. THE PROVISIONS OF
SECTION 262 ARE COMPLEX AND TECHNICAL IN NATURE. DISSENTING STOCKHOLDERS
INTERESTED IN APPRAISAL RIGHTS ARE ENCOURAGED TO CONSULT WITH THEIR INDEPENDENT
LEGAL ADVISORS SINCE THE FAILURE TO COMPLY STRICTLY WITH THESE PROVISIONS WILL
RESULT IN THE LOSS OF THEIR DISSENTERS' RIGHTS.
Material U.S. federal income tax consequences
The following discussion is a summary of the material U.S. federal income
tax consequences of the exchange of RP common stock for series C preferred
stock in the merger and of the disposition and conversion of the series C
preferred stock. The discussion which follows is based on the Code, Treasury
Regulations promulgated under the Code, administrative rulings and
pronouncements and judicial decisions as of the date of this registration
statement, all of which are subject to change, possibly with retroactive
effect.
The discussion below, except where specifically noted, does not address the
effects of any state, local or foreign tax laws. In addition, the discussion
below relates to persons who hold RP common stock and will hold series C
preferred stock as capital assets. The tax treatment of a RP stockholder may
vary depending upon such stockholder's particular situation, and certain
stockholders may be subject to special rules not discussed below. Such
stockholders would include, for example, non-U.S. persons, insurance companies,
tax-exempt organizations, financial institutions, dealers or traders in
securities or commodities, and individuals who received RP common stock
pursuant to the exercise of employee stock options or otherwise as
compensation.
Each RP stockholder should consult its own tax advisor with respect to the
U.S. federal, state, local and foreign tax consequences of the merger and of
the disposition and conversion of the series C preferred stock.
1. Consequences of the merger.
The material U.S. federal income tax consequences that will result from the
merger are as follows:
a. A RP stockholder will not recognize any income, gain or loss as a
result of the receipt of series C preferred stock in exchange for RP common
stock pursuant to the merger, except with respect to cash received in lieu
of a fractional share of series C preferred stock.
b. The aggregate tax basis to a RP stockholder of the series C preferred
stock received in exchange for RP common stock pursuant to the merger will
equal such RP stockholder's tax basis in the RP common stock surrendered in
exchange therefor reduced by the portion of such basis allocable to cash
received in lieu of a fractional share of series C preferred stock.
c. The holding period of a RP stockholder for the series C preferred
stock received pursuant to the merger will include the holding period of
the RP common stock surrendered in exchange for it.
43
<PAGE>
d. Neither RP, Coyote nor Merger Sub will recognize gain or loss as a
result of the merger and the issuance of series C preferred stock to the RP
stockholders pursuant to the merger.
e. A RP stockholder who receives cash in lieu of a fractional share
interest in series C preferred stock pursuant to the merger will be treated
as having received such cash in exchange for such fractional share interest
and generally will recognize capital gain or loss on such deemed exchange
in an amount equal to the difference between the amount of cash received
and the basis of the RP common stock allocable to such fractional share.
The above discussion of the consequences of the merger is based on an
opinion as of the date of this registration statement of Fabian & Clendenin
that the merger will constitute a reorganization within the meaning of Section
368 of the Code. Such opinion is based on facts existing as of the date hereof
and as of the consummation of the merger and on certain representations as to
factual matters made by Coyote and RP. Such representations, if incorrect in
certain material respects, could jeopardize the conclusions reached in the
opinion. Such opinion is not binding on the Internal Revenue Service or the
courts.
2. Conversion and disposition of the series C preferred stock.
A holder of series C preferred stock will not recognize gain or loss upon
the conversion of the series C preferred stock into Coyote common stock
pursuant to the terms of the series C preferred stock, other than with respect
to any Coyote common stock that may be received attributable to accrued but
unpaid dividends on the series C preferred stock, which will be taxable as
such. The aggregate tax basis and holding period of the Coyote common stock
received by a former RP stockholder who converts series C preferred stock into
Coyote common stock will be the same as the respective aggregate tax basis and
holding period of the series C preferred stock surrendered in any such
conversion transaction, except that with respect to any Coyote common stock
received attributable to accrued but unpaid dividends on the series C preferred
stock, the basis of such stock will be its fair market value and the holding
period of such stock will begin on the day following the conversion.
In general, a holder of series C preferred stock should recognize capital
gain or loss upon a sale, exchange or other taxable disposition of the series C
preferred stock. However, the character of gain from the disposition of the
series C preferred stock may be treated as ordinary income rather than capital
gain if the series C preferred stock is "Section 306 stock." In addition, no
loss is generally recognized on the disposition of Section 306 stock. Provided
that, at the time of the merger, a RP stockholder does not have a plan to
convert less than all of such stockholder's series C preferred stock into
Coyote common stock, the series C preferred stock should not be Section 306
stock, and, therefore, any gain or loss from the disposition of the series C
preferred stock should be capital gain or loss. In general, a redemption of
series C preferred stock will be treated in the same manner as a disposition of
such stock, provided such stock is not Section 306 stock and provided the
redemption meets one of the tests set forth in Section 302(b) of the Code. RP
stockholders should consult their tax advisors as to whether the series C
preferred stock will be Section 306 stock and as to the treatment of a
redemption of series C preferred stock.
Other legal matters
Coyote and RP do not believe that any material governmental filings in the
United States or the European Economic Area, other than the certificate of
merger, are required with respect to the merger. In addition to the United
States and the European Economic Area, Coyote and RP conduct operations in a
number of countries where regulatory filings or approvals may be required in
connection with the consummation of the merger. Coyote and RP believe that all
such material filings and approvals have been, or will be, made or obtained.
The respective obligations of Coyote and RP to consummate the merger are
subject to the condition that none of the parties to the merger agreement are
subject to any order or injunction of a court of competent
44
<PAGE>
jurisdiction which prohibits the consummation of the merger or has an adverse
impact on Coyote, RP or Merger Sub.
U.S. federal securities law consequences
Recipients of series C preferred stock issued in connection with the merger
can convert their shares of preferred stock into Coyote common stock and freely
transfer such shares under the Securities Act, except that persons who are
deemed to be "affiliates" of RP, as such term is defined under the Securities
Act, prior to the merger may only sell shares they receive in the merger in
transactions permitted by the resale provisions of Rule 145 under the
Securities Act, or as otherwise permitted under the Securities Act. Affiliates
are typically individuals or entities that control, are controlled by, or are
under common control with, RP, including directors and certain officers of RP.
In general, under Rule 145, for one year following the consummation of the
merger, RP affiliates will be subject to the following restrictions on the
public sale of Coyote common stock acquired on conversion of series C preferred
stock issued in the merger:
. a RP affiliate, together with certain related persons, may sell only
through unsolicited "broker transactions" or in transactions directly
with a "market maker," as such terms are defined in Rule 144 under the
Securities Act,
. the number of shares that RP affiliate may sell--together with certain
related persons and certain persons acting in concert--within any three-
month period for purposes of Rule 145 may not exceed the greater of 1%
of the outstanding Coyote common stock or the average weekly trading
volume of such stock during the four calendar weeks preceding such sale,
. a RP affiliate may sell only if Coyote remained current with its
informational filings with the SEC under the Securities Exchange Act of
1934, as amended.
After the end of one year from the consummation of the merger, a RP
affiliate may sell Coyote common stock received on conversion of the series C
preferred stock issued in the merger without these sale or volume limitations
provided that Coyote was current with its Exchange Act informational filings
and such RP affiliate was not then also an affiliate of Coyote. Two years after
the consummation of the merger, an affiliate of RP may sell such Coyote common
stock without any restrictions so long as such affiliate had not been an
affiliate of Coyote for at least three months prior to such sale.
Dividends on Coyote common stock
Coyote has never paid a dividend on its common stock and does not anticipate
paying a dividend in the foreseeable future. The merger agreement restricts
both RP and Coyote from declaring, setting aside, making or paying any dividend
or other distribution or payment in respect of its capital stock, during the
period from the date of the merger agreement until the earlier of the
termination of the merger agreement or the consummation of the merger. In
addition, Coyote will be restricted from declaring or paying dividends on its
common stock until such time as all cumulative dividends have been paid on
outstanding shares of the new series C preferred stock.
The exchange ratio and its effect on RP securities and equity-based benefit
plans
General.
As a result of the merger, all outstanding shares of RP common stock will be
converted into series C preferred stock in accordance with the terms of the
merger agreement, and all outstanding equity-based awards under RP's benefit
plans will be assumed by Coyote and appropriately adjusted to reflect the
merger in accordance with the merger agreement. The following is a summary of
these effects of the merger and is qualified in its entirety by the full
description set forth in Sections 1.4, 1.7 and 1.8 of the merger agreement
attached as Annex A to this document.
45
<PAGE>
The exchange ratio
The exchange ratio will be determined as follows:
. All shares of RP common stock which are held by RP or any subsidiary of
RP shall be canceled. Each remaining outstanding share of RP common
stock shall be converted into that number of fully paid and
nonassessable shares of the series C preferred stock, having the rights
and preferences set forth in Exhibit 1.4.1 to the merger agreement,
determined by dividing (1) the number of shares of Coyote's common stock
actually issued and outstanding as of the effective date of the merger
by (2) the number of shares of RP common stock actually issued and
outstanding as of the effective date of the merger, carried to four
decimal places.
. For example, if the exchange ratio for purposes of the merger agreement
were to be determined on the basis of the number of shares of common
stock in Coyote and common stock in RP stated to be outstanding on
February 2, 1999, the exchange ratio would be 1.0195. This number is
derived by dividing 5,777,692 by 5,667,375.
Fractional shares
In the merger, RP stockholders will be entitled to receive only whole
numbers of series C preferred stock for their shares of RP common stock. If
applying the exchange ratio would entitle a stockholder to receive a fractional
share of series C preferred stock, such stockholder will be paid cash, without
interest, in an amount equal to such fractional interest multiplied by the
product of $6.00 multiplied by the reciprocal of the exchange ratio. FOR
EXAMPLE: ASSUMING AN EXCHANGE RATIO OF 1.0195 , A RP STOCKHOLDER THAT OWNED 100
SHARES OF RP COMMON STOCK IMMEDIATELY BEFORE THE MERGER WILL OWN 101 SHARES OF
SERIES C PREFERRED STOCK IMMEDIATELY AFTER THE MERGER AND RECEIVE A CHECK FOR
$5.60.
Treatment of RP equity-based awards
Each option or warrant to purchase RP common stock issued pursuant to the RP
Stock Option Plan and the FM Precision Golf Corp. 1997 Stock Option Plan, or
otherwise which is set forth in the RP disclosure schedule to the merger
agreement, and is outstanding as of the date of the consummation of the merger
shall be assumed by Coyote. Each such option or warrant shall be converted into
an option or warrant to purchase the number of shares of Coyote common stock
(rounded to the nearest whole share) equal to the number of shares of series C
preferred stock into which the number of shares of RP common stock subject to
such RP option would have been converted pursuant to the merger. That is, the
number of shares of RP common stock subject to such RP option will be
multiplied by the exchange ratio. Each substitute option will have an exercise
price per share (rounded to the nearest penny) equal to the former exercise
price per share of RP common stock of the RP option immediately prior to the
date of the consummation of the merger multiplied by the reciprocal of the
exchange ratio; provided, however, that in the case of any RP Option to which
Section 421 of the Code applies by reason of its qualification under Section
422 of the Code, the conversion formula shall be adjusted, if necessary, to
comply with Section 424(a) of the Code and the regulations issued thereunder.
Except as otherwise provided in the applicable plan or agreement granting the
RP options, the duration, vesting and other terms of each new option to
purchase shares of Coyote common stock shall be the same as the original RP
option except that all references in the option agreement to RP shall be deemed
to be references to Coyote. Coyote and RP agree to take such action as may be
necessary to give effect to the foregoing provisions.
Stock exchange listing
It is a condition to the merger that the Coyote common stock issuable upon
conversion of the series C preferred stock to be delivered in connection with
the merger be authorized for listing on the Nasdaq National Market, if
qualified, or otherwise the Nasdaq Small Cap Market.
46
<PAGE>
FINANCING
Coyote anticipates entering into certain new financing arrangements in order
to provide for ongoing working capital needs of Coyote and RP following the
merger and to refinance existing indebtedness of both companies and their
respective subsidiaries. The receipt of that financing is a condition to the
consummation of the merger. Coyote expects the new financing to take the form
of two separate facilities, one senior and one subordinated, with two different
lenders, totalling $43,000,000. While the terms of that financing have not been
finalized, they are presently anticipated to be substantially as described
below.
Senior Debt
The senior debt will consist of:
. a $10,000,000 revolving line of credit--under which the amount available
will be based on eligible accounts receivable and inventory--bearing
interest at the reference or prime rate of Chase Manhattan Bank plus a
margin of 1.25%, with a minimum rate of 9%;
. a $13,000,000 tranche A term loan bearing interest at that prime rate
plus a margin of 2%, with a minimum rate of 9.75%; and
. a $12,000,000 tranche B term loan bearing interest at that prime rate
plus a margin of 3.5%, with a minimum rate of 11.25%.
All of that senior debt:
. will mature in four years--with interim reductions of principal required
on the tranche A loan of $1,250,000, 3,700,000 and $4,000,000 and
$4,050,000 after one, two, three and four years, respectively;
. will be secured by a first priority security interest in all existing
and future assets of Coyote and RP, tangible and intangible, including,
but not limited to, accounts, inventory, fixed assets and the stock of
subsidiaries; and
. will be subject to various affirmative, negative and financial
covenants, including maintenance of net worth and working capital,
minimum earnings before interest, taxes, depreciation and amortization
(EBITDA), maximum debt to EBITDA ratio, and minimum capital
expenditures.
A one-time commitment fee of $500,000 is payable upon closing. A fee of
$450,000 will be earned and payable on each anniversary. In addition, the
senior lender will receive a monthly fee of $15,000.
At the termination of the loan or upon prepayment of the senior
indebtedness, Coyote will pay the senior lender the following additional fees
depending on the time of refinancing, repayment, or maturity:
<TABLE>
<S> <C>
From the closing through and including the first anniversary
date of the loan: $ 590,000
From the day after the first anniversary of the loan through and
including the second anniversary of the loan: $ 787,500
From the day after the second anniversary of the loan through
and including the third anniversary of the loan: $1,100,000
From the day after the third anniversary of the loan through and
including the fourth anniversary of the loan: $1,575,000
</TABLE>
Subordinated Debt
The $8,000,000 subordinated loan will bear interest at 13%, and:
. will mature with a balloon payment after seven years;
. will be unsecured and subordinated in right of payment to Coyote's
senior lender; and
. will be subject to various covenants similar to those of the senior
debt.
47
<PAGE>
The subordinated lender will receive a fee of $240,000 payable at closing.
The subordinated lender will also receive detachable warrants, representing 12%
of the common stock of Coyote on a fully diluted basis, or approximately
693,000 shares. This number of shares is subject to decrease by 2% at the end
of 2001 if certain financial targets are met. The warrants will have a cashless
exercise provision and will be subject to a put option by the holder to require
purchase by Coyote after four years and a call option by Coyote to require sale
by the holder after five years, in each case at the higher of seven times
EBITDA minus then outstanding indebtedness or the then trading value of
Coyote's common stock. The subordinate debt cannot be prepaid for the first two
years and may be prepaid thereafter at a premium.
48
<PAGE>
THE MERGER AGREEMENT
General
This section and the following sections of the document describe the
material provisions of the merger agreement, the stockholder agreement, the
Coyote voting agreements, the RP voting agreements, the Edwards option re-
pricing agreement and certain undertakings with respect to resale. This
description is not intended to be complete and is qualified in its entirety by
the full texts of these agreements which are annexed to this document.
Effective time
Promptly after the satisfaction or waiver of the conditions to the merger
set forth in the merger agreement, RP will file a certificate of merger with
the secretary of State of the State of Delaware, as prescribed by Delaware law.
The effect of this filing is that Coyote's subsidiary, Merger Sub, will be
merged with and into RP, thereby resulting in RP becoming a wholly owned
subsidiary of Coyote.
Exchange of RP common stock
As soon as reasonably practicable after the consummation of the merger,
Coyote will instruct the exchange agent to mail to each holder of record of RP
common stock a letter of transmittal and instructions as to how to surrender
certificates of RP common stock in exchange for series C preferred stock and
payment in lieu of any fractional shares. RP stockholders should not return
stock certificates with the enclosed proxy.
After the consummation of the merger, each certificate or other authorized
evidence of ownership that previously represented shares of RP common stock
will represent only the right to receive the series C preferred stock into
which such RP shares were converted in the merger and the right to receive cash
in lieu of fractional shares as described above.
Holders of certificates previously representing RP common stock will not be
paid dividends or distributions on the series C preferred stock and will not be
paid cash in lieu of a fractional share of series C preferred stock until such
certificates are surrendered to the exchange agent for exchange. When such
certificates are surrendered, any unpaid dividends declared by Coyote after the
consummation of the merger and any cash in lieu of a fractional share of series
C preferred stock will be paid without interest. For all other corporate
purposes, certificates that represented shares of RP common stock prior to the
consummation of the merger will represent from and after the consummation of
the merger, the right to receive the number of shares of series C preferred
stock and cash in lieu of a fractional share, into which such shares of RP
common stock actually converted in the merger.
Representations and warranties
The merger agreement contains various representations and warranties of
Coyote and RP including those concerning:
. corporate existence and good standing
. authorization, validity and effect of the merger agreement
. capital stock
. subsidiaries
. no violation of existing arrangements
. documents and other reports filed with the Securities and Exchange
Commission
49
<PAGE>
. litigation
. absence of certain changes or events
. tax matters
. employee plans
. labor matters
. environmental laws and regulations
. real property
. limitation on business conduct
. title to property
. insurance
. intellectual property
. brokers
. conflicts of interest
. takeover statute issues
The merger agreement also contains a representation and warranty of Coyote
relating to the interim operations of Merger Sub and its intentions regarding
the post-merger disposition of RP. The representations and warranties do not
survive the merger.
Conduct of business pending the merger
Prior to the effective time, unless the other party otherwise agrees in
writing, Coyote and RP are to conduct, and cause each of their subsidiaries to
conduct, their business only in the ordinary course consistent with past
practice. Specifically, the merger agreement precludes Coyote and RP from a
multitude of specific corporate acts--without the consent of the other party
unless set forth in the Coyote or RP disclosure schedules--including among
other acts:
. the issuance of stock or options, the amendment of the certificate or
articles of incorporation or by-laws
. incurring debt not in the ordinary course of business, with certain
exceptions
. the increase of compensation, the entry into or amendment of any
employment, severance or termination agreement, except as specifically
permitted under the merger agreement
. entering into business combinations
. selling material assets
. declaring dividends
. making capital expenditures individually in excess of $25,000 or, in the
aggregate in excess of $150,000; and
. entering into material contracts.
In each case, the prohibitions are designed to ensure that Coyote and RP are in
generally the same condition at the time of the merger as they were at the time
of execution of the merger agreement. In addition, Coyote and RP are to use
their reasonable efforts to, and cause each of their subsidiaries to:
50
<PAGE>
. preserve intact their present business organization and goodwill
. keep available the services of their present officers and employees; and
. maintain satisfactory relationships with their existing business
relationships.
No-solicitation -- Coyote
Coyote has agreed that it will not directly or indirectly, or through any of
its subsidiaries, officers, directors, employees, representatives or agents
solicit or encourage the initiation of any inquiries or proposals regarding any
merger, sale of assets, sale of shares of capital stock or similar transactions
involving Coyote or any of its subsidiaries if any such inquiry or proposal
constitutes a Coyote acquisition proposal. An inquiry or proposal described in
the preceding sentence is a "Coyote acquisition proposal" if when consummated
it would constitute a "Coyote alternative transaction," which means any of the
following:
. a transaction pursuant to which any person (or group of persons) other
than RP or its affiliates acquires or would acquire beneficial ownership
or the right to acquire beneficial ownership of more than 50% of the
outstanding shares of any class of equity securities of Coyote, whether
from Coyote or pursuant to a tender offer or exchange offer or
otherwise;
. a merger or other business combination involving Coyote pursuant to
which any person (or group of persons) other than RP or its affiliates
acquires more than 50% of the outstanding equity securities of Coyote or
the entity surviving such merger or business combination;
. any transaction pursuant to which any person, or group of persons, other
than RP or its affiliates acquires or would acquire control of assets of
Coyote--including for this purpose the outstanding equity securities of
any of its subsidiaries and securities of the entity surviving any
merger or business combination to which any of Coyote's subsidiaries is
a party--or any of Coyote's subsidiaries having a fair market value, as
determined by the board of directors of Coyote in good faith, equal to
more than 20% of the fair market value of all the assets of Coyote and
its subsidiaries, taken as a whole, immediately prior to such
transaction, but not an acquisition of securities by a broker-dealer in
connection with a bona fide public offering of such securities; or
. any other consolidation, business combination, recapitalization or
similar transaction involving Coyote or any of its subsidiaries, other
than the transactions contemplated by the merger agreement.
Additionally, Coyote has agreed that it and its subsidiaries will not make
or authorize, and will instruct their officers, directors, employees,
representatives and agents not to make or authorize any public statement or
solicitation in support of or commenting positively on any Coyote acquisition
proposal unless it is required to do so by law.
However, under the limited circumstances discussed below, Coyote is
permitted to take certain actions in response to an inquiry or proposal from a
third party to acquire Coyote so long as that inquiry or proposal also
qualifies as a Coyote superior proposal. A "Coyote superior proposal" means any
proposal made by a third party to acquire, directly or indirectly, for cash
and/or securities, all or a majority of the voting equity securities of Coyote
or all or substantially all of the assets of Coyote, on terms which the board
of directors of Coyote reasonably believes are more favorable than the merger:
. from a financial point of view to the Coyote stockholders, based upon
the advice of an independent financial advisor, taking into account at
the time any changes to the financial terms of the merger proposed by
RP; and
. to Coyote after taking into account all pertinent factors deemed
relevant by the board of directors of Coyote under the laws of the State
of Nevada.
Until the Coyote stockholders approve and adopt the merger agreement and if
the Coyote board of directors reasonably determines in good faith after
consultation with independent legal counsel, that any of the
51
<PAGE>
following actions is required to discharge properly its fiduciary duties, the
Coyote board of directors, after notice to RP is permitted to:
. furnish information to a third party which has made an acquisition
proposal that the Coyote board of directors reasonably believes is a
Coyote superior proposal which was not solicited in violation of the
merger agreement, provided that such third party has executed a
confidentiality agreement substantially similar to the one in effect
between RP and Coyote; and
. consider and negotiate such a Coyote superior proposal and recommend it
to the Coyote stockholders and, in connection with its recommendation,
withdraw or modify its recommendation of the merger.
Notwithstanding the foregoing points, Coyote and the Coyote board of
directors may not under any circumstance withdraw or modify in a manner adverse
to RP, the Coyote board of directors' approval of the merger unless the merger
agreement has been terminated in accordance with its terms.
The merger agreement expressly provides that the foregoing restrictions
shall not prohibit Coyote from taking or disclosing to its stockholders a
position regarding a Coyote alternative transaction or Coyote acquisition
proposal or from making any disclosure to its stockholders required by law.
Coyote agreed to notify RP immediately of the following:
. the receipt of an acquisition proposal from a third party
. any material change to such an acquisition proposal
. any request for non-public information relating to Coyote or its
subsidiaries
. any request for access to Coyote's properties, books or records by a
person who is making or has made an acquisition proposal
. the identity of the person making an acquisition proposal or requesting
access to Coyote's properties, books or records
. the terms of such an acquisition proposal or any proposed acquisition
proposal
. Coyote's decision concerning whether or not to provide access to any
such information; and
. if Coyote enters into negotiations regarding any such acquisition
proposal
Coyote's obligation to provide notice as set forth in this paragraph may be
limited to the extent that the board of directors of Coyote reasonably
believes, based on the advice of independent counsel, that it may do so without
violating its fiduciary duties.
Coyote has agreed to cease any discussions or negotiations with any third
party that were ongoing at the time of the execution of the merger agreement.
Coyote has also agreed not to release any third party from the confidentiality
and standstill provisions of any agreement to which Coyote is a party.
Coyote will ensure that the officers and directors of Coyote and its
subsidiaries and any investment banker or other advisor or representative
retained by Coyote are aware of the no-solicitation restrictions described in
the merger agreement.
No-solicitation -- RP
RP has agreed that it will not directly or indirectly, or through any of its
subsidiaries, officers, directors, employees, representatives or agents solicit
or encourage the initiation of any inquiries or proposals regarding any merger,
sale of assets, sale of shares of capital stock or similar transactions
involving RP or any of its subsidiaries if any such inquiry or proposal
constitutes a RP acquisition proposal. An inquiry or proposal
52
<PAGE>
described in the preceding sentence is an "RP acquisition proposal" if when
consummated it would constitute an "RP alternative transaction," which means
any of the following:
. a transaction pursuant to which any person (or group of persons) other
than Coyote or its affiliates acquires or would acquire beneficial
ownership or the right to acquire beneficial ownership of more than 50%
of the outstanding shares of any class of equity securities of RP,
whether from RP or pursuant to a tender offer or exchange offer or
otherwise;
. a merger or other business combination involving RP pursuant to which
any person (or group of persons) other than Coyote or its affiliates
acquires more than 50% of the outstanding equity securities of RP or the
entity surviving such merger or business combination;
. any transaction pursuant to which any person (or group of persons) other
than Coyote or its affiliates acquires or would acquire control of
assets of RP, including for this purpose the outstanding equity
securities of any of its subsidiaries and securities of the entity
surviving any merger or business combination to which any of RP's
subsidiaries is a party, or any of RP's subsidiaries having a fair
market value, as determined by the board of directors of RP in good
faith, equal to more than 20% of the fair market value of all of the
assets of RP and its subsidiaries, taken as a whole, immediately prior
to such transaction, but not an acquisition of securities by a broker-
dealer in connection with a bona fide public offering of such
securities; or
. any other consolidation, business combination, recapitalization or
similar transaction involving RP or any of its subsidiaries, other than
the transactions contemplated by the merger agreement.
Additionally, RP has agreed that it and its subsidiaries will not make or
authorize, and will instruct their officers, directors, employees,
representatives and agents not to make or authorize any public statement or
solicitation in support of or commenting positively on any RP acquisition
proposal unless it is required to do so by law.
However, under the limited circumstances discussed below, RP is permitted to
take certain actions in response to an inquiry or proposal from a third party
to acquire RP so long as that inquiry or proposal also qualifies as a RP
superior proposal. A "RP superior proposal" means any proposal made by a third
party to acquire, directly or indirectly, for cash and/or securities, all or a
majority of the voting equity securities of RP or all or substantially all of
the assets of RP, on terms which the board of directors of RP reasonably
believes are more favorable than the merger:
. from a financial point of view to the RP stockholders, based upon the
advice of an independent financial advisor, taking into account at the
time any changes to the financial terms of the merger proposed by
Coyote; and
. to RP after taking into account all pertinent factors deemed relevant by
the board of directors of RP under the laws of the State of Delaware.
Until the RP stockholders approve and adopt the merger agreement and if the
RP board of directors reasonably determines in good faith after consultation
with independent legal counsel, that any of the following actions is required
to discharge properly its fiduciary duties, the RP board of directors, after
notice to Coyote is permitted to:
. furnish information to a third party which has made an acquisition
proposal that the RP board of directors reasonably believes is a RP
superior proposal which was not solicited in violation of the merger
agreement, provided that such third party has executed a confidentiality
agreement substantially similar to the one in effect between RP and
Coyote; and
. consider and negotiate such a RP superior proposal and recommend it to
the RP stockholders and, in connection with its recommendation, withdraw
or modify its recommendation of the merger.
53
<PAGE>
Notwithstanding the foregoing points, RP and the RP board of directors may
not under any circumstance withdraw or modify in a manner adverse to Coyote,
the RP board of directors' approval of the merger unless the merger agreement
has been terminated in accordance with its terms.
The merger agreement provides that these restrictions shall not prohibit RP
from taking or disclosing to its stockholders a position regarding a RP
alternative transaction or RP acquisition proposal or from making any legally
required disclosure to its stockholders.
RP has agreed to notify Coyote immediately of the following:
. the receipt of an acquisition proposal from a third party
. any material change to such an acquisition proposal
. any request for non-public information relating to RP or its
subsidiaries
. any request for access to RP's properties, books or records by a person
who is making or has made an acquisition proposal
. the identity of the person making an acquisition proposal or requesting
access to RP's properties, books or records
. the terms of such an acquisition proposal or any proposed acquisition
proposal
. RP's decision concerning whether or not to provide access to any such
information
. if RP enters into negotiations regarding any such acquisition proposal
RP's obligation to provide notice set forth in this paragraph may be limited to
the extent that the board of directors of RP reasonably believes, based on the
advice of independent counsel, that it may do so without violating its
fiduciary duties.
RP has agreed to cease any discussions or negotiations with any third party
that were ongoing at the time of the execution of the merger agreement. RP has
also agreed not to release any third party from the confidentiality and
standstill provisions of any agreement to which RP is a party.
RP will ensure that the officers and directors of RP and its subsidiaries
and any investment banker or other advisor or representative retained by RP are
aware of the no-solicitation restrictions described in the merger agreement.
Other covenants
Consents and approvals.
Coyote and RP will each use its reasonable efforts to obtain all consents,
approvals, permits or authorizations, and Coyote and RP will make all filings,
required in connection with the authorization, execution and delivery of the
merger agreement and the consummation by each of them of the transactions
contemplated by the merger agreement.
Indemnification and insurance.
For a period of at least six years after the consummation of the merger, the
surviving corporation will continue to indemnify each person who is a director
or officer of RP as of the date of this registration statement to the extent
such directors or officer is currently indemnified by RP. The amended and
restated certificate of incorporation and by-laws of RP in effect on that date
provide for indemnification of directors and officers of RP against any of the
following, which arise at or prior to the consummation of the merger:
. any claim, liability, loss, damage or judgment
54
<PAGE>
. any fine or penalty
. any amount paid in settlement or compromise
. any cost or expense, including reasonable fees and expenses of legal
counsel
Coyote will or will cause the surviving corporation to maintain, for a
period of at least six years after consummation of the merger, the current
policies of directors' and officers' liability insurance maintained by RP on
the date of the merger agreement or policies that are no less favorable than
RP's existing policies.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
Notification of various matters.
Coyote and RP will each give each other prompt notice of the occurrence of
any material emergency or other material change in the condition--financial or
otherwise--of such party's or any subsidiary's business, properties, assets,
liabilities, prospects or the normal course of its businesses or in the
operation of its properties, any material litigation or material governmental
complaints, investigations or hearings--or communications indicating that the
same may be contemplated--or the failure of the notifying party materially to
comply with any covenant, condition or agreement in the merger agreement.
RP stock plans.
Coyote has agreed to file a registration statement related to any RP Stock
Option Plan to the extent that any such filings are required to enable holders
of the replacement options for Coyote common stock granted under the merger
agreement to freely exercise those replacement options and (except for holders
who may be deemed to be affiliates of Coyote) to freely sell shares acquired by
the exercise of such replacement options (assuming such shares would be freely
salable pursuant to an effective registration statement covering such plans).
Tax treatment.
Coyote and RP intend to cause the merger to qualify as a reorganization
under the provisions of Section 368 of the Code as specified in the merger
agreement and have agreed to report the merger as a reorganization for income
tax purposes under Section 368 of the Code and any comparable state or local
law, and will not, both before and after consummation of the merger, take any
actions which could reasonably be expected to prevent the merger from
qualifying under that section of the Code.
Public announcements.
Coyote and RP will not issue any press release or make any public written
statement with respect to the merger or the merger agreement without consulting
with each other and using reasonable efforts to agree, subject to their
respective legal obligations (including requirements of stock exchanges and
other similar regulatory bodies).
Conditions to the merger
Conditions to obligation of each party to effect the merger.
Each of Coyote's and RP's respective obligations to complete the merger are
subject to the satisfaction at or prior to the consummation of the merger of
the following conditions:
55
<PAGE>
. the approval of the merger agreement and the transactions contemplated
by it in the manner required by applicable law or by applicable
regulations of any stock exchange or other regulatory body and the
approval and adoption of the merger agreement by the RP stockholders and
the approval of the amendment to Coyote's amended and restated articles
of incorporation to increase the number of authorized preferred shares
and to create, and approve the issuance of, a new series of shares, the
series C preferred stock to be delivered to RP stockholders in
connection with the merger by the Coyote stockholders;
. the absence of any order or injunction of a court of competent
jurisdiction which prohibits the consummation of the merger or has a
material adverse effect on Coyote, RP or Merger Sub;
. the receipt of all necessary governmental or other regulatory body
consents, authorizations, orders and approvals and the making of all
filings or registrations except for filings in connection with the
merger or where the failure to have obtained or made any such consent,
authorization, order, approval, filing or registration would not have an
adverse impact on either Coyote or RP following the consummation of the
merger;
. the approval for listing on the Nasdaq National Market, if qualified, or
otherwise for quotation on Nasdaq of the Coyote common stock issuable
upon conversion of the series C preferred stock;
. the compliance with all applicable blue sky laws;
. the effectiveness of the registration statement of which this document
forms a part; and
. the receipt of sufficient financing by Coyote to satisfy the ongoing
working capital needs of Coyote and RP following the consummation of the
merger and to refinance existing indebtedness of both companies, and
their respective subsidiaries to the extent applicable, on terms
substantially no less favorable than the terms of the most current
proposals furnished by Coyote to RP prior to the date of the merger
agreement or otherwise reviewed and approved by each party in good
faith.
Additional conditions to obligation of RP.
The obligation of RP to complete the merger is also subject to the following
conditions:
. Coyote shall have performed in all material respects its agreements
contained in the merger agreement and the representations and warranties
of Coyote in the merger agreement shall be true and correct in all
material respects on and as of the date of the consummation of the
merger, with the same force and effect as if made on and as of the date
of the consummation of the merger, and RP shall have received a
certificate to such effect signed by the president or vice president of
Coyote;
. absence of any change in the financial condition, business, operations
or prospects of Coyote and its subsidiaries, taken as a whole, that
would reasonably be expected to have an adverse impact on Coyote; and
. the absence of any change in the applicable law as a result of which the
merger would fail to qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Code.
Additional conditions to obligation of Coyote.
The obligation of Coyote to complete the merger is also subject to the
following conditions:
. RP shall have performed in all material respects its agreements
contained in the merger agreement and the representations and warranties
of RP in the merger agreement shall be true and correct in all material
respects on and as of the date of the consummation of the merger, with
the same force and effect as if made on and as of the date of the
consummation of the merger, and Coyote shall have received a certificate
to such effect signed by the president or vice president of RP;
56
<PAGE>
. absence of any change in the financial condition, business, operations
or prospects of RP and its subsidiaries, taken as a whole, that would
reasonably be expected to have an adverse impact on RP;
. the receipt of a certificate by Coyote from the secretary of RP
certifying the adoption of resolutions by the board of directors and
stockholders of RP in favor of the merger agreement, the merger and the
transactions contemplated by the merger agreement; and
. the amendment by RP of the FM Precision Golf Manufacturing Corp 401(k)
Plan effective no later than the date of the consummation of the merger,
to restrict eligibility to participate in that 401(k) Plan, to employees
of RP, by replacing the standardized prototype form of plan with a
nonstandardized prototype form of plan, in form and substance reasonably
satisfactory to Coyote.
Affiliate agreements
. RP shall use its reasonable best efforts to obtain and deliver to Coyote
prior to the date of consummation of the merger from each person who is
identified as an "affiliate" of RP an agreement to comply with
restrictions on such affiliates pursuant to Rule 145 under the
Securities Act.
Termination
Grounds for termination.
The merger agreement may be terminated at any time prior to the consummation
of the merger, notwithstanding the approval and adoption by the RP stockholders
of the merger agreement and the approval of the Coyote stockholders of the
Coyote proposal :
. By mutual written consent of both Coyote and RP.
. By the board of directors of either Coyote or RP, if the merger has not
been consummated by June 2, 1999 (other than for reasons set forth in 4
below), provided, however, that this right to terminate is not available
to the party whose failure to fulfill its obligations under the merger
agreement caused the merger not to be consummated before June 2, 1999.
. By the board of directors of either Coyote or RP, if a court of
competent jurisdiction or governmental, regulatory or administrative
agency or commission issues a nonappealable final order, decree or
ruling or takes any other action which permanently prohibits the merger;
provided, however, that the party seeking to terminate the merger
agreement must have used reasonable efforts to remove such injunction,
order or decree.
. By the board of directors of either Coyote or RP, if
. the RP stockholders do not approve and adopt the merger agreement at
the RP special meeting or at an adjournment thereof; or
. the stockholders of Coyote do not approve the Coyote proposal at the
Coyote special meeting or at an adjournment thereof.
. By RP, if, whether or not permitted to do so by the merger agreement,
Coyote or the Coyote board of directors
. withdraws, modifies or changes its approval or recommendation of the
merger agreement or the merger in a manner adverse to RP;
. approves or recommends to the stockholders of Coyote a Coyote
acquisition proposal or Coyote alternative transaction;
. approves or recommends that the Coyote stockholders tender their
shares in any tender offer or exchange offer that is a Coyote
alternative transaction; or
57
<PAGE>
. takes any position or makes any disclosures permitted under the
exception to the no-solicitation provisions in the merger agreement.
. By Coyote, if, whether or not permitted to do so by the merger
agreement, RP or the RP board of directors
. withdraws, modifies or changes its approval or recommendation of the
merger agreement or the merger in a manner adverse to Coyote;
. approves or recommends to the stockholders of RP a RP acquisition
proposal or RP alternative transaction;
. approves or recommends that the RP stockholders tender their shares
in any tender offer or exchange offer that is a RP alternative
transaction; or
. takes any position or makes any disclosures permitted under the
exception to the no-solicitation provisions in the merger agreement
that has the effect of any of the foregoing.
. By the board of directors of either Coyote or RP,
. if there has been a material breach of any representation or
warranty of the other party set forth in the merger agreement, or if
there has been a material breach of any covenant or agreement set
forth in the merger agreement by the other party, which is not
curable or, if curable, is not cured within 30 days after written
notice of that breach is given by either Coyote or RP to the
breaching party.
. By Coyote, if the Coyote board of directors has received a proposal for
an acquisition proposal that constitutes a Coyote superior proposal and
determines in good faith, and upon the advice of independent outside
legal counsel, that a failure to terminate the merger agreement and
accept that proposal would constitute a breach of its fiduciary duties;
provided, however, that Coyote may not terminate the merger agreement on
this basis unless simultaneously with such termination, Coyote enters
into a definitive acquisition, merger or similar agreement to effect the
Coyote superior proposal.
. By RP, if the RP board of directors has received a proposal for an
acquisition proposal that constitutes a RP superior proposal and
determines in good faith, and upon the advice of independent outside
legal counsel, that a failure to terminate the merger agreement and
accept that proposal would constitute a breach of its fiduciary duties;
provided, however, that RP may not terminate the merger agreement on
this basis unless simultaneously with such termination, RP enters into a
definitive acquisition, merger or similar agreement to effect the RP
superior proposal.
Fees and expenses.
Except as set forth below, each of Coyote or RP will pay its own fees and
expenses incurred in connection with the merger agreement and the merger,
whether or not the merger is completed, provided that Coyote and RP will share
equally all printing expenses incurred in connection with the printing and
filing of this joint proxy statement/prospectus and the related registration
statement.
RP will pay Coyote's actual, reasonable and documented out-of-pocket
expenses, including the costs of financing those expenses, incurred after
January 18, 1999 relating to the merger, up to $1 million, upon the first to
occur of any of the following events:
. the termination of the merger agreement for any reason, if at the time
of such termination Coyote was entitled to terminate the merger
agreement due to the RP board of directors' withdrawal or change of its
approval or recommendation of the merger, approval or recommendation of
a RP acquisition proposal or RP alternative transaction or approval or
recommendation to RP stockholders to tender their shares in a RP
alternative transaction; or
58
<PAGE>
. RP's termination of the merger agreement as the result of the RP board
of directors determining that a proposal for a RP alternative
transaction constitutes a RP superior proposal.
In addition, if within twelve months of such termination RP enters into a
transaction which would constitute a RP alternative transaction with or
involving a third party who directly or indirectly initiated or otherwise had
contact with RP with respect to any such transaction prior to the termination
of the merger agreement, RP will pay Coyote a termination fee of $750,000.
Coyote will pay RP's actual, reasonable and documented out-of-pocket
expenses (including the cost of financing those expenses) incurred after
January 18, 1999 relating to the merger, of up to $1 million, upon the first to
occur of any of the following events:
. the termination of the merger agreement for any reason, if at the time
of such termination RP was entitled to terminate the merger agreement
due to the Coyote board of directors' withdrawal or change of its
approval or recommendation of the merger, approval or recommendation of
a Coyote acquisition proposal or Coyote alternative transaction or
approval or recommendation to Coyote stockholders to tender their shares
in a Coyote alternative transaction;
. Coyote's termination of the merger agreement as the result of the Coyote
board of directors determining that a proposal for a Coyote alternative
transaction constitutes a Coyote superior proposal; or
Coyote will pay RP's actual, reasonable and documented out-of-pocket
expenses (including the costs of financing those expenses) incurred after
January 18, 1999 relating to the merger upon:
. the termination of the merger agreement as a result of a failure to
consummate the merger by June 2, 1999 due to Coyote's failure to have
received sufficient financing to satisfy the ongoing working capital
needs of Coyote and RP following the consummation of the merger and to
refinance existing indebtedness of both companies; provided, however,
that the expenses shall only be payable until the time notice is given
by Coyote to RP that such financing condition will not be, or is not
likely to be, satisfied.
In addition, if within twelve months of such termination, Coyote enters into
a transaction which would constitute a Coyote alternative transaction with or
involving a third party who directly or indirectly initiated or otherwise had
contact with Coyote with respect to any such transaction prior to the
termination of the merger agreement, Coyote will pay RP a termination fee of
$750,000.
The termination fee and/or reimbursement of expenses discussed in this
section are payable within five business days after a demand for payment
following the occurrence of the event requiring such payment, provided that, in
no event will a party be required to pay such termination fee and/or
reimbursement of expenses to the other if, immediately prior to the termination
of the merger agreement, the party to receive the termination fee and/or
reimbursement of expenses was in material breach of its obligations under the
merger agreement.
The fees payable under certain circumstances by Coyote to RP or by RP to
Coyote, are intended, among other things, to compensate such party for its
costs, including lost opportunity costs, if certain actions or inactions by the
other party or its stockholders lead to the abandonment of the merger. This may
have the effect of increasing the likelihood of consummation of the merger in
accordance with the terms of the merger agreement. The fee may also have the
effect of discouraging persons from making an offer to acquire all of or a
significant interest in Coyote or RP by increasing the cost of any such
acquisition.
Amendment and waiver; parties in interest
Coyote and RP may amend the merger agreement in writing by action taken by
or on behalf of their respective boards of directors at any time prior to
consummation of the merger.
59
<PAGE>
At any time prior to consummation of the merger, Coyote or RP may, to the
extent allowed by law, extend the time for the performance of any of the
obligations or other acts of the other, waive any inaccuracies in the
representations and warranties made by the other contained in the merger
agreement or in any document delivered pursuant to the merger agreement, and
waive compliance by the other with any of the agreements or conditions for the
benefit of such party contained in the merger agreement. Any such extension or
waiver will be valid only if set forth in writing by the party or parties
granting such extension or waiver.
The merger agreement is binding upon and inures solely to the benefit of the
parties to it, and nothing in the merger agreement confers upon any other
person any right, benefit or remedy, other than some indemnification and
insurance obligations of Coyote following consummation of the merger which are
intended for the benefit of some specified officers and directors of RP and may
be enforced by those individuals.
60
<PAGE>
STOCKHOLDER AGREEMENT
In connection with the merger agreement, Coyote and the individuals listed
below have entered into a stockholder agreement which has the effect of
determining in advance aspects of the composition of the board of directors of
Coyote for a period of five years after the merger. If the merger is
successful, the stockholders listed below will control shares of Coyote
common stock and series C preferred stock in Coyote, representing approximately
% of the outstanding Coyote stock. Voting together they will be able to
control the composition of the board of directors of Coyote and thus control
the management of Coyote. For the purposes of the stockholder agreement, they
have been designated as comprising three groups:
The Probst group: James M. Probst, Mel S. Stonebraker and Paragon Coyote
Texas Ltd.
The Johnston group: David E. Johnston, Richard P. Johnston and Jayne A.
Johnston Charitable Remainder Trust #3 and Kenneth J. Warren.
The BMC group: Berenson Minella
The board of directors of Coyote will consist of eight directors after the
merger agreement becomes effective. As a result of the stockholder agreement,
the groups listed above will be entitled to appoint the following number of
directors:
The Probst group: 4 directors
The Johnston group: 3 directors
The BMC group: 1 director
According to the stockholder agreement, if the number of directors increases,
the proportion of directors that the groups above are entitled to appoint will
remain the same unless any group owns less than 10% of the outstanding stock.
The Johnston group and the BMC group will each be entitled to designate one
director to sit on the executive committee. The Probst group will be entitled
to designate two directors to sit on the executive committee. The executive
committee, when the board of directors is not in session, has the authority of
the board of directors as limited by the resolution of the board appointing it.
Additionally, the executive committee does not have the authority of the board
of directors to:
. amend the amended and restated articles of incorporation;
. adopt a plan of merger or consolidation;
. recommend to the stockholders the sale, lease or other disposition of
all or substantially all of the property and assets of the corporation
otherwise than in the usual and regular course of its business;
. recommend to the stockholders a voluntary dissolution of the corporation
or to revoke such a dissolution; or
. amend the by-laws of the corporation.
The Johnston group and the BMC group, acting together, will be entitled to
designate one member of the board of directors of Coyote to serve as chairman
of the board of directors and one member of the board of directors'
compensation committee. The function of the compensation committee is to make
recommendations to the board of directors with respect to the compensation of
management and employees and to administer plans and programs relating to stock
options, pension and other retirement plans, employee benefits, incentives and
compensation.
61
<PAGE>
The Probst group will be entitled to designate the president and chief
executive officer of Coyote and the chairman of the executive committee.
The stockholder agreement also provides for the removal of directors from
the board of directors. If a group notifies the other groups that it wishes the
removal of a director appointed by it, the other groups agree to vote for the
removal of that director.
62
<PAGE>
VOTING AND OTHER AGREEMENTS
In connection with the execution of the merger agreement, Coyote and RP
have each entered into separate voting agreements with most of the large
stockholders of the other. Stockholders of RP who together hold approximately
53% of the common stock of RP as of the record date, have agreed with Coyote
to vote in favor of the merger agreement. Stockholders of Coyote who together
hold approximately 69% of the common stock of Coyote as of the record date,
have agreed with RP to vote in favor of the amendment of Coyote's amended and
restated articles of incorporation to increase the authorized preferred stock
and the issuance of a new series of preferred shares, the series C preferred
stock, in connection with the merger. Because together the stockholders who
have signed these voting agreements control over half the issued and
outstanding stock of each company, the practical effect of these agreements is
to secure the adoption of the merger agreement by stockholders of RP and the
authorization and issuance of the series C preferred stock by Coyote
stockholders. We discuss the particulars of these agreements below.
The Coyote voting agreements
James M. Probst, Mel S. Stonebraker and Paragon Coyote Texas Ltd. have each
entered into a voting agreement with RP as of February 2, 1999. James M.
Probst, the president and CEO of Coyote, owns 1,170,100 shares of common stock
of Coyote, or 20.25% of the outstanding stock in Coyote. Mr. Probst also holds
options to purchase another 90,000 shares of Coyote common stock. Mel S.
Stonebraker, the chairman of the board of directors of Coyote, owns 1,430,000
shares of common stock in Coyote or 24.75% of the outstanding stock. Mr.
Stonebraker also holds options to purchase another 90,000 shares of Coyote
common stock. Paragon, a Texas limited partnership owns 685,953 shares of
common stock of Coyote, or 11.87% of the outstanding stock in Coyote and holds
options to purchase another 521,739 shares of Coyote common stock. Mark A.
Pappas, who serves on the board of directors of Coyote, is president of the
general partner of Paragon. Together these stockholders beneficially own
3,286,053 shares of common stock of Coyote or approximately 69% of all the
outstanding shares.
In the voting agreements into which each of these Coyote stockholders
entered into with RP, they agreed:
. Not to sell, pledge or encumber their stock before the merger agreement
with RP has either become effective or been terminated;
. To vote their shares in favor of the merger agreement with RP and the
related transactions and against any action or agreement that would have
the effect of interfering with or adversely affecting the consummation
of the merger;
. To vote for the authorization and issuance of a new series of stock in
Coyote, the series C preferred stock, which will have certain rights
superior to those of existing common stock in Coyote;
. To vote their shares against any action by Coyote that would result in a
breach of the merger agreement with RP;
. To vote their shares against any other merger agreement other than the
one with RP;
. To grant to certain officers of RP a proxy, that is, the right to vote
these 3,286,053 shares as RP sees fit, with respect to the approval of
the merger agreement.
Because the Coyote stockholders identified above hold more than half the
outstanding stock in Coyote, and they have agreed to approve the merger
agreement with RP and to approve the authorization and issuance of the series
C preferred stock at the special meeting on , 1999, we expect that the
merger agreement and the amendment to Coyote's amended and restated articles
of incorporation to increase the authorized preferred stock, and to create and
approve, the issuance of a new series of shares, the series C preferred stock,
will be approved.
63
<PAGE>
The RP voting agreements
Kenneth J. Warren, David E. Johnston, Danny Edwards, Lawrence Bain, Richard
P. Johnston and Jayne A. Johnston Charitable Remainder Trust #3, Berenson
Minella and Ronald L. Chalmers have each entered into a voting agreement with
Coyote as of February 2, 1999.
Kenneth J. Warren owns 334,031 shares of common stock of RP, or
approximately 5.8% of the outstanding RP common stock. Mr. Warren also holds
options to purchase another 15,323 shares of RP common stock.
David E. Johnston owns 208,769 shares of common stock of RP or
approximately 3.6% of the outstanding stock. Mr. Johnston also holds options
to purchase another 11,106 shares of RP common stock.
Danny Edwards owns 526,502 shares of common stock in RP or approximately 9%
of the outstanding stock. Mr. Edward also holds options to purchase another
62,550 shares of RP common stock.
Lawrence Bain owns 12,500 shares of common stock of RP or approximately
0.2% of the outstanding RP common stock. Mr. Bain also holds options to
purchase another 5,625 shares of RP common stock.
Ronald L. Chalmers owns 125,261 shares of common stock of RP or
approximately 2.2% of the outstanding RP common stock. Mr. Chalmers also holds
options to purchase another 15,553 shares of RP common stock.
Richard P. Johnston and Jayne A. Johnston Charitable Remainder Trust #3
owns 646,309 shares of common stock of RP or approximately 11.1% of the
outstanding RP common stock. The trust holds no options to purchase shares of
RP common stock.
Berenson Minella, a limited partnership of which Raymond J. Minella, who
serves as chairman of the board of directors of RP, is a managing general
partner, owns 1,231,741 shares of common stock of RP or approximately 21.2% of
the outstanding RP common stock and holds no options to purchase shares of RP
common stock.
Together these seven stockholders own 3,085,113 shares of common stock of
RP or approximately 53% of all the outstanding shares of RP common.
In the voting agreements into which each of these RP stockholders entered
into with Coyote, they agreed:
. Not to sell their stock before the merger agreement with Coyote has
either become effective or terminated;
. To vote the shares they own in favor of the merger agreement with
Coyote;
. To vote their shares against any action by RP that would result in a
breach of the merger agreement with Coyote;
. To vote their shares against any other merger agreement other than the
one with Coyote; and
. To grant to certain officers of Coyote a proxy, that is, the right to
vote these 3,085,113 shares as Coyote sees fit, with respect to the
approval of the merger agreement.
Because the RP stockholders noted above hold more than half the outstanding
stock in RP, and they have agreed to approve the merger agreement with Coyote
at the special meeting on , 1999, the approval of the merger agreement is
assured.
64
<PAGE>
Edwards option re-pricing agreement
As of January 28, 1999, RP entered into a letter agreement with Danny
Edwards, one of RP's directors. As a result of this agreement, the following RP
stock options were canceled:
. 53,033 RP stock options with an exercise price of $5.50 and 55,000 RP
stock options with an exercise price of $6.00 held by Mr. Burg;
. 2,357 RP stock options with an exercise price of $5.50, 40,193 RP stock
options with an exercise price of $6.06 and 20,000 RP stock options with
an exercise price of $6.60 held by Mr. Edwards; and
. 7,500 RP stock options with an exercise price of $13.00 held by Everen
Securities.
In place of these canceled RP stock options, an equal amount of new RP stock
options with otherwise similar terms with an exercise price of $3.19 and an
expiration date five years from the date of grant were issued to Messrs. Burg
and Edwards and to Everen Securities.
Mr. Edwards had required such cancellation and reissuance as a condition to
waiving certain contractual rights which he possessed under the existing RP
stockholder agreement. Mr. Edwards entered into an amendment of the existing RP
stockholder agreement in order to permit certain other parties to that
agreement to enter into the RP voting agreements, the execution and delivery of
which was a condition to Coyote's willingness to enter into the merger
agreement.
When the merger agreement becomes effective, the options granted to Danny
Edwards, Everen Securities, Inc. and Robert Burg II will convert into options
to purchase an aggregate of 178,083 shares of Coyote common stock at an
exercise price of $3.19.
Certain undertakings with respect to resale
Coyote has agreed that for 10 years after the merger with RP:
. At the request of stockholders who together hold at least 10% of the
Coyote common stock outstanding (assuming conversion in full of the
series C preferred) Coyote will attempt to obtain one or more nationally
recognized underwriters to underwrite a public offering of the Coyote
common stock or a portion of the Coyote common stock, if such an
underwriter deems it practical that it be offered in such manner.
. This may include filing a registration statement, as required by the
Securities Act, if no registration statement is then in effect, or
filing under any registration statement that is then in effect any
necessary amendment or new prospectus.
. This may also include joining with such holders in entering into an
underwriting agreement in customary form with such underwriter or
underwriters selected by Coyote and reasonably satisfactory to such
holders.
. If no underwriter can be obtained, Coyote will, within reason, assist
such stockholders in an orderly and effective disposition of this common
stock.
A copy of the form of agreement addressing these matters may be found as
Exhibit 10.58 to the registration statement of which this joint proxy
statement/prospectus is a part.
65
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
give effect to the merger between Coyote and RP. The merger between Coyote and
RP will be accounted for in accordance with the purchase method pursuant to APB
Opinion No. 16.
The accompanying unaudited pro forma combined condensed balance sheet gives
effect to the merger as if it had occurred on December 31, 1998. The
accompanying unaudited pro forma combined condensed statements of operations
give effect to the merger as if it had occurred on January 1, 1998. These
unaudited pro forma combined condensed financial statements have been derived
from the audited consolidated financial statements of Coyote as of and for the
year ended December 31, 1998 and the unaudited consolidated financial
statements of RP as of and for the twelve months ended February 28, 1999.
Additionally, these pro forma financial statements give effect to Coyote's
acquisition of Unifiber Corporation as if Coyote's acquisition of Unifiber
Corporation had occurred on January 1, 1998. Assets acquired and liabilities
assumed are reflected at their estimated fair values, which values are subject
to further refinement after the closing of the merger. Coyote and RP do not
expect that the final allocation of the aggregate purchase price for the merger
will differ materially from the preliminary allocation reflected in the
accompanying pro forma combined condensed financial statements. No adjustments
have been included in the pro forma amounts for anticipated cost savings or
other synergies.
The unaudited pro forma combined condensed financial statements should be
read in conjunction with the following:
. Coyote's audited consolidated financial statements and notes thereto
included in Coyote's annual report on form 10-KSB for the year ended
December 31, 1998;
. RP's audited consolidated financial statements and notes thereto
included in RP's annual report on form 10-KSB for the fiscal year ended
May 31, 1998;
. Coyote's unaudited pro forma condensed combined consolidated financial
statements and notes thereto and Unifiber Corporation's audited
financial statements for the fiscal years ended March 29, 1997 and March
30, 1996, included in Coyote's 8-K/A (amendment No. 2) filed on April 3,
1998, in connection with Coyote's acquisition of Unifiber Corporation;
. RP's unaudited condensed consolidated financial statements and notes
thereto for the quarterly periods ended August 31, 1998, November 30,
1998 and February 28, 1999, filed on Form 10-QSB; and
. RP's unaudited pro forma condensed consolidated financial statements and
notes thereto for the Proxy Statement/Prospectus filed on August 18,
1997, in connection with the merger of FM Precision and Royal Grip.
The unaudited pro forma combined condensed financial statements have been
prepared in accordance with generally accepted accounting principles. The pro
forma information is presented for illustrative purposes only and is not
necessarily indicative of the combined operating results or financial position
that would have occurred if the merger had been consummated January 1, 1998 or
December 31, 1998, as the case may be, nor are they necessarily indicative of
future combined operating results or future financial position. Operating
results are subject to both seasonal fluctuations and the impact of planned
annual temporary plant shutdowns.
The unaudited pro forma combined condensed financial statements and notes
thereto contain forward-looking statements that involve risks and
uncertainties, including those described in "Risk Factors" or elsewhere herein.
Therefore, the actual results of Coyote may differ materially from those
discussed herein. Coyote undertakes no obligations publicly to release the
result of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances.
Refer to the accompanying notes to unaudited pro forma combined condensed
financial statements for an explanation of each pro forma adjustment.
66
<PAGE>
COYOTE SPORTS, INC. AND ROYAL PRECISION, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, February 28,
1998 1999 Pro Forma
Historical Historical Adjustments Adjustments Pro Forma
Coyote RP (Note 1) (Note 2) Combined
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents... $ 925,275 21,000 (1,278,109)(a) (3,507,740)(h)
4,511,849 (a) 274,000 (h) 946,275
Restricted cash........ 90,000 -- 90,000
Trade receivables,
net................... 4,693,788 3,077,000 7,770,788
Inventories............ 6,399,249 5,226,000 11,625,249
Prepaid expenses and
other current assets.. 903,712 887,000 1,790,712
------------ ---------- -----------
Total current assets... 13,012,024 9,211,000 22,223,024
Property, plant and
equipment, net......... 14,185,247 3,938,000 4,393,000 (i) 22,516,247
Intangible assets, net.. -- 9,637,000 8,316,860 (i) 17,953,860
Other assets, net....... 3,670,878 2,437,000 (300,003)(b)
4,105,000 (a) 9,912,875
------------ ---------- ----------- ----------- -----------
$ 30,868,149 25,223,000 7,038,737 9,476,120 72,606,006
============ ========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable.......... $ 13,127,754 3,977,000 (17,104,754)(a) --
Current portion of long
term debt............. 6,151,947 1,519,000 (7,670,947)(a)
1,250,000 (a) 1,250,000
Accounts payable....... 5,312,524 1,853,000 7,165,524
Accrued expenses....... 3,131,578 2,315,000 590,000 (a) (229,000)(h) 5,807,578
------------ ---------- -----------
Total current
liabilities........... 27,723,803 9,664,000 14,223,102
Long-term debt, net of
current portion........ 893,408 3,594,000 (4,487,408)(a)
(2,613,828)(c)
4,511,849 (a)
31,750,000 (a) 33,648,021
Deferred tax liability
and other long-term
liabilities............ 1,200,330 47,000 1,247,330
------------ ---------- -----------
Total liabilities...... 29,817,541 13,305,000 49,118,453
------------ ---------- -----------
Redeemable preferred
stock.................. 1,500,000 -- (1,500,000)(a) --
------------ ---------- -----------
Stockholders' equity
(deficit):
Convertible preferred
stock................. -- -- 5,777 (i) 5,777
Common stock........... 5,778 6,000 (6,000)(i) 5,778
Additional paid-in
capital............... 18,180,202 13,853,000 2,613,828 (c) (13,853,000)(i)
22,917,343 (i)
(1,300,000)(h) 42,411,373
Accumulated deficit.... (19,188,377) (1,941,000) (300,003)(b) 1,941,000 (i) (19,488,380)
Accumulated other
comprehensive income.. 553,005 -- 553,005
------------ ---------- -----------
Total stockholders'
equity (deficit)...... (449,392) 11,918,000 23,487,553
------------ ---------- ----------- ----------- -----------
Commitments and
contingencies
$ 30,868,149 25,223,000 7,038,737 9,476,120 72,606,006
============ ========== =========== =========== ===========
</TABLE>
67
<PAGE>
COYOTE SPORTS, INC. AND ROYAL PRECISION, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Twelve Months
Ended Ended Ended
December 31, February 28, December 31,
1998 1999 Pro Forma Pro Forma 1998
Pro Forma Pro Forma Adjustments Adjustments Pro Forma
Coyote RP (Note 1) (Note 2) Combined
------------ ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales............... $ 41,976,549 22,548,000 64,524,549
Cost of goods sold...... (34,017,166) (14,467,000) (250,214)(j) (48,734,380)
------------ ----------- -----------
Gross profit............ 7,959,383 8,081,000 15,790,169
Selling, general and
administration
expenses............... (10,344,691) (6,955,000) (415,843)(k) (17,715,534)
Nonrecurring write off
of goodwill and other
assets................. (11,341,332) -- (11,341,332)
Nonrecurring merger
related expenses....... -- (77,000) (77,000)
------------ ----------- -----------
Operating income
(loss)................. (13,726,640) 1,049,000 (13,343,697)
Other income (expense):
Interest expense........ (1,647,067) (773,000) (1,641,730)(d) (4,061,797)
Debt financing costs.... (826,059) -- 826,059 (e) --
(2,948,901)(e)
(313,167)(f) (3,262,068)
Other................... 221,606 256,000 477,606
------------ ----------- -----------
Income (loss) from
continuing operations
before income taxes and
minority interests..... (15,978,160) 532,000 (20,189,956)
Income tax expense...... (871,961) (350,000) (1,221,961)
Minority interests in
subsidiaries' income
and losses, net........ 212,035 -- 212,035
------------ ----------- -----------
Net income (loss) from
continuing operations
before extraordinary
item................... (16,638,086) 182,000 (21,199,882)
Convertible preferred
stock dividend......... -- -- (2,041,836)(m) (2,041,836)
------------ ----------- ---------- ---------- -----------
Net income (loss) from
continuing operations
before extraordinary
item available to
common stockholders.... $(16,638,086) 182,000 (4,077,739) (2,707,893) (23,241,718)
============ =========== ========== ========== ===========
Basic and diluted income
(loss) per share from
continuing operations
before extraordinary
item................... $ (3.49) 0.03 (4.88)
============ =========== ===========
Shares used in
calculating per share
amounts................ 4,762,797 5,755,945 4,762,797
============ =========== ===========
</TABLE>
68
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Unifiber Year Ended
Year Ended Period from Pro Forma December 31, 1998
December 31, 1998 January 1, 1998 Adjustments Pro Forma
Historical Coyote to March 27, 1998 (Note 3) Coyote
----------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Net Sales............... $ 38,217,632 3,758,917 41,976,549
Cost of goods sold...... (29,999,634) (4,017,532) (34,017,166)
------------- ---------- -----------
Gross profit.......... 8,217,998 (258,615) 7,959,383
Selling, general and
administration
expenses............... (9,056,585) (1,219,530) (68,740)(n)
164 (o) (10,344,691)
Nonrecurring write off
of goodwill and other
assets................. (11, 341,332) -- (11,341,332)
------------- ---------- -----------
Operating income
(loss)............... (12,179,919) (1,478,145) (13,726,640)
Other income (expense):
Interest expense...... (1,419,221) (97,634) (130,212)(p) (1,647,067)
Debt financing costs.. (675,510) -- (150,549)(q) (826,059)
Other................. 189,824 31,782 221,606
------------- ---------- -----------
Loss before income taxes
and minority
interests.............. (14,084,826) (1,543,997) (15,978,160)
Income tax expense...... (169,000) (702,961) (871,961)
Minority interests in
subsidiaries' income
and losses, net........ 212,035 -- 212,035
------------- ---------- -------- -----------
Net income (loss) before
extraordinary item..... $ (14,041,791) (2,246,958) (349,337) (16,638,086)
============= ========== ======== ===========
Basic and diluted loss
per share.............. $ (3.49)
===========
Shares used in
calculating per share
amounts................ 4,762,797
===========
</TABLE>
69
<PAGE>
ROYAL PRECISION, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Twelve Twelve
Months Ended Months Ended
February 28, 1999 Pro Forma February 28, 1999
Historical Adjustments Pro Forma
RP (Note 4) RP
----------------- ----------- -----------------
<S> <C> <C> <C>
Net sales..................... $ 22,548,000 22,548,000
Cost of goods sold............ (14,467,000) (14,467,000)
------------ -----------
Gross profit................ 8,081,000 8,081,000
Selling, general and
administration expenses...... (6,955,000) (6,955,000)
Nonrecurring merger related
expenses..................... (580,000) 503,000 (77,000)
------------ -----------
Operating income............ 546,000 1,049,000
Other income (expense):
Interest expense............ (773,000) (773,000)
Other....................... 256,000 256,000
------------ -----------
Income from continuing
operations before income
taxes...................... 29,000 532,000
Income tax expense............ (350,000) (350,000)
------------ ------- -----------
Net income (loss) from
continuing operations........ $ (321,000) 503,000 182,000
============ ======= ===========
Basic and diluted income from
continuing operations per
share........................ $ 0.03
===========
Shares used in calculating per
share amounts................ 5,755,945
===========
</TABLE>
70
<PAGE>
COYOTE SPORTS, INC. AND ROYAL PRECISION, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE 1
The pro forma combined condensed balance sheet gives effect to $35,000,000
in senior debt, consisting of a $10,000,000 revolving line of credit and
$25,000,000 in senior term debt, and $8,000,000 in senior subordinated debt
(collectively, the "financing") as if the financing had occurred on December
31, 1998. As of April 29, 1999, the financing had not been committed.
Consummation of the merger is contingent upon obtaining the financing. Coyote's
senior management believe that the aforementioned financing will be obtained
substantially with the terms described below. However, there can be no
assurance that Coyote will obtain the financing necessary to consummate the
merger, nor that it will be obtained on the terms described below. The senior
debt and subordinate debt are being separately negotiated by the management of
Coyote.
The Coyote and RP pro forma combined condensed statements of operations give
effect to the financing as if it had occurred at the beginning of the period
presented. Also reflected in the Coyote and RP pro forma combined condensed
financial statements are the estimated financing costs including payments to
financial advisors and closing fees. Adjustments included in the Coyote and RP
pro forma combined condensed financial statements are as follows:
(a) Adjustment to record the net effect of proceeds from senior debt and
subordinate debt from the financing and payments of existing notes payable
and long-term debt. Coyote expects to receive proceeds from a note payable
of $13,000,000, at an interest rate of prime plus 2% with a minimum rate of
9.75%, a note payable of $12,000,000, at an interest rate of prime plus
3.5% with a minimum rate of 11.25%, to draw $4,511,849 from a line of
credit facility with an interest rate of prime plus 1.25% with a minimum
rate of 9.0% and a subordinate note payable of $8,000,000, at an interest
rate of 13%. The $13,000,000 note payable is expected to be repaid over
four years as follows: year one $1,250,000; year two $3,700,000; year three
$4,000,000; year four $4,050,000 or earlier if cash flows exceed defined
thresholds or if defined assets or other defined transactions occur. The
$12,000,000 note payable is expected to mature, with a balloon payment four
years after the note commences or earlier if cash flows exceed defined
thresholds or if defined assets or other defined transactions occur. The
$8,000,000 note payable is expected to mature with a balloon payment seven
years after the note commences. The line of credit is expected to be
available for four years, subject to an adequate borrowing base and could
be paid earlier if cash flows exceed defined thresholds or if defined
assets or other defined transactions occur. Coyote expects to use these
proceeds to:
. repay $29,263,109 in notes payable and long-term debt of Coyote and
RP, $3,515,000 in total estimated financing costs (an additional
$590,000 in financing costs have been accrued and is the minimum
that will be payable when the $35,000,000 in senior debt is repaid
in the future);
. to redeem $1,500,000 of Coyote series A preferred stock; and
. use the remaining amount to pay $3,233,740 in remaining estimated
merger and joint proxy statement/prospectus costs (an additional
$274,000 in merger and joint proxy statement/prospectus costs have
been paid).
(b) Adjustment to other assets reflecting write-off of unamortized debt
financing costs on existing Coyote outstanding debt at December 31, 1998.
(c) Adjustment to reflect the estimated fair value of 693,323 warrants
to purchase common stock for no payment to be issued in connection with the
subordinate debt. The estimated fair value of the warrants is $3.77 per
warrant, which amount was determined using the Black Scholes valuation
model. Each warrant, when exercised, would entitle the holder thereof to
acquire one share of Coyote's common stock. The warrants will have an
exercise period of seven years. As part of the terms and conditions of the
subordinate debt currently being negotiated by Coyote's senior management,
warrants are expected to be issued to the subordinate debt lender(s).
Actual warrants issued may be more or less than the estimate.
71
<PAGE>
(d) Adjustment to record effect of net additional interest expense on
indebtedness.
(e) Adjustment to record amortization of financing costs, using the
interest method, over the life of the loans of four and seven years and to
eliminate amortization of financing costs on existing debt.
(f) Adjustment to record amortization of discount on subordinate debt
for warrants expected to be issued, using the interest method, over the
life of the loans of seven years .
(g) Coyote will incur early termination penalties of approximately
$240,000 in connection with early repayment of existing debt. The early
termination penalties will be recorded as an extraordinary loss on early
extinguishment of debt, and have not been reflected in the pro forma
combined condensed financial information.
NOTE 2
The unaudited pro forma combined condensed balance sheet gives effect to the
merger and to the financing as if they had occurred on December 31, 1998. The
Coyote and RP unaudited pro forma combined condensed statements of operations
give effect to the merger and to the financing as if they had occurred at the
beginning of each period. Also reflected in the Coyote and RP unaudited pro
forma combined condensed financial statements are the estimated merger and
joint proxy statement/prospectus costs, including payments to financial
advisors, independent accountants, attorneys and others. Adjustments included
in the Coyote and RP unaudited pro forma combined condensed financial
statements are as follows:
(h) Total estimated merger and joint proxy statement/prospectus costs
are $3,482,740, consisting of $2,207,740 in estimated merger costs and
$1,300,000 in estimated joint proxy statement/prospectus costs. Of the
$2,207,740 in estimated merger costs, $274,000 has been paid by RP and
$229,000 has been accrued and expensed.
(i) Adjustment to reflect the purchase price which represents the sum
of;
. the estimated fair value ($21,828,120) of 5,777,692 shares of Coyote
series C preferred stock, $0.001 par value, to be issued in exchange
for 5,667,375 shares of RP common stock outstanding as of January
31, 1999 (the estimated fair value of the consideration to be paid
for the RP common stock is $3.78 per share of Coyote series C
preferred stock issued based on an independent valuation performed
by Lehman Brothers Inc.);
. the estimated fair value of the 602,434 options to purchase Coyote
common stock of $1,095,000 which amount was determined using the
Black Scholes valuation model; and
. estimated merger costs of $2,207,740. The purchase price exceeding
the net book value of the assets acquired, including merger costs
paid and accrued by RP, of $13,212,860 results in an increase in the
carrying value of property, plant and equipment of $4,393,000 with
the balance of $8,316,860 allocated to goodwill. The net book value
of all remaining net assets approximate their fair value.
(j) Adjustment to record additional depreciation expense related to the
$4,393,000 increase to property, plant and equipment.
(k) Adjustment to record amortization of goodwill resulting from the
merger over the expected benefit period of 20 years.
(l) The Coyote and RP pro forma combined basic and diluted loss per
share amounts are based on the combined weighted average number of common
shares outstanding for the periods presented. Conversion of Convertible
Preferred Stock issued in connection with the merger would be antidilutive
and thus is not reflected in the diluted amounts.
(m) Adjustment to reflect dividends on 6% Coyote series C preferred
stock issued based upon a $5.89 per share redemption value assuming no
conversion taken by holders of the Coyote series C preferred stock.
72
<PAGE>
EXPENSE REDUCTIONS
Management has identified annualized cost savings in excess of $2,250,000
that have not been reflected in the pro forma combined condensed statements of
operations. Coyote expects to realize these cost savings as well as additional
cost reductions by benchmarking best practices at each manufacturing facility,
through vendor consolidation and through improved distribution capabilities.
However, there can be no assurance that these cost savings will be realized.
NOTE 3
The Coyote and subsidiaries unaudited pro forma combined condensed
statements of operations reflect Coyote's acquisition of Unifiber Corporation
as if it had occurred as of the beginning of the period presented. On March 19,
1998, Coyote acquired all of the outstanding stock of Unifiber, a supplier of
graphite golf shafts to premium golf club original equipment manufacturers, for
a purchase price of $3,000,000 in cash and 521,739 shares of Coyote's common
stock. The acquisition was accounted for by the purchase method. The results of
operations of Unifiber were included in the operations of Coyote beginning
April 1, 1998, since the results for the period from March 20, 1998 to March
31, 1998 were not significant. The following pro forma adjustments give effect
to the purchase and related debt financing as of the beginning of the period
presented for the unaudited pro forma combined condensed statement of
operations.
(n) Adjustment to record amortization of goodwill recorded in the
acquisition on a straight-line basis over the expected benefit period of 20
years.
(o) Adjustment to record additional depreciation expense related to
equipment purchased and to eliminate depreciation expense of equipment
sold.
(p) Adjustment to record net effect of additional interest expense on
indebtedness.
(q) Adjustment to record amortization of debt financing costs on the
interest method over an 18-month period.
EXPENSE REDUCTIONS
The unaudited Coyote and subsidiaries pro forma combined condensed
statements of operations do not reflect expected cost reductions for Unifiber
under Coyote's management. Management identified annualized cost savings in
excess of $1,328,000, which had been incurred by the previous owner and
management that would not have been incurred under Coyote's management. Coyote
realized these cost savings as well as additional expense reductions subsequent
to acquiring Unifiber.
NOTE 4
The RP pro forma condensed statement of operations for the twelve months
ended February 28, 1999 has been adjusted to eliminate $503,000 of costs
related to the merger between RP and Coyote which were expensed by RP prior to
February 28, 1999. As described in Note 7 to RP's Form 10-QSB for the period
ended February 28, 1999, RP disposed of the assets of its headwear division in
March 1999.
73
<PAGE>
BUSINESS OF COYOTE
General
Coyote was incorporated in Nevada on October 24, 1994. Coyote's principal
offices are located at 2291 Arapahoe Avenue, Boulder, Colorado 80302.
Coyote intends to continue to purchase companies within the sports equipment
and recreation products industry with experienced management, that have well-
established brand names and product lines, and strong engineering and design
capabilities. Management intends to strengthen and foster the growth of these
companies through the introduction of additional manufacturing capabilities and
techniques, expanded sales and marketing efforts and vertical integration of
company-wide manufacturing and distribution capabilities.
Through an aggressive acquisition strategy, Coyote has a controlling
ownership interest in five operating companies: Apollo, Reynolds Cycle
Technology, Limited, Apollo Golf, Inc., Unifiber Corporation and Sierra
Materials, LLC. In addition, Coyote has a minority interest in Unggul Galakan
Sdn. Bhd.
Inflation has not had a significant impact on Coyote's operations during the
two years ended December 31, 1998.
The Apollo Group and Unifiber
Apollo and Unifiber products
The Apollo group and Unifiber have two main product areas: steel golf shafts
and graphite golf shafts. Additionally, the Apollo group supplies high
performance steel alloy tubing and Unifiber supplies high performance carbon
composite bicycle components for use by Reynolds, Coyote's premium brand for
bicycling components. The Apollo group also sells specialized steel tubing for
wheelchairs and javelins.
Apollo is the only manufacturer of seamless steel golf shafts in the world.
Management believes that the physical integrity of the golf shaft is superior
using a seamless tube. For this reason, a seamless tube is usually specified
for safety-critical applications, such as power generation plants. Seamless
tubes provide a more homogeneous shaft which produces a more consistent product
and reduces the potential for structural defects. Seamless tubing also gives
more opportunities to use a greater variety of high carbon, high strength alloy
steels as compared to welded shafts. Apollo also uses high carbon alloys to
maximize strength for golf shafts which are not obtainable in a welded form.
Apollo and Unifiber manufacture a variety of unique golf shafts tailored to
each customer's needs and specifications. Its golf shafts are used by some of
the most well known golf club manufacturers. Coyote's golf shafts are generally
designed and engineered by Apollo and Unifiber in partnership with its club
manufacturer customers.
Apollo also manufactures unique products to meet the needs of the retail
after market consisting of the catalog and custom club maker market. For this
market, Apollo manufactures a variety of golf shafts. Each variety is available
in differing flexes, kick points, torques and weights. Apollo provides a range
of innovative, high-quality products designed to maximize the performance of
golfers at every skill level. Additionally, Apollo supplies high performance
alloy steel tubing for use by Reynolds in the manufacture of cycle frame
tubesets and specialized tubing for other uses, such as wheelchairs and
javelins.
Apollo and Unifiber sales and marketing
Apollo and Unifiber together rank as one of the leading steel and graphite
shaft manufacturers in the world and with the largest golf shaft manufacturing
facility in all of Europe. Management believes that Apollo has a dominant
position in the European market for golf shafts. The market for golf clubs, and
therefore golf shafts, is driven not only by the growth in the golfing
population, but also by the frequency of club purchases, which is determined
principally by product innovation. In the United States and Europe, Coyote
sells and markets its
74
<PAGE>
golf shafts through a salaried sales force directly to golf club manufacturers
and custom club makers. Apollo and Unifiber's sales force consists of four full
time employees in the United States and one full time employee in Europe.
Apollo U.S., responsible for U.S. sales, has expanded its sales force to
strengthen its sales and marketing efforts for golf shafts. Apollo's investment
in promotional activities has succeeded in strengthening its image with new
products. Current strategy focuses on the use of Apollo golf shafts by European
and U.S. Tour professionals. Apollo's Tour professional conversion program
includes one European consultant and two U.S. consultants who follow the
professional circuits in order to promote the use of Apollo golf shafts.
Apollo and Unifiber design, engineering and manufacturing
The larger golf club manufacturers each require exclusively designed golf
shafts for their club systems which comprise golf shafts, heads and grips
engineered to work together. Apollo also designs specialty putter golf shafts
which involve a high level of manufacturing complexity. Apollo and Unifiber
both have separate advanced test and inspection facilities, which use "in-
house" designed test equipment and a computer aided design package for golf
shaft design. Apollo U.S. has its own test and inspection laboratory for steel
golf shafts, while Unifiber has its own test and inspection laboratory for
graphite golf shafts. Considerable technical support is provided to sales by
product development engineers, involving frequent customer visits and
presentations. Development of manufacturing processes is crucial to new product
initiatives and is carried out by a senior development engineer with the
support of two development engineers and a design engineer. Coyote's
manufacturing processes involve a number of specialized processes requiring
specific know-how.
Unifiber purchased substantially all of the assets of West Coast, a wholly
owned subsidiary of Cobra Golf Incorporated in September 1998, through which
Unifiber has access to Autoclave technology. Autoclave units are used in the
aerospace industry to achieve high compaction of composite components ensuring
high strength and structural integrity. Unifiber is the only U.S. premium
graphite shaft manufacturer with Autoclave units and believes that it would
require a capital investment of approximately $1.0 million and significant
expertise to acquire this technology. Management believes that Autoclave
technology will enable Coyote to design more consistent, lower weight, higher
strength shafts utilizing specialty cure resin systems. Management believes
that the Company's shafts, which use the Autoclave, will be technologically
superior to existing shafts in the market.
Coyote's research and development team is the leader in the graphite market
with numerous innovations and patents, including:
. Construction for Fiber Reinforced Shaft (Patent 4,097,626)--original
patent for high modulus graphite shafts;
. Lynx Transmitter Shaft--first gripless graphite shaft (forerunner of the
"Big Butt" technology);
. Flare Shaft (Patent 5,265,872);
. AVDP woods and irons--original Big Butt technology;
. Prince woods and irons--unique high performance designs; and
. lightweight golf shaft with controllable "feel" (Patent 5,620,380)
In addition, Unifiber designed the Callaway RCH 90, RCH 96 and RCH 99 shafts
which management estimates to be the most popular designs in graphite shaft
history.
Coyote is the only manufacturer of steel shafts with an ISO 9001 quality
certificated steel manufacturing facility and is also the only manufacturer of
graphite shafts with an ISO 9001 quality certificated graphite manufacturing
facility. Apollo manufactures its golf shafts in a 132,000 sq. ft. facility in
Oldbury, England. Coyote owns the land, building and equipment used in
manufacturing its golf shafts. Unifiber manufactures its golf shafts in a
56,000 sq. ft. facility in Carlsbad, California.
75
<PAGE>
Competition
The golf shaft market has more than 35 competitors worldwide. The major
competitors are Aldila, True Temper, HST, UST, Fujikura and RP. The industry is
maturing and management anticipates a consolidation will occur over the next
several years. In the end, management believes that the number of competitors
will be reduced significantly as consolidation within the industry takes place.
Technology, price, quality and service will be determining factors.
Market
Most golf clubs have golf shafts constructed from steel or graphite.
Although some other materials are used, they represent an insignificant percent
of the total world-wide market. Apollo sells its golf shafts to golf club
manufacturers, and in the retail after market to catalogs and custom club
makers. According to management estimates, based on invitations to bid, golf
shafts represent a total worldwide wholesale market of approximately 60 million
units, representing $250 million in gross revenues. The market for steel golf
shafts has decreased over the last ten years due to the introduction of
graphite golf shafts. With the acquisition of Unifiber, Coyote is in a position
to continue as a leader in the golf shaft industry.
Sales of golf equipment is highly seasonal with models traditionally
introduced in October and phased out by September of the following year.
Selling concentration is somewhat weighted towards the first half of the year,
when component purchase decisions are made for the following season. Larger
manufacturers place orders by schedule for future delivery, but as much as 40%
of Apollo U.S.'s sales can be generated by spot sales for immediate delivery to
small and medium sized assemblers.
According to the National Golf Foundation (the "NGF") in "Trends in the golf
industry 1986-1996," U.S. golfers spend more than $15 billion a year on
equipment, related merchandise and playing fees. Management estimates that
world demand for golf shafts is forecast to grow from 55.6 million golf shafts
in 1996 to 59.0 million golf shafts in 1998 in line with the increase in the
golfer population in the U.S.A. Management estimates that the European golfer
population has grown 56% from 1.6 million in 1988 to 2.5 million in 1995 and is
forecast to grow to 2.9 million by 1998. According to the United States Golf
Association (the "USGA") in "Golf participation in the United States," golf is
played today by people from all walks of life. Approximately 43% of all golfers
come from households headed by professionals or managers and another
approximately 38% come from homes headed by blue-collar and clerical workers.
The remaining approximately 19% consists of retirees and other persons. The
U.S. golfer population currently stands at approximately 25 million players, of
which approximately 11 million are core golfers, those who play 8 or more
rounds per year. Of these core golfers, approximately 5 million play 25 or more
rounds per year. According to the NGF, in 1997, the number of first-time
players reached a record high of nearly three million, a 51.2% increase over
the nearly two million beginners in 1996. Approximately 48% of all golfers are
between the ages of 18 and 39. Senior golfers (over age 50) make up
approximately 26% of the golf population.
In 1998, the USGA estimated that there were approximately 78 million "baby
boomers" in the United States. According to the NGF, the average golfer in
their 40s or 50s plays 32.8% and 93.6% more rounds annually than the average
golfer in their 30s, respectively. In addition, the average golfer in their 60s
plays 217.6% more rounds than the average golfer in their 30s. As a result,
Coyote believes that as the "baby boom" population reaches its "peak" golf-
playing age, sales of golf-related equipment will continue to increase.
Similarly, "echo boomers," or the children of the baby boom generation, who now
constitute a large portion of new golfers, will have a similar impact on the
golf equipment industry as they continue to age.
Reynolds Cycle Technology Limited
Reynolds products
Reynolds and its predecessor businesses have been manufacturing steel tubing
for high end bicycle frames for 100 years. Reynolds' cycle tubing has been used
in the winning bike in 27 of the last 41 Tour De France
76
<PAGE>
races. Currently, Reynolds has under contract the U.S.A. National Road Racing
Team (which generally comprises a significant portion of the U.S.A. Olympic
Team), the Saturn Racing Team and the Shaklee Racing Team. Using Reynolds cycle
tubing, these teams have consistently finished within the top five places in
the U.S.A. and within the top ten places worldwide. Through Reynolds' strong
brand name and reputation for innovation Reynolds has established itself as a
supplier to many major OEM customers including, alphabetically, such brands as
GT Bicycle, Inc., Kona Bicycles USA, Raleigh Bicycle Company, Ltd., and Trek
Bicycle Corp.
Reynolds produces cycle tubing for a wide variety of cycle applications. The
tubing is used for road racing bicycles, road track bicycles and time trial
bicycles, competition touring bicycles, all-terrain bicycles and tandems.
Reynolds shares its research and development function with its main steel
tubing supplier, Apollo. Through this joint effort, the Reynolds 853(TM)
/631(TM) "Air Hardened" products were developed. These products give an
exceptional weight to strength and stiffness ratio not normally seen with
conventional steel alloys that is achieved by a unique air hardening process
that concentrates the stiffness in the frame geometry and strength in the
joint, where it is most needed. Reynolds cycle tubes are all manufactured from
high quality alloy steels, which also contributes to the high strength and
stiffness to weight ratio. In addition to the 853(TM)/631(TM) products,
Reynolds also manufactures its 753(TM) /531(TM) manganese molybdenum series and
its 725(TM)/525(TM) and its 501(TM)/500(TM) chrome molybdenum series tubesets.
The higher the number the higher the tensile strength and stiffness to weight
ratio. Accordingly, the 853(TM) gives the greatest tensile strength and
stiffness to weight ratio and the greatest performance features of tubesets in
Reynold's product line.
Through Reynolds and Unifiber, Coyote manufactures and distributes premium
carbon composite bicycle components. Management has established a separate
research and development group to focus on developing new products for the
cycling industry and has hired leading research and development engineers from
Easton, Trek and Unifiber. The carbon composite bicycle components are
manufactured at Unifiber.
Reynolds sales and marketing
In the U.S. and Europe, sales and marketing is accomplished using a salaried
sales force located in Elk Grove Village, Illinois for its U.S. sales and in
its Birmingham, England factory for its European sales. The design engineers
work closely with the Reynolds sales staff and the OEM customers. Reynolds
markets its product line through advertising in several cycling trade journals.
Reynolds produces cycle tubing for a wide variety of cycling applications. The
tubing is designed and engineered for road racing bikes, track bikes, time
trial bikes, touring bikes, mountain bikes and tandem bikes. Reynolds shares
its research and development function with its main steel tubing supplier,
Apollo (a subsidiary of Coyote). Through this joint effort, Apollo and Reynolds
have developed products such as the Reynolds 853(TM) / 631(TM) "Air Hardened"
products, which demonstrate an exceptional weight to strength and stiffness
ratio not normally seen with conventional steel alloys. Reynolds offers 525 and
725 series tubing for its lower Carbon content, which makes it suitable for
TIG-welded frames. This welding technique and production method has become
extremely important for mountain-bike frames, because lugs are not normally
required and design changes can be implemented easily. Reynolds' 531 brand of
tubing utilizes Manganese-Molybdenum and is mainly used in lugged, brazed
framesets when it produces a strong and durable racing frameset. In the heavier
gauges, it can be used for BMX or touring framesets.
Reynolds design, engineering and manufacturing
Reynolds currently manufactures its tubesets in a 20,000 square foot leased
facility in Birmingham, England. Coyote designs unique tubesets or various
pieces of a frame set to the specifications of its customers. Typically, the
tubesets are bid and specified twelve months before the actual production of
the cycle takes place. For example, in early 1997, the design and engineering
team at Reynolds was prototyping tubes sets for 1998 models. Once specified
into a specific bike model, manufacturing the tubeset is accomplished by a
series
77
<PAGE>
of cold forming, butting, heat treating and manipulations. The engineers at
Reynolds work closely with the design teams of its customers to ensure
compliance with tight tolerances and quality specifications.
Reynolds competition
The majority of branded cycle tubing is supplied by six manufacturers
worldwide. Easton is a U.S. based manufacturer, specializing in aluminum;
Columbus is an Italian-based manufacturer, primarily using steel; Dedacciai is
an Italian-based manufacturer, primarily using steel; True Temper, is a U.S.
based manufacturer, primarily using steel; Tange, is a Japanese based
manufacturer, primarily using steel; and Reynolds, a U.K.-based manufacturer
primarily using steel and carbon composites.
Market
According to the 1995 Interbike industry report, more than 100 million
Americans of all ages rode bicycles in 1993, which was up from approximately 72
million in 1983. The worldwide cycle industry produces approximately 108
million bicycles annually. Of those, 86% (93 million) are utility, low price
point bikes sold primarily in low income countries for transportation at under
$200 per cycle. Approximately 9% (10 million) of all bicycles sold fall in the
$200 to $400 range. While in general these bikes use lower cost steel and are
sold through mass merchants for recreational use, there are some examples of
branded components appearing on the higher end of these models. Approximately
5% (5 million) of all bicycles sold are sold for greater than $400, mainly
through specialist dealer networks. The latter models are Reynolds' targeted
market since these bikes are sold on a combination of performance, tensile
strength, endurance, brand and price to sports and recreation enthusiasts with
above average income and education levels. Both bicycle brands and branded
components tend to predominate in this segment, as potential purchasers will
research competing specifications. In addition, the specialist dealer network
also sells high margin after market accessories (for example, stems, seat
posts, and wheels). These items often provide over 40% of the cycle revenue to
the specialist dealer and represent a market into which Reynolds can extend its
brand through introduction of new products. Geographically, the major markets
for the top 5% of bicycles sold are Western Europe and the U.S., while the
largest producers are physically in Taiwan and Italy. Management believes that
the tubeset market in which it competes has annual revenues of approximately
$50 to $100 million worldwide. This includes steel, aluminum, titanium and
carbon fiber. Steel and aluminum tubesets account for approximately 90% of such
annual revenues.
Sierra Materials
Sierra Materials products
Sierra Materials produces three primary types of finished advanced composite
materials, consisting of unidirectional pre-impregnated tape, made primarily
from carbon fiber and fiberglass; solvent coated impregnated tape, primarily
woven fiberglass and Kevlar(TM); and carbon fiber laminates and molded
products. Sierra Materials' current customer base is comprised exclusively of
commercial product manufacturers. The majority of Sierra Materials' customers
are manufacturers of sporting goods. Because carbon fiber is as strong and
durable as metal but much lighter and more versatile, it is used in many
sporting goods applications where weight and performance are critical factors.
Some typical uses for products made of carbon fiber which combine the features
of strength, durability and lightness, include backpack frames, snowshoes,
sailboat masts, golf shafts, bicycles, hockey sticks, ski poles, tennis
rackets, tent poles, and other products where weight and strength are primary
concerns. Coyote's finished composite materials are principally sold in rolls,
sheets or in granular or chopped forms and are subsequently incorporated by
Sierra Materials' customers into manufactured products.
Over the last two decades, there has been significant growth in the use of
graphite and other advanced composite materials as a result of improvements in
applications engineering, advances in composites technology and declining costs
to the customer in manufacturing final products.
78
<PAGE>
Sierra Materials engineering, design and manufacturing
The most common method of advanced composites fabrication involves the use
of prepreg. This is a term given to preimpregnated materials, either
unidirectional fiber material or woven fabrics impregnated with resins. The raw
graphite comes into the factory in the form of a spool of yarn, where each
strand of yarn has between 1,000 to 50,000 filaments, depending on the
specifications ordered. The unidirectional prepreg is manufactured by spreading
these thousands of filaments (carbon or fiberglass) onto a resin coated paper
and by using pressure and heat, impregnating the filaments with the resin. Both
types of materials are sold in roll form to meet specific customer requirements
for size and weight. The woven fabric prepreg is manufactured primarily of
fiberglass, carbon fiber or Kevlar(TM).
Sierra Materials recently expanded its manufacturing capabilities by opening
a new, state-of-the-art 35,000 square foot facility. Sierra Materials has
finished a $3.0 million capital expenditures investment in new machinery and
equipment, which increased capacity by nearly 5 times, from 1,700 pounds per
day to 8,500 pounds per day.
Sierra Materials sales and marketing
Sierra Materials' sales force contacts its customers directly and plans to
expand its customer base through advertising, trade shows (both industry and
customer specific) and direct marketing. Beginning in September 1998, Sierra
Materials began an advertising campaign to increase its market exposure,
advertising in two popular trade journals once each quarter for a total of
seven advertisements per year. Sierra Materials will adjust its future
advertising plans based upon the response from the fourth quarter
(October/November) advertisements. Additionally, Sierra Materials began
exhibiting at three industry trade shows for the first time in 1998. Sierra
Materials gained significant exposure through these new shows as many industry
journals and newsletters wrote articles covering Sierra Materials'
announcements about increased capacity and lower prices. Sierra Materials
intends to have one new product introduction or market announcement for each of
these trade shows to gain additional market exposure.
Competition
Sierra Materials' primary competitors in its existing markets are Newport
Composites in California and Toray Composites America in Washington.
Additionally, Cytec-Fiberite (Formerly Cyctec Industries and ICI Fiberite) and
Hexcel Corporation (formerly Ciba Geigy and Hexcel Corporation) supply products
in Sierra Materials' primary markets, but are focused on aerospace markets.
Other competitors include Aldila, Inc., which is a vertically integrated
manufacturer of golf shafts and has started marketing its excess capacity in
the recreational products markets.
The composite materials market can be broken down into three segments: raw
materials suppliers, such as suppliers of carbon fiber and resins; converters
(prepreggers), such as Sierra Materials, which convert the raw materials into a
useable state; and end users, such as golf club shaft manufacturers, which form
the prepreg into a finished product. While some companies, such as the golf
shaft manufacturer Aldila, have integrated into producing its own prepreg
materials, very few companies have fully integrated from basic materials to end
product.
Unggul
On July 23, 1998 Coyote exchanged its 77% ownership interest in Pentiumatics
Sdn Bhd for a 28% ownership interest in the outstanding common stock of Unggul.
Unggul wholly owns Action Wear Sdn. Bhd, a southeast Asian manufacturer of
athletic apparel. For the nine months ended September 30, 1998 (unaudited),
Action Wear reported net income of $330,000 on sales of $5,869,000. As of
September 30,1998 (unaudited), Action Wear had net assets of $1,812,000. Coyote
has not actively managed Unggul since its minority
79
<PAGE>
investment was made in July 1998. Coyote has not received financial statements
from Unggul for the year ended December 31, 1998.
Principal suppliers and customers
Coyote, through Apollo and Reynolds, has an exclusive supply contract with
Benteler AG, a steel tube supplier, which supplies essentially all of the steel
for golf shaft and bicycle tube processing. The agreement establishes the price
for annual periods but does not require the Company to purchase specified units
or pounds. If the supplier ceased shipping steel tubing to the Company, the
Company would have to contract with other steel tubing suppliers. In the
opinion of management, changing suppliers would not have a material adverse
effect on the Company's results of operations or liquidity.
Because of the historical volatility of consumer demand for specific clubs,
as well as continued competition from alternative suppliers, sales to a given
customer in a prior period may not necessarily be indicative of future sales.
The loss of a significant customer or a substantial decrease in sales to a
significant customer could have a material adverse effect on Coyote's business
or operating results. Coyote anticipates a substantial increase in net sales to
Cobra and a substantial decrease in sales to Callaway for the year ended
December 31, 1999.
Coyote, through Unifiber, has entered into a five-year supply agreement
expiring December 31, 2003 with Cobra under which Unifiber will manufacture
premium graphite golf shafts for Cobra. Either party may terminate the supply
agreement upon a material breach by the other party of that supply agreement or
the asset sale agreement between Unifiber and Cobra. While Coyote currently
enjoys a strong relationship with Cobra, the loss of Cobra as a customer would
have a significant adverse effect on Coyote's business.
Government Regulations
UNITED KINGDOM
Apollo and Reynolds are established in England and are, accordingly, subject
to the laws of England and Wales with regard to their activities generally.
These laws relate to employment, including, for example, employee rights
against unfair dismissal and discrimination on the basis of race, sex or
disability, taxation, company administration, consumer protection and planning
matters. Specific regulations which apply to Apollo and Reynolds as
manufacturing companies include:
Environment. The activities of Apollo and Reynolds are regulated by the
Environmental Protection Act of 1990. This Act requires Apollo to obtain
licenses to carry out its nickel coating process for golf shafts and to
produce, store and dispose of industrial waste of various descriptions. In
addition, consent is required from the local rivers authority under the Water
Resources Act of 1991 and The Water Industry Act of 1991 regarding discharge of
overflow water from its property into the public sewers. Coyote believes it is
currently in compliance with all licenses and consents. When the Environment
Act of 1995 is fully implemented, the relevant authority will have
significantly increased powers to order persons and companies to clean
contaminated land. However, these increased powers may only be exercised if the
contamination poses a serious risk to health or property. No cleanup
proceedings have been threatened against Apollo and Reynolds, nor are such
proceedings anticipated.
Health and safety. The principal United Kingdom statute is the Health and
Safety At Work Act of 1974, which imposes a duty on employers to maintain "a
safe system of work." This obligation is supplemented by various regulations
requiring employers to establish procedures for assessing hazards to safety and
for reducing or eliminating risk. Apollo and Reynolds have regular contact with
the Factory Inspectorate, the statutory body which administers the Health and
Safety At Work Act of 1974. No proceedings are in existence or threatened
against the United Kingdom companies by the Factory Inspectorate.
80
<PAGE>
Although management believes it is currently in compliance with the above
regulations, Coyote's future operations could expose it to the risk of claims
with respect to environmental matters. Although compliance with governmental
requirements relating to the protection of the environment has not had a
material adverse effect on Coyote's financial condition or results of
operations to date, there can be no assurance that material costs or
liabilities will not be incurred in connection with such environmental matters
in the future.
UNITED STATES
Environmental Regulations. Coyote's operations which are located in the
United States, including Sierra Materials, Apollo U.S. and Unifiber, are
subject to governmental, environmental and health and safety laws and
regulations that impose workplace standards and limitations on the discharge of
pollutants into the environment and establish standards for the handling,
generation, emission, release, discharge, treatment, storage and disposal of
certain materials, substances and wastes. These laws include, for example, the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, the Clean Air Act, as amended, and the Resource Conservation
and Recovery Act of 1976, as amended. Management believes Coyote is in
compliance with United States environmental laws and regulations. Although
compliance with governmental requirements relating to the protection of the
environment has not had a material adverse effect on Coyote's financial
condition or results of operations to date, there can be no assurance that
material costs or liabilities will not be incurred in connection with such
environmental matters in the future.
Properties
Coyote's executive offices are located in Boulder, Colorado pursuant to a
month to month lease. Apollo operates its golf shaft manufacturing in a
facility in Birmingham, England, which is a heavy industrial area. Coyote owns
the land, building and equipment used in manufacturing its steel golf shafts.
Reynolds conducts its manufacturing operations out of a 20,000 sq. ft. facility
in Birmingham, England pursuant to a month to month lease. Apollo U.S. operates
a 8,153 square foot facility in Elk Grove Village, Illinois, pursuant to a
lease which expires January 31, 2000. Lease payments at the facility are $3,500
a month. Sierra Materials conducts its manufacturing operations out of a 35,000
sq. ft. facility in San Diego, California, pursuant to a sublease which expires
in March 2008. Lease payments at the facility are $12,000 a month and are
subject to a rent increase of approximately 6% per annum. Unifiber conducts its
manufacturing operations out of a 55,000 sq. ft. facility in Carlsbad,
California pursuant to a lease which expires in December 2007. Lease payments
at the facility are $28,000 a month and are subject to a rent increase based on
the Consumer Price Index. Unifiber has a semi-vacant 60,000 sq. ft. facility in
San Diego, California pursuant to a lease which expires in March 2006 which it
is looking to sublet. Lease payments at the facility are $48,000 a month and
are subject to a rent increase of 4% per annum.
Legal proceedings
Coyote has no material legal proceedings.
Employees
As of December 31, 1998, Coyote had 373 full time employees. Coyote hires
additional temporary employees as may be required to support expansion of
Coyote's operations.
There are three different unions that have collective bargaining agreements
with Apollo and Reynolds. All hourly paid Apollo employees and 18 hourly paid
Reynolds employees are members of a union. Several union agreements apply to
all hourly employees of both companies.
Except for the Hourly Paid Agreement, which is negotiated annually, there
are no termination dates to the above agreements. The above agreements continue
to apply until otherwise renegotiated between the parties. Management believes
that the relationship with its employees is good.
81
<PAGE>
Executive officers of the registrant
The executive officers of Coyote as of February 15, 1999 are as follows:
James M. Probst, chief executive officer and president--Mr. Probst is a co-
founder of Coyote and has been an officer of Coyote since February 1995. Mr.
Probst currently owns 1,170,100 shares of Coyote common stock, representing
21.7% of the total outstanding shares on September 30, 1998. Mr. Probst's
purchase price for his ownership in his shares was $4,250,000 or $3.63 per
share. From 1986 to 1995, Mr. Probst was employed by Schuller International
Corporation, a wholly owned subsidiary of Manville Corporation. During that
time, Mr. Probst worked through the research and development group to managing
a business unit that manufactured a specific type of fiberglass insulation. He
was responsible for all strategic aspects of the business which included
significant capital investment and production technology development. Mr.
Probst received a B.S. degree in Mechanical Engineering from the University of
Colorado, Denver in 1986 and a Masters in Business Administration from the
University of Denver in 1990.
John Paul McNeill, chief financial officer and treasurer--Mr. McNeill joined
Coyote in July 1997 as controller and was elected chief financial officer and
treasurer in February 1998. From 1996 to 1997, Mr. McNeill was controller of
Cobra, a wholly owned subsidiary of Fortune Brands. Prior to his position at
Cobra, he spent four years as a certified public accountant with Ernst & Young
LLP, one year in the United Kingdom and three years in San Diego, California.
Mr. McNeill is knowledgeable in both U.S. and U.K. generally accepted
accounting principles. Mr. McNeill graduated high honors with a B.B.A from the
University of Notre Dame in 1992.
James A. Pfeil, vice president--operations--Mr. Pfeil joined Coyote in May
1997 as vice president. From May 1995 to May 1997, Mr. Pfeil was senior vice
president of operations of Cobra, a wholly owned subsidiary of Fortune Brands.
From May 1992 to May 1995, he was vice president and general manager of West
Coast Composites, a wholly owned subsidiary of Cobra. West Coast Composites
manufactured all the graphite shafts used by Cobra. From April 1990 to May
1992, he was director of materials at Cobra. Mr. Pfeil received a B.S. in
Business from San Diego State University in 1980.
Mel S. Stonebraker, secretary--Mr. Stonebraker, co-founder of Coyote, has
been an officer and director of Coyote since its incorporation in 1994. Mr.
Stonebraker currently owns 1,430,000 shares of Coyote Sports common stock,
representing 26.6% of the total outstanding shares on September 30, 1998. Mr.
Stonebraker's purchase price for his ownership in his shares was $4,250,000 or
$2.97 per share. From 1983 to 1994, Mr. Stonebraker was international business
development manager for Schuller International Corporation, a wholly owned
subsidiary of Manville Corporation. In that position, he was responsible for
corporate activities throughout the Pacific Rim countries. He was a resident in
Singapore from 1984 to 1989. Mr. Stonebraker received a B.A. degree from the
University of Colorado in 1977 and a Masters of International Administration
from the American Graduate School for International Management (Thunderbird) in
1983.
Intellectual property
Coyote's success depends and will continue to depend in part on the goodwill
associated with its various trademarks, including "APOLLO", "ACCULITE",
"MATCHFLEX", "MASTERFLEX", "SHADOW", "FLARE SHAFT" and others. Coyote has
sought and obtained trademark registrations, or has applications currently
pending, for these and other marks in the United States through the United
States Patent and Trademark Office and for a portion of these marks in many
foreign countries as well.
Coyote has certain confidential and proprietary information including
confidential information relating to the operation of Coyote's business, sales
and customer information, supplier information and certain portions of the
manufacturing process which may be proprietary. While Coyote has taken
reasonable steps to safeguard such information, there can be no assurance that
the steps that have been and are taken by Coyote in this regard will be
adequate to prevent misappropriation of its technology or that Coyote's
competitors will not independently develop technologies that are substantially
equivalent or superior to Coyote's technology.
82
<PAGE>
Research and development
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products
amounted to approximately $813,000 for the year ended December 31, 1998
compared to $783,000 in 1997.
83
<PAGE>
COYOTE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Through an aggressive acquisition strategy, Coyote wholly owns or has a
controlling interest in five operating entities worldwide: Apollo, Reynolds,
Apollo U.S., Sierra Materials, and Unifiber. Coyote's products include steel
and graphite golf shafts, premium grade cycle tubing and javelins. Coyote also
produces graphite and other advanced composite materials for use in the
production of golf shafts, fishing poles, ski poles, hockey sticks and other
sporting goods products.
Coyote's business objective is to become a leading provider of sports
equipment and recreational products. Coyote management intends to build a
consolidated group of companies engaged in related and complementary businesses
that work together to compete effectively in the sports equipment and
recreation products industry. Coyote intends to continue to purchase companies
within the sports equipment and recreation products industry with experienced
management, that have well-established brand names and product lines and strong
engineering and design capabilities. Management intends to strengthen and
foster the growth of these companies through the introduction of additional
manufacturing capabilities and techniques, expanded sales and marketing efforts
and vertical integration of company-wide manufacturing and distribution
capabilities.
Results of operations
As discussed in greater detail below, the acquisition of Unifiber on March
19, 1998, the acquisition of West Cost on September 9, 1998 and the acquisition
of Sierra Materials on March 27, 1997 have resulted in material increases in
Coyote's net sales, cost of goods sold and operating expenses for the year
ended December 31, 1998 in comparison to the year ended December 31, 1997.
Coyote's results of operations could be materially adversely affected by the
traditional volatility in consumer demand for specific golf club brands. Coyote
also believes that while it will often be impossible to predict such shifts in
advance, Coyote's broad range of customers should reduce the extent of the
impact on Coyote's financial results.
84
<PAGE>
The following table sets forth, for the periods indicated, certain statement
of operations data as a percentage of net sales. The 1997 data reflects the
consolidated results of Apollo, Reynolds, Apollo U.S., ICE*USA (ICE) and
general corporate expenses from January 1, 1997 through December 31, 1997 and
includes Sierra Materials and Pentiumatics from April 1, 1997 through December
31, 1997 as these entities were acquired as of April 1, 1997. The 1998 data
reflects the consolidated results of all entities except for Unifiber from
January 1, 1998 through December 31, 1998. Unifiber was acquired on March 19,
1998 and is included in Coyote's results from April 1, 1998 through December
31, 1998, since the results for the period from March 20, 1998 to March 31,
1998 are not significant. The assets of West Coast Composites were consolidated
into Unifiber on September 9, 1998 and are included in Coyote's results from
September 9, 1998 through December 31, 1998.
<TABLE>
<CAPTION>
Year
Ended
December
31,
----------
1998 1997
---- ----
<S> <C> <C>
Net sales....................................................... 100% 100%
Cost of goods sold.............................................. (78) (80)
--- ---
Gross profit.................................................... 22 20
--- ---
Selling, general and administrative costs....................... (24) (30)
Nonrecurring write off of goodwill and other assets............. (30) --
Operating income (loss)......................................... (32) (10)
--- ---
Interest expense, net........................................... (4) (2)
Debt financing costs............................................ (2) (2)
Loss on relinquishment of assets ............................. -- (3)
Other income (expense)........................................ 1 (1)
Loss before income taxes, minority interests and extraordinary
item......................................................... (37) (18)
--- ---
Income tax (expense) benefit.................................... (1) 1
Minority interests.............................................. 1 2
Loss before extraordinary item.................................. (37) (15)
Extraordinary item, net of taxes................................ 1 --
--- ---
Net loss.................................................... (36) (15)
=== ===
</TABLE>
On March 19, 1998, Coyote acquired all of the outstanding stock of Unifiber
Corporation, a supplier of graphite golf shafts to premium original equipment
manufacturers, for a purchase price of $3,000,000 in cash and 521,739 shares of
Coyote common stock recorded at fair value of $1,500,000. The acquisition was
accounted for by the purchase method. Under the terms of the agreement, the
previous owner has the option to sell the shares back to Coyote for a period of
two years after the closing at a price of $5.17 per share. In addition, Coyote
has agreed to pay the previous owner $100,000 per year for the next five years
for a not to compete agreement in which the previous owner will not own,
manage, operate, be employed at or be connected to in any manner with any
business of the type conducted by Unifiber. The agreement provides for an
earnout in the event Unifiber's financial performance for the twelve month
period following the date of the transaction results in net income before
income taxes above $1,500,000. The earnout ranges from $0 to $2,000,000 based
upon net income before income taxes of $1,500,000 to $2,500,000. Based on
actual operating results no earnout will be paid. As a result of the
acquisition, total assets recorded were $13,879,967, of which $10,998,427 was
goodwill. Liabilities assumed were $9,082,446.
On June 15, 1998, Coyote relinquished the rights to certain intangible
assets to the previous owner and stopped distributing winter sports products
under the ICE*USA trade name. Coyote removed all of the assets and liabilities
of ICE*USA from its consolidated financial statements which resulted in an
extraordinary gain of $346,581 for the year ended December 31, 1998. In the
fourth quarter of the year ended December 31, 1997,
85
<PAGE>
Coyote incurred a charge of $934,000 by writing down the intangible assets
associated with the ICE*USA trade name and customer list.
On July 23, 1998, Coyote exchanged its 77% ownership interest in
Pentiumatics Sdn. Bhd. for a 28% ownership in the common stock of Unggul
Galakan Sdn. Bhd. Unggul wholly owns Action Wear Sdn. Bhd., a Southeast Asian
manufacturer of athletic apparel. For the nine months ended September 30, 1998
(unaudited), Action Wear reported net income of $330,000 on revenues of
$5,869,000. As of September 30, 1998 (unaudited), Action Wear had net assets of
$1,812,000.
On September 9, 1998, Coyote purchased substantially all of the assets of
West Coast, a wholly owned subsidiary of Cobra, for a purchase price of
$500,000 in cash and $5,500,000 in the form of a note payable due March 31,
1999. As a result of the acquisition, total assets recorded were $6,500,000.
Liabilities assumed were $500,000. The acquisition has been accounted for by
the purchase method.
In conjunction with the acquisition of all the assets of West Coast, Coyote
assumed the operating lease of the West Coast facility. In December 1998,
Coyote determined that the West Coast production facility in Carlsbad,
California was preferable to the Unifiber facility in San Diego, California due
to the close proximity of the West Coast facility to its largest customer and
to other significant golf club companies. In addition, management believes it
will be able to manufacture graphite golf shafts more efficiently and at lower
cost at the West Coast facility.
As a result of a significant reduction in order volume subsequent to the
acquisition of Unifiber, management determined that goodwill from the Unifiber
acquisition had been significantly impaired and recorded a nonrecurring write
off of goodwill and other assets of $11,341,332 in the fourth quarter.
Coyote evaluated long-lived assets, which included goodwill, at the lowest
level for which there are identifiable cash flows in accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and APB Opinion
No. 17 "Intangible Assets". Impairment was determined by evaluating the
estimated amount at which the assets of Unifiber could be sold in a current
transaction between willing parties. In the fourth quarter of 1998, it was
determined the goodwill acquired in the Unifiber acquisition had been
significantly impaired due to sales orders from three significant customers,
who historically had collectively represented greater than 90% of Unifiber's
sales, declining to de minimis amounts. Accordingly, the remaining goodwill
associated with the acquisition of Unifiber totaling $10,815,119 was expensed.
Additionally, Coyote estimated the remaining periods that the Unifiber facility
would be in use and amortized the remaining book value of leasehold
improvements and other long-lived assets that were impaired over the remaining
estimated use period. Coyote accordingly recognized as a liability and expense
in the fourth quarter of 1998, seven months of lease payments and estimated
executory costs for the Unifiber facility based on estimates received from
local real estate brokers. Should this facility not be sub-leased within this
period, Coyote will recognize additional expense in the future.
Years ended December 31, 1998 and 1997
Net sales for the year ended December 31, 1998 increased 38% to $38,218,000,
of which $8,914,000 were from UK operations and $29,304,000 were from U.S.
operations, as compared to $27,686,000 for the previous year, of which
$8,870,000 were from UK operations and $18,816,000 were from U.S. operations.
The increase in net sales is primarily attributable to an increase in golf
shaft sales from the acquisition of Unifiber and West Coast. Coyote's golf
shaft business accounted for approximately 79.9% and 67.0% of Coyote's revenue
for the years ended December 31, 1998 and 1997, respectively.
Sales to Callaway and Cobra have increased on a percentage basis from 1997
to 1998 as a result of the acquisition of Unifiber in March 1998 and the supply
contract entered into with Cobra in September 1998 in connection with the
acquisition of West Coast. Because of the historical volatility of consumer
demand for
86
<PAGE>
specific clubs, as well as continued competition from alternative suppliers,
sales to a given customer in a prior period may not necessarily be indicative
of future sales. The loss of a significant customer or a substantial decrease
in sales to a significant customer could have a material adverse effect on
Coyote's business or operating results. Coyote anticipates a substantial
increase in net sales to Cobra and a substantial decrease in sales to Callaway
for the year ended December 31, 1999.
Coyote, through Unifiber, has entered into a five-year supply agreement,
expiring December 31, 2003, with Cobra under which Unifiber will manufacture
premium graphite golf shafts for Cobra. Either party may terminate the supply
agreement upon a material breach by the other party of that supply agreement or
the asset sale agreement between Unifiber and Cobra. While Coyote currently
believes it has a strong relationship with Cobra, the loss of Cobra as a
customer would have a significant adverse effect on Coyote's business.
Gross profit for the years ended December 31, 1998 and 1997 was 22% and 20%
of net sales, respectively. The increase in gross margin is primarily
attributable to a change in product mix to higher margin golf shafts.
Selling, general and administrative expenses for the year ended December 31,
1998 were 24% of net sales or $9,057,000 as compared to 30% of net sales or
$8,243,000 for the previous year. The increase in operating expenses is
primarily due to the acquisition of Unifiber and West Coast and approximately
$305,000 in expenses incurred in connection with the proposed merger between
Coyote and Royal, which were offset by reductions in operating expenses for
Apollo.
Excluding the nonrecurring write off of goodwill and other assets, Coyote
had an operating loss of $839,000 for the year ended December 31, 1998, as
compared to an operating loss of $2,669,000 for the previous year. The change
is attributable to an increase in sales, a change in product mix to higher
margin golf shafts and a reduction in selling, general and administrative
expenses as a percent of sales, which was partially offset by approximately
$305,000 in costs incurred in connection with the proposed merger between
Coyote and RP. After the nonrecurring charge of $11,341,332 relating to the
nonrecurring write off of goodwill and other assets as noted above, Coyote had
an operating loss of $12,180,000 for the year ended December 31, 1998.
Interest expense was $1,419,000 for the year ended December 31, 1998 as
compared to $473,000 for the previous year. The increase in interest expense is
primarily attributable to the $6,000,000 note payable entered into on March 19,
1998 to acquire Unifiber and the $5,500,000 note payable entered into on
September 9, 1998 to acquire the assets of West Coast.
In connection with the $6,000,000 note payable entered into on March 19,
1998 to acquire Unifiber, Coyote issued shares of Coyote common stock. The fair
value of the issued shares is being amortized over the contracted life of the
loan. In December 1998, Coyote issued additional shares in connection with the
note payable which were expenses. For the year ended December 31, 1998, Coyote
incurred $676,000 in debt financing costs, excluding interest, in connection
with the $6,000,000 note payable. Coyote entered into two secured promissory
notes with Bridge Lenders in 1997 for $1,500,000 and two short term unsecured
promissory notes with other lenders in 1997 for $800,000. For the year ended
December 31, 1997, Coyote incurred $617,000 in debt financing costs, excluding
interest, in connection with these notes.
Coyote incurred a charge of $934,000 for the year ended December 31, 1997 by
writing off the intangible assets associated with the ICE*USA trade name and
customer list as a result of having received written notice of its payment
default of approximately $100,000. Consequently, Coyote wrote down the
intangible assets in the fourth quarter of the year ended December 31, 1997.
Coyote recorded income tax expense of $169,000 for the year ended December
31, 1998 on net income from its UK operations. Coyote recorded an income tax
benefit of $281,000 for the year ended December 31, 1997 primarily as a result
of losses generated by Apollo in the United Kingdom and recapturing previously
paid income taxes in 1997.
87
<PAGE>
Minority interests in subsidiaries' losses were $212,000 and $407,000 for
the years ended December 31, 1998 and 1997, respectively. Minority interests in
subsidiaries' losses are a result of the net effect on profits and losses of
Sierra Materials, ICE (prior to the relinquishment of ICE's assets) and
Pentiumatics (prior to the exchange of ownership) and is based on the
minorities' percentage ownership in Sierra Materials (20%), ICE (prior to the
relinquishment of ICE's assets) (20%) and Pentiumatics (prior to the exchange
of ownership) (23%).
Excluding the nonrecurring write off of goodwill and other assets and an
extraordinary gain, net loss for the year ended December 31, 1998 was
$2,700,000 or $0.57 per share, as compared to a net loss of $4,168,000 or $1.22
per share for the previous year. After the nonrecurring charge of $11,341,000
and the extraordinary gain of $347,000, net loss for the year ended December
31, 1998 was $13,695,000 or $2.88 per share. The increase in net loss is
primarily attributable to the nonrecurring charge from the write off of
goodwill and other assets and due to an increase in interest expense offset by
an increase in sales and gross profit.
In order to become profitable, Coyote must continue to increase sales while
effectively managing costs. Profitability depends to a large extent on
management's ability to increase sales, reduce selling, general, and
administrative costs, more efficiently use existing plant capacities at Apollo,
Reynolds and Sierra Materials and by acquiring companies whose businesses would
be complementary to, and compatible with, the existing business of Coyote's
subsidiaries. There can be no assurance that Coyote will be able to achieve
these goals or become profitable in the future.
Years ended December 31, 1997 and 1996
Coyote had revenues of $27,686,000 for the year ended December 31, 1997, of
which $8,870,000 were from UK operations and $18,816,000 were from U.S.
operations. Coyote had revenues of $5,453,000 for the year ended December 31,
1996, of which $2,499,000 were from UK operations and $2,954,000 were from U.S.
operations. Coyote's golf shaft business accounted for approximately 67% and
91% of Coyote's revenue for the years ended December 31, 1997 and 1996,
respectively.
Coyote had gross profit of $5,574,000 for the year ended December 31, 1997,
compared with $1,284,000 for the year ended December 31, 1996. Gross margins
fell from 23% in 1996 to 20% in 1997 primarily due to the addition of Sierra
Materials in April 1997 which historically has had lower gross margins than
Coyote's other operating entities, inventory write off at ICE*USA and graphite
shaft manufacturing costs incurred by Apollo. To improve margins, Coyote
commenced a $3.0 million capital expansion project in the fourth quarter of
1997 at Sierra Materials to increase capacity and improve operating
efficiencies. The capital expansion project was completed in the third quarter
of 1998. In addition, Coyote closed its graphite shaft manufacturing facility
in El Cajon, California in the fourth quarter of 1997.
Coyote's operating expenses increased to $8,243,000 for the year ended
December 31, 1997 compared to $2,308,000 for the comparable period in 1996.
Operating expenses as a percentage of revenue fell from 42% in 1996 to 30% in
1997 as a result of a full year's effect of owning and operating Apollo and
Reynolds in 1997.
Coyote incurred an operating loss of $2,669,000 for the year ended December
31, 1997 compared to an operating loss of $1,024,000 for the comparable period
in 1996.
Interest expense for the year ended December 31, 1997 was $473,000 compared
to $35,000 in 1996. The increase in interest expense is primarily the result of
Coyote's credit facilities in the United States, the United Kingdom, interest
on the remaining purchase obligation for ICE*USA and interest expense on two
promissory notes with bridge lenders which were repaid in September 1997.
Coyote incurred a charge of $934,000 for the year ended December 31, 1997 by
writing off the intangible assets associated with the ICE*USA trade name and
customer list as a result of having received written notice of its payment
default of approximately $100,000. Consequently, Coyote wrote off the
intangible assets in the fourth quarter of the year ended December 31, 1997 as
there was no continuing utility with these assets.
88
<PAGE>
Coyote entered into two secured promissory notes with bridge lenders in 1997
for $1,500,000 and two short term unsecured promissory notes with other lenders
in 1997 for $800,000. For the year ended December 31, 1997, Coyote incurred
$617,000 in debt financing costs excluding interest in connection with these
notes. No such transactions took place in the year ended December 31, 1996.
Coyote recorded an income tax benefit of $281,000 for the year ended
December 31, 1997, primarily as a result of losses generated by Apollo in the
United Kingdom and recapturing previously paid income taxes in 1997. A portion
of Apollo's current year losses were offset against taxes paid in 1997 on 1996
income and a portion will be utilized to offset future taxable income, if any,
in the United Kingdom. No such income tax benefits existed for the year ended
December 31, 1996.
Coyote incurred a net loss of $4,168,000 for the year ended December 31,
1997 or a net loss of $1.22 per share compared to a net loss of $938,000 or
$0.27 per share for the comparable period in 1996.
Seasonality
As a result of Coyote's present operations being primarily dependent upon
golf shaft sales, management expects for the foreseeable future that Coyote's
business will remain seasonal. Coyote's customers have historically built
inventory in anticipation of purchases by golfers in the spring and summer, the
principal selling season for golf shafts; Coyote's primary product. Coyote's
operating results have been affected by seasonal demand for golf clubs, which
has generally resulted in higher sales in the spring and summer months. The
success of certain customers' products, patterns of product introduction, and
customer acceptance thereof, coupled with generally increasing overall demand
for golf shafts, may mitigate the impact of this seasonality.
Year 2000 issue
Coyote is aware of the issues associated with the programming code in
existing computer systems and is working to resolve the potential impact of the
year 2000 on the ability of its computerized information systems to accurately
process information that may be date sensitive. Any of Coyote's programs that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures. Coyote utilizes a number of computer
programs across its operations. Coyote has developed a Year 2000 project team
to address the Year 2000 issue. An initial assessment has been completed for
each of its operations. The evaluation revealed that a number of computer
hardware and software systems utilized by Coyote have Year 2000 compliance
issues. These systems will need to be replaced or upgraded. The majority of the
system and/or programs are "off the shelf" products with Year 2000 compliant
versions now available. However, there are some custom programs which will need
to be reprogrammed to be Year 2000 compliant. A Year 2000 plan has been
developed for all of Coyote's operations, some of which are in the
implementation and testing stages. The systems and programs are scheduled to be
replaced or upgraded by September 1, 1999. Coyote expects to have all critical
systems and/or programs Year 2000 compliant by August 1999.
Coyote relies on third parties for many products and services and it may be
adversely impacted if these companies are unable to address this issue in a
timely manner, which could result in a material financial risk to Coyote.
Coyote has not performed an assessment on the state of readiness and/or
compliance of key suppliers and customers. Management plans to identify key
suppliers and customers by March 31, 1999. Management expects that completion
of its Year 2000 compliance project will result in expenditures of
approximately $100,000. To date, the Company has spent approximately $30,000 to
become Year 2000 compliant. Coyote's failure to resolve the Year 2000 issue
before December 31, 1999 could result in system failures or miscalculations
causing disruption in operations including, among other things, an inability to
process transactions, send invoices, send and/or receive e-mail and voice mail,
or engage in similar normal business activities. Additionally, failure of third
parties upon whom the Company's business relies to timely remediate their Year
2000 issues could result in disruptions in the supply of parts and materials,
late, missed or unapplied payments, disruptions in order processing and other
general problems related to their daily operation. While Coyote believes its
Year 2000 compliance actions will adequately address its internal Year 2000
issue, until
89
<PAGE>
Coyote completes its assessment of its suppliers and customers, the overall
risks cannot be accurately described and quantified, and there can be no
guarantee that the Year 2000 issue will not have a material adverse effect on
the Company. Coyote has not, to date, implemented a Year 2000 contingency plan.
Coyote's goal is to have the major Year 2000 issues resolved by September 1,
1999. Final verification and validation is scheduled to occur by October 1999.
However, Coyote intends to develop and implement a contingency plan by July 31,
1999, in the event that its Year 2000 issue plan should fall behind schedule.
Liquidity and Capital Resources
As of December 31, 1998, Coyote had an accumulated deficit of $19,188,000
compared to an accumulated deficit of $5,493,000 at December 31, 1997. Net loss
for the year ended December 31, 1998 was $13,695,000, compared to a net loss of
$4,168,000 for the previous year. As of December 31, 1998, Coyote had a working
capital deficit of $14,712,000, compared to working capital of $1,366,000 at
December 31, 1997. Cash used in operating activities for the year ended
December 31, 1998 was $3,590,000, compared to cash used in operating activities
of $4,238,000 for the previous year .
As of December 31, 1998, Coyote had nine outstanding notes payable. The
notes are broken out by operating entity and discussed below.
Coyote-Parent
As of March 19, 1998, Coyote entered into a $6,000,000 promissory note and
loan agreement as amended December 30, 1998 with Paragon. Paragon is an
unrelated third party to Coyote, although as a condition of the loan agreement,
the Coyote board of directors appointed Mr. Mark Pappas, the president of the
general partner of Paragon, to Coyote's board of directors, a capacity in which
he currently serves. In the ordinary course of business, this loan would be due
September 19, 1999. Interest is payable quarterly at an interest rate of 12%
per year. The consummation of the merger agreement would cause the note to be
due immediately.
Under the loan agreement, Coyote issued Paragon 163,265 shares of Coyote
common stock as of March 19, 1998, which represented $1,000,000 divided by the
closing price of the common stock on the Nasdaq Small Cap Market on the day
immediately preceding the closing of the loan. The loan agreement provides that
the issuer shall issue to Paragon such additional number of shares of Coyote
common stock, if any, as are necessary to make the aggregate value of all
shares of common stock issued equal $1,000,000 on December 30, 1998, upon the
maturity of the loan and upon the prepayment, if any, of the loan. Pursuant to
this formula, and based on a December 29, 1998 closing price of the common
stock on the Nasdaq Small Cap Market of $3.25 per share, Coyote issued Paragon
an additional 144,427 shares of the Coyote common stock effective December 30,
1998. Coyote may be required to issue Paragon additional shares of common stock
under the referenced formula depending on the price of the Coyote common stock
at the maturity date (September 19, 1999) and on any date that the note is
prepaid in full prior to the maturity date.
The loan agreement provides that the note is secured by 1,430,000 shares of
Coyote's common stock owned by Mel Stonebraker, director, and by 1,170,000
shares of Coyote's common stock owned by Jim Probst, president and chief
executive officer. Under the loan agreement, Messrs. Stonebraker and Probst
retain the power to vote their shares of Coyote common stock as long as Coyote
is not in default under the loan agreement.
On November 16, 1998, Coyote entered into a convertible promissory note for
$1,000,000 with interest payable as a warrant to purchase 35,000 shares of
Coyote's common stock. Principal on the note is due and payable upon
refinancing of Coyote's debt in connection with the merger between Coyote and
RP if Coyote is able to secure the refinancing prior to May 1, 1999. In the
event that the refinancing does not close on or before May 1, 1999, the holder
of the promissory note has the option of converting all or any portion of the
principal amount into Coyote's common stock at the price of $3.25 per share up
to and not to exceed five percent of the then outstanding shares of Coyote's
common stock. If the holder of the promissory note does not exercise this
90
<PAGE>
option, Coyote must repay the principal balance of $1,000,000. Management is in
discussions with the holder of the promissory note and expects the note will be
extended through the consummation of the merger between Coyote and RP and
subsequently converted into Coyote's common stock.
Apollo
One note payable provides for borrowings under a foreign line of credit up
to 600,000 Pounds Sterling ("PS") (approximately $1,020,000 U.S. at December
31, 1998) with an interest rate of 1.5% plus the LIBOR rate. Amounts
outstanding on the note are secured by the land and buildings owned by Apollo.
As of December 31, 1998, $715,000 was outstanding under this note payable.
On November 21, 1998, Apollo entered into a five-year note payable for up to
400,000 PS (approximately $680,000 U.S. at December 31, 1998) with an interest
rate of 1.75% plus the LIBOR rate. Amounts outstanding on the note are secured
by the land and buildings owned by Apollo. As of December 31, 1998, $635,000
was outstanding under this note payable.
In March 1997, Apollo entered into an agreement with a lender to advance
loans secured by trade receivables. As of December 31, 1998, $376,000 was
outstanding under this agreement. The Agreement continues indefinitely until
notice to terminate is given by either party.
Apollo U.S.
In January 1998, Apollo U.S. entered into a loan and security agreement with
a lender to advance loans up to $2,300,000 at an interest rate of prime plus
1.5 percent (9.5% at December 31, 1998) secured by substantially all of the
assets of Apollo U.S. Advances are guaranteed by Sierra Materials and Coyote.
Advances are calculated on a daily basis and are based on defined eligible
accounts receivable and inventories. Under the terms of the agreement, the
borrowings may be immediately callable by the lender. The term of the agreement
is two years. At December 31, 1998, the outstanding balance on the loan was
$1,877,000. Coyote may not declare or pay dividends on its common stock without
the written consent of the lender.
Unifiber
In March 1998, Unifiber entered into a loan and security agreement with a
lender. The agreement provides advance loans up to $2,300,000, a term loan of
$1,100,000 and a capital equipment term loan not to exceed $200,000, at an
interest rate of prime plus 1.5 percent (9.5% at December 31, 1998). Borrowings
are secured by substantially all of the assets of Unifiber and are guaranteed
by Apollo U.S., Sierra Materials and Coyote. Advances are calculated on a daily
basis and are based on defined eligible accounts receivable and inventories.
Borrowings on the capital equipment term loan can not exceed a defined
percentage of invoice prices for selected capital equipment. Under the terms of
the agreement, the borrowings may be immediately callable by the lender. The
formal term of the agreement is two years. As of December 31, 1998, the total
outstanding balance under the agreement was $1,843,000. Coyote may not declare
or pay dividends on its common stock without the written consent of the lender.
On September 9, 1998, Unifiber entered into a note payable for $5,500,000
with an interest rate of 10%. Principal and accrued interest are due March 31,
1999. Borrowings are secured by the shares of Unifiber and by the assets
purchased from Cobra.
Sierra Materials
In January 1998, Sierra Materials entered into a loan and security agreement
with a lender. The agreement provides advance loans up to $2,500,000, a term
loan of $169,365 and a capital equipment term loan not to exceed $2,100,000, at
an interest rate of prime plus 1.5 percent (9.5% at December 31, 1998).
Borrowings are secured by substantially all of the assets of Sierra Materials
and are guaranteed by Apollo U.S., and Coyote.
91
<PAGE>
Advances are calculated on a daily basis and are based on defined eligible
accounts receivable and inventories. Borrowings on the capital equipment term
loan can not exceed a defined percentage of invoice prices for selected capital
equipment. Under the terms of the agreement, the borrowings may be immediately
callable by the lender. The formal term of the agreement is two years. As of
December 31, 1998, the total outstanding balance under the Agreement was
$2,315,000. Coyote may not declare or pay dividends on its common stock without
the written consent of the lender.
At December 31, 1998, Coyote has entered into employment agreements with
each of its officers. Total commitments under the employment agreements are
$487,000 for 1999 and $123,000 for 2000. In addition, at December 31, 1998,
Coyote has entered into a consulting agreement as a part of the acquisition of
Unifiber in which Coyote must pay the previous owner of Unifiber $100,000 in
1999, 2000, 2001 and 2002 and $25,000 in 2003. Additionally, Coyote has
consulting agreements with Paragon and Investor Relations which were both
transacted with Coyote common stock as Coyote payment. There are no cash
requirements under these agreements.
At December 31, 1998, $90,000 in cash was restricted and held as collateral
against a standby letter of credit to secure an operating lease obligation.
Coyote's management believes that the combination of cash and cash
equivalents on hand of $925,000, restricted cash on hand of $90,000, its
borrowing availability of $402,000 at December 31, 1998, projected cash flows
from operations, extending the due dates of current debt agreements and
entering into new debt agreements will provide sufficient cash to meet its
obligations as they come due. Additionally, Coyote has historically built
inventory in the spring in order to meet demand, thereby increasing Coyote's
working capital needs in the spring. Coyote has current debt obligations of
$19,280,000 among five different lenders. Coyote has notified its existing
lenders that it is in negotiations with two lending groups to secure longer-
term replacement financing for Coyote in connection with the merger with RP. On
February 2, 1999, the boards of directors of Coyote and RP signed an agreement
to merge. The merger is structured so that Coyote will be the surviving company
and RP will become a wholly owned subsidiary of Coyote. If the merger is
consummated, Coyote expects to:
. secure a revolving line of credit of $10,000,000, at an interest rate of
9.00%;
. secure a note payable of $18,000,000 (amended to $13,000,000 based on a
non-binding term sheet subsequently received), at an interest rate of
9.75%;
. secure a note payable of $12,000,000, at an interest rate of 11.25%; and
. secure a note payable of $8,000,000, at an interest rate of 13.00%.
The notes are expected to be repaid over seven years as follows:
. year one $1,250,000;
. year two $3,700,000;
. year three $4,000,000;
. year four $16,050,000; and
. year seven $8,000,000.
Proceeds will be used to pay all of Coyote's current debt obligations of
$19,280,000, long-term debt obligations of $893,000, redeem $1,500,000 in
series A preferred stock, pay $6,749,000 in remaining estimated financing,
merger and registration costs and repay $9,090,000 in RP's current outstanding
indebtedness, with a remaining availability of $5,488,000 on the line of
credit, subject to borrowing base limitations.
In the event that Coyote is unable to obtain long-term lending facilities
and/or extend the due dates of its current debt obligations, Coyote would seek
bridge financing that would enable it to continue operating until it
92
<PAGE>
secures replacement long-term lending facilities for its current debt
obligations and to meet working capital needs which could have a material
adverse effect on Coyote's business, operating results and financial condition.
Coyote has received a letter of commitment from a lender to financially support
Coyote through March 31, 2000. Terms of the financial support such as interest
rates, collateral, due dates, etc. have not been established. However, there
can be no assurance that Coyote will obtain long-term lending facilities or
bridge financing that would enable it to continue operating, without exercising
the letter of commitment.
Net cash used in operating activities was $3,590,000 for the year ended
December 31, 1998, primarily due to the loss and an increase in inventories and
a decrease in accrued expenses offset by a decrease in restricted cash.
Net cash used in investing activities was $6,747,000 for the year ended
December 31, 1998, primarily due to the acquisition of Unifiber, the purchase
of the assets of West Coast and the purchase of machinery and equipment by
Sierra Materials.
Net cash provided by financing activities was $10,536,000 for the year ended
December 31, 1998, primarily due to the borrowings made to acquire Unifiber and
the assets of West Coast.
Coyote continues to consider the acquisition of additional businesses
complementary to Coyote's business. Coyote would require additional debt or
equity financing, if it were to engage in a material acquisition in the future.
93
<PAGE>
BUSINESS OF RP
RP (formerly FM Precision Golf Corp.) and its subsidiary, FM Precision Golf
Manufacturing Corp. ("FMP"), were incorporated on May 3, 1996 by a group of
investors who acquired, through such companies, substantially all of the assets
of the golf shaft manufacturing business of Brunswick Corporation. In 1997, RP
acquired, through a merger, RG, a Nevada corporation incorporated on July 16,
1993, and RP simultaneously changed its name from FM Precision Golf Corp. to
RP. RP is a holding company which carries on its business through its directly
and indirectly wholly owned subsidiaries including FMP and RG.
Principal products; markets
The value of certain FMP shaft product lines is enhanced by a process known
as frequency coefficient matching which determines shaft flex by measuring the
shaft's frequency (via oscillation) using an electronically calibrated
analyzer. This proprietary method results in producing shafts with consistency
in flex and, when applied to a set of golf clubs, assures the user that the
flex from one club to the next throughout a set is exactly the same.
FMP's team of engineers provides field support to FMP's sales
representatives. Each of FMP's products are sold by the original equipment
manufacturers ("OEMs") as a component of the complete golf club through a
variety of channels including sporting goods stores, discount stores, mail
order catalogs, pro shops, and mass merchandisers. Sales of golf club shafts to
OEMs accounted for the vast majority of FMP's sales in fiscal 1998, with the
remainder to distributors, custom club assemblers, pro shops, and repair shops.
Of FMP's top 25 accounts, three are international. Precision Japan is FMP's
third largest account. Lamkin International, from the U.K., is the fifteenth
largest account. Lamkin has been associated with FMP for over 15 years and
represents all of FMP's european sales. Infinity of Canada has been an FMP
distributor for ten years and is the eighteenth largest account.
In 1989, RG introduced a rubber wrap golf grip that gained widespread
acceptance in the golf industry and enabled RG to achieve brand name
recognition. RG currently offers a wide variety of standard and custom models,
all of which feature a distinctive feel, appearance and durability. These grips
are sold into the replacement market, which serves those golfers seeking to
replace grips that have become worn and slick due to prolonged use, as well as
to OEMs, who incorporate these grips on their newly manufactured golf clubs.
Many golf grip manufacturers sell their products to wholesale distributors
who in turn sell to dealers and other representatives. In the United States, RG
uses a single-tier distribution strategy in which its independent sales
representatives deal directly with thousands of golf club professionals and
off-course specialty store operators. Although RG's independent sales
representatives are permitted to sell other golf products, they do not sell
competing golf club grips. RG distributes a substantial portion of its grips in
Japan through Precision Japan.
During March 1999, RP disposed of the operating assets of Roxxi through two
transactions with unrelated parties. In one transaction, Roxxi sold its trade
name, customer list, design database and related computer software and
hardware. In return, RP will receive a royalty of 16% of the buyer's net sales
for the two-year period beginning May 1, 1999. In the second transaction, Roxxi
sold its headwear manufacturing equipment, headwear inventory and raw
materials. Roxxi received $300,000 at closing and RP will receive a royalty of
2% of the buyers net sales until the buyer has paid an additional $200,000.
Based on net headwear sales of $3.0 million by Roxxi during the twelve months
ended February 28, 1999, RP would record royalty revenue of approximately $0.5
million in each of the next two fiscal years under these contracts. However,
there can be no assurance that the two successor companies will be able to
achieve these sales amounts in the future.
94
<PAGE>
Competition
The sporting goods industry is highly competitive. FMP competes primarily on
the basis of quality, product specifications and design, quick response and
customer relationships. FMP competes primarily with two national and
international companies which manufacture and distribute steel golf shafts to
end users. There are numerous companies competing in various segments of the
golf equipment markets. Some of FMP's competitors have greater name
recognition, more extensive engineering, manufacturing and marketing
capabilities, and greater financial, technological and personnel resources than
those available to FMP. FMP is the second largest producer of steel golf
shafts, after True Temper Sports. RP's management believes that its market
share in steel golf shafts is approximately 26% while True Temper Sports'
market share in steel golf shafts is believed to be 48%. Other competitors in
steel golf shafts include Apollo Golf and Nippon Shaft Co., Ltd.
RG's principal competitors in the golf grip market include Eaton/Golf Pride
and Lamkin Corp., with Eaton's Golf Pride division currently maintaining a
majority of the total golf grip market. These companies, as well as several
other grip manufacturers with which RG competes, have greater financial,
marketing and other resources than RG. In addition, several OEMs that do not
currently manufacture premium quality grips could, in light of their
substantial resources, enter into this market segment.
Principal suppliers and customers
FMP uses Worthington Industries as its sole supplier for strip steel but has
no supply contract with Worthington Steel. Should Worthington Industries fail
to deliver steel, there may be a disruption of operations at FMP until an
alternate supplier is procured. Worthington Industries provides steel from two
separate plant locations. If one Worthington Industries plant becomes unable to
fill the necessary requirements, orders could be filled from the alternate
location. Although FMP has elected to use Worthington Industries as its sole
supplier of strip steel, management believes that there are other acceptable
supply sources at comparable prices and that the loss of Worthington Industries
as a supplier would not have a significant adverse impact on RP.
FMP and RG have entered into five-year and ten-year agreements with
Precision Japan expiring in 2002 and 2001, respectively, under which Precision
Japan was granted exclusive distribution rights for FMP and RG products in
Japan and certain other Far Eastern countries. Precision Japan may renew its
agreement with FMP for successive two-year terms and its agreement with RG for
successive five-year terms. The FMP agreement is terminable by either party for
cause or by FMP if Precision Japan fails to meet certain minimum purchase
requirements. The RG agreement is terminable by either party for cause or if
they fail to agree upon pricing terms, or by Precision Japan at any time upon
six months prior notice to RG. While FMP and RG currently enjoy a strong
relationship with Precision Japan, the loss of Precision Japan as a distributor
of FMP's and RG's products would have a significant adverse effect on FMP's and
RG's business.
In December 1996, RG outsourced all of its production of non-cord grips to
Acushnet. Acushnet experienced start-up delays and quality control problems in
the production of grips, which adversely affected RG. However, quality is now
significantly better and the timing of deliveries is good. Under RG's existing
manufacturing and supply agreement with Acushnet, either Acushnet or RG may
voluntarily terminate the agreement upon payment of a specified termination
fee. During March 1999, RG received a letter from Acushnet terminating the
manufacturing and supply agreement and the capital lease agreement. In the
notice of termination, Acushnet agreed to pay RG a $2.5 million termination fee
at the end of the transition period, to continue to produce grips until January
9, 2000 and to pay up to $100,000 for shipping and installing the manufacturing
equipment at a new location. In connection with the termination, RG will
receive the manufacturing equipment and Acushnet's obligation under the capital
lease will be terminated. At February 28, 1999, RP's capital equipment lease
receivable was approximately $2.7 million. Also in the termination letter,
Acushnet stated that it would not continue paying the lease payments. However,
RP and legal counsel believe that Acushnet's interpretation of the clause in
the contract related to the lease payments is without merit and RP will pursue
its rights under the contract to receive lease payments throughout the
transition period.
95
<PAGE>
Disagreements with accountants
There have been no disagreements between Coyote or RP and their independent
accountants on any matter of accounting principles or practices or financial
statement disclosure since the inception of either company.
RG currently has no back-up source of supply. However, RP is currently in
discussions with a number of grip manufacturers which RP believe can maintain
RG's standard of product quality and will facilitate a smooth transition.
Previously, switching suppliers has resulted in manufacturing delays and
quality control problems. There can be no assurance that RP will be able to
secure a source for grips on as favorable terms or with the same or better
quality as Acushnet. In addition, there can be no assurances that a transition
to a new supplier will not result in productions delays, the loss of sales and
key customers which would materially affect RG's financial condition and
results of operations.
Sales of golf equipment historically have been dependent on discretionary
spending by consumers, which may be adversely affected by general economic
conditions and the popularity of golf in general. A decrease in consumer
spending on golf equipment could have an adverse effect on RG's business and
operating results.
FMP is significantly dependent on sales to Taylor Made and Precision Japan.
These two customers represented in the aggregate approximately 28% of FMP's
sales for the year ended May 31, 1998. Taylor Made represents less than 1% of
RG sales and revenues, and 17% of FMP sales and revenues. Precision Japan
represents 44.7% of RG sales and revenues, and 11% of FMP sales and revenues.
FMP does not have a supply agreement with Taylor Made. The loss of sales to
either of these companies could have a significant adverse impact on FMP's
business. RG's market share in golf grips is approximately 3%.
Patents and trademarks
Patents held by RP on frequency matching and the manufacture of shafts and
clubs have expired. While there can be no assurance that competitors will not
use the technology of the expired patents in the future, RP's competitors, True
Temper and Apollo, have not adopted, nor does management believe that they have
plans to copy, the expired patents. RP has obtained a trademark on its Rifle
product and has filed for a utility patent. RP's management believes that the
only patents material to its future success are its patent #4,736,093, which
enables a club maker to take frequency sorted steel shafts and calculate what
new frequency shafts are needed to produce a Frequency Matched product, patent
#5,040,270 which relates to the same frequency sorting, but for graphite shafts
and patent #5,857,921 which relates to the manipulation of flex distribution
within a shaft or set of shafts. These patents expire on May 9, 2006, October
19, 2008, and January 12, 2016, respectively.
RP relies upon trademarks to establish and protect RP's proprietary rights
in its products and technologies. Its logo and the name "Royal Grip" have been
registered as trademarks in the United States, Japan, and in other foreign
countries. In addition, RP has filed trademark applications relating to the
names and configurations of several of its products in the United States and in
foreign countries, including Japan. RP has also obtained design patents on some
of its grips and applied for others that are pending. RP protects its
proprietary rubber compound and related technologies as trade secrets. Despite
such safeguards, there can be no assurance that its proprietary rights are
adequately protected or that competitors will not be able to produce golf club
grips that successfully imitate RP's designs and materials without infringing
RP's proprietary rights.
Regulations
The design of new golf clubs is greatly influenced by rules and
interpretations of the USGA. Although the golf equipment standards established
by the USGA generally apply only to competitive events sanctioned by that
organization, it has become critical for designers of new products to assure
compliance with USGA standards. Although RP believes that all of its grips and
shafts comply with current USGA standards, no assurance can be given that any
new products will receive USGA approval or that existing USGA standards will
not be altered in ways that adversely affect the sales of products.
Research and development
RP has two full-time employees and utilizes one consultant in research and
development. During the fiscal years ended May 31, 1997 and 1998, RP spent
approximately $157,000 and $120,000 respectively, on research
96
<PAGE>
and development. In addition, sales and other personnel of RP work to conceive
new product opportunities by creating prototypes and masters and by working
with suppliers and customers to design and produce finished products. New grip
products are tested through RP's PGA Tour representatives and sales force.
Environmental
During the fiscal year ended May 31, 1998, RP expended $129,000 on the
treatment, storage and disposal of hazardous waste which included a $72,000
expenditure for the removal of accumulated sludge from an outdoor holding basin
at FMP's Torrington, Connecticut manufacturing facility. Regulatory fees for
various environmental permits and costs were $50,000. RP estimates that it will
incur an estimated $900,000 in capital expense during 1999 for upgrading FMP's
wastewater treatment facilities due to EPA mandates on water quality adopted by
the State of Connecticut.
Employees
As of March 31, 1999, RP employed 270 persons, three of whom are part-time
employees. FMP's hourly employees are subject to a collective bargaining
agreement, which expires on November 14, 1999. RP believes its relationship
with its employees is satisfactory.
97
<PAGE>
RP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
RP is a holding company with three wholly-owned subsidiaries which are FMP,
FM Precision Golf Sales Corp. ("FM Sales"), and Royal Grip, Inc. ("RG"). RP
acquired RG on August 29, 1997 by means of a merger in which RG was the
surviving corporation. The effective date of this merger was August 29, 1997.
Accordingly, the results of operations of RP for all periods presented exclude
the results of operations of RG prior to August 29, 1997. As discussed in Notes
7 and 8 to RP's condensed consolidated financial statements, RP has entered
into an agreement to merge with Coyote Sports, Inc. and has disposed of the
operating assets of Roxxi, Inc. ("Roxxi").
FMP is a manufacturer and distributor of golf club shafts that are sold to
original equipment manufacturers and to distributors and retailers for use in
the replacement market. The majority of FMP's sales are to original equipment
manufacturers. FMP also sells golf shafts in foreign markets including Japan,
Canada, Australia and the United Kingdom. RG designs and distributes golf club
grips. RG's products are sold primarily throughout the United States, Japan and
the United Kingdom. The majority of RG's grip sales are to its Japanese
distributor. In December 1996, RG outsourced the manufacturing of its non-cord
grips to Acushnet.
RP's business experiences the impact of seasonality with stronger demand for
products during the quarters ending in February and May.
Nine Months Ended February 28, 1999 Compared to the Nine Months Ended February
28, 1998
Net Sales. Net sales for the nine months ended February 28, 1999 were $15.0
million, a decrease of 13% from net sales of $17.2 million for the
corresponding period in 1998. The decrease in net sales of $2.2 million was
primarily attributable to a reduction in sales of FMP's lower priced commercial
grade golf club shafts of $4.4 million or 68%. Sales of this product were
significantly reduced following a price increase instituted by FMP in the first
quarter of fiscal 1999. In response to these unfavorable results, FMP has
modified its pricing structure in an effort to increase sales of this product
in future periods. Net sales of FMP's other golf club shaft lines increased by
$1.8 million or 21%. Net sales of golf club grips increased by $0.4 million or
17% primarily due to the inclusion of RG golf club grip sales of $1.0 million
during the three month period ended August 31, 1998 compared to $0 during the
comparable period of 1997 which was prior to the effective date of the FMP-RG
merger.
Cost of Goods Sold. Cost of goods sold for the nine months ended February
28, 1999 was $9.9 million, a decrease of 17% from cost of goods sold of $11.9
million for the same period in 1998. The decrease in cost of goods sold of $2.0
million was primarily attributable to the decline in sales of commercial grade
golf club shafts discussed above. Total cost of goods sold related to golf club
shaft sales decreased by $2.6 million. Golf club grips cost of goods sold
increased by $0.5 million primarily due to the inclusion of RG golf club grip
cost of goods sold of $0.5 million during the three month period ended August
31, 1998 compared to $0 during the comparable period of 1997 which was prior to
the effective date of the FMP-RG merger.
Gross Profit. Gross profit for the nine months ended February 28, 1999 was
$5.1 million, a decrease of 3% from gross profit of $5.3 million for the
corresponding period in 1998. The decrease in gross profit of $0.2 million was
primarily attributable to a $0.5 million credit received from Acushnet as
compensation for delays and shortfalls in the production of golf club grips for
RG which recorded as a one-time reduction in golf club grips cost of sales
during the second quarter of fiscal 1998. As a percentage of sales, the gross
profit on shaft sales increased from 26.6% to 32.1% due to a change in the mix
of products sold from lower margin commercial grade shafts to higher margin
Rifle shafts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended February 28, 1999 were $5.0
million, an increase of 6% from selling, general and administrative
98
<PAGE>
expenses of $4.7 million for the same period in 1998. The increase in selling,
general and administrative expenses of $0.3 million was primarily attributable
to the inclusion of $0.5 million of selling, general and administrative
expenses from RG for the three month period ended August 31, 1998 compared to
$0 during the comparable period of 1997 which was prior to the effective date
of the FMP-RG Merger.
Merger Related Expenses. In conjunction with the pending RP-Coyote merger,
RP incurred expenses totaling $0.5 million during the nine months ended
February 28, 1999. In conjunction with the August 29, 1997 FMP-RG merger,
expenses of $0.8 million were incurred during the nine months ended February
28, 1998.
Interest Expense and Interest Income. Interest expense, net of interest
income for the nine months ended February 28, 1999 was $436,000 compared to
$317,000 for the same period last year. The increase in interest expense was
primarily attributable to a $75,000 loan prepayment fee incurred on October 9,
1998 upon funding of the new credit facilities discussed in Note 6 to the
condensed consolidated financial statements.
Other Income. Other income for the nine months ended February 28, 1999
primarily reflected royalty fees earned under certain license agreements
entered into after May 31, 1998.
Income Taxes. A benefit from income taxes of $39,000 and $361,000 was
recorded for the nine-month periods ended February 28, 1999 and 1998,
respectively. Taxes are provided based on the estimated effective tax rate for
the year which considers the effect of nondeductible goodwill amortization and
the inability to carry-back RG losses to periods prior to the FMP-RG merger.
Loss from Operations of Roxxi, Inc. The losses from the operations of Roxxi
for the nine-month periods ended February 28, 1999 and 1998 are $516,000 and
$420,000, respectively. The increase was primarily due to the inclusion of
Roxxi operating losses of $190,000 for three month period ended August 31, 1998
compared to $0 during the comparable period of 1997 which was prior to the
effective date of the FMP-RG merger. No income tax benefit was provided for
these losses due to NOL carry-back limitations.
Provision for Loss on Disposal of Assets of Roxxi, Inc. As discussed in Note
7 to the condensed consolidated financial statements, a loss of approximately
$1.2 million was recorded during the nine-month period ended February 28, 1999
to provide for the loss on disposition of the assets of Roxxi. No income tax
benefit was provided for this loss due to NOL carry-back limitations.
Twelve Months Ended May 31, 1998 compared to the Twelve Months Ended May 31,
1997
Sales. Net sales for the year ended May 31, 1998 were $27.6 million, an
increase of 27% over net sales of $21.7 million for the corresponding period in
1997. The increase in net sales of $5.9 million for the year ended May 31, 1998
as compared to the same period of the prior year is primarily attributable to
the inclusion of $6.6 million of net sales of golf club grips and headwear by
RG. Partially offsetting the inclusion of RG's sales for the year ended May 31,
1998 was a $720,000 or 3% decline in golf shaft sales. The reduction in shaft
sales for the year ended May 31, 1998 as compared to the same period last year
is primarily the result of lower Rifle shaft sales due to the loss of certain
customers. Sales of the Rifle shaft decreased by $2.0 million for the year
ended May 31, 1998, as compared to the same period last year. This decrease was
offset by an increase of $1.3 million in sales of other steel shafts for the
year ended May 31, 1998, as compared to the same period last year.
Cost of Goods Sold. Cost of goods sold for the year ended May 31, 1998 was
$18.7 million, an increase of 16.9% over cost of $16.0 million for the same
period in 1997. The increase in cost of goods sold of $2.7 million for the year
ended May 31, 1998, as compared to the same period of the prior year is
attributable to the inclusion of $4.0 million of cost of goods sold for RG golf
club grips and headwear. Partially offsetting the inclusion of RG's cost of
goods sold was a $1.3 million decrease in golf shaft cost of sales for the year
ended May 31, 1998, as compared to the same period last year. The decrease in
cost of goods sold for the golf shaft business was primarily the result of a
change in the mix of shafts sold to lower cost commercial grade shafts.
99
<PAGE>
As a percentage of sales, the gross profit on shaft sales increased from
26.2% to 30.2% for the year ended May 31, 1998, as compared to the same period
in 1997. This increase in gross profit percentage for the year ended May 31,
1998 was primarily the result of an inventory writeoff of $193,000 in the year
ended May 31, 1997 and a reduction in the average cost per unit due to
production volume increases in the year ended May 31, 1998, as compared to the
same period last year.
RG's gross profit and gross profit percentage was positively impacted during
the year ended May 31, 1998 as a result of RG recording a $472,000 reduction in
cost of sales related to supply agreement credits. See Note 5 of Notes to RP
Consolidated Financial Statements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended May 31, 1998 were $7.8 million, an
increase of 100% over selling, general and administrative expenses of $3.9
million for the same period last year. The increase in selling, general and
administrative expenses of $3.9 million for the year ended May 31, 1998, is
primarily attributable to the inclusion of $2.8 million of selling, general and
administrative expenses from RG for the period reported. In addition, the
Company amortized $391,000 of goodwill during the year ended May 31, 1998 as a
result of the FMP-RG merger. In addition, advertising expenses for FMP
increased $447,000 for the year ended May 31, 1998 as compared to the same
period in the 1997 fiscal year.
Nonrecurring Merger Related Expenses. Nonrecurring merger related expenses
for the year ended May 31, 1998 were $842,000. The primary components of this
expense were $348,000 related to a computer software installation that was
abandoned as a result of the FMP-RG merger, $100,000 related to certain
headwear related contracts, $150,000 of relocation expenses and $244,000 of
severance as a result of organizational changes in connection with the FMP-RG
merger.
Interest Expense and Interest Income. Interest expense for the year ended
May 31, 1998 was $695,000 compared to $485,000 for the year ended May 31, 1997.
The increase in interest expense was primarily attributable to the inclusion of
interest expense of RG of $122,000 for the year ended May 31, 1998.
Additionally, loan balances on FMP's revolving credit facility were higher
during the year ended May 31, 1998 as compared to the same period in 1997.
Interest income for the year ended May 31, 1998 was $170,000 compared to $0
for the same period last year. This increase was due to the inclusion of
interest income from RG's capital lease receivable in the 1998 period.
Provision for Income Taxes. The provision for income taxes for the years
ended May 31, 1998 and 1997 was $28,000 and $586,000, respectively,
representing effective tax rates of 12% and 43%, respectively. The reduction in
the effective rate was due to the effect of nondeductible goodwill amortization
partially offset by the change in the valuation allowance (See Note 9 of Notes
to RP Consolidated Financial Statements).
Liquidity and Capital Resources
General. At February 28, 1999, RP had negative working capital of $453,000
and a current ratio of 0.95 to 1 as compared to working capital of $401,000 and
a current ratio of 1.05 to 1 at May 31, 1998. On October 9, 1998, FMP entered
into a new credit facility and RG amended its existing borrowing arrangement.
As a result, all of RP's bank facilities are consolidated with one lender. RP
believes that its existing capital resources and credit lines available are
sufficient to fund its operations and capital requirements as presently planned
over the next twelve months.
In connection with the new credit facility for FMP, all loans to FMP were
paid off and a new credit and security agreement was entered into with RG's
lender. In connection with the repayment of the amounts outstanding under the
old FMP credit facility, FMP paid a $75,000 prepayment penalty which is
reflected as a component of interest expense in the second quarter of fiscal
1999.
100
<PAGE>
Terms of FMP's new credit facility are as follows. The amount available for
borrowings under the FMP term loan is $4.3 million. Such amount was funded on
October 9, 1998. FMP's term loan is due in monthly principal installments of
$99,000 through and until October 1, 1999 and $65,000 monthly, thereafter until
the maturity of the loan. The amount available for borrowings under the FMP
revolving line-of-credit is based upon the levels of eligible accounts
receivable and inventories, as defined, subject to maximum borrowing of $4.0
million.
The borrowing arrangement with RG was amended and restated. The amendment
resulted in the funding of a new RG term loan of $840,000 on October 9, 1998 in
addition to the existing RG term loan that had $472,000 outstanding at October
9, 1998. RG's term loans are due in monthly principal installments of $40,000
through and until October 1, 1999 and $22,500 monthly, thereafter until the
maturity of the loan. The amount available for borrowings under the RG
revolving line-of-credit is based upon the levels of eligible accounts
receivable and inventories, as defined, subject to maximum borrowing of $1.5
million.
Effective January 1, 1999, borrowings under all term loans and both
revolving lines-of-credit bear interest at a rate per annum equal to the prime
rate (7.75% at February 28, 1999) plus 2.75% and 2.25%, respectively, and are
secured by substantially all of RP's assets. The maturity date for all term
loans and both revolving lines-of-credit is September 30, 2001. On February 28,
1999, RP had $3,977,000 outstanding under the revolving lines-of-credit and
$949,000 available for additional borrowings.
Primarily as a result of merger-related expenses of $503,000 and a provision
of approximately $1.2 million for the loss on the sale of Roxxi, RP defaulted
on certain bank covenants during the quarter ended February 28, 1999. The
violation of these covenants has been waived by the lender. In connection with
granting the waivers, RP's lender increased RP's borrowing rate by 2% per annum
effective January 1, 1999.
RP's lender modified its covenants for the remainder of the fiscal year
ending May 31, 1999. The required debt service coverage ratio has been waived
through May 31, 1999 and the maximum monthly allowable net loss has been
reduced from breakeven to an aggregate net loss of $150,000 for the months of
March, April and May of 1999. In addition, the minimum annual net income
requirement for the fiscal year ending May 31, 1999 has been reduced from net
income of $400,000 to a net loss of $500,000. The modified covenants exclude
all merger-related expenses and the provision for the loss associated with the
disposition of Roxxi.
During the nine months ended February 28, 1999, net cash used in operating
activities was $0.7 million which primarily resulted from a net loss from
continuing operations of $0.7 million, a cash loss from operations of Roxxi of
$0.3 million and an increase in inventories of $1.7 million offset by a
decrease in accounts receivable of $1.0 million, an increase in accounts
payable and accrued expenses of $0.4 million and $0.7 million of depreciation
and amortization. RP used $0.7 million in investing activities during the nine
months
ended February 28, 1999, primarily for the purchase of additional property,
plant and equipment. RP estimates that capital expenditures for the fiscal year
ended May 31, 1999 will be approximately $1.2 million.
Net cash provided by financing activities for the nine months ended February
28, 1999, was $1.4 million resulting from issuance of long term debt totaling
$5.1 million and $0.5 million of net borrowings under lines of credit partially
offset by repayments of $4.2 million on RP's term loans.
Business Environment and Future Results.
Reliance on Third Party Suppliers. RG currently purchases a majority of its
supply of non-cord grips from Acushnet. During the transition to Acushnet
beginning in December 1996, Acushnet experienced delays and quality problems in
the production of grips, which adversely affected RG's customer relationships
and results of operations.
During March 1999, RG received a letter from Acushnet terminating the
Manufacturing and Supply Agreement and Capital Lease Agreement. In the notice
of termination, Acushnet agreed to pay RG a $2.5
101
<PAGE>
million termination fee at the end of the transition period, to continue to
produce grips for ten months and to pay up to $100,000 for shipping and
installing the manufacturing equipment at a new location. In connection with
the termination, RG will receive the manufacturing equipment and Acushnet's
obligation under the capital lease will be terminated. At February 28, 1999,
RG's capital equipment lease receivable was approximately $2.6 million. Also in
the termination letter, Acushnet stated that it would not continue paying the
lease payments. RG has not responded to Acushnet's termination letter; however,
RG and legal counsel believe that Acushnet's interpretation of the clause in
the contract related to the lease payments is without merit and RG will pursue
its rights under the contract to receive lease payments throughout the
transition period.
RG currently has no back-up source of supply; however, RG is currently in
discussions with a number of grip manufacturers which RG believes can maintain
RG's standard of product quality and will facilitate a smooth transition. There
can be no assurances that RG will be able to secure a source for grips on as
favorable terms or with the same or better quality as Acushnet. In addition,
there can be no assurances that a transition to a new supplier will not result
in production delays, the loss of sales and key customers which would
materially affect RG's financial condition and results of operations.
Sale of Roxxi, Inc. Operating Assets. During March 1999, RP disposed of the
operating assets of Roxxi through two transactions with unrelated parties. In
one transaction, Roxxi sold its trade name, customer list, design database and
related computer software and hardware. In return, RP will receive a royalty of
16% of the buyer's net sales for the two-year period beginning May 1, 1999. In
the second transaction, Roxxi sold its headwear manufacturing equipment,
headwear inventory and raw materials. Roxxi received $300,000 at closing and RP
will receive a royalty of 2% of the buyer's net sales until the buyer has paid
an additional $200,000. Based on net headwear sales of $3.0 million by Roxxi
during the twelve months ended February 28, 1999, RP could recognize royalty
revenue of approximately $0.5 million in each of the next two fiscal years
under these contracts. However, there can be no assurance that the two
successor companies will be able to achieve these sales amounts in the future.
102
<PAGE>
DESCRIPTION OF SHARE CAPITAL OF COYOTE
The summary of terms of Coyote's share capital set forth below is not
complete. Stockholders should also refer to Coyote's amended and restated
articles of incorporation and by-laws, which are available as described under
"Where to Find More Information" above, and copies of which will be sent to RP
and Coyote shareholders upon request.
Authorized share capital
Coyote's authorized share capital consists of 25,000,000 shares of Coyote
common stock, par value $.001 per share, and 10,000,000 preferred shares, par
value $.001 per share. As of , 1999, there were shares of Coyote
common stock outstanding and based on the exchange ratio as of the date of this
joint proxy/prospectus, after giving effect to the merger, there will be
shares of series C preferred stock outstanding.
Coyote common stock
Voting rights
At any meeting of Coyote stockholders, votes may be given in person or by
proxy. Each holder of Coyote common stock is entitled to one vote for each
share held. Except as subject to the Nevada General Corporation Law, one-third
of the outstanding shares entitled to vote shall constitute a quorum at a
general meeting. Cumulative voting is not allowed in the election of directors.
Preemptive rights
Coyote shares do not have preemptive rights.
Transfers
A Coyote share may be transferred in any manner the board of directors deems
appropriate. Coyote will not issue certificates representing fractional shares.
Additionally, Coyote is not obliged to make any transfer creating a fractional
interest.
Dividends
The Coyote board of directors may from time to time declare dividends on any
series of stock although to date, it has never done so. Coyote does not
anticipate paying any cash dividends on common stock in the foreseeable future.
Preferred stock
General
The board of directors has the authority to fix the rights, powers,
preferences and privileges, and the qualifications, limitations or
restrictions, of any series of preferred stock. Those include, among other
things, dividend rights, dividend rates, conversion rights, voting rights and
liquidation preferences. The board may also fix the number of shares
constituting any such series and the designation thereof.
103
<PAGE>
Coyote series C preferred stock
General
The series C preferred stock to be issued pursuant to the merger will be
duly authorized, validly issued, fully paid and non-assessable. All such shares
will be in registered form.
Dividends and distributions
The holders of the series C preferred stock shall be entitled to
preferential cumulative cash dividends with respect thereto at the rate of 6%
of the stated value thereof per annum, payable quarterly per share of series C
preferred stock outstanding if, as and when declared by the Coyote board of
directors or any duly authorized committee of the board of directors out of
funds legally available for the payment thereof.
Whenever dividends or distributions payable on the series C preferred stock,
as provided in the certificate of designation of the series C preferred stock,
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of series C preferred stock
outstanding shall have been paid in full, Coyote shall not:
. declare or pay dividends on or make any other distributions on any
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the series C preferred stock;
or
. declare or pay dividends on or make any other distributions on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the series C preferred
stock except dividends or distributions paid ratably on the series C
preferred stock and all such parity stock on which dividends or
distributions are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled.
Powers of the board of directors and preferred shares
Under the Coyote amended and restated articles of incorporation, the Coyote
board of directors, may fix the rights and powers of the preferred stock.
However, so long as shares of series C preferred stock are outstanding, Coyote
shall not without first obtaining the approval -- by vote or written consent,
as provided by law -- of the holders of two-thirds of the then outstanding
shares of series C preferred stock, voting together as a single class:
. designate or issue any additional shares of series C preferred stock or
in any manner authorize, create, designate, issue or sell any class or
series of capital stock -- including any shares of treasury stock -- or
rights, options, warrants or other securities convertible into or
exercisable or exchangeable for capital stock or any debt security which
by its terms is convertible into or exchangeable for any equity security
or has any other equity feature or any security that is a combination of
debt and equity, which, in each case, as to the payment of dividends or
distribution of assets, including, without limitation, distributions to
be made upon the liquidation, dissolution or winding up of Coyote, is
senior to or on a parity with the series C preferred stock;
. in any manner alter or change the terms, designations, powers,
preferences or relative, participating, optional or other special
rights, or the qualifications, limitations or restrictions, of the
series C preferred stock;
. reclassify the shares of any class or series of junior stock into shares
of any class or series of capital stock ranking, either as to payment of
dividends, distributions of assets or redemptions, including, without
limitation, distributions to be made upon the liquidation, dissolution
or winding up of Coyote senior to or on a parity with the series C
preferred stock;
. take any action to voluntarily dissolve, liquidate or wind up Coyote; or
104
<PAGE>
. take any action to cause any amendment, alteration or repeal of any of
the provisions of (1) the amended and restated articles of incorporation
or (2) the By-laws, if such amendment, alteration or repeal would
adversely affect in any material respect the rights of the holders of
the series C preferred stock in their capacity as such.
Conversion
Each share of series C preferred stock will be convertible into one share of
common stock of Coyote at the option of the stockholder. Upon conversion each
share of series C preferred stock will represent the right to receive one share
of Coyote common stock plus payment of any declared or accrued but unpaid
dividends related to such share of series C preferred stock, to be paid in
cash, or, to the extent that cash payment is not then permitted by the terms of
Coyote's existing debt agreements or applicable law, either by delivery of a
subordinated promissory note in a principal amount equal to the amount of such
dividends or shares of Coyote common stock with a value, equal to the amount of
such dividends (determined based on the average closing market price of the
Coyote common stock over the twenty-day period on the day immediately preceding
conversion), at Coyote's option.
Description of subordinated promissory note potentially issuable in respect of
unpaid dividends upon conversion of series C preferred stock
Each subordinated promissory note which may be issued, at Coyote's option,
upon the conversion of series C preferred stock for the payment of accrued but
unpaid dividends on such preferred stock under the circumstances described
above will:
. not be issued in a principal amount less than $1,000;
. accrue interest at a rate of 6% per year, compounded quarterly;
. mature 24 months from the date of conversion;
. be payable in cash upon maturity unless Coyote is not permitted to do so
under the terms of its then outstanding debt agreements or applicable
law, in which case Coyote will issue to the note holder shares of Coyote
common stock with a value equal to the amount of such note plus all
accrued and unpaid interest on such note (determined based on the
average closing market price of the Coyote common stock over the twenty-
day period immediately preceding maturity);
. be mandatorily prepayable, without premium, upon a change of control of
Coyote or as required from time to time to the extent permitted by the
terms of Coyote's indebtedness or applicable law pro rata with the
accrued but unpaid dividends on series C preferred stock still
outstanding; and
. be subordinate to all of Coyote's existing and future senior and senior
subordinated indebtedness but will be senior to all of Coyote's other
indebtedness.
Redemption
Coyote, upon resolution by its board of directors who are not holders of or
affiliates of holders of series C preferred stock, is entitled to redeem the
series C preferred stock on a pro rata basis, in whole or in part, at any time
or from time to time. After this redemption, should it occur, the holder is no
longer entitled to any dividends. The redemption price is the stated value and
any accrued and unpaid dividends to the date of redemption.
Liquidation preference
After all mature claims of creditors of Coyote have been paid in full, the
holders of the series C preferred stock are entitled to be paid an amount equal
to the liquidation preference of the series C preferred stock out of
105
<PAGE>
the assets of Coyote prior to the holders of Coyote common stock and any
preferred stock ranking junior to the series C preferred stock. Additionally,
the holders of two-thirds of the outstanding series C preferred stock must
approve the creation of any equity security which has seniority or parity with
these liquidation rights.
Stock exchange listing
The Coyote common stock is listed on the Nasdaq Small Cap Market. It is a
condition to the merger that the Coyote common stock issuable upon conversion
of the series C preferred stock shall have been listed or approved for listing
upon notice of issuance on the Nasdaq National Market, if qualified, or
otherwise on the Nasdaq Small Cap Market.
106
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS
The rights of Coyote stockholders are governed by Nevada law, the amended
and restated articles of incorporation of Coyote and the amended and restated
by-laws of Coyote. The rights of RP stockholders are governed by Delaware law,
the amended and restated certificate of incorporation of RP and the by-laws of
RP. Upon consummation of the merger, Nevada law, the amended and restated
articles of incorporation of Coyote and the amended and restated by-laws of
Coyote will govern the rights of RP stockholders who become Coyote
stockholders. The following is a summary of certain material differences
between the current rights of RP stockholders and those of Coyote stockholders
following the merger.
The following summary of stockholder rights is not intended to be complete,
and it is qualified by reference to Nevada law, Delaware law, the amended and
restated articles of incorporation of Coyote, the amended and restated by-laws
of Coyote, the amended and restated certificate of incorporation of RP and the
RP by-laws. Copies of the amended and restated articles of incorporation of
Coyote, the amended and restated by-laws of Coyote, the amended and restated
certificate of incorporation of RP and the RP by-laws have been filed with the
SEC and will be sent to holders of Coyote common stock and RP common stock upon
request.
107
<PAGE>
COMPARISON OF SERIES C PREFERRED STOCK,
RP COMMON STOCK AND COYOTE COMMON STOCK
The following is a summary comparison of certain of the principal terms of
the series C preferred stock and the RP common stock. The merger immediately
converts the RP shares of common stock into series C preferred stock. This
series C preferred stock will have a value based on the total issued and
outstanding stock of Coyote and RP. Each share of series C preferred stock will
be convertible into one share of common stock of Coyote at the option of the
stockholder.
<TABLE>
<CAPTION>
Coyote series C
RP common stock preferred stock Coyote common stock
--------------- --------------- -------------------
<S> <C> <C> <C>
Market.................. The Nasdaq National The series C The Nasdaq Small Cap
Market. preferred stock will Market.
not be listed on any
stock exchange or
inter-dealer
quotation system.
Liquidation............. First, the creditors After all mature After the mature
of RP and then the claims of creditors claims of creditors
holders of shares of of Coyote have been of Coyote have been
any class or series paid in full, the paid in full and the
of RP preferred stock holders of the series holders of any class
are entitled to the C preferred stock are or series of Coyote
ratable receipt of entitled to be paid preferred stock have
the RP assets. an amount equal to been paid an amount
Thereafter, the the liquidation equal to the
common stockholders preference of the liquidation
are entitled to the series C preferred preference of such
ratable receipt of stock out of the preferred stock, plus
the assets of RP. assets of Coyote an amount equal to
prior to the holders all dividends accrued
of Coyote common and unpaid on such
stock and any share, if any, on the
preferred stock date fixed for
ranking junior to the distribution of
series C preferred assets of Coyote, the
stock. Additionally, holders of common
the holders of two- stock are entitled to
thirds of the ratable receipt of
outstanding series C the assets of Coyote.
preferred stock must
approve the creation
of any equity
security which has
seniority to or
parity with these
liquidation rights.
State Law............... Delaware. Nevada. Nevada.
Quorum.................. A majority of shares Same as Coyote common One-third of the
entitled to vote at a stock. outstanding Coyote
meeting constitutes a stock entitled to
quorum. vote on any matter
constitutes a quorum.
</TABLE>
108
<PAGE>
<TABLE>
<CAPTION>
Coyote series C
RP common stock preferred stock Coyote common stock
--------------- --------------- -------------------
<S> <C> <C> <C>
Quorum (cont'd)......... Generally, a majority Generally, a majority
of affirmative votes of affirmative votes
will constitute an will constitute an
act of the act of the
stockholders. stockholders.
However, directors
are elected by a
plurality of votes by
holders entitled to
vote on the election.
As a matter of law, As a matter of law,
shares held by RP shares held by Coyote
shall neither be shall neither be
entitled to vote nor entitled to vote nor
be counted for quorum be counted for quorum
purposes. purposes.
Super-majority Voting...
None. The holders of two- None.
thirds of the
outstanding series C
preferred stock,
voting as a class
must approve:
. any creation of
liquidation rights
or liquidation of
Coyote;
. alterations or
reclassification to
the rights of
holders of series C
preferred stock;
. reclassification of
any junior stock;
or
. certain amendments
to the amended and
restated articles
of incorporation or
amended and
restated by-laws.
Voting.................. Each holder of RP Each holder has a Each holder of Coyote
common stock is right to one vote for common stock is
entitled to one vote each share of Coyote entitled to one vote
for each share held. common stock into for each share held.
which the series C The series C
preferred stock could preferred stock and
be converted. The the Coyote common
series C preferred stock vote as a class
stock and the Coyote on all matters
common stock vote as submitted to the
a class on all shareholders of
matters submitted to Coyote.
the shareholders of
Coyote.
</TABLE>
109
<PAGE>
<TABLE>
<CAPTION>
Coyote series C
RP common stock preferred stock Coyote common stock
--------------- --------------- -------------------
<S> <C> <C> <C>
Cumulative Voting....... Cumulative voting of See Coyote common Cumulative voting of
Coyote common stock stock. Coyote common stock
is not allowed in the is not allowed in the
election of election of
directors. directors.
Dividends............... If declared by the RP Holders are entitled If declared by the
board of directors. to preferential cash Coyote board of
To date, no dividends dividends at a rate directors. To date,
have been declared per annum equal to 6% no dividends have
for holders of RP of the $ stated been declared for
common stock. value per share and holders of Coyote
any accrued but common stock.
unpaid dividends from
the date of the
consummation of the
merger. Accrued but
unpaid dividends bear
a 6% interest rate
per year until paid.
If declared payable
by the Coyote board
of directors who are
not holders of series
C preferred stock,
the dividends are
generally payable on
January 1, April 1,
July 1 and October 1.
If any dividends are
in arrears and have
not been paid in
full, Coyote may not:
. declare dividends
to any stock which
is junior to the
series C preferred
stock; or
. declare dividends
to any parity stock
unless the holders
are paid ratably
and the dividends
are payable in
arrears in
proportion to the
total amounts to
which the holders
of all such shares
are entitled.
</TABLE>
110
<PAGE>
<TABLE>
<CAPTION>
Coyote series C
RP common stock preferred stock Coyote common stock
--------------- --------------- -------------------
<S> <C> <C> <C>
Optional Redemption..... Not applicable. Coyote, upon Not applicable.
resolution by its
board of directors,
is entitled to redeem
the
series C preferred
stock on a pro rata
basis, in whole or in
part, at any time or
from time to time on
30 day's notice to
the holders thereof.
After this
redemption, should it
occur, the holder is
no longer entitled to
any dividends.
Holders of series C
preferred stock do
not get to vote on
conversion.
Redemption Price........ Not applicable. The liquidation Not applicable.
preference and any
accrued and unpaid
dividends to date of
redemption.
Removal of directors.... Any director may be Any director may be Same as series C
removed for cause by removed with or preferred stock.
the holders of a without cause by
majority of shares holders of two-thirds
entitled to vote at of the issued and
an election. outstanding stock
entitled to vote at a
meeting called for
this purpose.
</TABLE>
111
<PAGE>
<TABLE>
<CAPTION>
Coyote series C
RP common stock preferred stock Coyote common stock
--------------- --------------- -------------------
<S> <C> <C> <C>
Conversion... Not applicable. Each share of series Not applicable.
C preferred stock
will be convertible
into one share of
common stock of
Coyote at the option
of the stockholder.
Upon conversion, each
share of series C
preferred stock will
represent the right
to receive one share
of Coyote common
stock plus an amount
equal to either the
payment of any
declared or accrued
(whether or not
declared) but unpaid
dividends related to
such shares of series
C preferred stock, to
be paid in cash, or,
to the extent cash
payment is not then
permitted by the
terms of Coyote's
indebtedness or
applicable law,
either by delivery of
a subordinated
promissory note in a
principal amount
equal to the amount
of such dividends or
shares of common
stock with a value
equal to the amount
of such dividends
(determined based on
the average closing
market price of the
Coyote common stock
over the twenty-day
period immediately
preceding conversion)
at Coyote's option.
</TABLE>
112
<PAGE>
<TABLE>
<CAPTION>
Coyote series C
RP common stock preferred stock Coyote common stock
--------------- --------------- -------------------
<S> <C> <C> <C>
Ability to Act by Any action which may See Coyote common Any action required
Consent................ be taken at any stock. or permitted to be
special or annual taken at a meeting of
meeting of the stockholders may
stockholders may be be taken without a
taken without a meeting if a written
meeting with the consent thereto is
written consent of signed by
not less than the stockholders holding
minimum number of at least a majority
votes that would be of the voting power,
necessary to unless a different
authorize or take proportion of voting
such action at a power is required for
meeting at which all the action taken
shares entitled to without a meeting.
vote thereon were
present.
Consent Threshold....... Not less than the See Coyote common At least a majority
minimum number of stock. of the voting power,
votes that would be subject to the
necessary to requirement of two-
authorize or take thirds of the issued
such action at a and outstanding stock
meeting at which all with respect to the
shares entitled to removal of directors.
vote thereon were
present.
Special Meeting......... May be called by the See Coyote common A special meeting
board of directors. stock. shall be called by
the CEO of Coyote at
the request of the
holders of not less
than one-tenth of all
outstanding shares of
Coyote entitled to
vote at such a
meeting. If all of
the stockholders meet
at any time, they may
unanimously waive
notice of such a
meeting.
</TABLE>
113
<PAGE>
STOCK HOLDINGS OF CERTAIN OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Coyote's common stock
beneficially owned or anticipated to be beneficially owned by:
. each person known to Coyote to be the beneficial owner of more than 5
percent of Coyote's common stock;
. each director of Coyote;
. each executive officer listed in the summary compensation table ("named
officers"); and
. all nominees, named officers, and other executive officers as a group
(a) as of , 1999 and (b) immediately following the merger for
purposes of which all shares of common stock into which series C
preferred stock shall be convertible shall be deemed outstanding.
A person is considered to beneficially own any shares (a) over which such
person exercises sole or shared voting or investment power, or (b) of which
such person has the right to acquire beneficial ownership at any time within 60
days (e.g., through conversion of securities or exercise of stock options).
Unless otherwise indicated, voting and investment power relating to the
following shares is exercised solely by the beneficial owner or shared by such
owner and such owner's spouse or children.
<TABLE>
<CAPTION>
Prior to the Merger Following the Merger
-------------------------------- ---------------------------
Shares Shares
Name and Address of Beneficially Percent of Beneficially Percent of
Beneficial Owner Owned(1) Class Owned(1) Owned(1) Class Owned(1)
- ------------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Mel S. Stonebraker (1).... 1,460,000(6) 25.3% %
James M. Probst (2)....... 1,200,100(6) 20.8% %
Jeffrey T. Kates (3)...... 12,266 Less than .1% %
Don A. Forte (4).......... 13,874 Less than .1% %
Mark Pappas (5)........... 1,207,692(7) 20.9% %
Paragon Coyote Texas
Ltd. .................... 1,207,692(8)(9) 20.9% %
Paragon Management Group,
Inc. .................... 1,207,692(9) 20.9% %
Richard P. Johnston (11).. -- % %
Richard P. Johnson and
Jayne A. Johnston
Charitable Remainder
Trust #3 ("Johnston CRT
#3") (12)................ -- -- %
Berenson Minella Company
(13)..................... -- --% %
Raymond J. Minella (14)... -- --% %
Kenneth J. Warren (15).... -- --% %
All directors and named
officers as a group ([ ]
persons).................... % %
</TABLE>
- --------
(1) Mr. Stonebraker's address is 2291 Arapahoe Avenue, Boulder, CO 80302.
(2) Mr. Probst's address is 2291 Arapahoe Avenue, Boulder, CO 80302.
(3) Mr. Kates' address is 3200 Robert T. Longway Blvd., Flint, MI 48506.
(4) Mr. Forte's address is 717 Seventeenth Street, Denver, CO 80202.
(5) Mr. Pappas' address is 307 W. Seventh Street, Suite 1210, Fort Worth,
Texas 76102.
114
<PAGE>
(6) These shares are pledged to Paragon Coyote Texas Ltd. as collateral for a
loan made to Coyote in March 1998.
(7) Represents 685,953 shares owned by Paragon and an option to purchase
521,739 shares of common stock which are currently owned by a third party.
Mr. Pappas is the president of Paragon Management Group, Inc., the sole
general partner of Paragon. Because of that position, Mr. Pappas may,
pursuant to Rule 13d-3, be deemed to be the beneficial owner of the
shares. Mr. Pappas disclaims beneficial ownership of these shares.
(8) Power to vote these shares is exercised through Paragon Management Group,
Inc.
(9) This figure assumes exercise in full of Paragon's option to purchase
521,739 shares of common stock.
(10) Mr. Johnston's mailing address is c/o Royal Precision, Inc., 15170 North
Hayden Road, Suite 1, Scottsdale, Arizona 85260. This amount includes: (i)
658,912 shares of series C preferred stock which will be acquired as a
result of the merger by Johnston CRT #3 over which Mr. Johnston will have
voting and dispositive power as trustee and (ii) 25,540 options to acquire
Coyote common stock that will be owned by Mr. Johnston personally as a
result of the merger.
(11) The mailing address of Johnston CRT #3 is Attention: Richard P. Johnston,
Trustee, Teton Pines, 4350 Greens Place, Wilson, Wyoming 83014. Richard P.
Johnston, as trustee of Johnston CRT #3, will have voting and investment
power over these shares.
(12) The mailing address of Berenson Minella & Company is 667 Madison Avenue,
New York, New York 10021. Raymond J. Minella, as a managing general
partner of Berenson Minella, may be deemed to have shared voting and
shared investment power over these shares. Jeffrey L. Berenson is also a
general partner of Berenson Minella.
(13) Mr. Minella's mailing address is c/o Berenson Minella & Co., 667 Madison
Avenue, New York, New York 10021. This amount includes 1,255,759 shares of
series C preferred stock which will be acquired as a result of the merger
by Berenson Minella, of which Mr. Minella is a managing general partner
(see note (13)). As such, Mr. Minella shares voting power and investment
power over these shares. This amount also includes 8,512 options to
acquire Coyote common stock that will be owned by Mr. Minella personally
as a result of the merger.
(14) Mr. Warren's address is c/o Royal Precision, Inc., 15170 North Hayden
Road, Suite 1, Scottsdale, Arizona 85260. This amount also includes 15,621
options to acquire Coyote common stock as a result of the merger.
115
<PAGE>
DIRECTORS AND OFFICERS
Board of Directors
It is anticipated that, following the merger, the board of directors of
Coyote will be composed of James M. Probst, Jeffrey T. Kates, Don A. Forte,
Mark A. Pappas, Richard P. Johnston, Kenneth J. Warren, Raymond J. Minella and
, as the individuals expected to be designated for such purpose pursuant
to the stockholder agreement. All directors will have a one-year term.
Background information regarding such individuals as of February 1999,
appears below:
James M. Probst, 40, a co-founder of Coyote, has been an officer and
director of Coyote since February 1995 and is currently president, CEO and a
director. From 1986 to 1995, Mr. Probst was employed by Schuller International
Corporation, a wholly owned subsidiary of Manville Corporation. During that
time, Mr. Probst held several positions ranging from research and development
engineer to business manager of a unit with approximately $30 million in
revenues. Mr. Probst received a B.S. degree in Mechanical Engineering from the
University of Colorado, Denver in 1986 and an M.B.A. from the University of
Denver in 1990.
Jeffrey T. Kates, 37, became a director of Coyote in May 1997. From August
1996 to the present, Mr. Kates has been the chief operating officer of Plastics
Research Corp. a firm with annual revenues of $35 million. From October 1994 to
August 1996, Mr. Kates was president and a director of Harloc Incorporated, a
subsidiary of the Tesa Group in Irun, Spain, which attained annual revenues of
$150 million. Mr. Kates received a B.S. degree in Agricultural Engineering from
the University of Illinois in 1984 and an M.B.A. from the University of Denver
in 1988.
Don A. Forte, 50, became a director of Coyote in June 1997. For the past 25
years, Mr. Forte has been employed by Johns Manville a leading manufacturer of
building products. Mr. Forte has held numerous positions in his career with
Johns Manville. His present position is vice president of manufacturing and
engineering for the insulation group. Mr. Forte is currently responsible for 16
manufacturing plants located in North America which manufacture fiberglass
insulation products for residential and commercial applications. Prior to this
assignment, Mr. Forte was vice president and general manager of Johns
Manville's Filtration Division. The Filtration Division manufactures products
in four U.S. plant locations and distributes to customers worldwide. Mr. Forte
received his B.S. degree from Northern Illinois University in 1970 and an
M.B.A. degree from Xavier University in 1982.
Mark A. Pappas, 37, became a director of Coyote in March 1998. Mr. Pappas is
the president of Paragon Management Group, Inc., a private investment
management firm located in Fort Worth, Texas. Prior to the formation of Paragon
Management Group, Inc. in June 1997, Mr. Pappas was employed in the field of
public accounting, five years as president of Pappas & Company, P.C., CPAs and
two years with the national accounting firm of Ernst & Young, LLP Mr. Pappas
also spent several years as the chief financial officer of a national home
building company. Mr. Pappas received a B.B.A. degree in accounting from the
University of Texas, Arlington in 1983 and has been a licensed Certified Public
Accountant in the State of Texas since 1985.
After the effective time of the merger agreement, the following directors
have been designated to sit on the board of directors of Coyote pursuant to the
stockholder agreement.
Raymond J. Minella, 49, has been a director of RP since its organization in
1996 and chairman of the board since August 1998. Since 1990, Mr. Minella has
been a managing general partner of Berenson Minella & Company, an investment
and merchant banking firm. Mr. Minella is a director of NEXClaim, Inc., an
insurance recovery business.
Kenneth J. Warren, 55, has been secretary of RP and a director since its
organization in 1996. Mr. Warren has been a practicing attorney for over 30
years. Before 1996, he was a partner in Schwartz, Kelm, Warren & Ramirez.
During 1996, he was of counsel to its successor, Schwartz, Warren & Ramirez
L.L.C. In January
116
<PAGE>
1997, he opened his own office for the practice of law. Mr. Warren is also
secretary of PH Group Inc., a manufacturer of presses, and Cable Link, Inc., a
cable television equipment refurbisher.
Richard P. Johnston, 68, served as chairman of the board of Merbanco, Inc.,
a merchant banking company, from 1991 until the end of 1998, served as chairman
of the board of Republic Realty Mortgage Co., a commercial mortgage company,
from 1992 to 1995, and was managing director of Hamilton Robinson & Co., an
investment advisory company from 1991 to 1994. Mr. Johnston has been a director
of RP since its organization in 1996 and served as chairman of the board of RP
from May 1996 to October 1997. Mr. Johnston is a founder and a director of AGCO
Corporation a farm implement manufacturer and distributor, and a director of
Myers Industries, Inc., a plastic and rubber products manufacturer. Richard P.
Johnston is the father of Leslie Reesing and David E. Johnston.
Executive Officers
Following the merger, James M. Probst will serve as chief executive officer
and president. John Paul McNeill will serve as chief financial officer.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Coyote's
directors and executive officers, and persons who own more than 10 percent of a
registered class of Coyote's equity securities, to file with the SEC and the
Nasdaq Stock Exchange initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of Coyote. Officers,
directors and greater than 10 percent stockholders are required by the
regulations of the SEC to furnish Coyote with copies of all Section 16(a) forms
they file. To Coyote's knowledge, based solely on review of the copies of such
reports furnished to Coyote and written representations that no other reports
were required, during the fiscal year ended December 31, 1998, all Section
16(a) filing requirements applicable to its officers, directors and greater
than 10 percent beneficial owners were complied with.
COMMITTEES OF THE BOARD OF DIRECTORS
The Coyote board currently has an audit committee and a compensation
committee. The Coyote board of directors does not have a nominating committee
and the functions of such a committee are performed by the board of directors.
Each committee member has a one-year term.
Presently Coyote has not appointed an executive committee. However, Coyote
will appoint an executive committee at the time of the consummation of the
merger. The executive committee, when the board of directors is not in session,
will have the authority of the board of directors as limited by the resolution
of the board appointing it. Additionally, the executive committee does not have
the authority of the board of directors to:
. amend the amended and restated articles of incorporation;
. adopt a plan of merger or consolidation;
. recommend to the stockholders the sale, lease or other disposition of
all or substantially all of the property and assets of the corporation
other than in the usual and regular course of its business;
. recommend to the stockholders a voluntary dissolution of the corporation
or revocation of such a dissolution; or
. amend the by-laws of the corporation.
117
<PAGE>
There were five meetings of the board of directors during the last full
fiscal year. Each director attended all meetings of the board of directors.
The compensation committee makes recommendations to the board with respect
to compensation of management employees. The compensation committee also
administers plans and programs relating to stock options, pension and other
retirement plans, employees benefits, incentives and compensation and
determines the eligibility and levels of participation under Coyote's 1997
Stock Option Plan (the "1997 Plan") and Coyote's 1998 Stock Option Plan (the
"1998 Plan"). There were four meetings of the compensation committee during the
last fiscal year. Messrs. Kates, Stonebraker and Pappas are the current members
of Coyote's compensation committee.
The audit committee reviews and makes recommendations to the Coyote board
regarding services provided by the independent accountants, reviews with the
independent accountants the scope and results of their annual audit of Coyote's
consolidated financial statements and any recommendations they may have, and
makes recommendations to the Coyote board with respect to the engagement or
discharge of the independent accountants. The audit committee also reviews
Coyote's internal procedures with respect to maintaining books and records, the
adequacy and implementation of internal auditing, accounting and financial
controls, and Coyote's policies concerning financial reporting and business
practices. The audit committee met in January 1999. Messrs. Kates, Pappas and
Probst are the current members of Coyote's audit committee.
COMPENSATION OF MANAGEMENT
The following table discloses compensation awarded to, earned by, or paid to
the Company's chief executive officer and to the Company's secretary, who prior
to August 1, 1998 was the company's chief executive officer. No other executive
officer of the Company received salary and bonus in excess of $100,000 during
the year ended December 31, 1998 and the two preceding years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
----------------------- ---------------------
Name and Principal Other Annual Securities Underlying
Position Year Salary($) Bonus($) Compensation Options/SARs(#)
------------------ ---- --------- -------- ------------ ---------------------
<S> <C> <C> <C> <C> <C>
James M. Probst, Chief
Executive Officer...... 1998 132,500 25,000 9,000 (1) 45,000
Mel S. Stonebraker, Sec-
retary................. 1998 150,000 25,000 9,000 (1) 45,000
1997 117,000 -0- 9,000 (1) 45,000
1996 115,000 -0- 7,000 (1) -0-
</TABLE>
- --------
(1) Mr. Probst was elected chief executive officer by the board of directors on
August 1, 1998. Prior to his election, Mr. Stonebraker was the chief
executive officer.
Coyote's 1997 Plan
Coyote's 1997 plan was adopted by the Coyote board of directors and
stockholders on June 10, 1997. The 1997 plan provided for the grant of options
to purchase 500,000 shares. The 1997 plan was amended by the board of directors
and approved by a majority of the stockholders on February 10, 1998. The
amendment provided for a total of 1,000,000 shares under the 1997 plan. The
shares of Coyote's common stock are intended to qualify as either incentive
stock options within the meaning of Section 422 of the Internal Revenue Code
("incentive stock options") or as options that are not intended to meet the
requirements of such section ("nonstatutory stock options"). Options to
purchase shares may be granted under the 1997 plan to persons who, in the case
of incentive stock options, are employees--including officers of Coyote or its
subsidiaries--or, in the case of nonstatutory stock options, are employees--
including officers of the Coyote or its subsidiaries--
118
<PAGE>
non-employee directors or consultants of Coyote. As of February 18, 1999,
570,000 incentive stock options and 130,000 nonstatutory stock options had been
granted under the 1997 plan.
The 1997 plan is administered by the Coyote compensation committee of the
board of directors. The Coyote compensation committee has full discretionary
authority, subject to certain restrictions, to determine the number of shares
for which incentive stock options and nonstatutory stock options may be granted
and the individuals to whom, and the times at which, and the exercise prices
for which options will be granted.
Coyote's 1998 Plan
Coyote's 1998 plan was adopted by the Coyote board of directors and
stockholders in March 1998. The 1998 plan provides for the grant of options to
purchase up to 1,000,000 shares of Coyote's common stock that are intended to
qualify as either incentive stock options or as nonstatutory stock options.
Options to purchase shares may be granted under the 1998 plan to persons who,
in the case of incentive stock options, are employees (including officers of
Coyote or its subsidiaries), or, in the case of nonstatutory stock options, are
employees (including officers of Coyote or its subsidiaries), non-employee
directors or consultants of Coyote. As of February 18, 1999, 152,500 options
had been granted under the 1998 plan.
The 1998 plan is administered by the Coyote compensation committee of the
board of directors. The Coyote compensation committee has full discretionary
authority, subject to certain restrictions, to determine the number of shares
for which incentive stock options and nonstatutory stock options may be granted
and the individuals to whom, and the times at which, and the exercise prices
for which options will be granted.
The following table presents information concerning individual grants of
options to purchase common stock made during the fiscal year ended December 31,
1998, to the chief executive officer and the named executive officers.
Option Grants in the Fiscal Year Ended December 31, 1998
<TABLE>
<CAPTION>
% of Total Exercise or
Options Granted Base Price
Options to Employees Date Expiration
Name Granted in Fiscal Year, ($/Share) Date
---- ------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
James M. Probst.................. 45,000 11.4 $4.375 2/10/05
Mel S. Stonebraker............... 45,000 11.4 $4.375 2/10/05
</TABLE>
AGGREGATE OPTION EXERCISES IN THE FISCAL YEAR ENDED
DECEMBER 31, 1998 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of In-The-Money
Unexercised Options Options At Fiscal Year-
at Fiscal Year-End End(1)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James M. Probst......... -0- -0- 15,000 75,000 -0- -0-
Mel S. Stonebraker...... -0- -0- 15,000 75,000 -0- -0-
</TABLE>
- --------
The aggregate option exercises listed above are based on a fair market value as
of December 31, 1998 of $3.375 per share. Values are stated on a pre-tax basis.
119
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
AND CHANGE-IN-CONTROL AGREEMENTS
Coyote has entered into employment agreements with Mr. Stonebraker and Mr.
Probst expiring on May 31, 2000, pursuant to which they are employed as
officers of Coyote. The employment agreements contain the following provisions:
. the agreements automatically renew for additional two-year periods
unless either party notifies the other party that it does not intend to
renew the agreements;
. the employment agreements provide for employment of Mr. Stonebraker and
Mr. Probst on a full-time basis at an annual salary of $150,000 and
$125,000, respectively, beginning September 1, 1997;
. Mr. Probst's annual salary was increased to $145,000 on August 1, 1998
with his appointment as CEO of Coyote;
. the officers are entitled to receive a bonus based on certain objectives
to be established by the board of directors and incentive stock options
to purchase 45,000 shares, expiring seven years from February 10, 1998,
at $4.375 per share;
. the options vest over a three year period if Coyote achieves 90% of its
targeted earnings before deduction of interest and taxes. In February
1998, the board of directors approved a waiver of the specified 90%
earnings target.
Mr. Stonebraker and Mr. Probst may be terminated by Coyote for cause, which
is defined as:
. excessive unauthorized absenteeism;
. actual fraud or material acts of dishonesty;
. destruction of material Coyote's property; and
. willful disclosure of Coyote's proprietary information, or a material
violation of internal controls or procedures.
If the officers voluntarily terminate prior to the end of the original
contract term, they are required to reimburse Coyote up to $62,500, on a pro-
rata basis depending on the date of termination. If Coyote terminates Mr.
Stonebraker or Mr. Probst without cause, the terminated officer is entitled to
18 months' salary as a severance payment. If termination without cause occurs
after the end of the original contract term, the terminated officer is entitled
to 12 months' salary. The employment agreements provide that the officers may
not compete with Coyote for a period of the greater of (1) nine months
subsequent to their termination date, or (2) the severance pay period. Please
note that a court may determine not to enforce, or to only partially enforce, a
non-competition clause of an employment agreement. The officers also have a
change of control agreement with Coyote pursuant to which they are entitled to
a continuation of salary benefits for 24 months if employment is terminated by
Coyote without cause or for good reason (such as a reduction in his
compensation) within two years after a change of control. A court may determine
not to enforce, or only partially enforce, non-competition clause of an
employment agreement.
Additionally, Coyote has entered into employment agreements with Mr. McNeill
and Mr. Pfeil, expiring on December 31, 1999, pursuant to which Mr. McNeill is
employed as chief financial officer of Coyote and Mr. Pfeil is employed as an
officer of Coyote. The employment agreements contain the following provisions:
. the agreements automatically renew for additional one-year periods
unless Coyote or the employee in question notifies the other party of
the agreement in question that it does not intend to renew the
agreement;
120
<PAGE>
. the employment agreements provide for employment on a full-time basis at
an annual salary of $96,000;
. Mr. McNeill and Mr. Pfeil are entitled to receive a bonus and stock
options based on certain objectives determined by the board of
directors;
. Mr. McNeill or Mr. Pfeil may be terminated by Coyote for cause, which is
defined as excessive unauthorized absenteeism, actual fraud or material
acts of dishonesty, destruction of material Coyote property; willful
disclosure of Coyote's proprietary information, or a material violation
of internal controls or procedures;
. if terminated without cause, Mr. McNeill or Mr. Pfeil is entitled to 6
months salary; and
. the employment agreements provide that neither Mr. McNeill nor Mr. Pfeil
may compete with Coyote for a period of the greater of (1) nine months
subsequent to his termination date, or (2) the severance pay period. Mr.
McNeill and Mr. Pfeil also each have a change of control agreement with
Coyote pursuant to which each is entitled to a continuation of salary
benefits for 24 months if his employment is terminated by Coyote without
cause or by Mr. McNeill or Mr. Pfeil respectively for good reason (such
as a reduction in his compensation) within two years after a change of
control.
DIRECTOR COMPENSATION
Messrs. Stonebraker and Probst do not receive additional compensation for
their services as directors. Outside directors Don A. Forte, Jeffrey T. Kates
and Mark A. Pappas are compensated in stock options under Coyote's 1997 Plan
and 1998 Plan and reimbursed for travel and other reasonable out-of-pocket
expenses incurred in attending board and committee meetings. During fiscal year
ended December 31, 1998, Don A. Forte and Jeffrey T. Kates each received 10,000
stock options with an exercise price of $4.375. Mark A. Pappas received 35,000
stock options with an exercise price of $5.375.
OTHER MATTERS
It is not expected that any matters other than those described in this
document will be brought before the special meetings. If any other matters are
presented, however, it is the intention of the persons named in the appropriate
proxy to vote the proxy in accordance with the discretion of the persons named
in such proxy.
LEGAL MATTERS
The validity of the series C preferred stock to be issued to RP stockholders
in connection with the merger will be passed upon by Chrisman, Bynum & Johnson,
P.C., counsel to Coyote. Certain other legal matters in connection with the
merger will be passed upon for Coyote by Kramer Levin Naftalis & Frankel LLP,
New York, New York special counsel to Coyote. Fabian & Clendenin has given its
opinion that the merger will be a reorganization within the meaning of Section
368 of the Code and will have the material U.S. federal income tax consequences
referred to under the caption "The Merger--Material U.S. Federal Income Tax
Consequences."
121
<PAGE>
EXPERTS
The consolidated financial statements of Coyote and subsidiaries as of
December 31, 1998 and 1997 and for the years then ended, have been included
herein in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements of Royal Precision, Inc. and
subsidiaries as of May 31, 1998 and for the years ended May 31, 1998 and 1997,
included in this joint proxy statement/prospectus, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
The audited historical financial statements of Unifiber Corporation
incorporated in this Prospectus [by reference] to Coyote's current report on
Form 8-K/A Amendment No. 2 dated March 19, 1998 have been so incorporated in
reliance on the report (which contains an explanatory paragraph relating to
Unifiber Corporation's ability to continue as a going concern as described in
Note 1 to the financial statements) of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
FUTURE STOCKHOLDER PROPOSALS
Due to the contemplated consummation of the merger, RP does not currently
expect to hold a 1999 annual meeting of stockholders because RP will be a
wholly owned subsidiary of Coyote following the merger. In the event the merger
is not consummated, proposals of RP stockholders to be included in the proxy
statement to be mailed to all RP stockholders entitled to vote at the 1999
annual meeting of RP stockholders must have been received at RP's principal
executive offices not later than [ ].
Any stockholder proposal intended for inclusion in Coyote's proxy statement
for Coyote's 1999 annual general meeting of stockholders must have been
received by Coyote no later than [ ], 1999.
122
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Coyote Sports, Inc.:
We have audited the accompanying consolidated balance sheets of Coyote
Sports, Inc. and subsidiaries (Company) as of December 31, 1998 and 1997, and
the related consolidated statements of operations, other comprehensive loss,
stockholders' equity (deficit) and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Coyote
Sports, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
KPMG LLP
Boulder, Colorado
March 16, 1999
F-1
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents.............................. $ 925,275 $ 726,290
Restricted cash................................... 90,000 702,814
Trade receivables, net of allowance for doubtful
accounts of $561,000 and $390,000 for 1998 and
1997, respectively............................... 4,693,788 3,778,483
Inventories, net.................................. 6,399,249 3,582,194
Prepaid expenses and other current assets......... 903,712 439,130
------------ -----------
Total current assets............................ 13,012,024 9,228,911
Property, plant and equipment, net.................. 14,185,247 7,546,284
Investment in Unggul................................ 1,930,942 --
Non-current prepaid services........................ 1,364,074 --
Other assets, net................................... 375,862 90,058
------------ -----------
$ 30,868,149 16,865,253
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable..................................... $ 13,127,754 2,705,928
Current portion of long-term debt................. 6,151,947 452,237
Accounts payable.................................. 5,312,524 3,204,234
Accrued expenses.................................. 3,131,578 1,413,362
Current portion of obligation payable under
purchase agreement............................... -- 87,000
------------ -----------
Total current liabilities....................... 27,723,803 7,862,761
Long-term debt, net of current portion.............. 893,408 202,644
Related party note payable.......................... -- 600,340
Obligation payable under purchase agreement......... -- 728,000
Deferred taxes...................................... 381,000 362,000
Other liabilities................................... 819,330 --
------------ -----------
Total liabilities............................... 29,817,541 9,755,745
Minority interests in net assets of subsidiaries.... -- 396,874
Redeemable preferred stock, $.001 par value.
Authorized 4,000,000 shares; 75,000 issued and
outstanding in 1998, redeemable at $20.00 per
share.............................................. 1,500,000 --
Stockholders' equity (deficit):
Common stock, $.001 par value. Authorized
25,000,000 shares; issued and outstanding,
5,777,692 and 3,855,000, at December 31, 1998 and
1997, respectively............................... 5,778 3,855
Additional paid-in capital........................ 18,180,202 12,664,642
Accumulated deficit............................... (19,188,377) (5,493,167)
Accumulated other comprehensive income (loss)..... 553,005 (462,696)
------------ -----------
Total stockholders' equity (deficit)............ (449,392) 6,712,634
Commitments and contingencies
------------ -----------
$ 30,868,149 $16,865,253
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
Net sales........................................... $ 38,217,632 27,685,918
Cost of goods sold.................................. (29,999,634) (22,111,617)
------------ -----------
Gross profit...................................... 8,217,998 5,574,301
Selling, general and administrative expenses........ (9,056,585) (8,243,325)
Non-recurring write off of goodwill and other
assets............................................. (11,341,332) --
------------ -----------
Operating loss.................................... (12,179,919) (2,669,024)
Other income (expense):
Interest expense.................................. (1,419,221) (473,402)
Debt financing costs.............................. (675,510) (617,156)
Loss on relinquishment of assets.................. -- (933,790)
Other, net........................................ 189,824 (162,466)
------------ -----------
Loss before income taxes, minority interests and
extraordinary item............................... (14,084,826) (4,855,838)
Income tax (expense) benefit........................ (169,000) 281,273
Minority interests in subsidiaries' losses.......... 212,035 406,991
------------ -----------
Net loss before extraordinary item.................. (14,041,791) (4,167,574)
------------ -----------
Extraordinary item, net of taxes.................... 346,581 --
Net loss............................................ $(13,695,210) (4,167,574)
============ ===========
Basic and diluted earnings (loss) per share
Loss before extraordinary item...................... $ (2.95) (1.22)
Extraordinary item.................................. 0.07 --
------------ -----------
Net loss............................................ $ (2.88) (1.22)
============ ===========
Shares used in calculating basic and diluted loss
per share.......................................... 4,762,797 3,426,945
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997
------------ ----------
<S> <C> <C>
Net loss............................................ $(13,695,210) (4,167,574)
Other comprehensive income (loss)................... 219,908 (675,116)
------------ ----------
Comprehensive loss.................................. $(13,475,302) (4,842,690)
============ ==========
Cumulative foreign currency translation adjustment
realized upon exchange of ownership interest....... $ 560,493 --
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Accumulated Total
Common stock Additional comprehensive stockholders'
----------------- paid-in Accumulated income (loss) equity
Shares Amount capital deficit adjustment (deficit)
--------- ------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1,
1997................... 3,450,000 $3,450 6,136,288 (1,325,593) 212,420 5,026,565
Contributed Capital..... -- -- 2,211,045 -- -- 2,211,045
Stock returned to the
Company for
cancellation........... (850,000) (850) -- -- -- (850)
Sale of common stock,
net of issuance costs.. 1,180,000 1,180 3,973,634 -- -- 3,974,814
Common stock and
warrants issued
pursuant to contractual
obligations............ 75,000 75 343,675 -- -- 343,750
Net loss................ -- -- -- (4,167,574) -- (4,167,574)
Accumulated
comprehensive income
(loss) adjustment...... -- -- -- -- (675,116) (675,116)
--------- ------ ---------- ----------- --------- -----------
BALANCES AT DECEMBER 31,
1997................... 3,855,000 3,855 12,664,642 (5,493,167) (462,696) 6,712,634
Common stock issued for
services............... 825,261 825 2,119,517 -- -- 2,120,342
Common stock issued for
acquisition............ 521,739 522 1,499,478 -- -- 1,500,000
Common stock issued in
connection with
note payable........... 18,000 18 59,044 59,062
Common stock issued in
connection with
long-term debt......... 307,692 308 975,202 -- -- 975,510
Sale of common stock,
net of issuance costs.. 250,000 250 949,750 -- -- 950,000
Warrants issued with
long-term debt......... -- -- 168,455 -- -- 168,455
Redeemable preferred
stock issuance costs... -- -- (255,886) -- -- (255,886)
Net loss................ -- -- -- (13,695,210) -- (13,695,210)
Accumulated other
comprehensive income
adjustment............. -- -- -- -- 1,015,701 1,015,701
--------- ------ ---------- ----------- --------- -----------
BALANCES AT DECEMBER 31,
1998................... 5,777,692 $5,778 18,180,202 (19,188,377) 553,005 (449,392)
========= ====== ========== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(13,695,210) (4,167,574)
Charges (credits) not affecting cash:
Depreciation and amortization....................... 1,910,571 489,517
Deferred tax liability.............................. -- (64,000)
Loss on relinquishment of assets.................... -- 933,790
Minority interests' in subsidiaries' losses......... (55,445) (406,991)
Stock issued for services........................... 2,120,342 --
Write-off of goodwill and other assets.............. 11,341,332 --
Extraordinary gain, net............................. (346,581) --
Gain on exchange of ownership....................... (17,267) --
Changes in operating assets and liabilities, net of
impact of acquisitions:
Restricted cash..................................... 612,814 (702,814)
Trade receivables................................... (298,631) (795,628)
Receivables from related parties.................... -- 91,735
Inventories......................................... (1,506,034) 778,487
Prepaid expenses and other current assets........... (2,697,952) (139,880)
Accounts payable.................................... 134,761 (180,426)
Accrued expenses.................................... (903,535) 564,112
Taxes payable....................................... (188,949) (638,000)
------------ ----------
Net cash used in operating activities............. (3,589,784) (4,237,672)
------------ ----------
Cash flows from investing activities:
Purchase of property, plant and equipment........... (3,097,706) (3,968,624)
Other assets........................................ -- (99,012)
Acquisition of businesses, net of cash acquired..... (3,649,441) (192,634)
------------ ----------
Net cash used in investing activities............. (6,747,147) (4,260,270)
------------ ----------
Cash flows from financing activities:
Proceeds from notes payable......................... 4,034,150 1,006,247
Payments on notes payable........................... (2,613,376) (414,926)
Borrowings on long-term debt........................ 7,781,702 739,781
Payments on long-term debt.......................... (860,674) --
Borrowings on related party notes payable........... -- 465,188
Sale of minority interest in Pentiumatics........... -- 594,177
Sale of preferred stock............................. 1,244,114 --
Sale of common stock................................ 950,000 6,528,759
------------ ----------
Net cash provided by financing activities......... 10,535,916 8,919,226
------------ ----------
Increase (decrease) in cash and equivalents....... 198,985 421,284
Cash and equivalents at beginning of year............ 726,290 305,006
------------ ----------
Cash and equivalents at end of year.................. $ 925,275 726,290
============ ==========
Supplemental disclosure of cash flow information
Cash paid during the year for interest.............. $ 1,234,966 355,867
Cash paid during the year for income taxes.......... $ 24,447 257,000
============ ==========
Non-cash financing activities:
Fair value of common stock issued for services.... $ 2,120,342 --
============ ==========
Fair value of common stock issued in connection
with long term debt.............................. $ 975,510 --
============ ==========
Fair value of common stock issued for acquisiton.. $ 1,500,000 --
============ ==========
Fair value of common stock issued in connection
with notes payable............................... $ 59,062 --
============ ==========
Note payable entered into in connection with
acquisition...................................... $ 5,500,000 --
============ ==========
Book value of assets exchanged in connection with
exchange of ownership interest................... $ 848,266 --
============ ==========
Fair value of assets received in connection with
exchange of ownership interest................... $ 1,426,025 --
============ ==========
Cumulative foreign currency translation loss
realized upon exchange of ownership interest..... $ (560,493) --
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies and Practices
Nature of Business
Coyote Sports, Inc. and subsidiaries (the "Company"), designs, engineers,
manufactures, markets and distributes brand name sports equipment and
recreational products worldwide. The Company's products include steel and
graphite golf shafts (under the names Apollo and Unifiber), premium grade steel
cycle tubing (under the name Reynolds), and graphite and other advanced
composite materials (under the name Sierra Materials) for use in the production
of golf shafts, fishing poles, ski poles, hockey sticks and other products. The
Company sells its golf shafts and bicycle frame tubes in wholesale markets and
to assemblers of finished products primarily in the United States and Europe
and its advanced composite materials to manufacturers in the United States and
Southeast Asia. The Company's golf shaft business accounted for approximately
80% and 67% of the Company's net sales for the years ended December 31, 1998
and 1997, respectively. If the demand for golf products were to experience a
significant change it could have a significant impact on the Company's
financial performance.
The Company, in addition to the businesses described above, plans to expand
its existing product lines into other sporting good product lines in the
future. The Company plans to develop some of these products internally, as well
as, acquiring companies with existing products lines that complement the
Company's product lines.
Principles of Consolidation
The consolidated financial statements include the accounts of all
subsidiaries in which a controlling interest is held, including Apollo Sports
Technologies, Limited (Apollo), Apollo Golf, Inc. (Apollo U.S.), Reynolds Cycle
Technology, Limited (Reynolds), Unifiber Corporation and Cape Composites, Inc.,
a wholly- owned subsidiary of Sierra Materials, LLC (which collectively are
referred to herein as Sierra Materials). All significant intercompany balances
and transactions have been eliminated in consolidation.
Liquidity
The Company incurred losses of $13,695,210 and $4,167,574 for the years
ended December 31, 1998 and 1997, respectively. The Company has a stockholders'
deficit of $449,392 as of December 31, 1998. As of December 31, 1998, the
Company had a working capital deficit of $14,711,779. Cash used in operating
activities for the year ended December 31, 1998 was $3,589,784.
The Company has current debt obligations of $19,280,000 among five different
lenders. The Company has notified its existing lenders that it is in
negotiations with two lending groups to secure longer-term replacement
financing for the Company in connection with the merger with Royal Precision
Inc. ("RP"). On February 2, 1999, the Boards of Directors of Coyote and Royal
Precision Inc. ("RP") signed an agreement to merge (the "Merger"). The Merger
is structured so that Coyote will be the surviving company and RP will become a
wholly-owned subsidiary of Coyote. If the Merger is consummated, the Company
expects to: secure a revolving line of credit of $10,000,000; secure a note
payable of $18,000,000; secure a note payable of $12,000,000, and secure a note
payable of $8,000,000. If the financing is secured, proceeds will be used to
pay all of the Company's current debt obligations of $19,280,000, long-term
debt obligations of $893,000, redeem $1,500,000 in Series A Preferred Stock,
pay $6,608,000 in estimated financing, merger and registration costs, repay
$8,980,000 in RP's current outstanding indebtedness and provide $738,891 for
general corporate purposes. The Company must secure financing in order to
effect the Merger.
F-7
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additionally, Coyote has historically built inventory in the spring in order
to meet demand, thereby increasing Coyote's working capital needs in the
spring.
In the event that the Company is unable to obtain long-term lending
facilities and or extend the due dates of its current debt obligations, the
Company would seek bridge financing that would enable it to continue operating
until it secured replacement long-term lending facilities for its current debt
obligations and to meet working capital needs which could have a material
adverse effect on Coyote's business, operating results and financial condition.
The Company has received a letter of commitment from a lender to financially
support the Company through March 31, 2000. Terms of the financial support such
as interest rates, collateral, due dates, etc. have not been established.
However, there can be no assurance that the Company will obtain long-term
lending facilities or bridge financing that would enable it to continue
operating, without exercising the letter of commitment.
Cash and Equivalents
Cash and equivalents represent cash and money market account investments.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Maintenance and repairs are
charged to expense as incurred. Depreciation is computed using the straight-
line method based on estimated useful lives of the assets, which range from 3
to 20 years.
Intangible Assets
The Company evaluates long-lived assets, which included goodwill, at the
lowest level for which there are identifiable cash flows in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
and APB Opinion No. 17 "Intangible Assets". As of December 31, 1998, all
goodwill resulting from the acquisition of Unifiber Corporation on March 19,
1998 was written off. Impairment was determined by evaluating the estimated
amount at which the assets of Unifiber could be sold in a current transaction
between willing parties. It was determined the goodwill acquired in the
Unifiber acquisition had been significantly impaired due to a significant
reduction in order volume from its three largest customers who had historically
represented approximately 90% of sales. Accordingly, the remaining goodwill of
$10,815,119 was written off. Additionally, Coyote estimated the remaining
periods that the Unifiber facility would be in use and amortized the remaining
book value of leasehold improvements and other long-lived assets that were
impaired over the remaining estimated use period. Coyote accordingly recognized
as a liability and expense in the fourth quarter of 1998, seven months of lease
payments and estimated executory costs for the Unifiber facility based on
estimates received from local real estate brokers. Should this facility not be
sub-leased within this period, Coyote will recognize additional expense in the
future.
As of December 31, 1997, all intangible assets related to trade names and
customer lists for ICE*USA were written off as the Company was in payment
default on its purchase obligation. On June 15, 1998, the Company relinquished
the right to these intangible assets to the previous owner and was released
from its purchase obligation for ICE*USA.
F-8
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
The Company recognizes sales upon shipment to customers.
Research and Development Expenses
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred. Amounts charged against operations in 1998 and 1997 were
approximately $813,000 and $783,000, respectively, which are included in
operating expenses.
Income Taxes
The Company accounts for income taxes under the asset and liability method
whereby deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in operations in the period that includes the
enactment date.
Advertising
The Company expenses advertising costs when incurred. Advertising expenses
recognized in the years ended December 31, 1998 and 1997 were approximately
$302,000 and $622,000, respectively, and are included in operating expenses.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from those
estimates.
Comprehensive Income
The Company has adopted Financial Accounting Standards Board SFAS No. 130,
"Reporting Comprehensive Income," as of January 1, 1998. SFAS No. 130 requires
all items that are required to be recognized under accounting standards as
components of comprehensive income to be reported in a financial statement that
is displayed with the same prominence as other financial statements. Foreign
currency translation adjustments are the Company's only component of
comprehensive income.
Foreign Currency
Adjustments resulting from translating foreign functional currency financial
statements into U.S. dollars are included in the accumulated comprehensive
income (loss) in stockholders' equity (deficit).
Gains and losses on transactions denominated in other than the functional
currency are recognized in income as they occur.
F-9
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Derivatives
The Company enters into forward foreign exchange contracts or currency
options in order to reduce the impact of currency fluctuations between the U.S.
dollar and the British Pound. Anticipated, but not yet firmly committed
transactions and related receivables and payables may be hedged through the use
of forward exchange contracts and options. Foreign currency exchange contracts
are marked to market at the end of each accounting period and corresponding
gains and losses are recognized in other income (expense). Premiums paid on
purchased options are recognized as expense when the option is purchased and
any gains are recognized in operations when the option is exercised.
Loss Per Share
Loss per share is reported as basic loss per share, which uses the weighted
average number of common shares outstanding, and diluted loss per share, which
assumes conversion of all potentially dilutive securities. Due to losses in
both years, any conversion would be anti-dilutive and, accordingly, basic and
diluted loss per share is the same.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
(2) Acquisitions
On September 9, 1998, the Company purchased substantially all of the assets
of West Coast Composites ("West Coast"), a wholly-owned subsidiary of Cobra
Golf Incorporated, for a purchase price of $500,000 in cash and $5,500,000 in
the form of a secured note payable due March 31, 1999. The acquisition was
accounted for by the purchase method. As a result of the acquisition, total
assets recorded were $6,500,000 and liabilities assumed were $500,000. The
assets of West Coast were consolidated into Unifiber as of September 9, 1998.
No goodwill resulted from this acquisition. Activities of West Coast are
included in the Company's financial statements starting September 10, 1998.
On March 19, 1998, the Company acquired all of the outstanding stock of
Unifiber Corporation (Unifiber), a supplier of graphite golf shafts to premium
original equipment manufacturers, for a purchase price of $3,000,000 in cash
and 521,739 shares of the Company's Common Stock with a fair value of
$1,500,000. The acquisition was accounted for by the purchase method. Under the
terms of the agreement, the previous owner has the option to sell the shares
back to the Company for a period of two years after the closing at a price of
$5.17 per share. In addition, the Company has agreed to pay the previous owner
$100,000 per year for five years for consulting services. As a result of the
acquisition, total assets recorded were $13,879,967, of which $10,998,427 was
goodwill. Liabilities assumed were $9,082,446. Results of Unifiber are included
in the Company's financial statements starting April 1, 1998 as results for the
period from March 20, 1998 to March 31, 1998 are not significant. As of
December 31, 1998, all goodwill resulting from the acquisition of Unifiber was
written off.
On April 1, 1997, the Company acquired all of the outstanding stock of
Pentiumatics Sdn. Bhd. (Pentiumatics), a Southeast Asian entity whose principal
operations have not commenced. The acquisition was accounted for by the
purchase method. Consideration for Pentiumatics was approximately $200,000 cash
and no goodwill was recorded. Subsequent to the purchase, 23% of the common
stock was sold to an independent third party. On July 23, 1998, Coyote
exchanged its 77% ownership interest in Pentiumatics Sdn. Bhd. for a 28%
ownership in the outstanding common stock of Unggul Galakan Sdn. Bhd. (Unggul).
Unggul wholly owns Action Wear Sdn. Bhd. (Action Wear), a Southeast Asian
manufacturer of athletic apparel.
F-10
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On March 27, 1997, the Company established a new entity, Sierra Materials,
LLC (Sierra). Sierra is 80% owned by the Company and 20% owned by two
individuals. Sierra was established to acquire Cape Composites, Inc. (d/b/a
Sierra Materials). Sierra Materials is a supplier of graphite and other
advanced composite materials for use in the sports and recreational markets.
The acquisition of Sierra Materials coincided with the formation of Sierra on
March 27, 1997. The transaction was accounted for by the purchase method, with
the assumption of approximately $650,000 in outstanding debt. The operations of
Sierra have been included in the Company's consolidated financial statements
from March 27, 1997 forward. No cash was paid and no goodwill was recorded as a
result of this acquisition.
The following unaudited pro forma financial information for the years ended
December 31, 1998 and 1997 present the combined results of operations of the
Company, Sierra Materials and Unifiber as if the acquisitions had occurred as
of the beginning of 1997 and 1998, respectively, after giving effect to certain
adjustments. The pro forma financial information does not include the effect of
certain acquisitions and dispositions because these transactions were not
material on an individual or an aggregate basis. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the Company, Sierra Materials and Unifiber constituted a
single entity during such periods.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1998 1997
------------ -----------
(unaudited) (unaudited)
<S> <C> <C>
Net sales....................................... $ 41,976,549 $48,170,866
Net loss before extraordinary item.............. (16,638,086) (6,650,255)
Basis and diluted loss per share before
extraordinary item............................. $ (3.49) $ (1.62)
</TABLE>
(3) Restricted Cash
At December 31, 1998, $90,000 in cash was restricted and held as collateral
against a standby letter of credit with a bank to secure an operating lease
obligation, which expires February 28, 1999.
(4) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Raw materials and supplies.......................... $ 1,746,787 $ 845,469
Work-in-process..................................... 1,682,018 1,034,927
Finished goods...................................... 4,151,757 2,414,362
----------- ----------
7,580,562 4,294,758
Reserve............................................. (1,181,313) (712,564)
----------- ----------
$ 6,399,249 $3,582,194
=========== ==========
</TABLE>
F-11
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Land............................................. $ 816,000 $2,909,638
Buildings........................................ 110,000 147,933
Machinery and equipment.......................... 12,486,518 4,935,224
Furniture and fixtures........................... 2,391,317 38,785
----------- ----------
15,803,835 8,031,580
Less accumulated depreciation and amortization... (1,618,588) (485,296)
----------- ----------
$14,185,247 $7,546,284
=========== ==========
</TABLE>
(6) Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
----------- ----------
<S> <C> <C>
(a) Note payable, with interest payable as a warrant to
purchase shares of the Company's common stock, due
May 1, 1999........................................ $ 877,487 $ --
(b) Note payable under line of credit, variable
interest rate of 1.5% plus LIBOR rate (8.94% at
December 31, 1998), interest payable quarterly..... 715,000 --
(c) Note payable, variable interest rate of 5% over the
Federal Reserve discount rate (10% at December 31,
1998), interest and note due March 31, 1999........ 5,500,000 --
(d) Note payable under line of credit and term loan,
variable interest rate of 1.5% over the lender's
prime rate (9.5% at December 31, 1998), interest
payable monthly.................................... 1,843,016 --
(e) Note payable under line of credit, variable
interest rate of 1.5% over the lender's prime rate
(9.5% at December 31, 1998), interest payable
monthly............................................ 1,877,000 --
(f) Note payable under line of credit and term loan,
variable interest rate of 1.5% over the lender's
prime rate (9.5% at December 31, 1998), interest
payable monthly.................................... 2,315,251 --
Note payable to individual with interest of 18,000
shares of the Company's common stock, which was repaid
in 1998............................................... -- 400,000
Note payable under line of credit, variable interest
rate of 1.5% over the bank's prime rate, which was
repaid in 1998........................................ -- 1,307,000
Note payable under line of credit, variable interest
rate of 1.5% over the bank's prime rate, which was
repaid in 1998........................................ -- 500,000
Note payable under line of credit, variable interest
rate of 1.5% over the bank's prime rate, which was
repaid in 1998........................................ -- 162,499
Note payable under line of credit, variable interest
rate of 1.5% over the bank's prime rate, which was
repaid in 1998........................................ -- 336,429
----------- ----------
$13,127,754 $2,705,928
=========== ==========
</TABLE>
- --------
(a) On November 16, 1998, the Company entered into a Convertible Promissory
Note (the "Note") for $1,000,000. The Note is due three days after the
closing of a debt placement (the "Debt Financing") as defined in the
agreement. In the event the Debt Financing does not close on or before May
1, 1999, then
F-12
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the holder has the option to convert the remaining principal balance into
common stock at a price of $3.25 per share up to and not to exceed five
percent (5%) of the then outstanding shares. As of December 31, 1998, the
balance outstanding, net of unaccreted value of warrants, is $877,487.
The Company issued 35,000 warrants exercisable for an aggregate of 35,000
shares of common stock in connection with the $1,000,000 convertible
promissory note. The warrants are exercisable for a period of five years
beginning six months from (i) May 1, 1999 or (ii) from the date the
Company refinances its existing debt obligations, at an exercise price of
$0.01.
(b) On September 22, 1998, the Company repaid the remaining balance under a
foreign line of credit and entered into a new Credit Facility Agreement
(credit facility) which provides for borrowings under a foreign line of
credit up to 600,000 PS ($1,002,000 U.S.). Amounts outstanding on the
credit facility are secured by substantially all of Apollo's and Reynolds'
assets. Under the terms of the agreement, the borrowings may be
immediately callable by the lender. The term of the agreement is for five
years. As of December 31, 1998, the Company had total borrowings of
426,000 PS ($715,000 U.S.).
(c) On September 9, 1998, the Company entered into a $5,500,000 note payable
for the purchase of certain assets. The interest rate is the Federal
Reserve discount rate plus 5 percent. The note is secured by certain
assets of Unifiber and is guaranteed by the parent company.
(d) On March 19, 1998, the Company entered into a new Loan and Security
Agreement with a lender to advance loans up to $2,300,000. The agreement
provides for a term loan of $1,100,000 and a capital equipment loan not to
exceed $200,000 at an interest rate of prime plus 1.5 percent. Borrowings
are secured by substantially all assets of Unifiber and are guaranteed by
Apollo U.S., Sierra Materials, and the parent company. Advances are
calculated on a daily basis and based on defined eligible accounts
receivable and inventories. Under the terms of the agreement, the
borrowings may be immediately callable by the lender. The term of the
agreement is for two years. The Company may not declare or pay any
dividends without the written consent of the lender. At December 31, 1998,
the balance under this agreement was $1,843,016.
(e) On January 9, 1998, the Company repaid the remaining balance on a line of
credit secured by substantially all assets of Apollo U.S. and entered into
a new Loan and Security Agreement with a lender to advance loans up to
$2,300,000, secured by substantially all assets of Apollo U.S. Advances
are guaranteed by Sierra Materials and the parent company. Advances are
calculated on a daily basis and based on defined eligible accounts
receivable and inventories. Under the terms of the agreement, the
borrowings may be immediately callable by the lender. The term of the
agreement is for two years. The Company may not declare or pay any
dividends without the written consent of the lender. At December 31, 1998,
the balance under this agreement is $1,877,000.
(f) On January 9, 1998, the Company repaid the remaining balance on a line of
credit and a term loan secured by substantially all assets of Sierra
Materials and entered into a new Loan and Security Agreement with a lender
which provides advance loans up to $2,500,000. The agreement provides for
a term loan of $169,365 and a capital equipment term loan not to exceed
$2,100,000, at an interest rate of the prime rate plus 1.5 percent. The
term loan and the capital equipment loan were combined during 1998 into
one term loan. Borrowings are secured by substantially all of the assets
of Sierra Materials and are guaranteed by Apollo U.S., and the parent
company. Advances are calculated on a daily basis and based on defined
eligible accounts receivable and inventories. Under the terms of the
agreement, the borrowings may be immediately callable by the lender. The
term of the agreement is for two years. The Company may not declare or pay
any dividends without the written consent of the lender. At December 31,
1998, the balance outstanding under the agreement was $2,315,251.
F-13
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, the Company had a borrowing availability of $402,000
in aggregate on its notes payable.
(7) Long Term Debt
Long term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
---------- -------
<S> <C> <C>
(a) Term loan, variable interest rate of 1.75% plus LIBOR
rate (9.19% at December 31, 1998), interest payable
quarterly............................................... $ 635,000 --
(b)Note payable, interest rate of 12%, interest payable
quarterly.................................................. 6,000,000 --
(c) Note payable secured by accounts receivable, variable
interest rate of 1.75% over the lender's base rate
(9.25% at December 31, 1998), interest payable monthly.. 376,000 347,000
Capital leases.............................................. 38,505 375,023
---------- -------
Total................................................... 7,049,505 722,023
Less interest on capital lease obligations.................. 4,150 67,142
Less current portion........................................ 6,151,947 452,237
---------- -------
$ 893,408 202,644
========== =======
</TABLE>
- --------
(a) On September 22, 1998, the Company repaid the remaining balance under a
foreign line of credit and term loan and entered into a new five year
Credit Facility Agreement (credit facility) which provides for a term loan
of 400,000 PS ($668,000 U.S.) at an interest rate of LIBOR plus 1.75%.
Additionally, the credit facility provides for borrowings of up to
6,000,000 PS ($10,026,000 U.S.) for spot and forward foreign exchange
transactions and borrowings of up to 50,000 PS ($83,000 U.S.) for customs
bonds. Amounts outstanding on the credit facility are secured by
substantially all of Apollo's and Reynolds' assets. The term loan will be
repaid in twenty consecutive quarterly payments of 20,000 PS ($33,400)
beginning on December 22, 1998. As of December 31, 1998, the Company had
total borrowings of 380,000 PS ($635,000 U.S.).
(b) As of March 19, 1998, Coyote entered into a $6,000,000 Promissory Note (the
"Note") and Loan Agreement as amended December 30, 1998 (the "Loan
Agreement") with Paragon Coyote Texas Ltd. ("Paragon"). Paragon is an
unrelated third party to Coyote, although as a condition of the Loan
Agreement, the Coyote Board of Directors appointed Mr. Mark Pappas, the
president of the general partner of Paragon, to the Company's Board of
Directors, a capacity in which he currently serves. In the ordinary course
of business, this loan is due September 19, 1999. Interest is payable
quarterly at an interest rate of 12% per year. The consummation of the
merger between the Company and Royal Precision, Inc. would cause the Note
to be due immediately.
Under the Loan Agreement, Coyote issued Paragon 163,265 shares of Coyote
common stock as of March 19, 1998, which represented $1,000,000 divided by the
closing price of the common stock on the Nasdaq Small Cap Market on the day
immediately preceding the closing of the loan. The Loan Agreement provides that
the Company shall issue to Paragon such additional number of shares of Coyote
common stock as are necessary to make the aggregate value of all shares of
common stock issued equal $1,000,000 on March 19, 1999, which was subsequently
amended to December 30, 1998, and upon maturity of the loan and upon the
prepayment, of the loan. Pursuant to this provision, and based on a December
29, 1998 closing price of the common stock on the Nasdaq Small Cap Market of
$3.25 per share, Coyote issued Paragon an additional 144,427 shares of the
Company's common stock effective
F-14
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 1998. The Company may be required to issue Paragon additional
shares of common stock at the maturity date (September 19, 1999) and on any
date that the Note is prepaid in full prior to the maturity date.
(c) In March 1997, the Company entered into an agreement with a lender to
advance loans secured by trade receivables. As of December 31, 1998,
225,000 PS ($376,000 U.S.) was outstanding under this agreement. The
Agreement continues indefinitely until notice to terminate is given by
either party.
Based on scheduled annual maturities of notes payable and long term debt
payments are as follows in each of the five years 1999 through 2003,
respectively, are $17,059,689, $1,128,208, $737,800, $737,800, and $509,612.
At December 31, 1998, equipment includes items under capital leases with
book values of $21,000 and accumulated amortization of $16,000.
(8) Income Taxes
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Current:
United States:
Federal......................................... $ -- $ --
State........................................... -- --
United Kingdom................................... 158,000 (217,273)
----------- -----------
158,000 (217,273)
Deferred:
United States:
Federal......................................... -- --
State........................................... -- --
United Kingdom................................... 11,000 (64,000)
----------- -----------
11,000 (64,000)
$169,000 $(281,273)
=========== ===========
Actual income tax expense (benefit) differs from the amounts computed using
the U.S. statutory tax rate of 34% as follows:
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Computed tax benefit at the expected statutory
rate............................................. $(4,397,000) $(1,651,000)
Increase (decrease) in income taxes resulting
from:
State tax, net of federal benefit and state tax
credits......................................... (92,000) (88,437)
Increase in valuation allowance in the U.S....... 1,364,000 1,107,000
Increase in valuation allowance in the UK........ -- 170,000
Difference between UK and U.S. tax rates......... (35,000) 37,719
Partial relief for UK losses carried back........ -- 50,698
Foreign exchange adjustments not deductible for
UK tax purposes................................. -- 75,918
Impact of acquisitions........................... (488,000) --
Goodwill and other permanent differences......... 3,999,000 --
Other, net....................................... (183,000) 16,829
----------- -----------
Income tax (benefit) expense................... $ 169,000 $ (281,273)
=========== ===========
</TABLE>
F-15
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 1,954,000 1,642,000
Bad debts and inventory allowances.............. 539,000 232,000
Other accruals and reserves..................... 624,000 72,000
----------- ----------
Total deferred tax assets..................... 3,117,000 1,946,000
Valuation allowance............................... (3,037,000) (1,834,000)
----------- ----------
Net deferred tax assets....................... 80,000 112,000
Deferred tax liability--difference in book and tax
basis of property, plant and equipment........... (461,000) (474,000)
----------- ----------
Net deferred tax liability.................... $ (381,000) (362,000)
=========== ==========
</TABLE>
At December 31, 1998, the Company has net operating loss carryforwards for
U.S. federal income tax purposes of $4,812,000 and net operating loss
carryforwards for United Kingdom income tax purposes of $223,000. United
Kingdom loss carryforwards have no expiration. U.S. net operating loss
carryforwards are available to offset future federal taxable income and expire
in the following years:
<TABLE>
<S> <C>
2009.............................. $ 16,000
2010.............................. 366,000
2011.............................. 904,000
2012.............................. 1,884,000
2018.............................. 1,642,000
----------
$4,812,000
==========
</TABLE>
At December 31, 1998, management believes it is more likely than not that
the Company will not realize the benefits of its deferred tax assets and,
accordingly, has recognized a valuation allowance.
(9) Redeemable Preferred Stock
On November 16, 1998, the Company issued 75,000 shares of Series A
redeemable preferred stock at $20.00 per share. Net cash proceeds were
$1,350,000, net of issuance costs. The preferred stock has a non-cumulative
dividend rate of 6% per annum. The redeemable preferred stock is stated at its
redemption value, $20.00 per share. Under the proposed merger with RP, if the
merger is consummated a change of control would be in effect and the Company
would pay the total redemption value of $1,500,000. The preferred stock has no
voting rights. In connection with the issuance of the Series A Preferred Stock,
the Company issued 22,000 shares of common stock.
(10) Common Stock
In September 1998, the Company issued 250,000 shares of common stock at
$4.00 per share in a private placement. The proceeds of the private placement
were used in connection with the acquisition of assets of West Coast Composites
from Cobra Golf. Inc.
In February 1998, the Company issued 18,000 shares of common stock in
connection with a $400,000 note payable which was entered into in December 1997
and paid in full in March 1998.
F-16
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In January 1998, the Company issued 200,000 shares of common stock to an
investor relations group as compensation for investor relation services. In
December 1998, the Company issued an additional 125,000 shares of common stock
to the investor relations group as compensation for investor relations to be
provided for from July 1, 1999 to June 30, 2000. For the year ended December
31, 1998, the Company recognized $262,000 in selling, general and
administrative expenses and as of December 31, 1998 had a remaining other asset
balance of $542,000. The amounts are being amortized over the contracted period
from January 1, 1998 through June 30, 2000.
In September 1997, the Company completed its initial public offering of
1,255,000 shares of common stock (including an exercised underwriter's
overallotment option of 130,000 shares and 75,000 shares issued to bridge
lenders) at a price of $5.00 per share, providing the Company with net proceeds
of approximately $3,970,000, after deducting underwriting discounts and
commissions of approximately $780,000 and offering costs of approximately
$1,150,000.
(11) Stock Options and Warrants
Stock options
In 1997, the board of directors adopted, and stockholders approved, Coyote
Sports, Inc. 1997 Stock Option Plan (1997 Plan). In March 1998, the board of
directors adopted, and stockholders approved, Coyote Sports, Inc. 1998 Stock
Option Plan (1998 Plan). The 1998 Plan and 1997 Plan (the "Plans") provide for
the grant of options to purchase up to 1,000,000 and 500,000 shares of the
Company's Common Stock, respectively, that are intended to qualify as either
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code or as options that are not intended to meet the requirements of
such section ("Nonstatutory Stock Options"). Options to purchase shares may be
granted under the Plans to persons who, in the case of Incentive Stock Options,
are employees (including officers of the Company or its subsidiaries), or, in
the case of Nonstatutory Stock Options, are employees (including officers of
the Company or its subsidiaries), non-employee directors or consultants of the
Company. The Plans are administered by the Compensation Committee of the Board
of Directors. The Compensation Committee has full discretionary authority,
subject to certain restrictions, to determine the number of shares for which
Incentive Stock Options and Nonstatutory Stock Options may be granted and the
individuals to whom, and the times at which, and the exercise prices for which
options will be granted.
On February 10, 1998, the stockholders voted by majority consent to approve
the Amendment to the Coyote Sports, Inc. 1997 Stock Option Plan. The Amendment
increased the total available stock options under the 1997 Plan from 500,000 to
1,000,000.
In accordance with SFAS No. 123, "Accounting for Stock Based Compensation,"
the Company has elected not to adopt the fair value method of accounting for
employee stock options or similar equity instruments and, accordingly, no
compensation expense has been recognized for its stock options. However, as
required by SFAS No. 123, the Company has provided the pro-forma disclosures of
the value of options granted using the Black-Scholes option pricing model. The
weighted average assumptions used for valuing stock option grants for 1998 and
1997 were a risk-free interest rate of 6%, no dividend yield, a volatility of
65% for 1998 and 30% for 1997 and a weighted average expected life of the
options of five years for 1998 and three years for 1997. The weighted average
assumptions reflect the historical volatility of the Company's stock price and
expected exercise date of the stock options.
For the years ended December 31, 1998 and 1997, the fair value of options
granted was approximately $1,135,000 and $482,000, respectively, which would
have been recognized on a straight line basis over the vesting period of the
options. The weighted-average fair value per share of options granted in 1998
and 1997 was $2.93 and $1.35, respectively.
F-17
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
If the Company had accounted for stock options issued to employees in
accordance with SFAS No. 123, the Company's net loss, pro forma net loss, net
loss per share and pro forma net loss per share would have been as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
------------ ---------
<S> <C> <C>
Net loss as reported................................ $(13,695,210) 4,167,574
Pro forma net loss.................................. $(13,968,843) 4,223,500
Net loss per share.................................. $ (2.88) (1.22)
Pro forma net loss per share........................ $ (2.93) (1.23)
</TABLE>
The pro forma effects of applying SFAS No. 123 may not be representative of
the effects on reported net loss and loss per share for future years as options
vest over several years.
The following summarizes the stock option transactions under the plans as
discussed above:
<TABLE>
<CAPTION>
Weighted average
Shares option price
------- ----------------
<S> <C> <C>
Options outstanding at January 1, 1997.............. -- --
Granted........................................... 487,000 $5.11
Exercised......................................... -- --
Terminated........................................ -- --
------- -----
Options outstanding at December 31, 1997............ 487,000 $5.11
Granted........................................... 395,000 $4.81
Exercised......................................... -- --
Terminated........................................ 129,500 $5.06
------- -----
Options outstanding at December 31, 1998............ 752,500 $4.96
Options exercisable at December 31, 1998............ 119,167 $5.13
</TABLE>
All options expire seven years from the grant date and have a weighted
average remaining contracted life of 6.1 years. Options outstanding at December
31, 1998, have exercise prices ranging from $4.375 to $5.375.
Warrants
During 1997, the Company issued 250,000 warrants exercisable for an
aggregate of 125,000 shares of common stock. These warrants are exercisable
beginning March 18, 1998 through September 18, 2000 at an exercise price of
$7.50 per share. The warrants are subject to redemption at $7.50 by the Company
if the closing high bid price of the common stock exceeds $11.25 during a
period of at least 20 out of 30 trading days and if certain other conditions
are satisfied.
The Company issued to the underwriter in connection with the initial public
offering 105,000 warrants exercisable to purchase 105,000 shares of Common
Stock at $6.25 per share. The warrants are exercisable from September 18, 1998
through September 18, 2002. The warrants contain anti-dilution provisions.
F-18
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12) Loss Per Share
The following represents a reconciliation of the losses and outstanding
shares used to compute loss per share:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
Net loss........................................ $(13,695,210) $(4,167,574)
Common shares outstanding at beginning of the
year as adjusted for cancelled stock........... 3,855,000 3,450,000
Net effect of shares issued (retired) during the
year........................................... 907,797 (23,055)
------------ -----------
Shares used in computing net loss per share..... 4,762,797 3,426,945
Net effect of dilutive stock options............ -- --
------------ -----------
Shares used in computing diluted loss per
share.......................................... 4,762,797 3,426,945
Basic and diluted loss per share................ $ (2.88) $ (1.22)
</TABLE>
(13) Related Parties
The minority stockholders of Pentiumatics had made loans to the Company of
2,323,298 Malaysian ringgits ($600,340) at December 31, 1997. On July 23, 1998,
Coyote exchanged its 77% ownership interest in Pentiumatics Sdn. Bhd. for a 28%
ownership in the outstanding common stock of Unggul Galakan Sdn. Bhd. (See Note
2).
In October 1998, the Company issued 378,261 shares of common stock to
Paragon for consulting services to be rendered over a ten-year period. For the
year ended December 31, 1998, the Company recognized $326,000 in selling,
general and administrative expenses and as of December 31, 1998 had a remaining
other asset balance of $938,000. The amount is being amortized over the
expected periods to be benefited of ten years.
(14) Relinquishment of Assets
On June 15, 1998, the Company relinquished the rights to certain intangible
assets to the previous owner and will not distribute its winter sports products
under the ICE*USA trade name. The Company has removed all of the assets and
liabilities of ICE*USA from its consolidated financial statements which
resulted in a net extraordinary gain of $346,581 due to early extinguishment of
debt for the year ended December 31, 1998.
(15) Exchange of Ownership Interest
On July 23, 1998, the Company exchanged its 77% ownership interest in
Pentiumatics Sdn. Bhd. for a 28% ownership interest in the outstanding common
stock of Unggul Galakan Sdn. Bhd (Unggul). Unggul wholly owns Action Wear Sdn.
Bhd. (Action Wear), a southeast Asian manufacturer of athletic apparel. The
exchange was accounted for using the fair value of the assets received. A gain
of $17,266, net of the loss realized on accumulated foreign currency
translation, was recorded as a result of the transaction. The investment in
Unggul is accounted for using the equity method.
(16) Commitments and Contingencies
Operating leases
The Company has non-cancelable operating leases for offices and equipment
that expire in various years through 2007. Lease expense on operating leases
amounted to approximately $948,476 and $270,000 for the years ended December
31, 1998 and 1997, respectively.
F-19
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, future minimum lease payments by year for operating
leases are as follows:
<TABLE>
<S> <C>
1999.............................. $1,304,134
2000.............................. 1,214,756
2001.............................. 1,147,401
2002.............................. 1,141,233
2003.............................. 1,146,236
Thereafter........................ 3,601,938
----------
$9,555,698
==========
</TABLE>
Year 2000 Compliance
The Company has under way a project to review and modify, as necessary, its
computer applications, hardware and other equipment to make them Year 2000
compliant. The Company has also initiated communications with third parties
having a substantial relationship to its business, including significant
suppliers and financial institutions, to determine the extent to which the
Company may be vulnerable to such third parties' failures to achieve Year 2000
compliance.
As of December 31, 1998, the Company had not completely resolved all of its
Year 2000 issues. Management expects that completion of its Year 2000
compliance project will result in additional expenditures of approximately
$100,000. To date, the Company has spent approximately $30,000 to become Year
2000 compliant. Failure to achieve Year 2000 compliance by the Company, its
principal suppliers and certain financial institutions with which it has a
relationship could negatively affect the Company's ability to conduct business
for an extended period. There can be no assurances that all Company information
technology systems and components will be fully Year 2000 compliant; in
addition, other companies on which the Company's systems and operations rely
may not be fully compliant on a timely basis, and any such failure could have a
material adverse effect on the Company's financial position, results of
operations and liquidity.
Agreements
On September 9, 1998, the Company entered into a five year supply agreement
with Cobra expiring December 31, 2003. Under the terms of the supply agreement,
the Company is obligated to supply Cobra up to a certain percentage of Cobra's
graphite golf shaft requirements at predetermined prices. The supply agreement
has certain product specifications and timing requirements that the Company
must comply with. Either party may terminate the supply agreement by giving
notice in writing in the event that the other party is in material breach of
the supply agreement if not cured within a given period.
On September 2, 1998, the Company entered into a agreement to acquire or
assign its right to acquire another company. If the Company does not perform
under the terms of the agreement by March 31, 1999, the Company will have to
transfer 100,000 shares of the Company's common stock which for reporting
purposes is recognized as an offset to additional paid-in capital, and to pay
$100,000 in cash. As of December 31, 1998 the 100,000 shares were issued,
outstanding and held in escrow. The Company has not recognized any liability
under this commitment.
Substantially all of the employees of Apollo and Reynolds are unionized
under various contracts which are renegotiated annually in December.
Apollo and Reynolds have an exclusive supply contract with a steel tube
supplier which supplies essentially all the steel for golf shaft and bicycle
tube processing. The agreement establishes the price for annual periods but
does not require the Company to purchase specified units or pounds. If the
supplier ceased shipping steel tubing to the Company, the Company would be
required to contract with other steel tubing
F-20
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
suppliers. In the opinion of management, changing suppliers would not have a
material adverse effect on the Company's results of operations or liquidity.
(17) Employee Benefit Plans
Two of the Company's subsidiaries participate in a defined benefit pension
plan. The plan provides defined benefits to substantially all salaried and
hourly employees in the two subsidiaries in the United Kingdom. Amounts charged
to pension expense and contributed to the plan in 1998 and 1997 were $491,000
and $739,000, respectively. In accordance with the purchase agreement with the
previous owner, assets must be transferred from the previous employer's defined
benefit pension plan to the Company's defined benefit plan. The asset transfer
will be equal to the benefit obligation for the Company's employees based upon
an actuarial report to be performed as of the transfer date. The plan
administrator has not finalized the value of the assets to transfer into the
Company's plan. Thus, the fair value of the plan assets and the projected
benefit obligation of the plan have not yet been determined. At the time of
acquisition, the previous owner's pension plan assets exceeded the projected
benefit obligation.
The Company has several voluntary defined contribution plans. The plans are
available to substantially all salaried and hourly employees. Company
contributions to the voluntary contribution plans totaled $38,000 and $9,000
for the years ended December 31, 1998 and 1997.
(18) Fair Value of Financial Instruments
The fair value of financial instruments equals the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts of certain of the Company's financial instruments,
including trade receivables and accounts payable approximate fair value because
of their short maturity. The fair value of notes payable and long term debt
approximate the carrying values because of the short maturity of these
instruments and because the instruments generally bear interest at variable
interest rates which approximate market rates.
(19) Financial Risk Management and Derivatives
The purpose of the Company's foreign currency hedging activities is to
protect the Company from the risk that dollar cash flows resulting from the
sale of products in the U.S. will not be adversely affected by changes in
exchange rates. A significant portion of cost of goods sold and operating
expenses are denominated in the British Pound by the Company's steel shaft and
tubing factories in the United Kingdom. The Company seeks to manage the impact
of foreign currency fluctuations between the U.S. dollar and the British Pound.
The Company does not hold or issue financial instruments for trading purposes.
The fair value of the Company's foreign exchange contracts is estimated
based on quoted market prices of comparable contracts.
The counterparty to these transactions is a major financial institution in
the United Kingdom with investment grade or better credit ratings. However,
this does not eliminate the Company's exposure to credit risk with the
institution. The credit risk is generally limited to the realized gains in such
contracts should the counterparty fail to perform as contracted. As a result,
the Company considers the risk of counterparty default to be minimal.
F-21
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(20) Reportable Segments
The Company operates predominantly in two industry segments: the design,
engineering, manufacturing, marketing and distribution of brand name sports
equipment products and the design, engineering, manufacturing and distribution
of advanced composite materials. The sports equipment segment produces golf
shafts, bicycle tubing and bicycle components for OEM's and the aftermarket.
The advanced composite materials segment produces preimpregnated graphite,
woven fabrics and other advanced composite materials for sale primarily to
sporting goods manufacturers.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies and practices. The Company
evaluates performance based on profit or loss from operations before income
taxes and minority interest. The Company accounts for intersegment sales as if
the sales or transfers were to third parties at current market prices.
Reportable segments are strategic business units that offer different products
and distribute product through different distribution channels. Each segment is
managed separately.
The following represents a reconciliation of reported segment loss and
segment assets:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------
1998 1997
--------------------------------------- -----------------------------------
Sports Advanced Sports Advanced
Equipment Materials Totals Equipment Materials Totals
------------ ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales to external
customers.............. $ 34,223,260 $ 3,994,372 $ 38,217,632 $22,490,222 $5,195,696 $27,685,918
Intersegment net sales.. -- 480,615 480,615 -- -- --
------------ ----------- ------------ ----------- ---------- -----------
Total net sales......... 34,223,260 4,474,987 38,698,247 22,490,222 5,195,696 27,685,918
Segment profit (loss)
before income taxes,
and
minority interest...... (12,469,258) (1,615,568) (14,084,826) (4,877,395) 21,557 (4,855,838)
Segment net profit
(loss)................. (12,241,034) (1,454,176) (13,695,210) (4,184,180) 16,606 (4,167,574)
Segment assets.......... $ 25,797,489 $ 5,070,660 $ 30,868,149 $14,331,034 $2,534,219 $16,865,253
</TABLE>
(21) Operating Information by Geographic Region
Coyote has approximately 400 customers principally located in the United
States and Europe. However, sales to Coyote's top two customers for the year
ended December 31, 1998, Callaway and Cobra, represented 20.7% and 15.2%,
respectively, of the Company's sales, as compared to 1.9% and 9.9%,
respectively, in 1997. The geographic distribution of the Company's revenues,
operating income and identifiable assets, are summarized in the following
table.
F-22
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
Revenue:
United States.................................. $ 29,303,632 $18,815,918
Europe......................................... 8,914,000 8,870,000
Asia/Pacific................................... -- --
------------ -----------
$ 38,217,632 $27,685,918
============ ===========
Operating income (loss)
United States.................................. $(13,192,919) $(1,436,773)
Europe......................................... 1,013,000 (1,225,000)
Asia/Pacific................................... -- (7,251)
------------ -----------
............................................. $(12,179,919) $(2,669,024)
============ ===========
Identifiable assets:
United States, excluding corporate............. $ 21,360,207 $ 6,865,304
Europe......................................... 7,577,000 7,477,000
Asia/Pacific................................... 1,930,942 2,522,949
------------ -----------
$ 30,868,149 $16,865,253
============ ===========
</TABLE>
(22) Subsequent Events
On February 2, 1999, the Boards of Directors of Coyote and Royal Precision
Inc. ("RP") signed an agreement to merge (the "Merger"). The merger is
structured so that Coyote will be the surviving company and RP will become a
wholly-owned subsidiary of Coyote. If the merger is completed, Coyote will
issue approximately 5,778,000 shares of Series C Preferred Stock with a per
share liquidation preference of approximately $5.89 to holders of RP common
stock. The Series C Preferred Stock is convertible on a share-for-share basis
into the Company's common stock. The Series C Preferred Stock is expected to
pay a quarterly cumulative dividend at an annual rate of six percent of the
liquidation preference. The Merger must be approved by both the Coyote
stockholders and the RP stockholders. The Merger is also contingent upon
certain obligations which must be fulfilled prior to consummation of the
Merger, which include the filing of a registration statement, refinancing of
debt and various other obligations specified in the merger agreement.
F-23
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Financial Statements
Report of Independent Public Accountants................................ F-25
Consolidated Balance Sheet as of May 31, 1998........................... F-26
Consolidated Statements of Operations for the Years Ended May 31, 1998
and 1997............................................................... F-27
Consolidated Statements of Stockholders' Equity for the Years Ended May
31, 1998 and 1997...................................................... F-28
Consolidated Statements of Cash Flows for the Years Ended May 31, 1998
and 1997............................................................... F-29
Notes to Consolidated Financial Statements.............................. F-30
Unaudited Condensed Financial Statements
Condensed Consolidated Balance Sheet as of February 28, 1999............ F-45
Condensed Consolidated Statements of Operations for the Nine Months
Ended February 28, 1999
and 1998............................................................... F-46
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended February 28, 1999
and 1998............................................................... F-47
Notes to Condensed Consolidated Financial Statements.................... F-48
</TABLE>
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Royal Precision, Inc.:
We have audited the accompanying consolidated balance sheet of Royal
Precision, Inc. (formerly FM Precision Golf Corp.) (a Delaware corporation) and
subsidiaries as of May 31, 1998 and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended May 31,
1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Royal Precision, Inc. and
subsidiaries as of May 31, 1998, and the results of their operations and their
cash flows for the years ended May 31, 1998 and 1997 in conformity with
generally accepted accounting principles.
As explained in Note 2 to the consolidated financial statements, the Company
has given retroactive effect to the change in its method of accounting for
inventories.
/s/ Arthur Andersen LLP
Hartford, Connecticut
July 2, 1998
F-25
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
CONSOLIDATED BALANCE SHEET
AS OF MAY 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
1998
-------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash................................................................. $ 28
Accounts receivable, net of allowance for doubtful accounts of
$602................................................................ 4,042
Inventories.......................................................... 4,049
Current portion of net investment in capital lease................... 240
Other current assets................................................. 74
Deferred income taxes................................................ 265
-------
Total current assets............................................... 8,698
-------
PROPERTY, PLANT AND EQUIPMENT:
Land................................................................. 123
Furniture, fixtures and office equipment............................. 544
Buildings and improvements........................................... 689
Machinery and equipment.............................................. 3,894
-------
5,250
Less--Accumulated depreciation....................................... (754)
-------
4,496
-------
GOODWILL, net......................................................... 10,028
-------
NET INVESTMENT IN CAPITAL LEASE, less current portion included above.. 2,593
-------
OTHER ASSETS.......................................................... 71
-------
Total assets......................................................... $25,886
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines-of-credit...................................................... $ 3,462
Current portion of long-term debt and capital lease obligations...... 1,047
Accounts payable..................................................... 1,769
Accrued salaries and benefits........................................ 760
Other accrued expenses............................................... 1,259
-------
Total current liabilities.......................................... 8,297
-------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion
included above....................................................... 3,171
-------
DEFERRED INCOME TAXES................................................. 46
-------
OTHER LIABILITIES..................................................... 45
-------
Total liabilities.................................................. 11,559
-------
COMMITMENTS AND CONTINGENCIES (Notes 4, 5, 6, 7 and 15)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000 shares authorized; no
shares issued....................................................... --
Common stock, $.001 par value; 50,000,000 shares authorized;
5,601,697 shares issued and outstanding............................. 6
Additional paid-in capital........................................... 13,821
Retained earnings.................................................... 500
-------
Total stockholders' equity......................................... 14,327
-------
Total liabilities and stockholders' equity......................... $25,886
=======
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-26
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1998 AND 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997
------- ------------
As restated
(see Note 2)
<S> <C> <C>
NET SALES:
Golf shafts........................................... $21,023 $21,743
Golf grips............................................ 3,699 --
Headwear.............................................. 2,899 --
------- -------
27,621 21,743
------- -------
COST OF SALES:
Golf shafts........................................... 14,683 16,036
Golf grips............................................ 1,805 --
Headwear.............................................. 2,235 --
------- -------
18,723 16,036
------- -------
Gross profit........................................ 8,898 5,707
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............ 7,766 3,873
NONRECURRING MERGER RELATED EXPENSES.................... 842 --
------- -------
Operating income...................................... 290 1,834
INTEREST EXPENSE, net of interest income of $170 and $0,
for 1998 and 1997, respectively........................ 525 485
------- -------
(Loss) income before provision for income taxes....... (235) 1,349
PROVISION FOR INCOME TAXES.............................. 28 586
------- -------
Net (loss) income..................................... $ (263) $ 763
======= =======
BASIC AND DILUTED NET (LOSS) INCOME PER COMMON SHARE.... $ (.05) $ .18
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1998 AND 1997
(in thousands)
<TABLE>
<CAPTION>
Common Stock Additional
------------- Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Issuance of common stock............ 4,175 $ 4 $ 996 $ -- $ 1,000
Compensation expense related to
grant of stock options............. -- -- 425 -- 425
Net income, as restated (Note 2).... -- -- -- 763 763
----- ---- ------- ----- -------
Balance, May 31, 1997............... 4,175 4 1,421 763 2,188
Issuance of common stock and stock
options in connection with merger,
net (Note 1)....................... 1,371 2 12,385 -- 12,387
Exercise of common stock options and
warrants........................... 56 -- 15 -- 15
Net loss............................ -- -- -- (263) (263)
----- ---- ------- ----- -------
Balance, May 31, 1998............... 5,602 $ 6 $13,821 $ 500 $14,327
===== ==== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1998 AND 1997
(in thousands)
<TABLE>
<CAPTION>
1998 1997
------- ------------
As restated
(see Note 2)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................... $ (263) $ 763
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization........................... 990 202
Loss on writeoff of fixed assets........................ 360 --
Compensation expense related to grant of stock
options................................................ -- 425
Deferred income taxes.................................. 7 (362)
Changes in operating assets and liabilities
Accounts receivable, net............................... 509 (210)
Inventories, net....................................... (130) (36)
Other current assets................................... 57 (63)
Accounts payable and accrued expenses.................. (786) 1,646
Supply agreement credits............................... (472) --
Other.................................................. 136 --
------- -------
Net cash provided by operating activities.............. 408 2,365
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from Royal Grip, Inc...................... 18 --
Merger costs............................................ (1,031) (465)
Purchases of equipment, net............................. (1,038) (936)
Payments from net investment in capital lease........... 148 --
Proceeds from sale of fixed assets...................... 49 --
Acquisition of net assets of golf shaft division of
Brunswick Corporation.................................. -- (6,824)
------- -------
Net cash used in investing activities................. (1,854) (8,225)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock...................... -- 1,000
Proceeds from exercise of common stock options and
warrants............................................... 15 --
Proceeds from long-term debt............................ 1,600 4,125
Borrowings under lines-of-credit, net................... 1,438 1,498
Repayments of long-term debt and capital lease
obligations............................................ (1,607) (735)
------- -------
Net cash provided by financing activities............. 1,446 5,888
------- -------
INCREASE IN CASH......................................... -- 28
CASH, beginning of year.................................. 28 --
------- -------
CASH, end of year........................................ $ 28 $ 28
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest............................................... $ 687 $ 438
======= =======
Income taxes........................................... $ 61 $ 911
======= =======
Non-cash transactions:
Issuance of common stock options and warrants in
connection with merger............................... $12,995 $ --
======= =======
Capital lease obligations............................. $ -- $ 195
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business:
Organization --
The accompanying consolidated financial statements include Royal Precision,
Inc. (formerly FM Precision Golf Corp.) and its three wholly-owned subsidiaries
(collectively, RPI or the Company), FM Precision Golf Manufacturing Corp.
(FMP), FM Precision Golf Sales Corp. (FM Sales) and Royal Grip, Inc. and its
wholly-owned subsidiary, Roxxi, Inc.
Results of operations for Royal Grip, Inc. and Roxxi, Inc. (collectively,
RG) are included in RPI's Consolidated Statements of Operations since August
29, 1997, the effective date of the business combination described below.
Business --
FMP is a manufacturer and distributor of golf shafts which are sold to
original equipment manufacturers and to distributors and retailers for use in
the replacement market. RG designs and manufactures golf club grips and
athletic headwear. RPI's products are sold throughout the United States as well
as internationally, primarily Japan and the United Kingdom (See Note 11).
Acquisitions --
On May 31, 1996, FMP, which was formed in 1996, acquired the golf assets and
golf liabilities, as defined, of the golf shaft division of Brunswick
Corporation (the Brunswick Acquisition). The Brunswick Acquisition was
accounted for as a purchase and, accordingly, the purchase price was allocated
to the assets acquired and liabilities assumed based on their estimated fair
values at the date of the Brunswick Acquisition. The following table summarizes
the allocation of the cost of the Brunswick Acquisition to the net assets
acquired (in thousands):
<TABLE>
<S> <C>
Accounts receivable................................................. $ 3,047
Inventories......................................................... 3,173
Property, plant and equipment....................................... 1,940
Accounts payable and accrued expenses............................... (1,336)
-------
$ 6,824
=======
</TABLE>
On May 14, 1997, RPI entered into an Agreement and Plan of Merger with RG.
Under the terms of the Merger agreement, effective August 29, 1997, FMPSUB,
Inc. (a wholly-owned subsidiary of RPI created for such purpose) merged with
and into RG (the Merger). RG was the surviving corporation and became a wholly-
owned subsidiary of RPI.
In the Merger, each outstanding share of RG common stock was converted into
one-half share of RPI common stock. No fractional shares of RPI were issued in
the Merger. In lieu of any such fractional shares, each holder of fractional
shares of RG common stock was paid in cash in an amount equal to such
fractional interest multiplied by the average of the high and low trading
prices per share of RG common stock for the five trading days ended immediately
prior to the Merger. As a result of the Merger, the pre-Merger stockholders and
option and warrant holders of RG owned or had the right to acquire an aggregate
of 30% of RPI's common stock on a fully diluted basis.
F-30
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The aggregate purchase price of $13,883,000 represents the sum of (i) the
fair value of the 1,371,058 shares of RPI common stock issued in exchange for
2,742,116 of the shares of RG common stock outstanding as of the Merger date at
$3.925 per share (the average closing bid price of RG common stock (pre-
conversion) for the period from two days before until the two days after the
announcement of the revised Merger terms) of $10,763,000, (ii) cash of $122
paid to RG stockholders in lieu of 31 fractional shares, as discussed above,
(iii) the fair value of the options and warrants to purchase 982,250 shares of
RG common stock outstanding as of the Merger date (which were converted into
options and warrants to purchase 491,125 shares of RPI common stock in
connection with the Merger) of $2,232,000, which amount was determined using
the Black Scholes Valuation Model, and (iv) RPI Merger expenses of $888,000
(RG's Merger costs of approximately $637,000 were expensed and RG's
registration statement costs of approximately $143,000 were charged to
stockholders' equity by RG prior to the acquisition). RPI also incurred
expenses of $608,000 associated with the Form S-4 Registration Statement which
were charged to stockholders' equity. The Merger was accounted for as a
purchase and the purchase price was allocated based on the fair value of the
assets acquired and liabilities assumed as follows (in thousands):
<TABLE>
<S> <C>
Cash................................................................ $ 18
Accounts receivable................................................. 1,293
Inventories......................................................... 710
Net investment in lease............................................. 2,981
Prepaid expenses and other current assets........................... 68
Property and equipment.............................................. 1,670
Goodwill............................................................ 10,418
Accounts payable and accrued expenses............................... (1,501)
Supply agreement credits............................................ (472)
Debt and capital lease obligations.................................. (1,166)
Other, net.......................................................... (136)
-------
$13,883
=======
</TABLE>
In connection with the Merger, the Company amended its Certificate of
Incorporation to increase the number of authorized shares of common stock from
3,000 to 50,000,000, reduce the par value of the common stock from $.01 to
$.001 per share, split each issued and outstanding share of common stock into
4,175.394 shares of common stock and to authorize 5,000,000 shares of $.001 par
value preferred stock. In connection with the stock split, RPI paid $84 in lieu
of issuing 10.46 fractional shares of RPI common stock. The accompanying
consolidated financial statements have been restated to reflect this share
split and change in par value and authorized shares.
In connection with the Merger, RG issued warrants to purchase 50,000 shares
of RG common stock to an investment banker. Such warrants are included in the
982,250 RG options and warrants outstanding as of the Merger date referred to
above. The warrants were exercisable at a price of $.02 per share. Such
warrants were exercised in September 1997 for $1,000.
RPI recorded a charge of $842,000 during the year ended May 31, 1998 for
nonrecurring Merger related expenses. The components of this expense are
$348,000 related to a computer software installation that was abandoned as a
result of the Merger, $100,000 related to certain headwear related contracts,
$150,000 of relocation expenses and $244,000 of severance as a result of
organizational changes in connection with the Merger.
F-31
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The unaudited pro forma consolidated condensed statements of operations for
the years ended May 31, 1998 and 1997 as though the Merger had been consummated
at the beginning of these periods are as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Net sales.................................................. $30,818 $34,744
Net income (loss).......................................... $ 195 $(4,046)
Basic and diluted income (loss) per common share........... $ 0.03 $ (0.73)
Weighted average shares outstanding........................ 5,589 5,546
</TABLE>
The pro forma amounts above reflect annual goodwill amortization of
$521,000, the elimination of nonrecurring Merger related expenses of $842,000
(included in the accompanying consolidated statement of operations) and
$637,000 (which amount was expensed by RG prior to the Merger) for the year
ended May 31, 1998 and the issuance of 1,371,058 shares of common stock in
connection with the Merger.
Dependence on "Rifle" Shaft Sales --
Sales of the "Rifle" shaft were $9.8 million and $11.8 million for the years
ended May 31, 1998 and 1997, respectively. Additionally, the "Rifle" shaft has
a substantially higher margin than other shaft products. While management
believes that demand for the "Rifle" shaft should remain high for the next
several years, there can be no assurance that sales of the "Rifle" shaft will
grow or that the product will retain its profitability. If sales or
profitability of the "Rifle" shaft continue to decrease without RPI's
introduction of new profitable products, RPI's overall financial performance
would be materially adversely affected.
2. Summary of Significant Accounting Policies:
Principles of consolidation --
All significant intercompany balances and transactions have been eliminated
in consolidation.
Use of estimates in the preparation of financial statements --
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories --
Inventories are stated at the lower of cost or market. In prior years, the
cost of FMP's inventories was determined by the last-in, first out (LIFO)
method. In fiscal 1998, the Company changed its method of determining cost for
FMP's inventories to the first-in, first-out (FIFO) method. As a result of this
change, the FIFO method for determining cost is used for all of the Company's
inventories. This change has been made retroactively and the consolidated
financial statements for the prior year have been restated.
The effect of the change in accounting principle was to reduce earnings for
the year ended May 31, 1997 by $171,000, or $0.04 per share. The change did not
have a significant effect on earnings for the year ended
F-32
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
May 31, 1998. Since the LIFO reserve for FMP as of May 31, 1996 was zero the
change had no effect on RPI's May 31, 1996 retained earnings.
Property, plant and equipment --
Property, plant and equipment are carried at acquired cost. Major additions
and betterments are capitalized, while replacements, maintenance and repairs
which do not extend the useful lives of the assets are charged to operations as
incurred. Upon the disposition of property, plant and equipment, any resulting
gain or loss is recognized in income.
Depreciation and amortization of plant and equipment are provided for,
commencing when such assets become operational, using the straight-line basis
over the following estimated useful lives:
<TABLE>
<CAPTION>
Useful Lives
------------
<S> <C>
Buildings and improvements...................................... 27.5 years
Machinery and equipment......................................... 3-12 years
Furniture and fixtures.......................................... 10 years
</TABLE>
Goodwill --
Goodwill, which resulted from the RG merger (see Note 1), is being amortized
over 20 years. At May 31, 1998, accumulated amortization related to goodwill
amounted to $390,693. RPI evaluates the asset for impairment by reviewing the
estimated future cash flows of the acquired operations on a quarterly basis. As
of May 31, 1998, the Company believes no impairment exists.
Long-lived assets --
Effective May 31, 1996, RPI adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", which had no impact upon
adoption. In accordance with this statement, RPI reviews long-lived assets and
certain identifiable intangible assets to be held and used by an entity for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairment losses are
recognized when the undiscounted future cash flows, excluding interest costs,
exceed the carrying value of the related assets. Prior to the adoption of SFAS
No. 121, RPI's policy for reviewing long-lived assets for impairment was
substantially the same as that under SFAS No. 121. Based on RPI's estimated
future undiscounted cash flows, excluding interest costs, no long-lived assets
were impaired as of May 31, 1998 and 1997.
Income taxes --
RPI accounts for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." This statement requires RPI to recognize deferred tax assets
and liabilities for the expected future tax consequences of events that have
been recognized in RPI's financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities and tax net operating loss carry-forwards available for
tax reporting purposes, using applicable tax rates for the years in which the
differences are expected to reverse. A valuation allowance is recorded on
deferred tax assets unless realization is more likely than not.
F-33
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-based compensation --
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards SFAS No. 123, "Accounting for
Stock-Based Compensation" which was adopted by RPI effective June 1, 1996.
SFAS No. 123 requires the measurement of the fair value of stock options or
warrants granted to be included in the statement of operations or that pro
forma information related to the fair value be disclosed in the notes to
financial statements. RPI has determined that it will continue to account for
stock-based compensation for employees under Accounting Principles Board
Opinion No. 25 and elect the disclosure-only alternative under SFAS No. 123.
Revenue recognition --
Revenue is recorded upon the passage of title to the customers which
generally occurs upon shipment.
Research and development --
RPI expenses costs of research and development as incurred. Research and
development expense was approximately $157,000 and $120,000 for the years
ended May 31, 1998 and 1997, respectively.
Advertising --
RPI expenses advertising costs as incurred.
Net income (loss) per share --
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
established new standards for computing and presenting earnings per share.
Additionally, on February 4, 1998, the Securities and Exchange Commission
released Staff Accounting Bulletin (SAB) No. 98 on computations of earnings
per share, which changed the guidance on how cheap stock is treated in
earnings per share computations. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997 and SAB No. 98
was effective on February 4, 1998. Accordingly, period earnings per share data
presented has been restated and all earnings per share data presented is in
accordance with SFAS No. 128 and SAB No. 98.
Basic earnings (loss) per common share are based on the average number of
common shares outstanding during the year. Diluted earnings per common share
assumes, in addition to the above, a dilutive effect of common share
equivalents during the year. Common share equivalents represent dilutive stock
options using the treasury stock method. The number of shares used in the
earnings (loss) per common share computation for 1998 and 1997 were as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Basic:
Average common shares outstanding................................ 5,246 4,175
Diluted:
Stock options.................................................... -- 33
----- -----
Average common shares--diluted................................. 5,246 4,208
===== =====
</TABLE>
Reclassifications --
Certain prior year balances have been reclassified to conform with the
current year presentation.
F-34
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
New accounting pronouncements --
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income (net income together with other non-owner changes in equity) and its
components in a full set of general purpose financial statements. SFAS No. 130
is effective for financial statements issued for periods beginning after
December 15, 1997 and earlier application is permitted. RPI's comprehensive
income is the same as RPI's net income for the years ended May 31, 1998 and
1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which requires disclosures for each
segment of an enterprise that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. SFAS No. 131 is effective for financial
statements issued for periods beginning after December 15, 1997 and RPI has
elected early adoption of this disclosure standard (See Note 13).
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and other Postretirement Benefits", which revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable and requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis. The Company will be required to adopt SFAS No. 132 for the
year ended May 31, 1999. The Company does not anticipate any material impact
resulting from the adoption of SFAS No. 132.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company will be
required to adopt SFAS No. 133 for the year ended May 31, 1999. The Company
does not anticipate any material impact resulting from the adoption of SFAS No.
133.
3. Inventories:
Inventories (see Note 2 for basis of presentation) as of May 31, 1998
consisted of the following (in thousands):
<TABLE>
<S> <C>
Raw materials......................................................... $1,161
Work-in-process....................................................... 1,206
Finished goods........................................................ 1,682
------
$4,049
======
</TABLE>
F-35
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Investment in Capital Lease:
RG is the lessor of certain manufacturing equipment under a capital lease
agreement with Acushnet Rubber Company (Acushnet) (See Note 5) expiring in
December 2006, which transfers ownership of the equipment to the lessee at the
end of the lease term. RG's net investment in the direct financing lease at May
31, 1998 consists of (in thousands):
<TABLE>
<S> <C>
Minimum lease payments receivable.................................... $3,908
Unearned income...................................................... 1,075
------
2,833
Less--Current portion................................................ 240
------
$2,593
======
</TABLE>
At May 31, 1998, future minimum lease payments receivable under the direct
financing lease are as follows (in thousands):
<TABLE>
<S> <C>
1999.................................................................. $ 451
2000.................................................................. 451
2001.................................................................. 451
2002.................................................................. 451
2003.................................................................. 451
Thereafter............................................................ 1,653
------
$3,908
======
</TABLE>
5. Manufacturing and Supply Agreement Credits:
During the first calendar quarter of 1997, Acushnet experienced startup
delays in the production of grips. In light of these difficulties, RG and
Acushnet renegotiated their Manufacturing and Supply Agreement (the Agreement).
In connection with this renegotiation, and subsequent production shortfalls,
Acushnet agreed to provide RG with aggregate credits of $472,393 for future
purchases of grips, to be applied against current accounts payable due to
Acushnet. Under certain circumstances based upon the level of RG's purchase
orders, the credits could be earned back by Acushnet prior to December 31,
1997. Since the credits were not earned back by Acushnet, RPI recorded $472,393
during the year ended May 31, 1998 as a reduction in grip cost of sales.
Acushnet has the right to terminate the Agreement at any time after June 30,
1998 by providing the Company not less than ten months written notice and by
paying the Company a cash termination fee in an amount equal to at least $2.5
million (See Note 17). However, during calendar year 1999 and beyond, the
Company is required to purchase a minimum number of grips. Failure by the
Company to purchase the minimum, during any calendar year, constitutes a
material breach of the Agreement pursuant to which Acushnet, at its option, may
terminate the Agreement without paying the termination fee. Although the
Company was not required to meet this minimum requirement during 1998, the
Company ordered fewer grips than the minimum required during 1999 and beyond.
At May 31, 1998, the Company owed approximately $160,000 to Acushnet related to
the Agreement which amount is included in accounts payable in the accompanying
consolidated balance sheet. Included in finished goods inventories is
approximately $562,000 of inventory located at Acushnet.
F-36
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Long-term Debt and Capital Lease Obligations:
FMP has a credit facility that includes a revolving line-of-credit, (the
Revolver) a term loan (the Term Loan) and special advances (collectively, the
FMP Credit Facility). During fiscal 1998, FMP entered into several amendments
to the FMP Credit Facility with its lender. The effect of the amendments
included providing for a special advance of $250,000 which amount was due and
repaid on January 16, 1998, providing for a special advance of $350,000 which
amount was due and repaid in three installments during May 1998 and increasing
borrowings under the Term Loan of an additional $1.0 million (used to pay down
the Revolver). In addition, the amendments changed certain terms, conditions
and covenants of the FMP Credit Facility.
The amount available for borrowings under the Term Loan, as amended, is
subject to a maximum of the lesser of $3,998,000 or a percentage of the fair
value of eligible plant and equipment, as defined. The amount available for
borrowing under the Revolver is based upon the levels of eligible accounts
receivable and inventories, as defined, subject to maximum borrowings of
$7,500,000, less the amount outstanding on the Term Loan. As of May 31, 1998,
FMP had approximately $1,162,000 available for additional borrowings under the
FMP Credit Facility.
The Term Loan is due in monthly principal installments of $69,712 commencing
December 1997 through June 2, 2000 plus an additional annual principal payment
each August in an amount equal to 30% of excess cash flow, as defined, for
FMP's preceding fiscal year. This additional principal payment was waived for
the year ended May 31, 1997. No additional principal payment was due for the
year ended May 31, 1998. The Revolver and Term Loan mature on June 2, 2000;
however, the lender may extend the maturity to May 31, 2001. If the lender does
not extend the maturity of the FMP Credit Facility, the remaining principal
outstanding under the Term Loan is due and payable June 2, 2000. Certain terms
of the Revolver require that the obligation be classified as a current
liability in the accompanying consolidated balance sheet.
Borrowings under the Term Loan and Revolver bear interest at a rate per
annum equal to the prime rate (8.5% at May 31, 1998) plus 1.25% and 1.0%,
respectively, and are secured by substantially all of FMP's assets.
In February 1997, RG entered into a credit facility with a commercial bank
consisting of a revolver of $1,750,000 and a term loan of $700,000 (the RG
Credit Facility). The RG Credit Facility matures February 28, 2000. Effective
January 1, 1998, the interest rate on the RG Credit Facility was revised to the
base rate plus 4% from the base rate plus 3%. The interest rate increased in
accordance with the agreement based on the amount of RG's loss for the year
ended December 31, 1997. As of May 31, 1998, RG had $151,000 available for
additional borrowings.
The FMP and RG credit facilities contain financial and other covenants which
are determined separately for FMP and RG and which, among other things, limit
annual capital expenditures and require the maintenance of minimum quarterly
(monthly for RG) earnings before interest, taxes, depreciation and
amortization, as defined, fixed charge coverage ratios, as defined, and
accounts receivable and inventory turnover ratios, as defined. FMP and RG were
in compliance with their respective financial covenants at May 31, 1998.
F-37
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt and capital lease obligations as of May 31, 1998 consisted of
the following (in thousands):
<TABLE>
<CAPTION>
1998
------
<S> <C>
FMP Credit Facility:
Line-of-credit................................................... $2,438
Term loan........................................................ 3,579
RG Credit Facility:
Line-of-credit................................................... 1,024
Term loan........................................................ 533
Capital lease obligations.......................................... 106
------
7,680
Less--Current portion, including lines-of-credit of $3,462......... 4,509
------
$3,171
======
</TABLE>
Scheduled maturities of long-term debt at May 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ending
May 31,
-----------
<S> <C>
1999............................................................... $4,509
2000............................................................... 1,264
2001............................................................... 1,907
------
$7,680
======
Future minimum lease payments under capital leases at May 31, 1998 are as
follows (in thousands):
<CAPTION>
Year Ending
May 31,
-----------
<S> <C>
1999............................................................... $ 71
2000............................................................... 41
------
112
Less--Amounts representing interest................................ 6
------
Present value of future minimum lease payments..................... $ 106
======
As of May 31, 1998, the carrying value of the lines-of-credit and term loans
approximated their fair market value since the obligations bear interest at a
variable rate of interest.
7. Leases:
RPI leases corporate offices, manufacturing facilities and office equipment
under operating lease agreements. Minimum annual rental commitments under
noncancelable leases are as follows (in thousands):
<CAPTION>
Year Ending
May 31,
-----------
<S> <C>
1999............................................................... $ 226
2000............................................................... 234
2001............................................................... 222
2002............................................................... 5
2003............................................................... 1
------
$ 688
======
</TABLE>
F-38
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rental expense under operating leases totaled approximately $204,000 and $0
for the years ended May 31, 1998 and 1997, respectively.
8. Stock Options Plan:
In March 1997, FMP adopted the FM Precision Golf Corp. 1997 Stock Option
Plan (the FMP Plan). The FMP Plan is administered by the Board of Directors and
provides for the granting of nonqualified stock options. As of May 31, 1998,
169,761 shares of common stock are reserved for issuance under the FMP Plan. In
March 1997, FMP granted nonqualified options to purchase 169,761 shares of
FMP's common stock to certain members of management and a consultant. The
options are exercisable at a price of $0.24 per share, vested immediately and
expire on March 12, 2007. As of May 31, 1998, options with respect to 2,755
shares have been exercised and all of the remaining options are exercisable.
The estimated fair market value of FMP's common stock on the date of grant
exceeded the exercise price of the options by approximately $425,000.
Accordingly, such amount was recorded as compensation expense in March 1997.
In connection with the Merger, options and warrants to purchase 982,250
shares of RG common stock outstanding as of the Merger date were converted into
options and warrants to purchase 491,125 shares of RPI common stock.
In October 1997, RPI adopted the Royal Precision, Inc. Stock Option Plan
(the RPI Plan) which is subject to shareholder approval. The RPI Plan is
administered by the Board of Directors and provides for the granting of
nonqualified stock options to certain employees, consultants and directors. As
of May 31, 1998, 750,000 shares of common stock are reserved for issuance under
the RPI Plan. During the year ended May 31, 1998, 250,000 options were granted
under the RPI plan. All of such options were cancelled during the year ended
May 31, 1998 and as of May 31, 1998, there are no options outstanding under the
RPI Plan.
Stock option and warrant activity is as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Shares Price
-------- ---------
<S> <C> <C>
Outstanding at May 31, 1996............................ -- $ --
Granted.............................................. 169,761 0.24
-------- ------
Outstanding at May 31, 1997............................ 169,761 0.24
Converted from RG options in connection with RG
merger.............................................. 491,125 7.53
Granted.............................................. 250,000 6.75
Exercised............................................ (55,255) .28
Cancelled............................................ (250,000) 6.75
Expired.............................................. (1,875) 13.00
-------- ------
Outstanding at May 31, 1998............................ 603,756 $ 6.13
======== ======
</TABLE>
F-39
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of information about stock options and warrants outstanding at
May 31, 1998 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise at May 31, Contractual Exercise at May 31, Exercise
Prices 1998 Life Price 1998 Price
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.24 167,006 8.9 years $ 0.24 167,006 $ 0.24
$5.26--$9.00 278,625 5.6 years $ 6.07 260,723 $ 6.07
$10.00--$24.50 158,125 2.7 years $12.44 158,125 $12.44
------- -------
603,756 585,854
======= =======
</TABLE>
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. SFAS No. 123 requires the measurement of the fair value of stock-
based compensation to be included in the statement of operations or disclosed
in the notes to financial statements. The Company has determined that it will
continue to account for stock-based compensation for employees under
Accounting Principles Board Opinion No. 25 and elect the disclosure-only
alternative under SFAS No. 123. The Company has computed the pro forma
disclosures required under SFAS No. 123 for the options granted in March 1997
using the Black-Scholes option pricing model as prescribed by SFAS No. 123.
The weighted average assumptions used are as follows for the year ended May
31, 1997:
<TABLE>
<S> <C>
Risk free interest rate.............................................. 6.7%
Expected dividend yield.............................................. None
Expected life........................................................ 7 years
Expected volatility.................................................. 55%
</TABLE>
The only options granted during the year ended May 31, 1998 were also
cancelled. Since the Company accounts for cancellations on an actual basis for
SFAS No. 123 disclosure purposes, the grant has no effect on net loss for the
year ended May 31, 1998. Had compensation cost for the Company's stock plan
been determined consistent with SFAS No. 123, the Company's net income and
basic and diluted net income per share would have been the following pro forma
amounts for the year ended May 31, 1997 (in thousands, except per share data):
<TABLE>
<S> <C>
Net income:
As reported.......................................................... $763
Pro forma............................................................ $753
Basic and diluted net income per share:
As reported.......................................................... $.18
Pro forma............................................................ $.18
</TABLE>
The resulting pro forma compensation cost may not be representative of that
to be expected in future years, since the pro forma amounts above consider
only options granted in fiscal 1997.
F-40
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income Taxes:
The components of the provision for (benefit from) income taxes are as
follows for the years ended May 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- -----
<S> <C> <C>
Current.......................................................... $21 $ 948
Deferred......................................................... 7 (362)
--- -----
$28 $ 586
=== =====
</TABLE>
RPI's effective income tax rate, as a percent of pretax income, differs from
the statutory federal rate as follows for the years ended May 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Statutory federal income tax rate............................... (34)% 34%
State taxes, net of federal benefit............................. 9 6
Nondeductible goodwill amortization............................. 67 --
Other........................................................... -- 3
Change in valuation allowance................................... (30) --
--- ---
Effective income tax rate....................................... 12 % 43%
=== ===
</TABLE>
The components of deferred income tax assets (liabilities) as of May 31,
1998 are as follows (in thousands):
<TABLE>
<S> <C>
Current asset --
Financial reserves not currently deductible....................... $ 621
Long-term asset (liability) --
Tax effect of net operating loss carryforwards.................... 2,170
Book basis in excess of tax for property plant and equipment...... (453)
Compensation expense related to grant of stock options............ 325
Other............................................................. 377
Valuation allowance............................................... (2,821)
-------
$ 219
=======
</TABLE>
As of May 31, 1998, RPI has federal and state net operating loss (NOL)
carryforwards of approximately $6.4 million of which $5.8 million relate to RG
for periods prior to the Merger (Pre-Merger NOL's). Such Pre-merger NOL's are
available only to offset RG income after the merger. Additionally, the use of
such Pre-merger NOL's is limited to $620,000 per annum under Section 382 of the
Internal Revenue Code. As of May 31, 1998, $465,000 (related to the post-Merger
period for the nine months ended May 31, 1998), of Pre-Merger NOL's are
available for usage. Due to uncertainty of realization, a valuation allowance
has been recorded to fully offset the value of the NOL carryforwards. If any
Pre-merger NOL's carryforwards are used in the future, the related benefit will
be recorded as a reduction in goodwill. The NOL's, if unused, expire in 2008
through 2018.
F-41
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Related Party Transactions:
In connection with the Brunswick Acquisition and the RG Merger (See Note 1),
fees of approximately $500,000 and $607,000, respectively, were paid to related
parties. Additionally, certain of these companies receive advisory fees.
Professional and advisory fees and expense reimbursements of approximately
$416,000 and $403,000 were paid to certain shareholders or their affiliates
during the years ended May 31, 1998 and 1997, respectively.
11. Foreign Sales:
RPI has export sales to customers located primarily throughout Japan, Canada
and the United Kingdom. Foreign sales were approximately 18% and 10% of RPI's
sales for the years ended May 31, 1998 and 1997, respectively.
12. Benefit Plans:
401(k) Plan --
The Company maintains a defined contribution benefit plan intended to comply
with Section 401(k) of the Internal Revenue Code. Each year, eligible
participants may elect to make salary reduction contributions on their behalf
up to a maximum of the lesser of 15% of compensation or the annual maximum
contribution established by the Internal Revenue Service. Participants may also
make voluntary after-tax contributions to the defined contribution benefit
plan. The Company does not contribute to the defined contribution benefit plan.
Pension Plan --
The Brunswick Acquisition agreement required FMP to establish a pension plan
for union employees which provided benefits similar to those provided to FMP's
union employees prior to the Brunswick Acquisition. Accordingly, the FM
Precision Golf Corp. Pension Plan for Represented Hourly Wage Employees (the
Plan) was implemented effective January 1, 1997.
FMP contributes such amounts as are necessary on an actuarial basis to
provide the Plan with assets sufficient to meet the benefits to be paid to
participants. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
F-42
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the funded status of the Plan and amounts
recognized in RPI's consolidated balance sheet at May 31, 1998 (in thousands):
<TABLE>
<CAPTION>
1998
-----
<S> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation........................................... $ --
Non-vested benefit obligation....................................... 181
-----
Accumulated benefit obligation........................................ $ 181
=====
Projected benefit obligation.......................................... $ 181
Plan assets at fair value............................................. 120
-----
Projected benefit obligation in excess of plan assets................. 61
Unrecognized net gain................................................. 15
-----
Accrued pension expense............................................... $ 76
=====
</TABLE>
Net pension costs for the years ended May 31, 1998 and 1997 included the
following components (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Service cost--benefits earned during the period................... $ 85 $80
Interest cost of projected benefit obligations.................... 7 8
Excess cost (return) on plan assets............................... 10 (8)
Net amortization and deferral..................................... -- 8
---- ---
Net periodic pension cost......................................... $102 $88
==== ===
</TABLE>
Assumptions used in the actuarial valuations for the years ended May 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Discount rate.................................................... 7.5% 7.5%
Expected long-term rate of return on assets...................... 9.0 9.0
</TABLE>
F-43
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
(formerly, FM Precision Golf Corp. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Information on Segments:
The Company has three reportable segments: golf shafts, golf grips and
headwear. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates the performance of these segments based on segment profit or loss
after income taxes. The Company allocates certain administrative expenses to
segments. The amounts in this illustration are assumed to be the amounts in
reports used by the chief operating decision maker as of May 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
Year Ended May 31, 1998
--------------------------------
Golf Golf
Shafts Grips Headwear Total
------- ------ -------- -------
<S> <C> <C> <C> <C>
Revenues from external customers......... $21,023 $3,699 $ 2,899 $27,621
Intersegment revenues.................... -- -- 8 8
Interest expense......................... 573 119 3 695
Depreciation and amortization............ 524 224 242 990
Segment profit (loss).................... 127 165 (555) (263)
Segment assets........................... 9,276 12,249 1,956 23,481
Segment capital expenditures............. 828 206 4 1,038
Total assets for reportable segments... $23,481
Elimination of investment in
subsidiary............................ (7,623)
Goodwill not allocated to segments..... 10,028
-------
Consolidated total assets.............. $25,886
=======
</TABLE>
For the year ended May 31, 1997, the Company had only one segment, golf
shafts.
14. Concentration of Credit Risk:
RPI is subject to a concentration of credit risk as a result of sales to its
significant customers including its exclusive Japanese distributor and an
original equipment manufacturer. To reduce its credit risk, RPI requires letter
of credit agreements from its Japanese distributor.
15. Significant Customer:
The two largest customers each accounted for more than 10% of the Company's
net sales for the year ended May 31, 1998 and in the aggregate accounted for
28% of the Company's net sales for that year. The largest customer of the
Company was the only customer that accounted for more than 10% of the Company's
net sales with 13% of the Company's net sales for the year ended May 31, 1997.
16. Commitments and Contingencies:
RPI is a party to various legal proceedings arising in the ordinary course
of business which management believes, after consultation with legal counsel,
will not have a material adverse effect on RPI's financial condition or future
operating results.
F-44
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28, 1999
(dollars in thousands)
(Unaudited)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash................................................................ $ 21
Accounts receivable, net of allowance for doubtful accounts of $473
at February 28, 1999 and $602 at May 31, 1998...................... 3,077
Inventories......................................................... 5,226
Current portion of net investment in capital lease.................. 254
Other current assets................................................ 368
Deferred income taxes............................................... 265
-------
Total current assets.............................................. 9,211
-------
PROPERTY, PLANT AND EQUIPMENT:
Land................................................................ 123
Buildings and improvements.......................................... 670
Furniture, fixtures and office equipment............................ 455
Machinery and equipment............................................. 3,513
-------
4,761
Less--Accumulated depreciation...................................... (823)
-------
3,938
-------
GOODWILL, NET......................................................... 9,637
-------
NET INVESTMENT IN CAPITAL LEASE, LESS CURRENT PORTION................. 2,381
-------
OTHER ASSETS.......................................................... 56
-------
Total assets...................................................... $25,223
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines-of-credit..................................................... $ 3,977
Current portion of long-term debt and capital lease obligations..... 1,519
Accounts payable.................................................... 1,853
Accrued salaries and benefits....................................... 667
Other accrued expenses.............................................. 1,648
-------
Total current liabilities......................................... 9,664
-------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION.... 3,594
-------
DEFERRED INCOME TAXES................................................. 46
-------
OTHER LIABILITIES..................................................... 1
-------
Total liabilities................................................. 13,305
-------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000 shares authorized; no
shares issued....................................................... --
Common stock, $.001 par value; 50,000,000 shares authorized;
5,667,375 and 5,601,697 shares issued and outstanding at February
28, 1999 and May 31, 1998, respectively............................. 6
Additional paid-in capital........................................... 13,853
Accumulated deficit.................................................. (1,941)
-------
Total stockholders' equity......................................... 11,918
-------
Total liabilities and stockholders' equity......................... $25,223
=======
</TABLE>
The accompanying notes are an integral part of this condensed consolidated
financial statements.
F-45
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED FEBRUARY 28, 1999 AND 1998
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
NET SALES:
Golf shafts........................................... $ 12,220 $ 14,790
Golf grips............................................ 2,787 2,391
--------- ---------
15,007 17,181
--------- ---------
COST OF SALES:
Golf shafts........................................... 8,295 10,853
Golf grips............................................ 1,566 1,029
--------- ---------
9,861 11,882
--------- ---------
Gross profit.......................................... 5,146 5,299
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............ 4,997 4,700
MERGER RELATED EXPENSES................................. 503 765
--------- ---------
Operating loss........................................ (354) (166)
INTEREST EXPENSE, net of interest income of $159 and
$113 for 1999 and 1998, respectively................... 436 317
OTHER INCOME............................................ (40) --
--------- ---------
Loss from continuing operations before income tax
expense (benefit).................................... (750) (483)
INCOME TAX EXPENSE (BENEFIT)............................ (39) (361)
--------- ---------
Loss from continuing operations....................... (711) (122)
DISCONTINUED OPERATIONS:
Loss from operations of Roxxi, Inc.................... (516) (420)
Provision for loss on disposal of assets of
Roxxi, Inc........................................... (1,214) --
--------- ---------
Net loss.............................................. $ (2,441) $ (542)
========= =========
BASIC AND DILUTED LOSS FROM CONTINUING OPERATIONS PER
COMMON SHARE........................................... $ (0.13) $ (0.03)
BASIC AND DILUTED LOSS FROM OPERATIONS OF ROXXI, INC.
PER COMMON SHARE....................................... (0.08) (0.08)
BASIC AND DILUTED LOSS FROM PROVISION FOR LOSS ON
DISPOSAL OF ROXXI, INC. PER COMMON SHARE............... (0.22) --
--------- ---------
BASIC AND DILUTED NET LOSS PER COMMON SHARE............. $ (0.43) $ (0.11)
========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
USED IN COMPUTING PER SHARE INFORMATION................ 5,643,818 5,127,624
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-46
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended February 28, 1999 and 1998
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations.......................... $ (711) $ (122)
Adjustments to reconcile net loss from continuing operations
to net
cash (used in) provided by operating activities--
Cash loss from operations of Roxxi, Inc..................... (299) (257)
Depreciation and amortization............................... 703 574
Loss on write-off of fixed assets, net...................... -- 347
Changes in operating assets and liabilities, net of effect
of
business acquired--
Accounts receivable....................................... 965 633
Inventories............................................... (1,682) 427
Other assets.............................................. (47) 166
Accounts payable and accrued expenses..................... 399 (880)
Supply agreement credits.................................. -- (472)
Other liabilities......................................... (44) --
------ -------
Net cash (used in) provided by operating activities......... (716) 416
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from Royal Grip, Inc.......................... -- 18
Payments from net investment in capital lease............... 198 --
Purchases of equipment, net................................. (754) (776)
Merger costs................................................ (162) (1,032)
------ -------
Net cash used in investing activities..................... (718) (1,790)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock warrants and
options.................................................... 17 14
Proceeds from issuance of long-term debt.................... 5,140 1,000
Borrowings under lines-of-credit, net....................... 515 1,075
Repayments of long-term debt and capital lease obligations.. (4,245) (743)
------ -------
Net cash provided by financing activities................. 1,427 1,346
------ -------
DECREASE IN CASH.............................................. (7) (28)
CASH, beginning of period..................................... 28 28
------ -------
CASH, end of period........................................... $ 21 $ --
====== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest.................................................. $ 649 $ 473
====== =======
Income taxes.............................................. $ 82 $ 60
====== =======
Non-cash transactions--
Provision for loss on disposal of assets of Roxxi, Inc.... $1,214 $ --
====== =======
Issuance of common stock and options and warrants to
purchase common stock for acquisition of Royal Grip,
Inc...................................................... $ -- $12,995
====== =======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-47
<PAGE>
ROYAL PRECISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Operations and Significant Accounting Policies:
Basis of Presentation --
The condensed consolidated financial statements of Royal Precision, Inc. and
subsidiaries (collectively, "RPI" or the "Company") presented herein have been
prepared pursuant to the rules of the Securities and Exchange Commission for
quarterly reports on Form 10-QSB and do not include all of the information and
note disclosures required by generally accepted accounting principles. These
condensed consolidated financial statements should be read in conjunction with
the Company's consolidated financial statements and notes thereto for the year
ended May 31, 1998 included herein. 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.
Principles of Consolidation --
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. ("FM Sales") and
Royal Grip, Inc. (formerly FMPSUB, Inc.) and its wholly owned subsidiary,
Roxxi, Inc. (collectively "RG"). On May 14, 1997, RPI entered into an Agreement
and Plan of Merger with RG. Under the terms of the Merger agreement, effective
August 29, 1997, FMPSUB, Inc. (a wholly owned subsidiary of RPI created for
such purpose) merged with and into RG (the "FMP-RG Merger"). RG was the
surviving corporation and became a wholly owned subsidiary of RPI. Accordingly,
the results of operations of RPI for all periods presented exclude the results
of operations of RG prior to August 29, 1997. All significant intercompany
balances and transactions have been eliminated in consolidation. As discussed
in Notes 7 and 8, the Company has entered into an agreement to merge with
Coyote Sports, Inc. and has disposed of the operating assets of Roxxi, Inc.
("Roxxi").
Reporting Periods --
The Company's first three fiscal quarters in the fiscal year ended May 31,
1998 ended on a Saturday. The Company's first three fiscal quarters in the
fiscal year ending May 31, 1999 end on the last calendar day of the quarter.
The Company's year-end is May 31.
2. Net Loss Per Share:
Basic earnings per common share are based on the average number of common
shares outstanding during the periods presented. Common share equivalents of
approximately 150,000 shares during the nine month period ended February 28,
1999 and approximately 170,000 shares during the nine month period ended
February 28, 1998 were antidilutive and are excluded from diluted earnings per
share.
3. New Accounting Standard:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company will be
required to adopt SFAS
F-48
<PAGE>
No. 133 as of June 1, 2000 and does not anticipate any material impact
resulting from the adoption of this pronouncement.
4. Inventories:
Inventories as of February 28, 1999 consisted of the following (in
thousands):
<TABLE>
<S> <C>
Raw materials......................................................... $ 525
Work-in-process....................................................... 1,979
Finished goods........................................................ 2,722
------
$5,226
======
</TABLE>
5. Information on Segments:
The Company has two reportable segments within continuing operations: golf
club shafts and golf club grips. The accounting policies of the segments are
the same as those described in the summary of significant accounting policies
in Form 10-KSB. The Company evaluates the performance of these segments based
on segment profit or loss after income taxes. The Company allocates certain
administrative expenses to segments. The amounts in this illustration are the
amounts in reports used by the chief operating officer as of February 28, 1999
(in thousands):
<TABLE>
<CAPTION>
Nine Months Ended February 28, 1999
------------------------------------
Golf Golf
Shafts Grips Total
------------ -----------------------
<S> <C> <C> <C>
Revenues from external customers..... $ 12,220 $ 2,787 $ 15,007
Segment profit (loss)................ (730) 19 (711)
Segment assets....................... 10,752 11,417 22,169
Total assets for reportable
segments............................ $ 22,169
Assets of discontinued operation..... 630
Elimination of investment in
subsidiaries........................ (7,213)
Goodwill not allocated to segments... 9,637
------------
Consolidated total assets............ $ 25,223
============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended February 28, 1998
------------------------------------
Golf Golf
Shafts Grips Total
------------ -----------------------
<S> <C> <C> <C>
Revenues from external customers..... $ 14,790 $ 2,391 $ 17,181
Segment profit (loss)................ (481) 359 (122)
Segment assets....................... 9,179 11,821 21,000
Total assets for reportable
segments............................ $ 21,000
Assets of discontinued operation..... 2,147
Elimination of investment in
subsidiaries........................ (7,768)
Goodwill not allocated to segments... 10,158
------------
Consolidated total assets............ $ 25,537
============
</TABLE>
6. Borrowing Arrangements:
On October 9, 1998, FMP entered into a new credit facility and RG amended
its existing borrowing arrangement. In connection with the new credit facility
for FMP, all loans to FMP were paid off and a new credit and security agreement
was entered into with RG's lender. In connection with the repayment of the
F-49
<PAGE>
amounts outstanding under the old FMP credit facility, FMP paid a $75,000
prepayment penalty which is reflected as a component of interest expense in the
second quarter of fiscal 1999. Terms of FMP's new credit facility are as
follows. The amount available for borrowings under the FMP term loan is $4.3
million. Such amount was funded on October 9, 1998. FMP's term loan is due in
monthly principal installments of $99,000 through and until October 1, 1999 and
$65,000 monthly, thereafter until the maturity of the loan. The amount
available for borrowings under the FMP revolving line-of-credit is based upon
the levels of eligible accounts receivable and inventories, as defined, subject
to maximum borrowing of $4.0 million.
The borrowing arrangement with RG was amended and restated. The amendment
resulted in the funding of a new RG term loan of $840,000 on October 9, 1998 in
addition to the existing RG term loan that had $472,000 outstanding at October
9, 1998. RG's term loans are due in monthly principal installments of $40,000
through and until October 1, 1999 and $22,500 monthly, thereafter until the
maturity of the loan. The amount available for borrowings under the RG
revolving line-of-credit is based upon the levels of eligible accounts
receivable and inventories, as defined, subject to maximum borrowing of $1.5
million.
Effective January 1, 1999, borrowings under all term loans and both
revolving lines-of-credit bear interest at a rate per annum equal to the prime
rate (7.75% at February 28, 1999) plus 2.75% and 2.25%, respectively, and are
secured by substantially all of the Company's assets. The maturity date for all
term loans and both revolving lines-of-credit is September 30, 2001. On
February 28, 1999, the Company had $3,977,000 outstanding under the revolving
lines-of-credit and $949,000 available for additional borrowings.
Primarily as a result of merger-related expenses of $503,000 and a provision
of approximately $1.2 million for the loss on the sale of Roxxi, the Company
defaulted on certain bank covenants during the quarter ended February 28, 1999.
The violation of these covenants has been waived by the lender. In connection
with granting the waivers, the Company's lender increased the Company's
borrowing rate by 2% per annum effective January 1, 1999.
The Company's lender modified its covenants for the remainder of the fiscal
year ending May 31, 1999. The required debt service coverage ratio has been
waived through May 31, 1999 and the maximum monthly allowable net loss has been
reduced from breakeven to an aggregate net loss of $150,000 for the months of
March, April and May of 1999. In addition, the minimum annual net income
requirement for the fiscal year ending May 31, 1999 has been reduced from net
income of $400,000 to a net loss of $500,000. The modified covenants exclude
all merger-related expenses and the provision for the loss associated with the
disposition of Roxxi.
7. Discontinued Operation:
During March 1999, the Company disposed of the operating assets of Roxxi
through two transactions with unrelated parties. In one transaction, Roxxi sold
its trade name, customer list, design database and related computer software
and hardware. In return, the Company will receive a royalty of 16% of the
buyer's net sales for the two-year period beginning May 1, 1999. In the second
transaction, Roxxi sold its headwear manufacturing equipment, headwear
inventory and raw materials. Roxxi received $300,000 at closing and the Company
will receive a royalty of 2% of the buyer's net sales until the buyer has paid
an additional $200,000.
In the fiscal quarter ended February 28, 1999, the Company recorded a loss
provision of approximately $1.2 million on the disposition of the Roxxi assets.
This amount reflects a $1,059,000 write-down of the excess book value of
inventory and fixed assets over the cash received in the sale, the
establishment of a reserve totaling $80,000 for estimated costs associated with
the transaction, and $75,000 for estimated operating losses to be incurred
during the phase-out period of this business segment. The Company will account
for royalty fees as income in future periods as payments are received from the
two buyers.
During the nine months ended February 28, 1999 and 1998, Roxxi recorded net
sales of $1.9 million and $1.8 million, respectively. The net operating results
of Roxxi are segregated from income from continuing operations in the condensed
consolidated statements of operations and are reflected as discontinued
operations
F-50
<PAGE>
for all periods presented. Included in the Roxxi operating losses of $0.5
million and $0.4 million for the nine month periods ended February 28, 1999 and
1998 are depreciation expense of $217,000 and $163,000, respectively. As of
February 28, 1999, the remaining assets and liabilities of Roxxi include net
accounts receivable of $300,000, assets held for sale at a value of $300,000
(included in other current assets) and accounts payable and accrued expenses
totaling $290,000.
8. Merger:
On February 2, 1999, the Company and Coyote Sports, Inc. ("Coyote") entered
into a merger agreement. Pursuant to the terms of the merger agreement, Coyote
will be the surviving publicly-traded company and RPI will become a wholly
owned subsidiary of Coyote (the "RPI-Coyote Merger"). Coyote, along with its
subsidiaries, designs, engineers, manufactures, markets and distributes brand
name sports equipment and recreational products including steel and graphite
golf shafts, premium grade cycle tubing and javelins and also produces graphite
and other advanced composite materials for use in the production of sporting
goods products. The RPI-Coyote Merger must be approved by both the Company's
stockholders and Coyote's stockholders and is contingent upon conditions which
must be fulfilled prior to consummation of the transaction. These conditions
include the filing of a registration statement, obtaining adequate financing
and various other obligations identified in the merger agreement. Management
believes the RPI-Coyote Merger will be consummated in the second calendar
quarter of 1999. However, there can be no assurance that the RPI-Coyote
Merger will be consummated. During the third fiscal quarter ended February 28,
1999, the Company incurred costs totaling $503,000 related to the RPI-Coyote
Merger which have been reflected as Merger Related Expenses in the accompanying
financial statements.
9. Termination of Acushnet Supply Agreement:
During March 1999, RG received a letter from Acushnet Rubber Company
("Acushnet") terminating the Manufacturing and Supply Agreement and Capital
Lease Agreement. In the notice of termination, Acushnet agreed to pay RG a $2.5
million termination fee at the end of the transition period, to continue to
produce grips for ten months and to pay up to $100,000 for shipping and
installing the manufacturing equipment at a new location. In connection with
the termination, RG will receive the manufacturing equipment and Acushnet's
obligation under the capital lease will be terminated. At February 28, 1999,
the Company's capital equipment lease receivable was approximately $2.6
million. Also in the termination letter, Acushnet stated that it would not
continue paying the lease payments. The Company has not responded to Acushnet's
termination letter; however, the Company and legal counsel believe that
Acushnet's interpretation of the clause in the contract related to the lease
payments is without merit and the Company will pursue its rights under the
contract to receive lease payments throughout the transition period.
RG currently has no back-up source of supply; however, the Company is
currently in discussions with a number of grip manufacturers which the Company
believes can maintain RG's standard of product quality and will facilitate a
smooth transition. There can be no assurances that the Company will be able to
secure a source for grips on as favorable terms or with the same or better
quality as Acushnet. In addition, there can be no assurances that a transition
to a new supplier will not result in production delays, the loss of sales and
key customers which would materially affect RG's financial condition and
results of operations.
F-51
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annex A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMONG
ROYAL PRECISION, INC.,
COYOTE SPORTS, INC. AND
RP ACQUISITION CORP.
Dated as of February 2, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (the "Agreement")
dated as of February 2, 1999 among ROYAL PRECISION, INC., a Delaware
corporation ("RP"), COYOTE SPORTS, INC., a Nevada corporation ("CSI"), and RP
ACQUISITION CORP., a Delaware corporation and a wholly owned subsidiary of CSI
("Merger Sub"), evidences that, for and in consideration of the mutual
covenants set forth herein, the parties hereto, intending to be legally bound,
hereby agree as follows:
RECITALS
A. The Boards of Directors of CSI and Merger Sub and the Board of Directors
of and RP have approved the merger of Merger Sub into RP upon the terms and
subject to the conditions set forth herein (the "Merger") and have determined
that the Merger is advisable, fair to, and in the best interests of, their
respective shareholders.
B. For U.S. federal income tax purposes, it is intended that the Merger
shall qualify as a tax-free reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code").
C. Concurrently herewith, certain holders of voting stock of RP and CSI,
respectively, have entered into agreements ("Shareholder Agreements") pursuant
to which they agree to vote such stock beneficially owned by them in favor of
the transactions contemplated by this Agreement.
ARTICLE 1.
The transaction.
1.1. The Merger. Upon the terms and subject to the conditions hereof, on the
Effective Date (as defined in Section 1.2), Merger Sub shall be merged with and
into RP which shall be the surviving corporation in the Merger (the "Surviving
Corporation"), the separate existence of Merger Sub shall thereupon cease, and
the name of the Surviving Corporation shall by virtue of the Merger remain
"Royal Precision, Inc."
1.2. Effective date of the Merger. The Merger shall become effective when a
properly executed Certificate of Merger is duly filed with the Secretary of
State of the State of Delaware, which filing shall be made concurrently with
the closing of the transaction contemplated by this Agreement in accordance
with Section 1.12. When used in this Agreement, the term "Effective Date" shall
mean the date and time at which such Certificate of Merger is so filed or at
such time thereafter as is provided in such Certificate of Merger.
1.3. Tax-free Reorganization. The parties intend to adopt this Agreement as
a tax-free plan of reorganization and to consummate the Merger in accordance
with the provisions of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. In
this regard, CSI represents that it presently intends, and that at the
Effective Date it will intend, to continue RP's historic business or use a
significant portion of RP's business assets in a business.
1.4. Conversion of Securities.
1.4.1. As of the Effective Date, by virtue of the Merger and without any
action on the part of any holder of any shares of RP's Common Stock, $.001
par value ("RP Shares" or "RP Common Stock"):
(a) All shares of RP Common Stock which are held by RP or any
Subsidiary (as defined in Section 8.13) of RP shall be canceled.
(b) Subject to Section 1.7, each remaining outstanding share of RP
Common Stock shall be converted into that number of fully paid and
nonassessable shares of the Convertible Preferred Stock,
A-1
<PAGE>
$.001 par value, of CSI ("CSI Preferred Stock"), having the rights and
preferences set forth in Exhibit 1.4.1 hereto, determined by dividing
(i) the number of shares of CSI's Common Stock, par value $.001 per
share ("CSI Common Stock"), actually issued and outstanding as of the
Effective Date by (ii) the number of shares of RP Common Stock actually
issued and outstanding as of the Effective Date, carried to four
decimal places (the "Exchange Ratio").
(c) Each issued and outstanding share of Common Stock, without par
value, of Merger Sub ("Merger Sub Common Stock") shall be converted
into and become one fully paid and nonassessable share of Common Stock,
$.001 par value, of the Surviving Corporation.
1.5. Terms of Exchange. The manner of exchanging RP Common Stock for CSI
Preferred Stock in the Merger shall be as follows:
1.5.1. On the Effective Date, CSI shall make available to such United
States federally or state chartered commercial bank or trust company having
net capital of not less than $100,000,000 (or a subsidiary thereof) as may
be selected as exchange agent by CSI (the "Exchange Agent"), for the
benefit of each holder of RP Common Stock, a sufficient number of
certificates representing CSI Preferred Stock to effect the delivery of CSI
Preferred Stock required to be issued pursuant to Section 1.4. CSI shall
enter into an agreement (the "Exchange Agent Agreement") with the Exchange
Agent pursuant to which the Exchange Agent shall be obligated to provide
the services set forth in Section 1.5.2.
1.5.2. The Exchange Agent Agreement shall provide that promptly after
the Effective Date, the Exchange Agent shall mail to each holder of record
(as shown on the books of RP's transfer agent as of the Effective Date) of
a certificate or certificates which immediately prior to the Effective Date
represented outstanding shares of RP Common Stock (individually, a
"Certificate" and collectively, the "Certificates") (a) a form of letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon proper delivery
of the Certificates to the Exchange Agent) and (b) instructions for use in
effecting the surrender of the Certificates for exchange. Upon surrender of
Certificates for cancellation to the Exchange Agent, together with such
letter of transmittal duly executed and any other required documents, the
holder of such Certificates shall be entitled to receive for each of the
shares of RP Common Stock represented by such Certificates the number of
shares of CSI Preferred Stock into which such shares of RP Common Stock are
converted in the Merger and the Certificates so surrendered shall forthwith
be canceled. Until so surrendered, Certificates shall represent solely the
right to receive the number of shares of CSI Preferred Stock into which
such shares of RP Common Stock are converted in the Merger and any cash in
lieu of fractional shares of CSI Preferred Stock as contemplated by Section
1.7 with respect to each of the shares of RP Common Stock represented
thereby. The Exchange Agent shall not be entitled to vote or exercise any
rights of ownership with respect to the CSI Preferred Stock held by it from
time to time hereunder, except that it shall receive and hold all dividends
or other distributions paid or distributed with respect to such CSI
Preferred Stock for the account of the persons entitled thereto.
1.5.3. Certificates surrendered for exchange by any Affiliate (as
defined in Section 5.9.1) shall not be exchanged for certificates
representing shares of CSI Preferred Stock until CSI has received the
written agreements from such Affiliate as provided in Section 5.9.2.
1.6. Dividends; Transfer Taxes. No dividends or other distributions that are
declared or made on CSI Preferred Stock will be paid to persons entitled to
receive certificates representing CSI Preferred Stock pursuant to this
Agreement until such persons surrender their Certificates representing RP
Common Stock. Upon such surrender, there shall be paid to the person in whose
name the certificates representing such CSI Preferred Stock shall be issued any
dividends or other distributions which shall have become payable with respect
to such CSI Preferred Stock in respect of a record date after the Effective
Date. In no event shall the person entitled to receive such dividends be
entitled to receive interest on such dividends. If any cash in lieu of
fractional shares or any certificate representing CSI Preferred Stock is to be
paid to or issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it shall be a condition of such
exchange that the
A-2
<PAGE>
Certificate so surrendered shall be properly endorsed and otherwise in proper
form for transfer and that the person requesting such exchange shall pay to the
Exchange Agent any transfer or other taxes required by reason of the issuance
of certificates for such CSI Preferred Stock in a name other than that of the
registered holder of the Certificate surrendered, or shall establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
applicable. Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to a holder of shares of RP Common Stock for any
shares of CSI Preferred Stock or dividends thereon properly delivered to a
public official pursuant to any applicable escheat laws.
1.7. No Fractional Shares. No certificates or scrip representing less than
one share of CSI Preferred Stock shall be issued upon the surrender for
exchange of Certificates representing RP Common Stock pursuant to Section
1.5.2. In lieu of any such fractional share, each holder of RP Common Stock who
would otherwise have been entitled to a fraction of a share of CSI Preferred
Stock upon surrender of Certificates for exchange pursuant to Section 1.5.2
shall be paid upon such surrender cash (without interest) in an amount equal to
(x) such fractional interest multiplied by (y) the product of $6.00 multiplied
by the reciprocal of the Exchange Ratio. As soon as practicable after the
determination of the amount of cash to be paid to former stockholders of RP in
lieu of any fractional interests, CSI shall make available to the Exchange
Agent, which shall in turn make available in accordance with this Agreement,
such amounts to such former stockholders.
1.8. Stock Options.
1.8.1. Each option or warrant to purchase RP Common Stock issued
pursuant to the Royal Precision, Inc. Stock Option Plan and the FM
Precision Golf Corp. 1997 Stock Option Plan, or otherwise which is (a) set
forth in the RP Disclosure Schedule (as hereinafter defined), and (b)
outstanding as of the Effective Date (individually, an "RP Option" and,
collectively, the "RP Options") shall be assumed by CSI and converted into
an option or warrant (or a substitute option shall be granted) to purchase
the number of shares of CSI Common Stock (rounded to the nearest whole
share) equal to the number of shares of CSI Preferred Stock into which the
number of shares of RP Common Stock subject to such RP Option would have
been converted pursuant to the Merger (that is, the number of shares of RP
Common Stock subject to such RP Option multiplied by the Exchange Ratio),
at an exercise price per share of CSI Preferred Stock (rounded to the
nearest penny) equal to the former exercise price per share of RP Common
Stock under the RP Option immediately prior to the Effective Date
multiplied by the reciprocal of the Exchange Ratio; provided, however, that
in the case of any RP Option to which Section 421 of the Code applies by
reason of its qualification under Section 422 of the Code, the conversion
formula shall be adjusted, if necessary, to comply with Section 424(a) of
the Code and the regulations issued thereunder. Except as otherwise
provided in the applicable plan or agreement granting the RP Options, the
duration, vesting and other terms of each new option to purchase shares of
CSI Common Stock shall be the same as the original RP Option except that
all references in the option agreement to RP shall be deemed to be
references to CSI. CSI and RP agree to take such action as may be necessary
to effectuate the foregoing provisions.
1.8.2. As soon as practicable after the Effective Date, CSI shall
deliver to each holder of an option to purchase CSI Common Stock a notice
that accurately reflects the changes to such option contemplated by this
Section 1.8.
1.9. Stockholder Approval. Each of RP and CSI shall take all action
reasonably necessary, in accordance with applicable law and their respective
certificate or articles of incorporation and by-laws, to convene a special
meeting of the holders of RP Common Stock (the "RP Meeting") and a special
meeting of the holders of CSI Common Stock (the "CSI Meeting") as promptly as
practicable for the purpose of considering and taking action upon this
Agreement. Subject to Section 5.1, the Board of Directors of RP will recommend
that holders of RP Common Stock vote to approve the Merger and to adopt this
Agreement at the RP Meeting and the Board of Directors of CSI will recommend
that holders of CSI Common Stock vote to approve an increase in the number of
authorized shares of the CSI Preferred Stock and the issuance of CSI Preferred
Stock pursuant to the Merger at the CSI Meeting.
A-3
<PAGE>
1.10. Closing Of RP's Transfer Books. At the Effective Date, the stock
transfer books of RP shall be closed and no transfer of shares of RP Common
Stock shall be made thereafter. In the event that, after the Effective Date,
Certificates are presented to the Surviving Corporation, they shall be canceled
and exchanged for CSI Preferred Stock and/or cash as provided in Sections 1.4,
1.5, 1.6 and 1.7.
1.11. Assistance In Consummation Of The Merger. Each of CSI, Merger Sub and
RP shall provide all reasonable assistance to, and shall cooperate with, each
other to bring about the consummation of the Merger as soon as practicable in
accordance with the terms and conditions of this Agreement. CSI shall cause
Merger Sub to perform all of its obligations in connection with this Agreement.
1.12. Closing. The closing of the transaction contemplated by this Agreement
shall take place (a) at the offices of Kramer Levin Naftalis & Frankel LLP, New
York, New York at 10:00 A.M. local time on the day which is not more than one
business day after the day on which the last of the conditions set forth in
Article 6 (other than those requiring an exchange of a certificate, opinion or
other document, or the taking of other action, at the closing) is fulfilled or
waived or (b) at such other time and place as CSI and RP shall agree in
writing.
1.13. Illustrative Computation. For the avoidance of doubt, if the Exchange
Ratio for purposes of Section 1.4.1(b) were to be determined on the basis of
the number of shares of CSI Common Stock and RP Common Stock stated to be
outstanding in Sections 3.4 and 4.4 hereof, the Exchange Ratio would be 1.0195
(that is, 5,777,692 divided by 5,667,375), and the reciprocal of the Exchange
Ratio would be .9809.
ARTICLE 2.
Surviving Corporation.
2.1. Certificate of Incorporation. The Certificate of Incorporation of RP as
of the Effective Date shall be the Certificate of Incorporation of the
Surviving Corporation until duly amended by the stockholder of the Surviving
Corporation subsequent to the Effective Date.
2.2. By-Laws. The By-Laws of Merger Sub as in effect immediately prior to
the Effective Date shall be the By-Laws of the Surviving Corporation, and
thereafter may be amended in accordance with their terms and as provided by
law.
2.3. Officers; Board Of Directors.
2.3.1. The directors of Merger Sub at the Effective Time shall, from and
after the Effective Time, be the directors of the Surviving Corporation
until their successors have been duly elected or appointed or until their
earlier death, resignation or removal, in accordance with the Surviving
Corporation's Certificate of Incorporation and By-Laws.
2.3.2. The officers of RP at the Effective Time and such other persons
as may be designated by CSI shall, from and after the Effective Time, be
the officers of the Surviving Corporation until their successors have been
duly elected or appointed or until their earlier death, resignation or
removal, in accordance with the Surviving Corporation's Certificate of
Incorporation and By-Laws.
2.4. Effects of the Merger. The Merger shall have the effects set forth in
Section 259 of the Delaware General Corporation Law ("DGCL").
ARTICLE 3.
Representations of CSI.
CSI hereby represents and warrants to rp that:
3.1. CSI Disclosure Schedule
3.1.1. The CSI Disclosure Schedule sets forth all of the information
concerning CSI, its Subsidiaries and the CSI Shares required in this
Article 3. To the extent any statement in this Article 3 is untrue, the
A-4
<PAGE>
CSI Disclosure Schedule sets forth the statements necessary to make the
statements in this Article 3 true. All information and statements set forth
in the CSI Disclosure Schedule shall be deemed to supersede and correct the
statements made in this Article 3 and to be additional representations and
warranties of CSI. The CSI Disclosure Schedule sets forth all of the
information and statements required in numbered sections bearing the number
of the Section of this Agreement calling for such information and in the
order of such numbers in this Agreement.
3.1.2. CSI has delivered to RP complete and accurate copies of (a) any
written contract or other document referred to in the CSI Disclosure
Schedule or herein and (b) the CSI Reports referred to in Section 3.7 of
this Agreement.
3.2. Existence and Good Standing of CSI. CSI is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Nevada and has all requisite corporate power and corporate authority to own,
lease and operate its properties and to carry on its business as now being
conducted. CSI is duly qualified or licensed as a foreign corporation to do
business, and is in good standing in each jurisdiction in which the character
or location of the property owned, leased or operated by it or the nature of
the business conducted by it makes such qualification necessary, except where
the failure to be so duly qualified or licensed would not reasonably be
expected to have a material adverse effect on the consolidated business,
financial condition or results of operations of CSI and its Subsidiaries (a
"CSI Material Adverse Effect"). Each of CSI's Subsidiaries is a corporation or
limited liability company duly organized, validly existing and in good standing
under the laws of the state of its incorporation or formation, has the
corporate or other power and corporate or other authority to own its properties
and to carry on its business as it is now being conducted, and is duly licensed
or qualified to do business and is in good standing in each jurisdiction in
which the ownership of its property or the conduct of its business requires
such qualification, except for jurisdictions in which such failure to be so
licensed or qualified or to be in good standing would not reasonably be
expected to have, individually or in the aggregate, a CSI Material Adverse
Effect. Neither CSI nor any of its Subsidiaries is in violation of any order of
any court, governmental authority or arbitration board or tribunal, or any law,
ordinance, governmental rule or regulation to which CSI or any CSI Subsidiary
or any of their respective properties or assets is subject, except where such
violation would not have, individually or in the aggregate, a CSI Material
Adverse Effect. CSI and its Subsidiaries have obtained all licenses, permits
and other authorizations and have taken all actions required by applicable law
or governmental regulations in connection with their business as now conducted,
where the failure to obtain any such items or to take any such action would
reasonably be expected to have a CSI Material Adverse Effect. The copies of the
certificate or articles of incorporation and By-Laws of CSI, Merger Sub and
each other CSI Subsidiary previously delivered to RP are true and correct.
Neither CSI nor any of the CSI Subsidiaries is in violation of any of the
provisions of their restated articles of incorporation or By-Laws.
3.3. Authorization, Validity and Effect of Agreement. Each of CSI and Merger
Sub has the requisite corporate power and corporate authority to execute and
deliver this Agreement and all agreements and documents contemplated hereby and
consummate the transactions contemplated hereby and thereby. Subject only to
the approval of the amendment of CSI's articles of incorporation and the
issuance of the CSI Preferred Stock pursuant to this Agreement and the
transaction contemplated hereby by the holders of a majority of the outstanding
CSI Shares, the consummation by CSI of the transaction contemplated hereby has
been duly authorized by all requisite corporate action. This Agreement
constitutes, and all agreements and documents contemplated hereby (when
executed and delivered pursuant hereto for value received) will constitute, the
valid and legally binding obligations of CSI, enforceable in accordance with
their respective terms subject to applicable bankruptcy, insolvency, moratorium
or other similar laws relating to creditors' rights and general principles of
equity.
3.4. Capital Stock. CSI has an authorized capitalization consisting of
25,000,000 shares of Common Stock, par value $.001 per share, of which
5,777,692 shares are issued and outstanding, and 4,000,000 shares of preferred
stock, par value $.001 per share, of which 75,000 shares are issued and
outstanding. On or immediately prior to the Effective Date, CSI will have
authorized capitalization as set forth in Exhibit 3.4.1
A-5
<PAGE>
(including the CSI Preferred Stock to be issued pursuant to the Merger). Except
as set forth in the CSI Disclosure Schedule, CSI has no outstanding bonds,
debentures, notes or other obligations the holders of which have the right to
vote (or which are convertible into or exercisable for securities having the
right to vote) with the stockholders of CSI on any matter. All such outstanding
shares have been and will be duly authorized and validly issued and are and
will be fully paid and non-assessable. Except as set forth in the CSI
Disclosure Schedule, there are, and at the Effective Date, there will be no
outstanding subscriptions, options, warrants, rights, calls, commitments,
conversion rights, convertible securities, rights of exchange, plans or other
agreements providing for the purchase, issuance or sale of any shares of the
capital stock of CSI by or to CSI, other than as contemplated by this
Agreement.
3.5. Subsidiaries. Except as set forth in the CSI Disclosure Schedule, CSI
owns each of the outstanding shares of capital stock of each of CSI's
Subsidiaries. Each of the outstanding shares of capital stock of each of CSI's
Subsidiaries is duly authorized, validly issued, fully paid and nonassessable,
and except as set forth in the CSI Disclosure Schedule, is owned by CSI free
and clear of all liens, pledges, security interests, claims or other
encumbrances. The CSI Disclosure Schedule sets forth with respect to each CSI
Subsidiary (a) its name and jurisdiction of incorporation, (b) its authorized
capital stock, and (c) the number of issued and outstanding shares of capital
stock. Except for interests in the CSI Subsidiaries, neither CSI nor any CSI
Subsidiary owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, limited
liability company, business, trust or entity.
3.6. No Violations. The execution and delivery of this Agreement by CSI and
the consummation of the transaction contemplated hereby (a) will not violate
any provision of the articles of incorporation or by-laws of CSI or its
Subsidiaries, (b) will not violate or conflict with, or result in a breach of
any provision of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination or cancellation of, or accelerate the performance required by, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the material properties of CSI or its Subsidiaries under, or result
in being declared void, voidable, or without further binding effect, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, deed of
trust or any material license, franchise, permit, lease, contract, agreement or
other instrument, commitment or obligation to which CSI or any of its
Subsidiaries is a party, or by which CSI or any of its Subsidiaries or any of
their properties is bound or affected, except for any of the foregoing matters
which would not reasonably be expected to have, individually or in the
aggregate, a CSI Material Adverse Effect; (c) will not violate any order, writ,
injunction, decree, law, statute, rule or regulation applicable to CSI or any
of its Subsidiaries or any of their respective properties or assets (assuming
completion of the Regulatory Filings as defined in (d) below), except for
violations which would not reasonably be expected to have, individually or in
the aggregate, a CSI Material Adverse Effect, or (d) other than the filings
provided for in Section 1, filings under the Securities Exchange Act of 1934
(the "Exchange Act"), the Securities Act of 1933, as amended (the "Securities
Act") or applicable state securities and "Blue Sky" laws or filings in
connection with the maintenance of qualification to do business in other
jurisdictions (collectively, the "Regulatory Filings"), will not require any
material consent, approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory authority, the
failure to obtain or make which would reasonably be expected to have,
individually or in the aggregate, a CSI Material Adverse Effect.
3.7. SEC Documents.
3.7.1. CSI has furnished RP with each registration statement, Quarterly
Report on Form 10-QSB, Report on Form 8-KSB, report, proxy statement or
information statement, including all exhibits thereto, prepared by CSI
since September 18, 1997, including, without limitation, (a) its Annual
Report on Form 10-KSB for its fiscal year ended December 31, 1997 (the "CSI
Balance Sheet Date") which includes the consolidated balance sheets of CSI
and its Subsidiaries (the "CSI Balance Sheet") as of such date (the "CSI
Balance Sheet Date") and CSI's Quarterly Reports on Form 10-QSB, and
Reports on Form 8-K filed since the filing of such Annual Report and (b)
its proxy statement for its annual meeting of Stockholders held on May 9,
1998, each of (a) and (b) in the form (including exhibits and any
A-6
<PAGE>
amendments thereto) filed with the Securities and Exchange Commission (the
"SEC") and the items in (a) and (b), the "CSI Reports." As of their
respective dates, the CSI Reports (including, without limitation, any
financial statement or schedules included or incorporated by reference
therein) (i) were prepared in all material respects in accordance with the
applicable requirements of the Exchange Act, and the respective rules and
regulations thereunder, and (ii) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements made therein, in the light of
the circumstances under which they were made, not misleading. The 1996 and
1997 consolidated financial statements of CSI included in or incorporated
by reference into the CSI Reports (including the related notes and
schedules) present fairly, in all material respects the consolidated
financial position of CSI and its Subsidiaries as of December 31, 1997 and
1996 and the consolidated results of their operations and their cash flows
for such fiscal periods, in conformity with generally accepted accounting
principles ("GAAP"), consistently applied during the periods involved.
Except as and to the extent set forth on the CSI Balance Sheet, including
all notes thereto, or as set forth in the CSI Reports or the CSI Disclosure
Schedule, neither CSI nor any of its Subsidiaries has any material
liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) whether or not required to be reflected on, or
reserved against in, a consolidated balance sheet of CSI, prepared in
accordance with GAAP, consistently applied, except liabilities arising in
the ordinary course of business since such date which would not reasonably
be expected to have, individually or in the aggregate, a CSI Material
Adverse Effect.
3.8. Litigation. There is no action, suit or proceeding pending against CSI
or the CSI Subsidiaries, or, to the knowledge of CSI, overtly threatened
against CSI or its Subsidiaries or any of their respective properties or
assets, at law or in equity, or before or by any federal or state commission,
board, bureau, agency or instrumentality which would reasonably be expected to
have, individually or in the aggregate, a CSI Material Adverse Effect, or would
prevent or delay the consummation of the transaction contemplated by this
Agreement. Neither CSI nor any of its Subsidiaries is subject to any
outstanding order, writ, injunction or decree which, insofar as can be
reasonably foreseen, individually or in the aggregate, in the future would have
a CSI Material Adverse Effect or would prevent or delay the consummation of the
transaction contemplated hereby.
3.9. Absence of certain changes. Since the CSI Balance Sheet Date, each of
CSI and its Subsidiaries has conducted its business only in the ordinary course
of such business and there has not been (a) any event or changes with respect
to CSI and its Subsidiaries (other than events or changes in general economic
conditions or developments affecting the industry generally) having,
individually or in the aggregate, a CSI Material Adverse Effect, (b) any
declaration, setting aside or payment of any dividend or other distribution
with respect to its capital stock, (c) any material change in its accounting
principles, practices or methods, (d) any amendments or changes in the Amended
and Restated Articles of Incorporation or By-Laws of CSI, (e) any material
revaluation by CSI of any of its assets, including writing down the value of
inventory or writing off notes or accounts receivable other than in the
ordinary course of business, (f) any sale of a material amount of property of
CSI or its Subsidiaries, except in the ordinary course of business, or (g) any
increase in the compensation or benefits or establishment of any bonus,
insurance, severance deferred compensation, pension, retirement, profit
sharing, stock option (including, without limitation, the granting of stock
options, stock appreciation rights, performance awards or restricted stock
awards), stock purchase or other employee benefit plan, or any other increase
in the compensation payable or to become payable to any executive officers of
CSI or any of the CSI Subsidiaries except in the ordinary course of business
consistent with past practice or except as required by applicable law.
3.10. Tax Matters.
Except as set forth in the CSI Disclosure Schedule:
3.10.1. For purposes of this Agreement "Taxes" shall mean all taxes,
assessments, charges, duties, fees, levies or other governmental charges,
including, without limitation, all federal, state, local, foreign
A-7
<PAGE>
and other income, franchise, profits, capital gains, capital stock,
transfer, sales, use, occupation, property, excise, severance, windfall
profits, stamp, license, payroll, withholding and other taxes, assessments,
charges, duties, fees, levies or other governmental charges of any kind
whatsoever (whether payable directly or by withholding and whether or not
requiring the filing of a Return), and all estimated taxes, deficiency
assessments, additions to tax, penalties and interest and shall include any
liability for such amounts as a result either of being a member of a
combined, consolidated, unitary or affiliated group or of a contractual
obligation to indemnify any person or other entity.
3.10.2. Each of CSI and its Subsidiaries has timely filed or caused to
be timely filed all returns, statements, forms, declarations and reports
for Taxes ("Returns") which are required to be filed by, or with respect
to, any of them on or prior to the Effective Date (taking into account all
applicable extensions). The Returns have accurately reflected and will
accurately reflect all liability for Taxes of CSI and its Subsidiaries for
the periods covered thereby.
3.10.3. All Taxes and Tax liabilities of CSI and its Subsidiaries for
all taxable years or periods that end on or before the Effective Date and,
with respect to any taxable year or period beginning before and ending
after the Effective Date, the portion of such taxable year or period ending
on and including the Effective Date, have been timely paid or will be
timely paid in full on or prior to the Effective Date or accrued and
adequately disclosed and fully provided for on the books and records of CSI
in accordance with GAAP.
3.10.4. Complete and accurate copies of all CSI federal, state and local
income tax returns have been made available to RP.
3.10.5. Neither CSI nor any of its Subsidiaries has been the subject of
an audit or other examination of Taxes by the tax authorities of any
nation, state or locality nor has CSI or any of its Subsidiaries received
any notices from any taxing authority relating to any issue which could
affect the Tax liability of CSI or any of its Subsidiaries. Neither CSI nor
any of its Subsidiaries, as of the Effective Date, (A) has entered into an
agreement or waiver or been requested to enter into an agreement or waiver
extending any statute of limitations relating to the payment or collection
of Taxes of CSI or any of its Subsidiaries or (B) is presently contesting
the Tax liability of CSI or any of its Subsidiaries before any court,
tribunal or agency. Neither CSI nor any of its Subsidiaries has granted a
power-of-attorney relating to Tax matters to any person. All final
adjustments made by the Internal Revenue Service ("IRS") with respect to
any federal tax return of CSI or its Subsidiaries have been reported for
state and local income tax purposes to the relevant state or local taxing
authorities.
3.10.6. Neither CSI nor any of its Subsidiaries has been included in any
"consolidated," "unitary" or "combined" Return provided for under the law
of the United States, any foreign jurisdiction or any state or locality
with respect to Taxes for any taxable period for which the statute of
limitations has not expired (other than a Return with respect to which CSI
was the common parent).
3.10.7. All Taxes which CSI or any of its Subsidiaries is (or was)
required by law to withhold or collect have been duly withheld or collected
and have been timely paid over to the proper authorities to the extent due
and payable.
3.10.8. There are no Tax sharing, allocation, indemnification or similar
agreements in effect as between CSI or any predecessor or affiliate thereof
and any other party under which CSI or any of its Subsidiaries could be
liable for any Taxes or other claims of any party other than of CSI and its
Subsidiaries.
3.10.9. No requests for ruling or determination letters relating to
federal, state or local income taxes paid or payable by CSI or any of its
Subsidiaries are pending with any taxing authority.
3.10.10. (a) Neither CSI nor any CSI Subsidiary has agreed to or is
required to make any adjustment pursuant to Section 481 of the Code or the
corresponding tax laws of any nation, state or locality by
A-8
<PAGE>
reason of a change in accounting method initiated by CSI or its
Subsidiaries or required by law, (b) CSI has no knowledge that the IRS or
any other taxing authority has proposed or purported to require any such
adjustment or change in accounting method and (c) CSI has no knowledge or
belief that any such adjustment under Section 481 of the Code or the
corresponding tax laws of any nation, state or locality will be required of
CSI or its Subsidiaries upon the completion of, or by reason of, the
transaction contemplated by this Agreement.
3.10.11. (a) There are no deferred intercompany transactions between CSI
and any of its Subsidiaries or between its Subsidiaries which will or may
result in the recognition of income upon the consummation of the
transaction contemplated by this Agreement, and (b) there are no other
transactions or facts existing with respect to CSI and/or its Subsidiaries
which by reason of the consummation of the transaction contemplated by this
Agreement will result in CSI and/or its Subsidiaries recognizing income.
3.10.12. There are no Tax liens on any of the assets or property of CSI
or its Subsidiaries.
3.10.13. There are no contracts, agreements or plans entered into by CSI
or its Subsidiaries covering any person that individually or collectively
would require CSI or any of its Subsidiaries to make any payments of any
amount which would not be deductible by reason of the provisions of Section
162(m) or Section 280G of the Code.
3.10.14. Neither CSI nor any of its Subsidiaries has filed a consent
pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2)
of the Code apply to any disposition of a subsection (f) asset (as such
term is defined in Section 341(f) of the Code) owned by it.
3.11. Certain Employee Plans.
3.11.1. (a) "Benefit Plan" means any "employee benefit plan" as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), any fringe benefit plan, any equity compensation plan or
arrangement (including without limitation, stock option, restricted stock
and stock purchase plans), any plan, policy or arrangement for the
provision of executive compensation, incentive benefits, bonuses or
severance benefits, any employment contract, collective bargaining
agreement, deferred compensation agreement, Code section 125 cafeteria plan
or split dollar arrangement, any participation or similar agreement with a
multi-employer pension fund, or any other plan, policy, arrangement or
scheme for the provision or funding of employee benefits with respect to
which a CSI or RP Controlled Group Member in the past or present, directly
or indirectly maintained or maintains, sponsored or sponsors, or had or has
any liability or obligation.
(b) "CSI Controlled Group Member" means CSI and each other person or
entity required to be aggregated with CSI under Code section 414(b),
(c), (m) or (o).
(c) "RP Controlled Group Member" means RP and each other person or
entity required to be aggregated with RP under Code section 414(b),
(c), (m) or (o).
3.11.2. Each Benefit Plan maintained by any CSI Controlled Group Member
(the "CSI Benefit Plans") complies with, and has been administered in
accordance with, in all material respects, all applicable requirements of
law, except for instances of non-compliance that would not reasonably be
expected to have caused, individually or in the aggregate, a CSI Material
Adverse Effect. The CSI Benefit Plans are listed in the CSI Disclosure
Schedule and copies or descriptions of all material Plans have previously
been provided to RP.
3.11.3. With respect to each CSI Benefit Plan intended to qualify under
section 401(a) of the Code, (a) a favorable determination letter has been
issued by or an application is pending with the IRS with respect to the
qualification of each CSI Benefit Plan, and (b) no "reportable event" or
"prohibited transaction" (as such terms are defined in ERISA and the Code)
or termination has occurred under circumstances which present a risk of
material liability by any CSI Controlled Group Member to any governmental
entity or other person, including a CSI Benefit Plan. Each CSI Benefit Plan
which is subject to Part 3 of Subtitle B of Title I of ERISA or Section 412
of the Code has been maintained in compliance
A-9
<PAGE>
with the minimum funding standards of ERISA and the Code and no such CSI
Benefit Plan has incurred any "accumulated funding deficiency" (as defined
in Section 412 of the Code and Section 302 of ERISA), whether or not
waived. No CSI Controlled Group Member directly or indirectly contributes
to, has an obligation to contribute to or has, or could be reasonably
expected to have, liability with respect to, and has not directly or
indirectly maintained, sponsored, contributed to or had an obligation to
contribute to at any time within the 10 year period ending on the date of
the Closing, any employee benefit plan which is a multi-employer plan
subject to the requirements of Subtitle E of Title IV of ERISA.
3.11.4. Except as required by Code section 4980B or 162 or Part 6 of
Subtitle B of Title I of ERISA, no CSI Controlled Group Member provides any
health, welfare or life insurance benefits to any of its former or retired
employees, which benefits would be material either individually or in the
aggregate to CSI.
3.12. Labor Matters.
3.12.1. Except as set forth in the CSI Disclosure Schedule, neither CSI
nor any of its Subsidiaries is a party to, or bound by, any collective
bargaining agreement, contract or other agreement or understanding with a
labor union or labor organization. There is no unfair labor practice or
labor arbitration proceeding pending or, to the knowledge of CSI, overtly
threatened against CSI or its Subsidiaries relating to their business,
except for any such proceeding which would not reasonably be expected to
have, individually or in the aggregate, a CSI Material Adverse Effect. To
the knowledge of CSI, there are no organizational efforts with respect to
the formation of a collective bargaining unit presently being made or
overtly threatened involving employees of CSI or any of its Subsidiaries.
3.12.2. CSI has delivered to RP copies of all employment agreements,
consulting agreements, severance agreements, bonus and incentive plans,
profit-sharing plans and other material agreements, plans or arrangements
with respect to compensation of the employees of CSI and its Subsidiaries
(the "CSI Compensation Arrangements"). The Merger will not accelerate or
otherwise give rise to payments pursuant to the CSI Compensation
Arrangements.
3.13. Environmental Laws and Regulations.
3.13.1. CSI and each of its Subsidiaries is in compliance in all
material respects with all applicable federal, state and local laws and
regulations of the United States and national and local laws and
regulations of the United Kingdom relating to pollution, hazardous
substances, or protection of human health or the environment (collectively,
"Environmental Laws") which compliance includes, but is not limited to, the
possession by CSI and its Subsidiaries of all material permits and other
governmental authorizations required under applicable Environmental Laws,
and compliance with the terms and conditions thereof. Neither CSI nor any
of its Subsidiaries has received written notice of, or, to the knowledge of
CSI, is the subject of, any action, cause of action, claim, investigation,
demand or notice, including without limitation, non-compliance orders,
warning letters, or notices of violation, by any person or entity alleging
liability under or non-compliance with any Environmental Law (a "CSI
Environmental Claim"), nor to the knowledge of CSI is there any basis for
any CSI Environmental Claim that would reasonably be expected to have,
individually or in the aggregate, a CSI Material Adverse Effect. To the
knowledge of CSI there are no circumstances that are reasonably likely to
prevent or interfere with such material compliance or give rise to such
liability in the future.
3.13.2. There are no CSI Environmental Claims, which would reasonably be
expected to have, individually or in the aggregate, a CSI Material Adverse
Effect, that are pending or, to the knowledge of CSI, overtly threatened
against CSI or any of its Subsidiaries or, to the knowledge of CSI, against
any person or entity whose liability for any CSI Environmental Claim CSI or
any of its Subsidiaries has or may have retained or assumed either
contractually or by operation of law.
A-10
<PAGE>
3.13.3. Neither CSI nor any CSI Subsidiary (a) has handled or
discharged, nor has it allowed or arranged for any third party to handle or
discharge, any hazardous substances to, at or upon: (i) any location other
than a site lawfully permitted to receive such hazardous substances, (ii)
any parcel of real property owned or leased by CSI or any CSI Subsidiary,
except in compliance with applicable Environmental Laws; (iii) any site
which, pursuant to CERCLA or any similar state law or law of the U.K. (x)
has been placed on the National Priorities List or its state or U.K.
equivalent, or (y) the Environmental Protection Agency or any equivalent
agency in the U.K. or the relevant state agency has notified CSI that it
has proposed or is proposing to place on the National Priorities List or
its state equivalent or equivalent in the U.K.; or (b) has any knowledge
that there has occurred or is presently occurring a discharge, or
threatened discharge, of any hazardous substance on, into or beneath the
surface of, or adjacent to, any real property owned or leased by CSI or any
CSI Subsidiary.
3.13.4. The CSI Disclosure Schedule identifies (a) all environmental
audits, assessments, or occupational health studies undertaken by CSI or
its agents on its behalf, or, to the knowledge of CSI, undertaken by any
governmental authority, or any third party, relating to or affecting any
real property owned or leased by CSI or any CSI Subsidiary; (b) the results
of any ground, water, soil, air or asbestos monitoring undertaken by CSI or
its agents on its behalf, or, to the knowledge of CSI, undertaken by any
governmental authority or any third party, relating to or affecting any
real property owned or leased by CSI or any CSI Subsidiary; (c) all
material written communications between CSI and any governmental authority
arising under or related to Environmental Laws; and (d) all outstanding
citations issued under OSHA, or similar state or local statutes, laws,
ordinances, codes, rules, regulations, orders, rulings or decrees relating
to or affecting any real property owned or leased by CSI or any CSI
Subsidiary.
3.14. Real Property.
3.14.1. CSI has delivered to RP either copies or fair and accurate
summaries (the "CSI Property Documents") of each of its leases, subleases,
deeds, material licenses or other material agreements or instruments (and
any amendments thereto) under which CSI or any of its Subsidiaries owns,
uses or occupies or has the right to use or occupy, now or in the future,
any real property (the "CSI Real Estate Agreements"). Each CSI Real Estate
Agreement is valid, binding and in full force and effect, all rent and
other sums and charges payable by CSI and its Subsidiaries as tenants
thereunder are current, no termination event or condition or uncured
default of a material nature on the part of CSI or any such Subsidiary or,
to the knowledge of CSI, as to a landlord, exists under any CSI Real Estate
Agreement, except for any of the foregoing matters which would not
reasonably be expected to have, individually or in the aggregate, a CSI
Material Adverse Effect. The information contained in the CSI Property
Documents is true and correct in all material respects.
3.14.2. Except for any of the following matters which would not
reasonably be expected to have, individually or in the aggregate, a CSI
Material Adverse Effect:
(a) CSI has not granted, and to the best of CSI's knowledge, no
other person has granted, any leases, subleases, licenses or other
agreements granting to any person other than CSI any right to
possession, use, occupancy or enjoyment of the property covered by the
CSI Real Estate Agreements, or any portion thereof, and
(b) CSI is not obligated under any option, right of first refusal or
any contractual right to purchase, acquire, sell or dispose of any real
property covered by the CSI Real Estate Agreements.
3.14.3. None of the CSI Real Estate Agreements contains continuous
operating covenants, radius restrictions or provisions requiring the
consent of the landlord to the Merger or the assumption of CSI's
obligations under the CSI Real Estate Agreements in the manner contemplated
by this Agreement, except for any of the foregoing matters which would not
reasonably be expected to have, individually or in the aggregate, a CSI
Material Adverse Effect.
A-11
<PAGE>
3.15. Limitation on business conduct. Neither CSI nor any of the CSI
Subsidiaries is a party to, or has any obligation under, any contract or
agreement, written or oral, which contains any covenants currently or
prospectively limiting in any material respect the freedom of CSI or any of the
CSI Subsidiaries to engage in any line of business or to compete with any
entity or which would prohibit the business of RP, CSI or any of their
respective Subsidiaries from being conducted in substantially the same manner
as it was conducted prior to the Merger.
3.16. Title to property. Each of CSI and each of the CSI Subsidiaries owns
the material properties and assets that it purports to own free and clear of
all liens, security interests, charges or encumbrances, except for any liens,
security interests, charges or encumbrances which arise in the ordinary course
of business (including mechanics' liens and other similar statutory liens) and
do not materially impair CSI's or any CSI Subsidiary's ownership or use of any
such properties or assets, or liens for taxes not yet due. The rights,
properties and assets presently owned, leased or licensed by CSI include all
rights, properties and assets necessary to permit CSI and the CSI Subsidiaries
to conduct their business in all material respects in the same manner as their
businesses have been conducted prior to the date hereof.
3.17. Insurance. CSI and its Subsidiaries maintain with respect to their
operations and their assets, in full force and effect, policies of insurance in
the ordinary course of business as is usual and customary for businesses
similarly situated to CSI. CSI has provided RP copies of all insurance policies
so maintained and all claims associated with its operations and the operations
of its Subsidiaries for the past 18 months.
3.18. Intellectual property. Every material trade secret (including know-
how, inventions, designs and processes), patent, patent right, trademark,
trademark right, logo, service mark, trade name or copyright, or application
thereof, and licenses and rights with respect to the foregoing, used in
connection with the business of CSI and its Subsidiaries (the "CSI Intellectual
Property"), is protected by CSI in a manner which, under the circumstances, is
prudent and commercially reasonable, and owned by CSI or its Subsidiaries free
and clear of any liens, encumbrances, claims or restrictions whatsoever which
would have a CSI Material Adverse Effect, direct or indirect. There are no
valid grounds for any bona fide claims (i) to the effect that the business of
CSI or any of the CSI Subsidiaries infringes on any copyright, patent,
trademark, service mark or trade secret; (ii) against the use by CSI or any of
the CSI Subsidiaries, of any patents, patent rights, trademarks, trademark
rights, logos, trade names, service marks, trade secrets, copyrights,
technology, know-how or computer software programs and applications used in the
business of CSI or any of the CSI Subsidiaries as currently conducted or as
proposed to be conducted; (iii) challenging the ownership, validity or
effectiveness of any of the patents, patent rights, registered and material
unregistered trademarks, logos and service marks, registered copyrights, trade
names and any applications therefor owned by CSI or any of the CSI Subsidiaries
or other trade secret material to CSI or any of the CSI Subsidiaries; or (iv)
challenging the license or legally enforceable right to use of any third-party
patents, patent rights, trademarks, trademark rights, logos, service marks,
trade names and copyrights by CSI or any of the CSI Subsidiaries, except, in
each case, for claims that, if determined adversely to CSI, would not
reasonably be expected to have, individually or in the aggregate, a CSI
Material Adverse Effect. Neither CSI nor any of its Subsidiaries has granted to
any other person the right to use the CSI Intellectual Property, or any part
thereof. CSI is not obligated or under any liability whatsoever to make any
payments by way of royalties, fees or otherwise to any owner of, licensor of,
or other claimant to, any patent, patent rights, trademark, trademark rights,
logo, service mark, trade name, trade name rights, copyright or other
intangible assets, with respect to the use thereof or in connection with the
conduct of its business or otherwise.
3.19. Certain contracts. CSI has delivered copies of each contract to which
CSI or any of its Subsidiaries is a party (i) calling for payments in excess of
$100,000 in the case of any contract or series of related contracts or (ii)
otherwise material to CSI or any of its Subsidiaries, or by which any of their
respective properties or assets are bound. CSI and its Subsidiaries, and to
CSI's knowledge the other parties thereto, are in compliance in all material
respects with all material terms of such contracts.
3.20. No brokers. Neither CSI nor any CSI Subsidiary has entered into any
contract, arrangement or understanding with any person or firm which may result
in the obligation of CSI or RP or Merger Sub to pay
A-12
<PAGE>
any finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transaction contemplated hereby, except that CSI has retained Lehman
Brothers as its financial advisor and to render a fairness opinion as set forth
herein. The arrangements with Lehman Brothers have been disclosed in writing to
RP prior to the date hereof.
3.21. Conflicts of Interest. No officer, or director, or, to the knowledge
of CSI, no significant shareholder, employee or consultant of CSI or any CSI
Subsidiary, or any affiliate of such person has any direct or indirect interest
(except a passive investment in less than 5% of the publicly traded stock of a
public company) (a) in any corporation, partnership, proprietorship,
association, or other person or entity which does business with CSI or any CSI
Subsidiary, (b) in any property, asset or right which is used by CSI or any CSI
Subsidiary in the conduct of its business, or (c) in any contract to which CSI
is a party or by which CSI or any CSI Subsidiary may be bound nor are any
amounts owing to any such person by, or due to any such person from, CSI or any
CSI Subsidiary.
3.22. Personal Property. CSI owns all of its material personal property,
including, without limitation, the material personal property reflected in the
CSI Balance Sheet, except for personal property disposed of in the ordinary
course of business since the CSI Balance Sheet Date, subject to no mortgage,
pledge, lien, charge, security interest, encumbrance or restriction, except
those which are shown and described in the CSI Balance Sheet or the notes
thereto. All personal properties purported to be leased by CSI are subject to
valid and effective leases.
3.23. Takeover Statute. The Board of Directors of CSI has taken all
appropriate action so that no former shareholder of RP will be an "interested
stockholder" of CSI subject to Sections 78.438 and 78.439 of the Nevada General
Corporation Law (the "NGCL") by virtue of the transactions contemplated by this
Agreement.
3.24. Disclosure. Neither CSI nor any CSI Subsidiary has knowingly withheld
from RP any material facts relating to CSI's and any CSI Subsidiary's assets,
business, operations, financial conditions, or prospects. No representation or
warranty in this Agreement contains any untrue statement of a material fact.
3.25. Status as Reorganization.
3.25.1. CSI has no plan or intent to:
(a) Liquidate RP;
(b) Merge RP with or into another corporation;
(c) Sell or otherwise dispose of the stock of RP except for
transfers of stock to corporations "controlled" (within the meaning of
Section 368(c) of the Code) by CSI;
(d) Reacquire any of its stock issued in connection with the Merger;
(e) Cause RP to issue additional shares of stock of RP that would
result in CSI losing "control" (within the meaning of Section 368(c) of
the Code) of RP;
(f) Cause RP to sell or otherwise dispose of any of its assets or
any assets of Merger Sub acquired in the Merger except for dispositions
made in the ordinary course of business or transfers described in
Section 368(a)(2)(C) of the Code or described in Treasury Regulation
Section 1.368-2(k)(2); or
(g) Take any other action that might otherwise cause the Merger not
to be treated as a reorganization within the meaning of Sections
368(a)(1)(A) and 368(a)(2)(E) of the Code.
3.25.2. Except as provided in this Agreement, each of CSI and its
stockholders will pay their respective expenses, if any, incurred in
connection with the Merger.
A-13
<PAGE>
3.25.3. There is no intercorporate indebtedness existing between CSI and
RP, or between Merger Sub and RP, that was issued, acquired or will be
settled at a discount.
3.25.4. CSI and any of the major stockholders of CSI do not own, nor
have they owned during the past five years, any shares of stock of RP.
3.25.5. Neither CSI nor Merger Sub is an "investment company" (within
the meaning of Sections 368(a)(2)(F)(iii) and (iv) of the Code);
3.25.6. Merger Sub is being formed solely for the purpose of merging
with and into RP and, as of the Effective Date, will not have had any
existing operation, assets or liabilities (other than liabilities for
franchise taxes, if applicable, and liabilities under this Agreement); and
3.25.7. CSI will, as of the Effective Date, own all of the stock of
Merger Sub.
ARTICLE 4.
Representations of RP
RP hereby represents and warrants to CSI that:
4.1. RP Disclosure Schedule.
4.1.1. The RP Disclosure Schedule sets forth all of the information
concerning RP and its Subsidiaries and the RP Shares required in this
Article 4. To the extent any statement in this Article 4 is untrue, the RP
Disclosure Schedule sets forth the statements necessary to make the
statements in this Article 4 true. All information and statements set forth
in the RP Disclosure Schedule shall be deemed to supersede and correct the
statements made in this Article 4 and to be additional representations and
warranties of RP. The RP Disclosure Schedule sets forth all of the
information and statements required in numbered sections bearing the number
of the Section of this Agreement calling for such information and in the
order of such numbers in this Agreement.
4.1.2. RP has delivered to CSI complete and accurate copies of (a) any
written contract or other document referred to in the RP Disclosure
Schedule or herein and (b) the RP Reports referred to in Section 4.7 of
this Agreement.
4.2. Existence and Good Standing of RP. RP is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power and corporate authority to own, lease and
operate its properties and to carry on its business as now being conducted. RP
is duly qualified or licensed as a foreign corporation to do business, and is
in good standing in each jurisdiction in which the character or location of the
property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
be so duly qualified or licensed would not reasonably be expected to have a
material adverse effect on the consolidated business, financial condition or
results of operations of RP and its Subsidiaries (an "RP Material Adverse
Effect"). Each of RP's Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of the state of its incorporation,
has the corporate power and corporate authority to own its properties and to
carry on its business as it is now being conducted, and is duly licensed or
qualified to do business and is in good standing in each jurisdiction in which
the ownership of its property or the conduct of its business requires such
qualification, except for jurisdictions in which such failure to be so licensed
or qualified or to be in good standing would not reasonably be expected to
have, individually or in the aggregate, an RP Material Adverse Effect. Neither
RP nor any of its Subsidiaries is in violation of any order of any court,
governmental authority or arbitration board or tribunal, or any law, ordinance,
governmental rule or regulation to which RP or any RP Subsidiary or any of
their respective properties or assets is subject, except where such violation
would not
A-14
<PAGE>
have, individually or in the aggregate, an RP Material Adverse Effect. RP and
its Subsidiaries have obtained all licenses, permits and other authorizations
and have taken all actions required by applicable law or governmental
regulations in connection with their business as now conducted, where the
failure to obtain any such items or to take any such action would reasonably be
expected to have an RP Material Adverse Effect. The copies of the articles of
incorporation and by-laws of RP and each other RP Subsidiary previously
delivered to CSI are true and correct. Neither RP nor any of the RP
Subsidiaries is in violation of any of the provisions of its Amended and
Restated Certificate of Incorporation or By-Laws.
4.3. Authorization, validity and effect of agreement. RP has the requisite
corporate power and corporate authority to execute and deliver this Agreement
and all agreements and documents contemplated hereby and consummate the
transactions contemplated hereby and thereby. Subject only to the approval of
this Agreement and the transaction contemplated hereby by the holders of a
majority of the outstanding RP Shares, the consummation by RP of the
transaction contemplated hereby has been duly authorized by all requisite
corporate action. This Agreement constitutes, and all agreements and documents
contemplated hereby (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of RP,
enforceable in accordance with their respective terms subject to applicable
bankruptcy, insolvency, moratorium or other similar laws relating to creditors'
rights and general principles of equity.
4.4. Capital stock. The authorized capital stock of RP consists of
50,000,000 shares of common stock and 5,000,000 shares of preferred stock, par
value $.001 per share. As of December 31, 1998, there were 5,667,375 shares of
common stock issued and outstanding none of which is held by RP or any
Subsidiary of RP and no shares of preferred stock issued and outstanding. Since
such date, no additional shares of capital stock of RP have been issued. RP has
no outstanding bonds, debentures, notes or other obligations the holders of
which have the right to vote (or which are convertible into or exercisable for
securities having the right to vote) with the stockholders of RP on any matter.
All such issued and outstanding RP Shares are duly authorized, validly issued,
fully paid, nonassessable and free of preemptive rights. Other than as
contemplated by this Agreement or the RP Option Plans, there are not at the
date of this Agreement any outstanding subscriptions, options, warrants,
rights, calls, commitments, conversion rights, convertible securities, rights
of exchange, plans or other agreements providing for the purchase, issuance or
sale of any of the shares of the capital stock of RP by or to RP. As of
December 31, 1998, 602,433 RP Shares were reserved for issuance and are
issuable upon or otherwise deliverable in connection with the exercise of
outstanding options; since that date, no options have been granted under the RP
Option Plans or otherwise and no new option plans have been authorized or
adopted.
4.5. Subsidiaries. Except as set forth in the RP Disclosure Schedules, RP
owns each of the outstanding shares of capital stock of each of RP's
Subsidiaries. All of the outstanding shares of capital stock of the RP
Subsidiaries are duly authorized, validly issued, fully paid and nonassessable,
and are owned by RP free and clear of all liens, pledges, security interests,
claims or other encumbrances. The RP Disclosure Schedule sets forth with
respect to each RP Subsidiary (a) its name and jurisdiction of incorporation,
(b) its authorized capital stock, and (c) the number of issued and outstanding
shares of capital stock. Except for interests in the RP Subsidiaries, neither
RP nor any RP Subsidiary owns directly or indirectly any interest or investment
(whether equity or debt) in any corporation, partnership, joint venture,
limited liability company, business, trust or entity.
4.6. No violations. The execution and delivery of this Agreement by RP and
the consummation of the transaction contemplated hereby (a) will not violate
any provision of the articles of incorporation or by-laws of RP or its
subsidiaries, (b) will not violate or conflict with, or result in a breach of
any provision of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination or cancellation of, or accelerate the performance required by, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the material properties of RP or its Subsidiaries under, or result
in being declared void, voidable, or without further binding effect, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, deed of
trust or any material license, franchise, permit, lease, contract, agreement or
other instrument, commitment or obligation to which RP or any of its
subsidiaries is a party, or by which RP or any of its subsidiaries or any of
their properties is bound or
A-15
<PAGE>
affected, except for any of the foregoing matters which would not reasonably be
expected to have, individually or in the aggregate, an RP Material Adverse
Effect; (c) will not violate any order, writ, injunction, decree, law, statute,
rule or regulation applicable to RP or any of its subsidiaries or any of their
respective properties or assets (assuming completion of the Regulatory
Filings), except for violations which would not reasonably be expected to have,
individually or in the aggregate, an RP Material Adverse Effect, or (d) other
than the Regulatory Filings, will not require any material consent, approval or
authorization of, or declaration, filing or registration with, any domestic
governmental or regulatory authority, the failure to obtain or make which would
reasonably be expected to have, individually or in the aggregate, an RP
Material Adverse Effect.
4.7. SEC DOCUMENTS. RP has furnished CSI each registration statement, proxy
statement or information statement, including all exhibits thereto, prepared by
RP since August 29, 1997, including, without limitation, (a) its Annual Report
on Form 10-K for its fiscal year ended May 31, 1998 (the "RP Balance Sheet
Date"), which includes the consolidated balance sheet for RP as of such date
(the "RP Balance Sheet") and RP's Quarterly Reports on Form 10-Q and Reports on
Form 8-K filed since the filing of such Annual Report and (b) its proxy
statement for its annual meeting of Stockholders held on October 1, 1998, each
of (a) and (b) in the form (including exhibits and any amendments thereto)
filed with the SEC and the items in (a) and (b), the "RP Reports." As of their
respective dates, the RP Reports (including, without limitation, any financial
statements or schedules included or incorporated by reference therein) (i) were
prepared in all material respects in accordance with the applicable
requirements of the Exchange Act, and the respective rules and regulations
thereunder, and (ii) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements made therein, in the light of the circumstances under which
they were made, not misleading. The 1997 and 1998 consolidated financial
statements of RP and its Subsidiaries included in or incorporated by reference
into the RP Reports (including the related notes and schedules) present fairly,
in all material respects, the consolidated financial position of RP at May 31,
1997 and 1998, and the consolidated results of their operations and their cash
flows such fiscal years in conformity with GAAP. Except as and to the extent
set forth on the RP Balance Sheet, including all notes thereto, or as set forth
in the RP Reports or the RP Disclosure Schedule, neither RP nor any of its
Subsidiaries has any material liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) whether or not required to be
reflected on, or reserved against in, a consolidated balance sheet of RP
prepared in accordance with GAAP, except liabilities arising in the ordinary
course of business since such date which would not reasonably be expected to
have, individually or in the aggregate, an RP Material Adverse Effect.
4.8. Litigation. There is no action, suit or proceeding pending against
RP or the RP Subsidiaries, or, to the knowledge of RP, overtly threatened
against RP or its Subsidiaries or any of their respective properties or
assets, at law or in equity, or before or by any federal or state
commission, board, bureau, agency or instrumentality which would reasonably
be expected to have, individually or in the aggregate, an RP Material
Adverse Effect, or would prevent or delay the consummation of the
transaction contemplated by this Agreement. Neither RP nor any of its
Subsidiaries is subject to any outstanding order, writ, injunction or
decree which, insofar as can be reasonably foreseen, individually or in the
aggregate, in the future would have an RP Material Adverse Effect or would
prevent or delay the consummation of the transaction contemplated hereby.
4.9. Absence of Certain Changes. Since the RP Balance Sheet Date, each
of RP and the RP Subsidiaries has conducted its business only in the
ordinary course of such business and there has not been (a) any event or
changes with respect to RP and the RP Subsidiaries (other than events or
changes in general economic conditions or developments affecting the
industry generally) having, individually or in the aggregate, an RP
Material Adverse Effect, (b) any declaration, setting aside or payment of
any dividend or other distribution with respect to its capital stock, (c)
any material change in its accounting principles, practices or methods, (d)
any amendments or changes in the Amended and Restated Certificate of
Incorporation or By-Laws of RP, (e) any material revaluation by RP of any
of its assets, including writing down the value of inventory or writing off
notes or accounts receivable other than in the ordinary course of business,
(f) any sale of a material amount of property of RP or its Subsidiaries,
except in the ordinary course of business, or (g) any increase in the
compensation or benefits or establishment of any
A-16
<PAGE>
bonus, insurance, severance deferred compensation, pension, retirement,
profit sharing, stock option (including, without limitation, the granting
of stock options, stock appreciation rights, performance awards or
restricted stock awards), stock purchase or other employee benefit plan, or
any other increase in the compensation payable or to become payable to any
executive officers of RP or any of the RP Subsidiaries except in the
ordinary course of business consistent with past practice or except as
required by applicable law.
4.10. Tax Matters.
Except as set forth in the RP Disclosure Schedule:
4.10.1. Each of RP and its Subsidiaries has timely filed or caused to be
timely filed all Returns which are required to be filed by, or with respect
to, any of them on or prior to the Effective Date (taking into account all
applicable extensions). The Returns have accurately reflected and will
accurately reflect all liability for Taxes of RP and its Subsidiaries for
the periods covered thereby.
4.10.2. All Taxes and Tax liabilities of RP and its Subsidiaries for all
taxable years or periods that end on or before the Effective Date and, with
respect to any taxable year or period beginning before and ending after the
Effective Date, the portion of such taxable year or period ending on and
including the Effective Date, have been timely paid or will be timely paid
in full on or prior to the Effective Date or accrued and adequately
disclosed and fully provided for on the books and records of RP in
accordance with GAAP.
4.10.3. Complete and accurate copies of all RP federal, state and local
income tax returns have been made available to CSI.
4.10.4. Neither RP nor any of its Subsidiaries has been the subject of
an audit or other examination of Taxes by the tax authorities of any
nation, state or locality nor has RP or any of its Subsidiaries received
any notices from any taxing authority relating to any issue which could
affect the Tax liability of RP or any of its Subsidiaries. Neither RP nor
any of its Subsidiaries, as of the Effective Date, (A) has entered into an
agreement or waiver or been requested to enter into an agreement or waiver
extending any statute of limitations relating to the payment or collection
of Taxes of RP or any of its Subsidiaries or (B) is presently contesting
the Tax liability of RP or any of its Subsidiaries before any court,
tribunal or agency. Neither RP nor any of its Subsidiaries has granted a
power-of-attorney relating to Tax matters to any person. All final
adjustments made by the IRS with respect to any federal tax return of RP or
its Subsidiaries have been reported for state and local income tax purposes
to the relevant state or local taxing authorities.
4.10.5. Neither RP nor any of its Subsidiaries has been included in any
"consolidated," "unitary" or "combined" Return provided for under the law
of the United States, any foreign jurisdiction or any state or locality
with respect to Taxes for any taxable period for which the statute of
limitations has not expired (other than a Return with respect to which RP
was the common parent).
4.10.6. All Taxes which RP or any of its Subsidiaries is (or was)
required by law to withhold or collect have been duly withheld or collected
and have been timely paid over to the proper authorities to the extent due
and payable.
4.10.7. There are no Tax sharing, allocation, indemnification or similar
agreements in effect as between RP or any predecessor or affiliate thereof
and any other party under which RP or any of its Subsidiaries could be
liable for any Taxes or other claims of any party other than of RP and its
Subsidiaries.
4.10.8. No requests for ruling or determination letters relating to
federal, state or local income taxes paid or payable by RP or any of its
Subsidiaries are pending with any taxing authority.
4.10.9. (a) Neither RP nor any RP Subsidiary has agreed to or is
required to make any adjustment pursuant to Section 481 of the Code or the
corresponding tax laws of any nation, state or locality by
A-17
<PAGE>
reason of a change in accounting method initiated by RP or its Subsidiaries
or required by law, (b) RP has no knowledge that the IRS or any other
taxing authority has proposed or purported to require any such adjustment
or change in accounting method and (c) RP has no knowledge or belief that
any such adjustment under Section 481 of the Code or the corresponding tax
laws of any nation, state or locality will be required of RP or its
Subsidiaries upon the completion of, or by reason of, the transaction
contemplated by this Agreement.
4.10.10. (a) There are no deferred intercompany transactions between RP
and any of its Subsidiaries or between its Subsidiaries which will or may
result in the recognition of income upon the consummation of the
transaction contemplated by this Agreement, and (b) there are no other
transactions or facts existing with respect to RP and/or its Subsidiaries
which by reason of the consummation of the transaction contemplated by this
Agreement will result in RP and/or its Subsidiaries recognizing income.
4.10.11. There are no Tax liens on any of the assets or property of RP
or its Subsidiaries.
4.10.12. There are no contracts, agreements or plans entered into by RP
or its Subsidiaries covering any person that individually or collectively
would require RP or any of its Subsidiaries to make any payments of any
amount which would not be deductible by reason of the provisions of Section
162(m) or Section 280G of the Code.
4.10.13. Neither RP nor any of its Subsidiaries has filed a consent
pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2)
of the Code apply to any disposition of a subsection (f) asset (as such
term is defined in Section 341(f) of the Code) owned by it.
4.11. Certain Employee Plans.
4.11.1. Each Benefit Plan maintained by any RP Controlled Group Member
(the "RP Benefit Plans") complies with, and has been administered in
accordance with, in all material respects, all applicable requirements of
law, except for instances of non-compliance that would not reasonably be
expected to have caused, individually or in the aggregate, an RP Material
Adverse Effect. The RP Benefit Plans are listed in the RP Disclosure
Schedule and copies or descriptions of all material Plans have previously
been provided to CSI.
4.11.2. With respect to each RP Benefit Plan intended to qualify under
Section 401(a) of the Code, (a) a favorable determination letter has been
issued by or an application is pending with the IRS with respect to the
qualification of each RP Benefit Plan and (b) no "reportable event" or
"prohibited transaction" (as such terms are defined in ERISA and the Code)
or termination has occurred under circumstances which present a risk of
material liability by any RP Controlled Group Member to any governmental
entity or other person, including an RP Benefit Plan. Each RP Benefit Plan
which is subject to Part 3 of Subtitle B of Title I of ERISA or Section 412
of the Code has been maintained in compliance with the minimum funding
standards of ERISA and the Code and no such RP Benefit Plan has incurred
any "accumulated funding deficiency" (as defined in Section 412 of the Code
and Section 302 of ERISA), whether or not waived. No RP Controlled Group
Member directly or indirectly contributes to, has an obligation to
contribute to or has or could be reasonably expected to have liability with
respect to, and has not directly or indirectly maintained, sponsored,
contributed to or had an obligation to contribute to at any time within the
10 year period ending on the date of the Closing, any employee benefit plan
which is a multi-employer plan subject to the requirements of Subtitle E of
Title IV of ERISA.
4.11.3. Except as required by Code section 4980B or 162 or Part 6 of
Subtitle B of Title I of ERISA, no RP Controlled Group Member provides any
health, welfare or life insurance benefits to any of its former or retired
employees, which benefits would be material either individually or in the
aggregate to RP.
4.12. Labor Matters.
4.12.1. Except as set forth in the RP Disclosure Schedule, neither RP
nor any of its Subsidiary is a party to, or bound by, any collective
bargaining agreement, contract or other agreement or understanding with a
labor union or labor organization. There is no unfair labor practice or
labor arbitration proceeding
A-18
<PAGE>
pending or, to the knowledge of RP, overtly threatened against RP or its
Subsidiaries relating to their business, except for any such proceeding
which would not reasonably be expected to have, individually or in the
aggregate, an RP Material Adverse Effect. To the knowledge of RP, there are
no organizational efforts with respect to the formation of a collective
bargaining unit presently being made or overtly threatened involving
employees of RP or any of its Subsidiaries.
4.12.2. RP has delivered to CSI copies of all employment agreements,
consulting agreements, severance agreements, bonus and incentive plans,
profit-sharing plans and other material agreements, plans or arrangements
with respect to compensation of the employees of RP and its Subsidiaries
(the "RP Compensation Arrangements"). The Merger will not accelerate or
otherwise give rise to payments pursuant to the RP Compensation
Arrangements.
4.13. Environmental Laws and Regulations.
4.13.1. RP and each of its Subsidiaries is in compliance in all material
respects with all applicable Environmental Laws which compliance includes,
but is not limited to, the possession by RP and the RP Subsidiaries of all
material permits and other governmental authorizations required under
applicable Environmental Laws, and compliance with the terms and conditions
thereof. Neither RP nor any of its Subsidiaries has received written notice
of, or, to the knowledge of RP, is the subject of, any action, cause of
action, claim, investigation, demand or notice, including without
limitation, non-compliance orders, warning letters or notices of violation,
by any person or entity alleging liability under or non-compliance with any
Environmental Law (an "RP Environmental Claim"), nor to the knowledge of RP
is there any basis for any RP Environmental Claim that would reasonably be
expected to have, individually or in the aggregate, an RP Material Adverse
Effect. To the knowledge of RP there are no circumstances that are
reasonably likely to prevent or interfere with such material compliance or
give rise to such liability in the future.
4.13.2. There are no RP Environmental Claims which would reasonably be
expected to have, individually or in the aggregate, an RP Material Adverse
Effect that are pending or, to the knowledge of RP, overtly threatened
against RP or any of its Subsidiaries or, to the knowledge of RP, against
any person or entity whose liability for any RP Environmental Claim RP or
any of its Subsidiaries has or may have retained or assumed either
contractually or by operation of law.
4.13.3. Neither RP nor any RP Subsidiary (a) has handled or discharged,
nor has it allowed or arranged for any third party to handle or discharge,
any hazardous substances to, at or upon: (i) any location other than a site
lawfully permitted to receive such hazardous substances, (ii) any parcel of
real property owned or leased by RP or any of its Subsidiaries, except in
compliance with applicable Environmental Laws; (iii) any site which,
pursuant to CERCLA or any similar state law (x) has been placed on the
National Priorities List or its state equivalent, or (y) the Environmental
Protection Agency or the relevant state agency has notified RP that it has
proposed or is proposing to place on the National Priorities List or its
state equivalent; or (b) has any knowledge that there has occurred or is
presently occurring a discharge, or threatened discharge, of any hazardous
substance on, into or beneath the surface of, or adjacent to, any real
property owned or leased by RP or the RP Subsidiaries.
4.13.4. The RP Disclosure Schedule identifies (a) all environmental
audits, assessments, or occupational health studies undertaken by RP or its
agents on its behalf, or, to the knowledge of RP, undertaken by any
governmental authority, or any third party, relating to or affecting any
real property owned or leased by RP or any RP Subsidiary; (b) the results
of any ground, water, soil, air or asbestos monitoring undertaken by RP or
its agents on its behalf, or, to the knowledge of RP, undertaken by any
governmental authority or any third party, relating to or affecting any
real property owned or leased by RP or any RP Subsidiary; (c) all material
written communications between RP and any governmental authority arising
under or related to Environmental Laws; and (d) all outstanding citations
issued under OSHA, or similar state or local statutes, laws, ordinances,
codes, rules, regulations, orders, rulings or decrees relating to or
affecting any real property owned or leased by RP or the RP Subsidiaries.
A-19
<PAGE>
4.14. Real Property.
4.14.1. RP has delivered to CSI either copies or fair and accurate
summaries (the "RP Property Documents") of each of its leases, subleases,
deeds, material licenses or other material agreements or instruments (and
any amendments thereto) under which RP or any of its Subsidiaries owns,
uses or occupies or has the right to use or occupy, now or in the future,
any real property (the "RP Real Estate Agreements"). Each RP Real Estate
Agreement is valid, binding and in full force and effect, all rent and
other sums and charges payable by RP and its Subsidiaries as tenants
thereunder are current, no termination event or condition or uncured
default of a material nature on the part of RP or any RP Subsidiary or, to
the knowledge of RP, as to a landlord, exists under any RP Real Estate
Agreement, except for any of the foregoing matters which would not
reasonably be expected to have, individually or in the aggregate, an RP
Material Adverse Effect. The information contained in the RP Property
Documents is true and correct in all material respects.
4.14.2. Except for any of the following matters which would not
reasonably be expected to have, individually or in the aggregate, an RP
Material Adverse Effect:
(a) RP has not granted, and to the best of RP's knowledge, no other
person has granted, any leases, subleases, licenses or other agreements
granting to any person other than RP any right to possession, use,
occupancy or enjoyment of the property covered by the RP Real Estate
Agreements, or any portion thereof, and
(b) RP is not obligated under any option, right of first refusal or
any contractual right to purchase, acquire, sell or dispose of any real
property covered by the RP Real Estate Agreements.
4.14.3. None of the RP Real Estate Agreements contains continuous
operating covenants, radius restrictions or provisions requiring the
consent of the landlord to the Merger or the assumption of RP's obligations
under the RP Real Estate Agreements in the manner contemplated by this
Agreement, except for any of the foregoing matters which would not
reasonably be expected to have, individually or in the aggregate, an RP
Material Adverse Effect.
4.15. Limitation on Business Conduct. Neither RP nor any of the RP
Subsidiaries is a party to, or has any obligation under, any contract or
agreement, written or oral, which contains any covenants currently or
prospectively limiting in any material respect the freedom of RP or any of
the RP Subsidiaries to engage in any line of business or to compete with
any entity or which would prohibit the business of RP, CSI or any of their
respective Subsidiaries from being conducted in substantially the same
manner as it was conducted prior to the Merger.
4.16. Title to Property. Each of RP and each of the RP Subsidiaries owns
the material properties and assets that it purports to own free and clear
of all liens, security interests, charges or encumbrances, except for any
liens, security interests, charges or encumbrances which arise in the
ordinary course of business (including mechanics' liens and other similar
statutory liens) and do not materially impair RP's or any RP Subsidiary's
ownership or use of any such properties or assets, or liens for taxes not
yet due. The rights, properties and assets presently owned, leased or
licensed by RP include all rights, properties and assets necessary to
permit RP and the RP Subsidiaries to conduct their business in all material
respects in the same manner as their businesses have been conducted prior
to the date hereof.
4.17. Insurance. RP and the RP Subsidiaries maintain with respect to
their operations and their assets, in full force and effect, policies of
insurance in the ordinary course of business as is usual and customary for
businesses similarly situated to RP. RP has provided CSI copies of all
insurance policies so maintained and all claims associated with its
operations and the operations of its Subsidiaries since their
incorporation.
4.18. Intellectual Property. Every material trade secret (including
know-how, inventions, designs and processes), patent, patent right,
trademark, trademark right, logo, service mark, trade name or copyright, or
application thereof, and licenses and rights with respect to the foregoing,
used in connection
A-20
<PAGE>
with the business of RP and its Subsidiaries, (the "RP Intellectual
Property"), is protected by RP in a manner which, under the circumstances,
is prudent and commercially reasonable and owned by RP or its Subsidiaries
free and clear of any liens, encumbrances, claims or restrictions
whatsoever which would have an RP Material Adverse Effect, direct or
indirect. There are no valid grounds for any bona fide claims (i) to the
effect that the business of RP or any of the RP Subsidiaries infringes on
any copyright, patent, trademark, service mark or trade secret; (ii)
against the use by RP or any of the RP Subsidiaries, of any patents, patent
rights, trademarks, trademark rights, logos, trade names, service marks,
trade secrets, copyrights, technology, know-how or computer software
programs and applications used in the business of RP or any of the RP
Subsidiaries as currently conducted or as proposed to be conducted; (iii)
challenging the ownership, validity or effectiveness of any of the patents,
patent rights, registered and material unregistered trademarks, logos and
service marks, registered copyrights, trade names and any applications
therefor owned by RP or any of the RP Subsidiaries or other trade secret
material to RP or any of the RP Subsidiaries; or (iv) challenging the
license or legally enforceable right to use of any third-party patents,
patent rights, trademarks, trademark rights, logos, service marks, trade
names and copyrights by RP or any of the RP Subsidiaries, except, in each
case, for claims that, if determined adversely to RP, would not reasonably
be expected to have, individually or in the aggregate, an RP Material
Adverse Effect. Neither RP nor any of its Subsidiaries has granted to any
other person the right to use the RP Intellectual Property, or any part
thereof. RP is not obligated or under any liability whatsoever to make any
payments by way of royalties, fees or otherwise to any owner of, licensor
of, or other claimant to, any patent, patent rights, trademark, trademark
rights, logo, service mark, trade name, trade name rights, copyright or
other intangible assets, with respect to the use thereof or in connection
with the conduct of its business or otherwise.
4.19. Certain Contracts. RP has delivered copies of each contract to
which RP or any of its Subsidiaries is a party (i) calling for payments in
excess of $100,000 in the case of any contract or series of related
contracts or (ii) otherwise material to RP or any of its Subsidiaries, or
by which any of their respective properties or assets are bound. RP and its
Subsidiaries, and to RP's knowledge the other parties thereto, are in
compliance in all material respects with all material terms of such
contracts.
4.20. No Brokers. Neither RP nor any RP Subsidiary has entered into any
contract, arrangement or understanding with any person or firm which may
result in the obligation of RP or CSI or Merger Sub to pay any finder's
fees, brokerage or agent's commissions or other like payments in connection
with the negotiations leading to this Agreement or the consummation of the
transaction contemplated hereby, except that RP has retained NatCity
Investments, Inc. and Berenson Minella & Company, L.P. as its financial
advisors and NatCity Investments, Inc. to render a fairness opinion as set
forth herein. The arrangements with NatCity Investments, Inc. and Berenson
Minella & Company, L.P. have been disclosed in writing to CSI prior to the
date hereof.
4.21. Conflicts of Interest. No officer, or director, or, to the
knowledge of RP, no significant shareholder, employee or consultant of RP
or any RP Subsidiary, or any affiliate of such person has any direct or
indirect interest (except a passive investment in less than 5% of the
publicly traded stock of a public company) (a) in any corporation,
partnership, proprietorship, association, or other person or entity which
does business with RP or any RP Subsidiary, (b) in any property, asset or
right which is used by RP or any RP Subsidiary in the conduct of its
business, or (c) in any contract to which RP is a party or by which RP may
or any RP Subsidiary be bound, nor are any amounts owing to any such person
by, or due to such person from, RP or any RP Subsidiary.
4.22. Personal Property. RP owns all of its material personal property,
including, without limitation, the material personal property reflected in
the RP Balance Sheet, except for personal property disposed of in the
ordinary course of business since the RP Balance Sheet Date, subject to no
mortgage, pledge, lien, charge, security interest, encumbrance or
restriction, except those which are shown and described in the RP Balance
Sheet or the notes thereto. All personal properties purported to be leased
by RP are subject to valid and effective leases.
A-21
<PAGE>
4.23. Takeover Statute. The Board of Directors of RP has taken all
appropriate action so that neither CSI nor Merger Sub will be an
"interested stockholder" of RP within the meaning of or subject to Section
203 of the DGCL.
4.24. Disclosure. Neither RP nor any RP Subsidiary has knowingly
withheld from CSI any material facts relating to RP's and any RP
Subsidiary's assets, business, operations, financial conditions, or
prospects. No representation or warranty in this Agreement contains any
untrue statement of a material fact.
4.25. Additional Disclosure. Prior to and in connection with the Merger,
RP has no intention to redeem any RP Common Stock or make any extraordinary
distributions with respect thereto, and the persons that are related to RP
within the meaning of Temporary Treasury Regulation (S) 1.368-1T(e)(2)(ii)
have not and will not acquire any RP Common Stock from any holder thereof
with consideration other than RP Common Stock.
(a) Following the Merger, RP intends to hold at least 90 percent of the
fair market value of its net assets and at least 70 percent of the fair
market value of its gross assets held immediately prior to the Effective
Date. For purposes of this representation, amounts paid by RP to
stockholders who receive cash or other property pursuant to the Merger,
amounts paid by RP to pay reorganization expenses, and all redemptions and
distributions (except for regular, normal dividends) made by RP immediately
preceding the Effective Date, will be included as assets of RP held
immediately prior to the Effective Date.
(b) RP has no plan or intention to issue additional shares of its stock
(or securities, options, warrants or instruments giving the holder thereof
the right to acquire RP stock) that would (or if exercised would) result in
CSI losing control of RP within the meaning of Section 368(c) of the Code.
(c) RP will not assume any liabilities of Merger Sub (other than those
liabilities, if any, incurred by Merger Sub in the ordinary course of its
business) or acquire any assets of Merger Sub that are subject to
liabilities (other than those liabilities, if any, incurred by Merger Sub
in the ordinary course of its business).
(d) Following the Merger, RP intends to continue its historic business
or use a significant portion of its historic business assets in a business.
(e) Except as provided in this Agreement, each of RP and its
stockholders will pay their respective expenses, if any, incurred in
connection with the Merger.
(f) There is no intercorporate indebtedness existing between CSI and RP,
or between Merger Sub and RP, that was issued, acquired or will be settled
at a discount.
(g) RP is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
(h) On the date of the Merger, the fair market value of the assets of RP
will exceed the sum of its liabilities, plus the amount of liabilities, if
any, to which the assets are subject.
(i) RP is not under the jurisdiction of a court in a Title 11 or similar
case within the meaning of Section 368(a)(3)(A) of the Code.
(j) RP will not take any action that might otherwise cause the Merger
not to be treated as a reorganization within the meaning of Sections
368(a)(1)(A) and 368(a)(2)(E) of the Code.
ARTICLE 5.
Covenants.
5.1. No Solicitation by RP. (a) RP shall not, directly or indirectly,
through any officer, director, employee, representative or agent of RP or any
of the RP Subsidiaries, solicit or encourage the initiation of (including by
way of furnishing information) any inquiries or proposals regarding any merger,
sale of assets,
A-22
<PAGE>
sale of shares of capital stock (including without limitation by way of a
tender offer) or similar transactions involving RP or any of the RP
Subsidiaries that if consummated would constitute an RP Alternative Transaction
(as defined in Section 7.4.2) (any of the foregoing inquiries or proposals
being referred to herein as an "RP Acquisition Proposal"). In addition, subject
to the other provisions of this Section 5.1(a) (including the following
sentence), from and after the date of this Agreement until the earlier of the
Effective Time or termination of this Agreement pursuant to its terms, RP and
its subsidiaries will not, and will instruct their officers, directors,
employees, representatives and agents not to, directly or indirectly, make or
authorize any public statement, recommendation or solicitation in support of,
or commenting positively regarding, any RP Acquisition Proposal made by any
Person or group of Persons (other than the Merger provided, that nothing in
this Section 5.1 shall prevent the Board of Directors of RP from taking and
disclosing to RP's stockholders a position contemplated by Rule 14d-9 and Rule
14e-2 promulgated under the Exchange Act, with respect to any tender offer or
from making such disclosure to RP's stockholders (not constituting a
recommendation or solicitation), upon the advice of its independent outside
legal counsel, as is necessary to make under applicable law. Nothing contained
in this Agreement shall prevent the Board of Directors of RP from (i)
furnishing information to a third party which has made a bona fide RP
Acquisition Proposal that the RP Board of Directors reasonably determines in
good faith contains the material terms of an RP Superior Proposal (as defined
below) not solicited in violation of this Agreement, provided that such third
party has executed an agreement with confidentiality provisions substantially
similar to those then in effect between RP and CSI, or (ii) subject to
compliance with the other terms of this Section 5.1, including Section 5.1(c),
(A) considering and negotiating a bona fide RP Acquisition Proposal that the RP
Board of Directors has reasonably determined in good faith is likely to
constitute an RP Superior Proposal not solicited in violation of this
Agreement, or (B) recommending to its stockholders an RP Acquisition Proposal
that the RP Board of Directors reasonably determines in good faith is a
Superior Proposal and, in connection therewith, withdrawing or modifying its
recommendation of the Merger and the transactions contemplated thereby (which
action shall entitle CSI to terminate this Agreement pursuant to Section 7.4.2
and to receive the CSI Expenses and CSI Fee, if applicable, as defined in
Section 5.13.2); provided that, as to each of clauses (i) and (ii), (x) such
actions occur at a time prior to approval of the Merger and this Agreement at
the RP Stockholders Meeting, and (y) the Board of Directors of RP reasonably
determines in good faith upon the advice of independent counsel that it is
required to do so in order to discharge properly its fiduciary duties. For
purposes of this Agreement, a "RP Superior Proposal" means any proposal made by
a third party to acquire, directly or indirectly, for consideration consisting
of cash and/or securities, all or a majority of the equity securities of RP
entitled to vote generally in the election of directors or all or substantially
all the assets of RP, on terms which the Board of Directors of RP reasonably
believes (i) (upon the advice of an independent financial advisor) to be more
favorable from a financial point of view to its stockholders than the Merger
and the transactions contemplated by this Agreement taking into account at the
time of determination any changes to the financial terms of this Agreement
proposed by CSI and (ii) to be more favorable to RP than the Merger and the
transactions contemplated by this Agreement after taking into account all
pertinent factors deemed relevant by the Board of Directors of RP under the
laws of the State of Delaware.
(b) RP shall immediately notify CSI after receipt of any RP Acquisition
Proposal, or any material modification of or amendment to any RP Acquisition
Proposal, or any request for nonpublic information relating to RP or any of its
subsidiaries in connection with an RP Acquisition Proposal or for access to the
properties, books or records of RP or any RP Subsidiary by any person or entity
that informs the Board of Directors of RP or such RP Subsidiary that it is
considering making, or has made, an RP Acquisition Proposal. Such notice to CSI
shall be made as soon as practicable orally and confirmed in writing, if
requested, and shall indicate the identity of the person making the RP
Acquisition Proposal or intending to make an RP Acquisition Proposal or
requesting non-public information or access to the books and records of RP, the
terms of any such RP Acquisition Proposal or material modification or amendment
to an RP Acquisition Proposal, and whether RP is providing or intends to
provide the person making the RP Acquisition Proposal with access to
information concerning RP as provided in Section 5.1(a). RP shall also
immediately notify CSI, as soon as practicable orally and confirmed in writing,
if requested, if it enters into negotiations concerning any RP Acquisition
Proposal. In each case, the notice to CSI required by this clause (b) may be
limited to the extent
A-23
<PAGE>
that the Board of Directors of RP reasonably determines in good faith upon the
advice of independent counsel that it is prohibited from giving such notice in
order to properly discharge its fiduciary duties.
(c) Unless this Agreement shall have been terminated in accordance with its
terms, neither RP nor the Board of Directors of RP shall withdraw or modify, or
propose to withdraw or modify, in a manner adverse to CSI, the approval by such
Board of Directors of this Agreement or the Merger.
(d) Without the prior written consent of CSI, RP and the Board of Directors
of RP shall not enter into any agreement with respect to, or otherwise approve
or recommend, or propose to approve or recommend, any RP Acquisition Proposal
or RP Alternative Transaction, unless the Merger Agreement is terminated prior
to or substantially simultaneously with such time pursuant to Sections 7.1 or
7.2 or is terminated prior to such time by RP pursuant to Section 7.3.
(e) RP shall immediately cease and cause to be terminated any existing
discussions or negotiations with any persons (other than CSI and Merger Sub)
conducted heretofore with respect to any of the foregoing. RP agrees not to
release any third party from the confidentiality and standstill provisions of
any agreement to which RP is a party.
(f) RP shall ensure that the officers and directors of RP and the RP
Subsidiaries and any investment banker or other advisor or representative
retained by RP are aware of the restrictions described in this Section 5.1.
(g) No action by the Board of Directors of RP expressly permitted by this
Section 5.1 shall constitute a breach or violation of any other provision of
this Agreement, provided that nothing in this Section 5.1 shall narrow the
obligations of RP under Section 5.4.1.
5.2 No solicitation by CSI. (a) CSI shall not, directly or indirectly,
through any officer, director, employee, representative or agent of CSI or any
of the CSI Subsidiaries, solicit or encourage the initiation of (including by
way of furnishing information) any inquiries or proposals regarding any merger,
sale of assets, sale of shares of capital stock (including without limitation
by way of a tender offer) or similar transactions involving CSI or any of the
CSI Subsidiaries that if consummated would constitute a CSI Alternative
Transaction (as defined in Section 7.3.2) (any of the foregoing inquiries or
proposals being referred to herein as "CSI Acquisition Proposal"). In addition,
subject to the other provisions of this Section 5.2(a) (including the following
sentence), from and after the date of this Agreement until the earlier of the
Effective Time or termination of this Agreement pursuant to its terms, CSI and
its subsidiaries will not, and will instruct their officers, directors,
employees, representatives and agents not to, directly or indirectly, make or
authorize any public statement, recommendation or solicitation in support of or
commenting positively regarding, any CSI Acquisition Proposal made by any
Person or group of Persons (other than the Merger), provided, that nothing in
this Section 5.2 shall prevent the Board of Directors of CSI from taking and
disclosing to CSI's stockholders a position contemplated by Rule 14d-9 and Rule
14e-2 promulgated under the Exchange Act with respect to any tender offer or
from making such disclosure to stockholders (not constituting a recommendation
or solicitation) upon the advice of its independent outside legal counsel, as
is necessary to make under applicable law. Nothing contained in this Agreement
shall prevent the Board of Directors of CSI from (i) furnishing information to
a third party which has made a bona fide CSI Acquisition Proposal that the CSI
Board of Directors reasonably determines in good faith contains the material
terms of a CSI Superior Proposal (as defined below) not solicited in violation
of this Agreement, provided that such third party has executed an agreement
with confidentiality provisions substantially similar to those then in effect
between RP and CSI, or (ii) subject to compliance with the other terms of this
Section 5.2 including Section 5.2 (c), (A) considering and negotiating a bona
fide CSI Acquisition Proposal that the CSI Board of Directors has reasonably
determined in good faith is likely to constitute a CSI Superior Proposal not
solicited in violation of this Agreement, or (B) or recommending to its
stockholders a CSI Acquisition Proposal that the CSI Board of Directors
reasonably determines in good faith is a Superior Proposal and, in connection
therewith, withdrawing or modifying its recommendation of the Merger and the
transactions contemplated thereby (which action shall entitle RP to
A-24
<PAGE>
terminate this Agreement pursuant to Section 7.3.2 and to receive the RP
Expenses and RP Fee, if applicable, as defined in Section 5.13.3); provided
that, as to each of clauses (i) and (ii), (x) such actions occur at a time
prior to approval of the Merger and this Agreement at the CSI Stockholders
Meeting, and (y) the Board of Directors of CSI reasonably determines in good
faith upon the advice of independent counsel that it is required to do so in
order to discharge properly its fiduciary duties. For purposes of this
Agreement, a "CSI Superior Proposal" means any proposal made by a third party
to acquire, directly or indirectly, for consideration consisting of cash and/or
securities, all or a majority of, the equity securities of CSI entitled to vote
generally in the election of directors or all or substantially all the assets
of CSI, on terms which the Board of Directors of CSI reasonably believes (i)
(upon the advice of an independent financial advisor) to be more favorable from
a financial point of view to its stockholders that the Merger and the
transactions contemplated by this Agreement taking into account at the time of
determination any changes to the financial terms of this Agreement proposed by
CSI and (ii) to be more favorable to CSI than the Merger and the transactions
contemplated by this Agreement after taking into account all pertinent factors
deemed relevant by the Board of Directors of CSI under the laws of the State of
Nevada.
(b) CSI shall immediately notify RP after receipt of any CSI Acquisition
Proposal, or any material modification of or amendment to any CSI Acquisition
Proposal, or any request for nonpublic information relating to RP or any of its
subsidiaries in connection with a CSI Acquisition Proposal or for access to the
properties, books or records of CSI or any CSI Subsidiary by any person or
entity that informs the Board of Directors of CSI or such CSI Subsidiary that
it is considering making, or has made, a CSI Acquisition Proposal. Such notice
to RP shall be made as soon as practicable orally and confirmed in writing, if
requested, and shall indicate the identity of the person making the CSI
Acquisition Proposal or intending to make a CSI Acquisition Proposal or
requesting non-public information or access to the books and records of CSI,
the terms of any such CSI Acquisition Proposal or material modification or
amendment to a CSI Acquisition Proposal, and whether CSI is providing or
intends to provide the person making the CSI Acquisition Proposal with access
to information concerning CSI as provided in Section 5.2(a). CSI shall also
immediately notify RP, as soon as practicable orally and confirmed in writing,
if requested, if it enters into negotiations concerning any CSI Acquisition
Proposal. In each case, the notice to RP required by this clause (b) may be
limited to the extent that the Board of Directors of CSI reasonably determines
in good faith upon the advice of independent counsel that it is prohibited from
giving such notice in order to properly discharge its fiduciary duties.
(c) Unless this Agreement shall have been terminated in accordance with its
terms, neither CSI nor the Board of Directors of CSI shall withdraw or modify,
or propose to withdraw or modify, in a manner adverse to RP, the approval by
such Board of Directors of this Agreement or the Merger.
(d) Without the prior written consent of RP, CSI and the Board of Directors
of CSI shall not enter into any agreement with respect to, or otherwise approve
or recommend, or propose to approve or recommend, any CSI Acquisition Proposal
or CSI Alternative Transaction, unless the Merger Agreement is terminated prior
to or substantially simultaneously with such time pursuant to Sections 7.1 or
7.2 or is terminated prior to such time by CSI pursuant to Section 7.4.
(e) CSI shall immediately cease and cause to be terminated any existing
discussions or negotiations with any persons (other than RP) conducted
heretofore with respect to any of the foregoing. CSI agrees not to release any
third party from the confidentiality and standstill provisions of any agreement
to which CSI is a party.
(f) CSI shall ensure that the officers and directors of CSI and the CSI
Subsidiaries and any investment banker or other advisor or representative
retained by CSI are aware of the restrictions described in this Section 5.2.
(g) No action by the Board of Directors of CSI expressly permitted by this
Section 5.2 shall constitute a breach or violation of any other provision of
this Agreement, provided that nothing in this Section 5.2 shall narrow the
obligations of CSI under Section 5.4.2.
A-25
<PAGE>
5.3 Conduct of Businesses. Prior to the Effective Date, except as set forth
in the CSI Disclosure Schedule, the RP Disclosure Schedule or as contemplated
by any other portion of this Agreement, unless both parties have consented in
writing thereto, which consent will not be unreasonably withheld, each party:
5.3.1 Shall, and shall cause each of its Subsidiaries to, conduct its
operations according to its usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
5.3.2 Shall use its reasonable efforts, and shall cause each of its
Subsidiaries to use its reasonable efforts, to preserve intact its business
organization and goodwill, keep available the services of its officers and
employees and maintain satisfactory relationships with those persons having
business relationships with it;
5.3.3 Except to the extent, if any, prohibited by applicable law or
binding confidentiality agreements with third parties, shall confer on a
regular basis with one or more representatives of the other party to report
operational matters of materiality and any proposals to engage in material
transactions;
5.3.4 Shall not amend its articles or certificate of incorporation or
by-laws (except to the extent the Articles of Incorporation of CSI are
amended to authorize the CSI Preferred Stock);
5.3.5 Shall promptly notify the other party of (a) any material
emergency or other material change in the condition (financial or
otherwise), of such party's or any Subsidiary's business, properties,
assets, liabilities, prospects or the normal course of its businesses or in
the operation of its properties, (b) any material litigation or material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or (c) the breach in any
material respect of any representation or warranty or covenant contained
herein;
5.3.6 Shall promptly deliver to the other party true and correct copies
of any report, statement or schedule filed by such party with the SEC
subsequent to the date of this Agreement;
5.3.7 Shall not (a) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on the
date hereof and disclosed pursuant to this Agreement, issue any shares of
its capital stock, effect any stock split or otherwise change its
capitalization as it exists on the date hereof, (b) grant, confer or award
any option, warrant, conversion right or other right not existing on the
date hereof to acquire any shares of its capital stock, (c) increase any
compensation or enter into or amend any employment severance, termination
or similar agreement with any of its present or future officers or
directors, except for normal increases in compensation to employees not
earning more than $50,000 in annual base compensation, consistent with past
practice, and the payment of cash bonuses to employees pursuant to and
consistent with existing plans or programs, nor (d) adopt any new employee
benefit plan (including any stock option, stock benefit or stock purchase
plan) or amend any existing employee benefit plan in any material respect,
except for changes which are less favorable to participants in such plans
or as may be required by applicable law;
5.3.8 Shall not (a) declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital
stock, (b) except in connection with the use of shares of capital stock to
pay the exercise price or tax withholding in connection with stock-based RP
Benefit Plans or as required or otherwise contemplated by this Agreement
(including any refinancing in connection therewith), directly or indirectly
redeem, purchase or otherwise acquire any shares of its capital stock or
capital stock of any of its Subsidiaries, or make any commitment for any
such action, nor (c) split, combine or reclassify any of its capital stock;
5.3.9 Shall not, and shall not permit any of its Subsidiaries to sell,
lease or otherwise dispose of any of its assets (including capital stock of
Subsidiaries) which are material, individually or in the aggregate, except
in the ordinary course of business;
5.3.10 Shall not (a) incur or assume any long-term or short-term debt or
issue any debt securities except for borrowings under existing lines of
credit and indebtedness for working capital in the ordinary course of
business and refinancing of existing indebtedness in the same amount and on
substantially the
A-26
<PAGE>
same terms (and except that either party may incur indebtedness for the
payment of expenses related to the transactions contemplated by this
Agreement and any financing therefor, provided such indebtedness does not
include any material prepayment penalty or equity component), (b) except
for obligations of wholly-owned Subsidiaries; assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, indirectly,
contingently or otherwise) for the obligations of any other person except
in the ordinary course of business consistent with past practices in an
amount not material to such party, taken as a whole, (c) other than to
wholly-owned Subsidiaries, make any loans, advances or capital
contributions to or investments in, any other person, (d) pledge or
otherwise encumber shares of capital stock of such party or its
Subsidiaries, nor (e) mortgage or pledge any of its material assets,
tangible or intangible, or create or suffer to create any material
mortgage, lien, pledge, charge, security interest or encumbrance of any
kind in respect to such asset;
5.3.11 Shall not acquire, sell, lease or dispose of any assets outside
the ordinary course of business or any assets which in the aggregate are
material to such party taken as a whole, or enter into any commitment or
transaction outside the ordinary course of business consistent with past
practice which would be material to such party taken as a whole;
5.3.12 Except as may be required as a result of a change in law or in
GAAP, shall not change any of the accounting principles or practices used
by such party;
5.3.13 Shall not (a) acquire (by merger, consolidation or acquisition of
stock or assets) any corporation, partnership, limited liability company or
other business organization or division thereof or any equity interest
therein, (b) enter into any contract or agreement other than in the
ordinary course of business consistent with past practice which would be
material to such party taken as a whole, (c) authorize any new capital
expenditure or expenditures which, individually, is in excess of $25,000
or, in the aggregate, is in excess of $150,000; provided, that none of the
foregoing shall limit any capital expenditure within the aggregate amount
previously authorized by such party's Board of Directors for capital
expenditures and written evidence thereof has been previously provided to
the other party, nor (d) enter into or amend any contract, agreement,
commitment or arrangement providing for the taking of any action which
would be prohibited hereunder;
5.3.14 Shall not (a) make any Tax election with respect to such party or
its Subsidiaries or settle or compromise any Tax liability material to such
party or its Subsidiaries taken as a whole or (b) file or cause to be filed
any amended Return or claims for refund with respect to such party or its
Subsidiaries;
5.3.15 Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction of business
liabilities reflected or reserved against in, and contemplated by, the
financial statements (or the notes thereto) of such party or incurred in
the ordinary course of business consistent with past practice;
5.3.16 Shall not settle or compromise any pending or threatened suit,
action or claim relating to the transaction contemplated hereby;
5.3.17 Shall not adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or
reorganization; or
5.3.18 Shall not take, or agree in writing or otherwise to take, any of
the actions described in Section 5.3.1 through 5.3.17 or any action that
would make any of the representations and warranties of a party hereto
contained in this Agreement untrue or incorrect as of the date when made.
5.4 Meetings of Stockholders.
5.4.1 RP has received from NatCity Investments, Inc. its opinion on the
fairness to the holders of RP Shares, from a financial point of view, of
the terms of the Merger, pursuant to the terms of an engagement letter
presented to CSI. RP will take all action reasonably necessary in
accordance with applicable law and its Certificate of Incorporation and By-
laws to convene a meeting of its stockholders as promptly as practicable to
consider and vote upon the approval of this Agreement and the transaction
contemplated
A-27
<PAGE>
hereby. The Board of Directors of RP shall recommend such approval and RP
shall take all reasonable lawful action to solicit such approval,
including, without limitation, timely mailing the Proxy Statement (as
defined in Section 5.11); provided, however, that the Board of Directors of
RP shall not be required to make such recommendation if the Board of
Directors of RP reasonably determines in good faith, based as to legal
matters on the advice of outside legal counsel, that such action would
violate its fiduciary duties. CSI shall coordinate and cooperate with RP
with respect to the timing of such meeting and RP shall use its best
efforts to hold such meeting as soon as is practicable.
5.4.2 CSI has received from Lehman Brothers its opinion on the fairness
to the holders of CSI Shares, from a financial point of view, of the terms
of the Merger, pursuant to the terms of an engagement letter presented to
RP. CSI will take all action reasonably necessary in accordance with
applicable law and its Articles of Incorporation and By-laws to convene a
meeting of its stockholders as promptly as practicable to consider and vote
upon the approval of this Agreement and the transaction contemplated
hereby. The Board of Directors of CSI shall recommend such approval and CSI
shall take all reasonable lawful action to solicit such approval,
including, without limitation, timely mailing the Proxy Statement (as
defined in Section 5.11); provided, however, that the Board of Directors of
CSI shall not be required to make such recommendation if the Board of
Directors of CSI reasonably determines in good faith, based as to legal
matters on the advice of outside legal counsel, that such action would
violate its fiduciary duties. RP shall coordinate and cooperate with CSI
with respect to the timing of such meeting and CSI shall use its best
efforts to hold such meeting as soon as is practicable.
5.4.3 The Board of Directors of either CSI or RP may delay the meeting
of such party's stockholders required by this Section 5.4 for no more than
30 days to the extent such Board of Directors reasonably determines in good
faith, based on the advice of outside legal counsel, that it is required by
its fiduciary duties to delay such meeting to consider a bona fide
Acquisition Proposal that such Board of Directors reasonably determines in
good faith contains the material terms of a Superior Proposal received
without violation of this Agreement (provided that in such event the party
which has so delayed such meeting may not terminate this Agreement pursuant
to Section 7.2(a) until at least 5 days after the date on which such
meeting is actually held).
5.5 Flings; other action. Subject to the terms and conditions herein
provided, each party shall: (a) use all reasonable efforts to cooperate with
one another in (i) determining which filings are required to be made prior to
the Effective Date with, and which consents, approvals, permits or
authorizations are required to be obtained prior to the Effective Date from,
governmental or regulatory authorities of the United States, the several states
and foreign jurisdictions in connection with the execution and delivery of this
Agreement and the consummation of the transaction contemplated hereby, and (ii)
timely making all such filings and timely seeking all such consents, approvals,
permits or authorizations; and (b) use all reasonable efforts to take, or cause
to be taken, all other action and do, or cause to be done, all other things
necessary, proper or appropriate to consummate and make effective the
transaction contemplated by this Agreement. If, at any time after the Effective
Date, any further action is necessary or desirable to carry out the purpose of
this Agreement, the proper officers and directors of each party shall take all
such necessary action.
5.6 Inspection of records; access. Except to the extent, if any, prohibited
by applicable law or binding confidentiality agreements with third parties,
from the date hereof to the Effective Date, each party shall allow all
designated officers, attorneys, accountants and other representatives of the
other party (the "Other Party's Representatives") access at all reasonable
times to all employees, stores, offices, warehouses, and other facilities and
to the records and files, correspondence, audits and properties, as well as to
all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs, of such party
and its Subsidiaries; provided, however, the Other Party's Representatives
shall use their reasonable best efforts to avoid interfering with, hindering or
otherwise disrupting the employees of such party in the execution of their
employment duties during any visit to, or inspection of, such party's
facilities.
5.7 Publicity. The initial press release relating to this Agreement shall be
a joint press release and thereafter each party shall, subject to its
respective legal obligations (including requirements of stock exchanges
A-28
<PAGE>
and other similar regulatory bodies), consult with each other, and use
reasonable efforts to agree upon the text of any press release, before issuing
any such press release or otherwise making public statements with respect to
the transaction contemplated hereby and in making any filings with any federal
or state governmental or regulatory agency or with any national securities
exchange with respect thereto.
5.8. Registration Statement/Proxy Statement.
5.8.1. As promptly as practicable after the execution of this Agreement,
CSI and RP shall prepare and file with the SEC preliminary proxy materials
which shall constitute the preliminary Proxy Statement (as defined in
Section 5.11) and a preliminary prospectus with respect to the CSI
Preferred Stock to be issued in connection with the Merger. As promptly as
practicable after comments are received from the SEC with respect to the
preliminary proxy materials and after the furnishing by RP and CSI of all
information required to be contained therein, RP shall file with the
Commission the definitive Proxy Statement and CSI shall file with the
Commission the definitive Proxy Statement and Registration Statement (as
defined in Section 5.11) and CSI and RP shall use all reasonable efforts to
cause the Registration Statement to become effective as soon thereafter as
practicable.
5.8.2. CSI and RP shall make all necessary filings with respect to the
Merger under the Securities Act and the Exchange Act and the rules and
regulations thereunder, under applicable blue sky or similar securities
laws, and shall use all reasonable efforts to obtain required approvals and
clearances with respect thereto.
5.9. Compliance with the Securities Act; Resale Prospectus
5.9.1. Prior to the Effective Date, RP shall deliver to CSI a letter
setting forth a true and complete list of persons whom the Company believes
may be deemed to be "affiliates" of RP as that term is used in paragraphs
(c) and (d) of Rule 145 under the Securities Act (the "Affiliates").
5.9.2. RP shall use its reasonable best efforts to obtain as promptly as
practicable a written agreement from each person who is identified as an
Affiliate in the letter referred to in Section 5.9.1 above, in the form
previously approved by the parties, that he or she will not offer to sell,
sell or otherwise dispose of any of the CSI Preferred Stock (or CSI Common
Stock issuable upon conversion thereof) issued to him or her pursuant to
the Merger, except in compliance with Rule 145 under the Securities Act or
another exemption from the registration requirements of the Securities Act.
RP shall deliver all such written agreements obtained by it to CSI on or
prior to the Effective Date.
5.9.3. CSI shall use its reasonable best efforts to file with the SEC as
promptly as practicable following the Effective Date, and cause to become
effective, a registration statement for the purpose of permitting the CSI
Preferred Stock (or CSI Common Stock issuable upon conversion thereof)
issued to any such Affiliate to be resold by such Affiliate, and to
maintain such registration statement in effect until such time as such
Affiliates may resell such stock pursuant to an applicable exemption
therefrom.
5.10. Takeover Provisions Inapplicable. RP agrees that it will not take any
action to render Section 203 of the DGCL applicable to the Merger and the other
transactions contemplated hereby, and CSI agrees that it will not take any
action to render Sections 78.438 and 78.439 the NGCL applicable to (x) the
acquisition of CSI Preferred Stock pursuant to the Merger or (y) the conversion
of the CSI Preferred Stock into the CSI Common Stock.
5.11. Information in Disclosure Documents, Registration Statements,
etc. Each of CSI, Merger Sub and RP agree that none of the information supplied
by it for inclusion in (a) the Registration Statement to be filed with the SEC
by CSI on Form S-4 under the Securities Act for the purpose of registering
shares of CSI Preferred Stock to be issued in the Merger (the "Registration
Statement") and all other documents required to be filed by CSI with the SEC
and (b) the prospectus/proxy statement of RP and CSI (the "Proxy Statement") to
be mailed to the stockholders of RP and CSI in connection with the Merger will,
in the case of the Proxy Statement or any amendments or supplements thereto, at
the time of mailing of the Proxy Statement or any
A-29
<PAGE>
amendments or supplements thereto, and at the time of the RP Meeting to be held
in connection with the Merger and the CSI meeting to be held in connection with
the Merger, or, in the case of the Registration Statement, at the time it
becomes effective and at the Effective Date, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. CSI and Merger Sub
agree that the Registration Statement will comply as to form in all material
respects with the provisions of the Securities Act and the rules and
regulations promulgated thereunder. RP and CSI agree that the Proxy Statement
will comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder. Each of CSI and RP
agrees to make all reasonable representations and covenants in connection with
the opinions of counsel, if any, required to be attached to the Registration
Statement and Proxy Statement with respect to the correctness of the discussion
therein as to the material federal income tax consequences of the Merger.
5.12. Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Date of each of the conditions of performance set forth
herein or the waiver thereof, perform such further acts and execute such
documents as may be reasonably required to effect the Merger.
5.13. Fees and Expenses.
5.13.1. Except as provided below in this Section 5.13, if the Merger is
not effected, all costs and expenses incurred in connection with this
Agreement and in the transaction contemplated hereby shall be paid by the
party incurring such expense except that (a) to the extent that the RP Fee
or the CSI Fee (each as defined below) is not payable, RP and CSI each
agree to pay 50% of all printing expenses incurred by either party in
connection with the Registration Statement and the Proxy Statement and (b)
as provided in Section 5.13.2 or 5.13.3, as applicable, below.
5.13.2. If this Agreement is terminated by RP pursuant to Section 7.3.3
or this Agreement is terminated by CSI pursuant to Section 7.4.2, RP shall
pay to CSI an amount equal to CSI's and Merger Sub's actual, reasonable and
documented expenses (including without limitation financing therefor)
incurred after January 18, 1999 and on or prior to the termination date of
this Agreement relating to the transactions contemplated by this Agreement
(the "CSI Expenses"), provided that RP shall not be responsible for any CSI
Expenses in excess of $1,000,000 in the aggregate. If during the 365 day
period immediately following the termination of this Agreement, RP shall
enter into a transaction which would constitute an RP Alternative
Transaction with or involving an RP Third Party who directly or indirectly
initiated or otherwise had any contact with RP with respect to any such
transaction prior to the termination of this Agreement, RP will pay to CSI,
in addition to the CSI Expenses, a fee equal to $750,000 (the "CSI Fee"),
and, if RP enters into such a transaction following a termination of this
Agreement pursuant to Section 7.2(b), RP shall also then pay to CSI the CSI
Expenses to the extent, if any, that such CSI Expenses were not otherwise
due and payable at the time of such termination.
5.13.3. If this Agreement is terminated by CSI pursuant to Section 7.4.3
or this Agreement is terminated by RP pursuant to Section 7.3.2, CSI shall
pay to RP an amount equal to RP's actual, reasonable and documented
expenses (including without limitation financing therefor) incurred after
January 18, 1999 and on or prior to the termination date of this Agreement
relating to the transactions contemplated by this Agreement (the "RP
Expenses"), provided that CSI shall not be responsible for any RP Expenses
in excess of $1,000,000 in the aggregate. If during the 365 day period
immediately following the termination of this Agreement, CSI shall enter
into a transaction which would constitute an CSI Alternative Transaction
with or involving a CSI Third Party who directly or indirectly initiated or
otherwise had any contact with CSI with respect to any such transaction
prior to the termination of this Agreement, CSI will pay to RP, in addition
to the RP Expenses, a fee equal to $750,000 (the "RP Fee"), and, if CSI
enters into such a transaction following a termination of this Agreement
pursuant to Section 7.2(c), CSI shall also then pay to RP the RP Expenses
to the extent, if any, that such RP Expenses were not otherwise due and
payable at the time of such termination.
A-30
<PAGE>
5.13.4. If this Agreement is terminated pursuant to Section 7.2(a)
because the condition set forth in Section 6.1.7 has not been satisfied
despite the reasonable best efforts of RP to cooperate in satisfying such
condition, CSI shall pay the RP Expenses to the extent incurred prior to
notice from CSI to RP that such condition will not be, or is not likely to
be, satisfied.
5.13.5. Any CSI or RP Fee and/or CSI or RP Expenses payable pursuant to
Section 5.13.2, 5.13.3 or 5.13.4 as the case may be, shall be paid in
immediately available funds within five business days after a demand for
payment following the first to occur of any of the events described in
Section 5.13.2, 5.13.3 or 5.13.4, as the case may be, and entitling a party
to payment; provided that, in no event shall RP or CSI, as the case may be,
be required to pay such Fee and/or Expenses to the entities entitled
thereto, if, immediately prior to the termination of this Agreement, the
entity entitled to receive such Fee and/or Expenses was in material breach
of its obligations under this Agreement (and such breach, if curable, was
not cured within 30 days after written notice of such breach is given to
such entity by the other party).
5.14. Stockholders' Agreement; Voting Agreements.
(a) Simultaneously with the execution of this Agreement CSI is entering into
(i) a Stockholder Agreement with certain stockholders or prospective
stockholders of CSI identified in Exhibit 5.14(a)(i) hereto providing for the
election of directors of CSI and (ii) Voting Agreements pursuant to which
certain stockholders of RP identified in Exhibit 5.14(a)(ii) hereto agree to
vote all shares of RP Common Stock over which they have voting power in favor
of the Merger and the transactions contemplated hereby. (b) Simultaneously with
the execution of this Agreement, RP is entering into Voting Agreements pursuant
to which certain stockholders of CSI identified in Exhibit 5.14(b) hereto agree
to vote all shares of CSI Common Stock over which they have power in favor of
the Merger and the transactions contemplated hereby.
5.15. Directors' and Officers' Insurance and Indemnification. CSI agrees
that at all times after the Effective Date, it will and shall cause the
Surviving Corporation to, for not less than six years, indemnify each person
who is a director or officer of RP on the date hereof (individually an
"Indemnified Party" and collectively the "Indemnified Parties"), with respect
to any claim, liability, loss, damage, judgment, fine, penalty, amount paid in
settlement or compromise, cost or expense, including reasonable fees and
expenses of legal counsel ("Indemnified Liability"), to the extent such
Indemnified Party would have been indemnified pursuant to RP's articles of
incorporation or by-laws as in effect as of the date hereof, based in whole or
in part on, or arising in whole or in part out of, any matter existing or
occurring at or prior to the Effective Date whether commenced, asserted or
claimed before or after the Effective Date, and shall advance expenses to such
Indemnified Party to the extent such Indemnified Party would have been advanced
expenses pursuant to RP's articles of incorporation or by-laws as in effect as
of the date hereof. CSI shall, and shall cause the Surviving Corporation to,
maintain in effect for not less than six years after the Effective Date, the
current policies of directors' and officers' liability insurance maintained by
RP on the date hereof (provided that CSI may substitute therefor policies
having at least the same coverage and containing terms and conditions which are
no less advantageous to the persons currently covered by such policies as
insured) with respect to matters existing or occurring on or prior to the
Effective Date.
5.16. RP Stock Plans. CSI agrees to file a registration statement with
respect to any RP stock option plan, to the extent that such filings are
required to enable holders of options granted under Section 1.8.1 to freely
exercise such options and (except for holders who may be deemed to be
affiliates of CSI) to freely sell shares acquired by the exercise of such
options (assuming such shares would be freely salable pursuant to an effective
registration statement covering such plans). Nothing set forth herein shall
require CSI to register such exercises on any form other than Form S-8. On and
after the Effective Date, CSI will assume and discharge all obligations of RP
with respect to registration rights agreements disclosed on the RP Disclosure
Schedule.
5.17. Reorganization. The parties hereto intend to adopt this Agreement and
the transactions contemplated hereby as a plan of reorganization under Section
368(a) of the Code. No party hereto, without the consent of the other parties
hereto, will take any action that could reasonably be expected to cause the
Merger
A-31
<PAGE>
to fail to qualify as a reorganization within the meaning of Section 368(a) of
the Code. Each of the parties shall report the Merger for income tax purposes
as a reorganization within the meaning of Section 368(a) of the Code (and any
comparable state or local statute).
ARTICLE 6.
Conditions.
6.1. Conditions to each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing of the following conditions:
6.1.1. This Agreement and the transaction contemplated hereby shall have
been approved in the manner required by applicable law or by applicable
regulations of any stock exchange or other regulatory body and by the
holders of the issued and outstanding shares of capital stock of each of RP
and CSI entitled to vote thereon.
6.1.2. None of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transaction contemplated by this Agreement or has a
material adverse effect on a party hereto (including the requirement that
either party divest any material portion of its assets). In the event any
such order or injunction shall have been issued, each party agrees to use
its reasonable efforts to have any such injunction lifted.
6.1.3. All consents, authorizations, orders and approvals of (or filings
or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made, except for
filings in connection with the Merger and any other documents required to
be filed after the Effective Date and except where the failure to have
obtained or made any such consent authorization, order, approval, filing or
registration would not have a CSI Material Adverse Effect or an RP Material
Adverse Effect following the Effective Date.
6.1.4. The CSI Common Stock issuable upon conversion of the CSI
Preferred Stock shall have been listed or approved for listing upon notice
of issuance on the NASDAQ National Market System, if qualified, or
otherwise quoted on NASDAQ.
6.1.5. The Registration Statement shall have been declared effective.
6.1.6. All applicable Blue Sky laws shall have been complied with.
6.1.7. CSI shall have received sufficient financing to satisfy ongoing
working capital needs of CSI and RP following the Transaction and to
refinance existing indebtedness of both companies (and their respective
Subsidiaries to the extent applicable) on terms substantially no less
favorable than the terms of the most current proposals therefor furnished
by CSI to RP prior to the date of this Agreement, or otherwise reviewed and
approved by each party in good faith.
6.2. Conditions to Obligation of RP to Effect the Merger. The obligation of
RP to effect the Merger shall be subject to the fulfillment at or prior to the
Closing of the following conditions:
6.2.1. CSI shall have performed in all material respects its agreements
contained in this Agreement required to be performed on or prior to the
Closing and the representations and warranties of CSI contained in this
Agreement and in any document delivered in connection herewith shall be
true and correct in all material respects (or, to the extent any such
representation is qualified by reference to materiality or to a CSI
Material Adverse Effect, is entirely true and correct) as of the Closing
Date, and RP shall have received a certificate of the President or a Vice
President of CSI, dated the Closing Date, certifying to such effect.
A-32
<PAGE>
6.2.2. From the date of this Agreement through the Effective Date, there
shall not have occurred any change in the financial condition, business,
operations or prospects of CSI and its Subsidiaries, taken as a whole, that
would reasonably be expected to have a CSI Material Adverse Effect.
6.2.3. RP shall have received a certificate from the Secretary of CSI
and Merger Sub, in form and substance reasonably satisfactory to RP,
certifying the adoption of resolutions by the Board of Directors and
stockholders of CSI approving an amendment to the Amended and Restated
Articles of Incorporation of CSI to increase the number of authorized
preferred shares from 4,000,000 to 10,000,000, and to create, and approve
the issuance of, a new series of shares, the Series C Convertible Preferred
Stock, par value $.001 per share, to be delivered in connection with the
Merger.
6.2.4. There shall have been no change of applicable law after the date
hereof as a result of which the Merger will fail to qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Code.
6.3. Conditions to Obligation of CSI to Effect the Merger. The obligations
of CSI to effect the Merger shall be subject to the fulfillment at or prior to
the Closing of the following conditions:
6.3.1. RP shall have performed in all material respects its agreements
contained in this Agreement required to be performed on or prior to the
Closing and the representations and warranties of RP contained in this
Agreement and in any document delivered in connection herewith shall be
true and correct in all material respects (or, to the extent any such
representation is qualified by reference to materiality or to an RP
Material Adverse Effect, is entirely true and correct) as of the Closing
Date, and CSI shall have received a certificate of the President or a Vice
President of RP, dated the Closing Date, certifying to such effect;
6.3.2. From the date of this Agreement through the Effective Date, there
shall not have occurred any change in the financial condition, business,
operations or prospects of RP and the RP Subsidiaries, taken as a whole,
that would reasonably be likely to have an RP Material Adverse Effect.
6.3.3. CSI shall have received a certificate from the Secretary of RP,
in form and substance reasonably satisfactory to CSI certifying the
adoption of resolutions by the RP Board of Directors and stockholders in
favor of this Agreement, the Merger and the transactions contemplated by
this Agreement.
6.3.4 RP shall take all actions necessary to amend the FM Precision Golf
Manufacturing Corp 401(k) Plan (the "401(k) Plan") to restrict eligibility
to participate in the 401(k) Plan, effective no later than the Closing
Date, to employees of RP, by replacing the standardized prototype form of
plan with a non-standardized prototype form of plan, in form and substance
reasonably satisfactory to CSI.
ARTICLE 7.
Termination.
7.1. Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Date, before or
after the approval of this Agreement by the stockholders of RP and CSI, by the
mutual consent of the parties hereto.
7.2. Termination by Either RP or CSI. This Agreement may be terminated and
the Merger may be abandoned by action of the Board of Directors of either RP or
CSI if: (a) the Merger shall not have been consummated on or before 120 days
after the date of this Agreement; (b) RP's stockholders have voted against the
approval required by Section 6.1.1 at a meeting duly convened therefor or at an
adjournment thereof; (c) 1SI's shareholders have voted against the approval
required by Section 6.1.1 at a meeting duly convened therefor or at an
adjournment thereof; (d) a United States federal or state court of competent
jurisdiction or United States federal or state governmental, regulatory or
administrative agency or commission shall have issued an order, decree or
ruling or taken any other action permanently restraining, enjoining or
otherwise
A-33
<PAGE>
prohibiting the transaction contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and non-appealable;
provided, that the party seeking to terminate this Agreement pursuant to this
clause (d) shall have used all reasonable efforts to remove such injunction,
order or decree; and provided, in the case of a termination pursuant to clause
(a) above, that the terminating party shall not have breached in any material
respect its obligations under this Agreement in any manner that shall have
proximately contributed to the occurrence of the failure referred to in said
clause.
7.3. Termination by RP. This Agreement may be terminated and the Merger may
be abandoned at any time prior to the Effective Date, before or after the
adoption and approval by the stockholders of RP referred to in Section 6.1.1,
by action of the Board of Directors of RP, if:
7.3.1. (a) There has been a breach by CSI of any representation or
warranty contained in this Agreement which would reasonably be expected to
have a CSI Material Adverse Effect, or (b) there has been a material breach
of any of the covenants or agreements set forth in this Agreement on the
part of CSI, which breach is not curable or, if curable, is not cured
within 30 days after written notice of such breach is given by RP to CSI.
7.3.2. Whether or not permitted to do so by this Agreement, the Board of
Directors of CSI or CSI shall (i) withdraw, modify or change its approval
or recommendation of this Agreement or the Merger in a manner adverse to
RP, (ii) approve or recommend to the stockholders of CSI a CSI Acquisition
Proposal or CSI Alternative Transaction, (iii) approve or recommend that
the stockholders of CSI tender their shares in any tender or exchange offer
that is a CSI Alternative Transaction or (iv) take any position or make any
disclosures to CSI's stockholders permitted pursuant to Section 5.2 which
has the effect of any of the foregoing. As used herein, "CSI Alternative
Transaction" means any of (i) a transaction pursuant to which any person
(or group of persons) other than CSI or its affiliates (a "CSI Third
Party") acquires or would acquire beneficial ownership or the right to
acquire beneficial ownership of more than 50% of the outstanding shares of
any class of equity securities of CSI, whether from CSI or pursuant to a
tender offer or exchange offer or otherwise, (ii) a merger or other
business combination involving CSI pursuant to which any CSI Third Party
acquires more than 50% of the outstanding equity securities of CSI or the
entity surviving such merger or business combination (iii) any transaction
pursuant to which any CSI Third Party acquires control of assets of CSI
(including for this purpose the outstanding equity securities of any of the
CSI Subsidiaries and securities of the entity surviving any merger or
business combination to which any of the CSI Subsidiaries is a party) or
any of the CSI Subsidiaries having a fair market value (as determined by
the Board of Directors of CSI in good faith) equal to more than 20% of the
fair market value of all the assets of CSI and the CSI Subsidiaries, taken
as a whole, immediately prior to such transaction or (iv) any other
consolidation, business combination, recapitalization or similar
transaction involving CSI or any of the CSI Subsidiaries, other than the
transactions contemplated by this Agreement; provided, however, that the
term CSI Alternative Transaction shall not include any acquisition of
securities by a broker dealer in connection with a bona fide public
offering of such securities.
7.3.3. The Board of Directors of RP has received an RP Superior Proposal
and the Board of Directors of RP reasonably determines in good faith (upon
the advice of independent outside counsel) that a failure to terminate this
Agreement and enter into an agreement to effect such RP Superior Proposal
would constitute a breach of its fiduciary duties; provided that this
Agreement shall not be terminated pursuant to this Section 7.3.3 unless
simultaneously with such termination, RP enters into a definitive
acquisition, merger or similar agreement to effect the RP Superior
Proposal.
7.4. Termination by CSI. This Agreement may be terminated and the Merger may
be abandoned at any time prior to the Effective Date by action of the Board of
Directors of CSI, if:
7.4.1. (a) There has been a breach by RP of any representation or
warranty contained in this Agreement which would have or would be
reasonably likely to have an RP Material Adverse Effect, or (b) there has
been a material breach of any of the covenants or agreements set forth in
this Agreement on the part of RP, which breach is not curable or, if
curable, is not cured within 30 days after written notice of such breach is
given by CSI to RP
A-34
<PAGE>
7.4.2. Whether or not permitted to do so by this Agreement, the Board of
Directors of RP or RP shall (i) withdraw, modify or change its approval or
recommendation of this Agreement or the Merger in a manner adverse to CSI, (ii)
approve or recommend to the stockholders of RP an RP Acquisition Proposal or RP
Alternative Transaction, (iii) approve or recommend that the stockholders of RP
tender their shares in any tender or exchange offer that is an RP Alternative
Transaction or (iv) take any position or make any disclosures to RP's
stockholders permitted pursuant to Section 5.1 which has the effect of any of
the foregoing. As used herein, "RP Alternative Transaction" means any of (i) a
transaction pursuant to which any person (or group of persons) other than CSI
or its affiliates (an "RP Third Party") acquires or would acquire beneficial
ownership or the right to acquire beneficial ownership of more than 50% of the
outstanding shares of any class of equity securities of RP, whether from RP or
pursuant to a tender offer or exchange offer or otherwise, (ii) a merger or
other business combination involving RP pursuant to which any RP Third Party
acquires more than 50% of the outstanding equity securities of RP or the entity
surviving such merger or business combination (iii) any transaction pursuant to
which any RP Third Party acquires or would acquire control of assets of RP
(including for this purpose the outstanding equity securities of any of the RP
Subsidiaries and securities of the entity surviving any merger or business
combination to which any of the RP Subsidiaries is a party) or any of the RP
Subsidiaries having a fair market value (as determined by the Board of
Directors of RP in good faith) equal to more than 20% of the fair market value
of all the assets of RP and the RP Subsidiaries, taken as a whole, immediately
prior to such transaction, or (iv) any other consolidation, business
combination, recapitalization or similar transaction involving RP or any of the
RP Subsidiaries, other than the transactions contemplated by this Agreement;
provided, however, that the term RP Alternative Transaction shall not include
any acquisition of securities by a broker dealer in connection with a bona fide
public offering of such securities.
7.4.3 The Board of Directors of CSI has received a CSI Superior Proposal and
the Board of Directors of CSI reasonably determines in good faith (upon the
advice of independent outside counsel) that a failure to terminate this
Agreement and enter into an agreement to effect CSI Superior Proposal would
constitute a breach of its fiduciary duties; provided that this agreement shall
not be terminated pursuant to this Section 7.4.3 unless simultaneously with
such termination CSI enters into a definitive acquisition, merger or similar
agreement to effect the CSI Superior Proposal.
7.5. Effect of termination and abandonment. In the event of termination of
this Agreement and the abandonment of the Merger pursuant to this Article 7,
all obligations of the parties hereto shall terminate, except the obligations
of the parties pursuant to Sections 5.11, 5.13, and this 7.5 and Article 8 and
the Confidentiality Agreement referred to in Section 8.4. Moreover, in the
event of termination of this Agreement pursuant to Section 7.3 or 7.4, nothing
herein shall prejudice the ability of the non-breaching party from seeking
damages from the other party for any breach of this Agreement, including
without limitation, attorneys' fees and the right to pursue any remedy at law
or in equity.
7.6. Extension; waiver. At any time prior to the Effective Date, any party
hereto, by action taken by its Board of Directors, may, to the extent legally
allowed, (a) extend the time for the performance of any of the obligations or
other acts of the other party hereto, (b) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document to be delivered pursuant hereto, and (c) waive compliance with any of
the agreements or conditions for the benefit of such party contained herein.
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed by or on
behalf of the party granting such extension or waiver.
ARTICLE 8.
General Provisions.
8.1. Nonsurvival, representations and warranties. All representations and
warranties in this Agreement or in any instrument delivered pursuant to this
Agreement shall be deemed to the extent expressly provided herein to be
conditions to the Merger and shall not survive the Merger.
A-35
<PAGE>
8.2. Notices. Any notice required to be given hereunder shall be sufficient
if in writing, and sent by facsimile transmission and by courier service (with
proof of service), hand delivery or certified or registered mail (return
receipt requested and first-class postage prepaid), addressed as follows:
<TABLE>
<CAPTION>
If to RP: If to CSI:
<S> <C>
Royal Precision, Inc. Coyote Sports, Inc.
15170 North Hayden Road 2291 Arapahoe Avenue
Scottsdale, Arizona 89260 Boulder, Colorado 80302
Telecopier No.: (602) 627-0206 Telecopier No.: (303) 818-4626
Telephone No.: (602) 627-0270 Telephone No.: (303) 933-6609
Attn: Chairman of the Board Attn: President
</TABLE>
or to such other address as any party shall specify by written notice so
given and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
8.3. Assignment; binding effect; benefit. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the
parties hereto or their respective successors, and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
8.4. Entire agreement. This Agreement, the Exhibits, the CSI Disclosure
Schedule, the RP Disclosure Schedule, the Confidentiality Agreement dated
November 16, 1997, between RP and CSI and any documents delivered by the
parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings (oral and written) among the parties with respect
thereto. No addition to or modification of any provision of this Agreement
shall be binding upon any party hereto unless made in writing and signed by all
parties hereto. During the term of this Agreement, the Confidentiality
Agreement may not be terminated by either party thereto.
8.5. Amendment. This Agreement may be amended by the parties hereto, by
action taken by their respective Boards of Directors, at any time before or
after approval of matters presented in connection with the RP Merger by the
stockholders of RP and CSI, but after any such stockholder approval, no
amendment shall be made which by law requires the further approval of
stockholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed by or on behalf of each of
the parties hereto.
8.6. Governing law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules
of conflict of laws.
8.7. Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies of this
Agreement, each of which may be signed by less than all of the parties hereto,
but together all such copies are signed by all of the parties hereto.
8.8. Headings. Headings of the Articles and Sections of this Agreement are
for the convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
8.9. Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
A-36
<PAGE>
8.10. Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
giving such action of compliance with any representations, warranties,
covenants or agreements contained in this Agreement. The waiver by any party
hereto of a breach of any provision hereunder shall not operate or be construed
as a waiver of any prior or subsequent breach of the same or any other
provision hereunder.
8.11. Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or otherwise affecting the validity or enforceability of any of the
terms or provisions of this Agreement in any other jurisdiction. If any
provision of this Agreement is so broad as to be unenforceable, the provision
shall be interpreted to be only so broad as is enforceable.
8.12. Enforcement of agreement. The parties hereto agree that irreparable
damage would occur in the event that any provision of this Agreement was not
performed in accordance with its specific terms or was otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court having jurisdiction of the matter,
this being in addition to any other remedy to which they may be entitled at law
or in equity.
8.13. Subsidiaries. As used in this Agreement, the word "Subsidiary" when
used with respect to any party means any corporation or other organization,
whether incorporated or unincorporated, of which such party directly or
indirectly owns or controls at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of
the board of directors or others performing similar functions with respect to
such corporation or other organization, or any organization of which such party
is a general partner.
8.14 Knowledge. When references are made in this Agreement to any
representation or warranty being "to the knowledge" of CSI or RP, or similar
language, "knowledge" shall mean (a) the actual knowledge of any director or
senior executive officer of such party or (b) such knowledge as any director or
senior executive officer of such party could reasonably be expected to have
following a reasonably comprehensive investigation of the matter subject to
such representation or warranty.
A-37
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf as of the day and year first written
above.
Coyote Sports, Inc.
/s/ James M. Probst
By: _________________________________
Name: James M. Probst
Title: President and CEO
RP Acquisition Corp.
/s/ James M. Probst
By: _________________________________
Name: James M. Probst
Title:
Royal Precision, Inc.
/s/ Raymond J. Minella
By: _________________________________
Name: Raymond J. Minella
Title: Chairman of the Board
A-38
<PAGE>
Exhibit 1.4.1
Form of Certificate of Designation
AMENDED AND RE STATED FORM OF
CERTIFICATE OF DESIGNATION
(Pursuant to the provisions of Section 78.1955
of the General Corporation Law of the State of Nevada)
It is hereby certified that:
1. The name of the corporation (the "Corporation") is Coyote Sports,
Inc.
2. Set forth hereinafter is a copy of a resolution, containing a
statement of the voting powers, preferences, limitations, restrictions, and
relative rights of the Series C Preferred Stock hereinafter designated,
adopted by the Board of Directors of the Corporation, pursuant to a
provision of the Amended and Restated Articles of Incorporation relating to
the issuance of said Series C Preferred Stock by resolution of the Board of
Directors:
RESOLVED, that a series of the authorized preferred stock, par value $.001
per share, of the Corporation be created hereby, and that the designations and
amounts thereof and the voting powers, preferences, and relative,
participating, optional and other special rights, of the shares of such series,
and the qualifications, limitations, or restrictions thereof, are as follows:
1. Designations and Numbers of Shares. ( ) shares of the Series C
Convertible Redeemable Preferred Stock of the Corporation are hereby
constituted as a series of preferred stock, $.001 par value per share,
stated value $ (/2/) per share (the "Stated Value") and designated as
"Series C Convertible Redeemable Preferred Stock" (hereinafter called the
"Series C Preferred Stock").
2. Dividends and Distributions.
(i) The holders of the Series C Preferred Stock shall be entitled to
preferential cash dividends with respect thereto at the rate of 6% of the
Stated Value thereof per annum, payable ratably per share of Series C
Preferred Stock outstanding if, as and when declared by the board of
directors of the Corporation or any duly authorized committee of that board
(the "Board of Directors") out of funds legally available for the payment
thereof. Such preferential dividends shall accrue daily from the date of
issuance of the applicable preferred share (the "Issuance Date") and shall
be payable on the 1st day of January, April, July, and October, or if any
such dividend payment date is a Saturday, Sunday or legal holiday, then on
the next day which is not a Saturday, Sunday or legal holiday.
(ii) Dividends on the Series C Preferred Stock shall be cumulative so
that if, for any dividend accrual period, cash dividends in the amount
specified in paragraph (a) of this Section 2 are not declared and paid or
set aside for payment, the amount of accrued but unpaid dividends shall
accumulate, and such accrued but unpaid dividends shall be added to the
preferential cash dividends payable for subsequent dividend accrual
periods. Accrued but unpaid dividends shall bear interest at the rate of 6%
per annum until paid.
(iii) Whenever dividends or distributions payable on the Series C
Preferred Stock, as provided in this Section 2, are in arrears, thereafter
and until all accrued and unpaid dividends and distributions, whether or
not declared, on shares of Series C Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:
1) declare or pay dividends on or make any other distributions on any
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series C Preferred Stock; or
- --------
(2) Stated value to be set at (x) $6.00 multiplied by (y) the reciprocal of the
final merger exchange ratio of shares of Series C Preferred Stock to shares
of Royal Precision, Inc. Common Stock in the merger pursuant to which the
Series C Preferred Stock is to be issued. (For the avoidance of doubt,
based on the shares of common stock of the Corporation and Royal Precision,
Inc. stated to be outstanding in the Agreement and Plan of Merger with
respect to such merger, such exchange ratio would be 1.0195, such
reciprocal would be .9809, and such stated value would be $5.8854).
A-39
<PAGE>
2) declare or pay dividends on or make any other distributions on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series C Preferred Stock
except dividends or distributions paid ratably on the Series C Preferred
Stock and all such parity stock on which dividends or distributions are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled.
3. Redemption.
3.1 Redemption at Option of the Corporation. The Corporation may, by
resolution of its Board of Directors (excluding any director who is, or is
designated by, any holder of the Series C Preferred Stock or any Affiliate
of such a holder) subject to any applicable law, at any time, or from time
to time, in whole or in part, on a pro-rata basis among the holders of
Series C Preferred Stock in proportion to the number of shares of Series C
Preferred Stock held by them, redeem the shares of Series C Preferred Stock
from each holder thereof (each date set for redemption being referred to
herein as a "Redemption Date") at a price per share of Series C Preferred
Stock payable in cash equivalent to (i) the Stated Value plus (ii) all
accrued and unpaid dividends (whether or not declared or due) to the
Redemption Date fixed for the redemption of such shares of Series C
Preferred Stock (the "Redemption Price").
3.2 Procedures Applicable to Redemptions.
(a) Redemption Notice. At least thirty (30) days but not more than sixty
(60) days prior to a Redemption Date, written notice (a "Redemption
Notice") shall be delivered by the Corporation to each holder of Series C
Preferred Stock which the Corporation seeks to redeem on such Redemption
Date (in each case, a "Redeeming Holder"). The Redemption Notice shall
state:
(i) the number of shares of Series C Preferred Stock to be redeemed
from such Redeeming Holder;
(ii) the Redemption Date and the Redemption Price; and
(iii) the manner and place designated for the Redeeming Holders to
surrender to the Corporation their certificates representing the shares
of Series C Preferred Stock to be redeemed in exchange for the
Redemption Price.
(b) Deliveries of Stock Certificates. On or before the Redemption Date,
each Redeeming Holder shall surrender to the Corporation the certificate or
certificates representing the shares of Series C Preferred Stock to be
redeemed, in the manner and the place designated in the Redemption Notice
and thereupon the Redemption Price for those shares shall be payable on the
Redemption Date to the order of the person whose name appears on that
certificate or certificates, and each surrendered certificate shall be
canceled and retired. In the event that less than all of the shares of
Series C Preferred Stock represented by a certificate surrendered for
redemption are redeemed as aforesaid, a new certificate or certificates
shall be issued representing the unredeemed shares. The Redemption Notice
shall not be given effect in the case of any shares of Series C Preferred
Stock as to which a proper notice of conversion, specifying an effective
date prior to the Redemption Date, has been duly received by the
Corporation prior to the Redemption Date, which shares shall be converted
into Common Stock in accordance with such notice of conversion pursuant to
the terms hereof.
(c) Cessation of Dividend Accrual, etc. If on the Redemption Date the
Redemption Price is either paid or made available for payment through the
deposit arrangement specified in clause (d) below, then notwithstanding
that certificates evidencing any of the shares of Series C Preferred Stock
so elected to be redeemed shall not have been surrendered, dividends on
such shares shall cease to accrue after the Redemption Date and all rights
with respect to the redeemed shares of Series C Preferred Stock shall
forthwith after the Redemption Date terminate, except only the right of the
Redeeming Holders to receive the Redemption Price without interest upon
surrender of their certificate or certificates representing the shares of
Series C Preferred Stock that have been redeemed, subject to applicable
law. If the Corporation shall default in the payment of the Redemption
Price, then, with respect to all shares of Series C Preferred
A-40
<PAGE>
Stock for which the Redemption Price shall not have been paid, dividends
shall continue to accrue on such redeemed shares of Series C Preferred
Stock and all other rights shall remain in effect with respect to such
shares until the Corporation shall pay the Redemption Price on such shares.
(d) Deposit of Funds for Redemption. On or prior to the Redemption Date,
the Corporation shall deposit in a segregated trust account with any United
States federally or state chartered commercial bank or trust company having
net capital of not less than $100,000,000 (or a subsidiary thereof) a sum
equal to the aggregate Redemption Price (either in cash or certificates
representing shares of Common Stock) of all shares of Series C Preferred
Stock to be redeemed, with irrevocable instructions and authority to the
bank or trust company to pay, or deliver on or after the Redemption Date or
prior thereto, the Redemption Price to the respective holders upon the
surrender of their share certificates. From and after the Redemption Date
if such deposit shall have been made, the shares so called for redemption
shall be redeemed and shall after such redemption be canceled and no longer
be available for issuance as shares of Series C Preferred Stock by the
Corporation but shall have the status of authorized but unissued shares of
Preferred Stock of the Corporation without designation as to rights,
preferences, limitations or series until such shares are once more
designated as part of a particular series with particular rights,
preferences or limitations by the Board of Directors of the Corporation.
The deposit shall constitute full payment of the redeemed shares of Series
C Preferred Stock to their holders, and from and after the Redemption Date
the shares shall be deemed to be no longer outstanding, and the holders
thereof shall cease to be stockholders with respect thereto except for the
right to receive from the bank or trust company payment or delivery of the
Redemption Price of the shares, without interest, upon surrender of their
certificates therefor. Any funds so deposited and unclaimed at the end of
one year from the Redemption Date shall be released or repaid to the
Corporation, after which time the holders of shares redeemed shall be
entitled to receive payment of the Redemption Price only from the
Corporation. No sinking fund shall be established in relation to the
redemption of Series C Preferred Stock.
4. Conversion Rights; Certain Issuances to Affiliates. (a) All holders of
record of shares of Series C Preferred Stock shall have the option, upon notice
to the Corporation, to convert any or all of their shares of Series C Preferred
Stock in the ratio of one share of Common Stock for each share of Series C
Preferred Stock (the "Conversion") effective on the date specified in each such
holder's notice to the Corporation, which shall be at least three (3) days but
not more than twenty (20) days after the date such notice is given. Upon the
giving of such notice, such holder of shares of Series C Preferred Stock shall
surrender his or its certificate or certificates for all such shares to the
Corporation and shall thereafter receive certificates for the number of shares
of Common Stock to which such holder is entitled pursuant to this Section 4. On
the effective date of the Conversion, all rights with respect to the Series C
Preferred Stock so converted, including the rights, if any, to receive notices
and vote, will terminate, except only the rights of the holders thereof, upon
surrender of their certificate or certificates therefor, to receive
certificates for the number of shares of Common Stock into which such Series C
Preferred Stock has been converted, and payment of any declared or accrued but
unpaid dividends thereon. Payment of such dividends upon Conversion shall be
made in cash as promptly as practicable after the effective date of the
Conversion; provided that to the extent that such payment is not then permitted
by the terms of the Corporation's then-outstanding indebtedness and applicable
law, payment may, at the option of the Board of Directors of the Corporation
(excluding any director who is, or is designated by, any holder of the Series C
Preferred Stock or any Affiliate of such a holder), be made either (i) by
delivery of a promissory note of the Corporation on the terms set forth in
Annex A hereto in a principal amount equal to the cash amount of such dividends
or (ii) by delivery of shares of Common Stock in a number equal to (x) the cash
amount of such dividends divided by (y) the average daily closing prices of the
Common Stock on the Nasdaq Small Cap Market (or the principal securities
exchange or securities market on which the Common Stock is then being traded)
over the twenty (20) consecutive trading days ending on the trading day
immediately prior to the effective date of the Conversion. If so required by
the Corporation, certificates surrendered for conversion shall be endorsed or
accompanied by written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered holder or by
his or its attorney duly authorized in writing. As soon as practicable after
the effective date of the Conversion and the surrender of the certificate or
certificates for Series C Preferred Stock, the Corporation shall cause to be
issued and delivered to such holder, or on his or its
A-41
<PAGE>
written order, a certificate or certificates for the number of shares of Common
Stock issuable on such conversion in accordance with the provisions hereof.
(b) In the event the Corporation shall, at any time after the issuance of
any share of Series C Preferred Stock, declare or pay any dividend or make any
distribution on Common Stock payable in shares of Common Stock, or effect a
subdivision or split or a combination, consolidation or reverse split of the
outstanding shares of Common Stock into a greater or lesser number of shares of
Common Stock, then in each such case a provision shall be made, as applicable,
for either (i) delivery upon conversion of the Series C Preferred Stock of, on
a per share basis, the number of shares of Common Stock paid on each share of
Common Stock into which such Series C Preferred Stock is converted, or (ii) a
subdivision or split or a combination, consolidation or reverse split of the
Common Stock into which the Series C Preferred Stock is convertible.
(c) If and whenever on or after the Issuance Date of the Series C Preferred
Stock (except pursuant to the exercise, in accordance with their terms, of any
rights, options or warrants, or other securities convertible into or
exercisable or exchangeable for Common Stock, outstanding as of such Issuance
Date), the Corporation issues or sells any shares of Common Stock to any
Affiliate of the Corporation for a consideration per share less than the
average closing market price for such Common Stock for the thirty (30)
consecutive trading days ending three (3) trading days immediately preceding
the date of such issuance or sale (the "Market Price"), then forthwith upon
such issuance or sale, the number of shares of Common Stock issuable upon
conversion in respect of each share of Series C Preferred Stock shall be
adjusted so that such number of shares shall equal (A) the number of shares of
Common Stock issuable upon conversion in respect of a share of Series C
Preferred Stock immediately prior to the date of such issuance or sale
multiplied by (B) a fraction, (x) the numerator of which shall be (i) the
number of shares of Common Stock outstanding on the date of such issuance or
sale, plus (ii) the number of additional shares of Common Stock issued or sold,
and (y) the denominator of which shall be (i) the number of shares of Common
Stock outstanding on the date of such issuance or sale, plus (ii) the number of
additional shares of Common Stock which the aggregate consideration received by
the Corporation upon such issuance or sale would purchase at such Market Price
per share of Common Stock. Notwithstanding the foregoing, no such adjustment
shall be required by this Section 4(c) or otherwise in respect of (x) the
issuance or exercise of any warrants issued in connection with any financing
transaction involving an Affiliate of the Corporation on terms substantially
equivalent to those customary in transactions of a similar nature as determined
in good faith by, and reflected in written resolutions of, the Corporation's
Board of Directors, or (y) the issuance or exercise of any options issued to
officers or employees of the Corporation as approved by the Corporation's Board
of Directors. In case any shares of Common Stock are issued for consideration
consisting of securities or other property other than cash, the value of such
consideration shall be as determined in good faith by, and reflected in written
resolutions of, the Corporation's Board of Directors. In the case of the
issuance or sale of Common Stock pursuant to the exercise of any rights,
options or warrants, or other securities convertible into or exercisable or
exchangeable for Common Stock, the date as of which the "Market Price" of
Common Stock shall be determined for purposes of this Section 4(c) shall be the
initial date of issuance of such rights, options or warrants or other
securities, and not, for example, the date of such exercise.
(d) Except as specifically provided in Section 4(b) or (c), the number of
shares of Common Stock issuable upon conversion of a share of Series C
Preferred Stock shall not be adjusted by reason of any issuance or sale of
Common Stock by the Corporation regardless of the consideration received
therefor.
5. Liquidation. Upon any voluntary or involuntary dissolution, liquidation,
or winding up of the Corporation (a "Liquidation"), the holder of each share of
Series C Preferred Stock then outstanding shall be entitled to be paid out of
the assets of the Corporation available for distribution to its stockholders,
before any distribution of assets shall be made to the holders of Common Stock
of the Corporation or to the holders of other stock of the Corporation that
ranks junior to such series of the Series C Preferred Stock in respect to
distributions upon a Liquidation of the Corporation ("Junior Stock"), an amount
equal to the Stated Value of such Series C Preferred Stock, plus an amount
equal to all dividends accrued and unpaid on such share on the date fixed for
distribution of assets of the Corporation to the holders of the Series C
Preferred Stock. Neither a
A-42
<PAGE>
consolidation or merger of the Corporation with or into any other entity, nor a
merger of any other entity with or into the Corporation, nor a sale or transfer
of all or any part of the Corporation's assets for cash or securities or any
other property, shall be considered a Liquidation. Written notice of any
Liquidation shall be given to the holders of the Series C Preferred Stock not
less than thirty (30) days prior to any payment date stated therein.
6. Voting Rights. The holder of each share of Series C Preferred Stock shall
have the right to one vote for each share of Common Stock into which such
Series C Preferred Stock could then be converted (with any fractional share
determined on an aggregate conversion basis being rounded to the nearest whole
share), and with respect to such vote, such holder shall have full voting
rights and powers equal to the voting rights and powers of the holders of
Common Stock, and shall be entitled, notwithstanding any provision hereof, to
notice of any shareholders' meeting or any action by written consent of the
shareholders in accordance with the Bylaws of this Corporation, and shall vote
separately as a class to the extent, if any, required by applicable law.
7. Protective Provisions. So long as shares of Series C Preferred Stock are
outstanding, this Corporation shall not without first obtaining the approval
(by vote or written consent, as provided by law) of the holders of two-thirds
of the then outstanding shares of Series C Preferred Stock, voting together as
a single class:
(i) designate or issue any additional shares of Series C Preferred Stock
or in any manner authorize, create, designate, issue or sell any class or
series of capital stock (including any shares of treasury stock) or rights,
options, warrants or other securities convertible into or exercisable or
exchangeable for capital stock or any debt security which by its terms is
convertible into or exchangeable for any equity security or has any other
equity feature or any security that is a combination of debt and equity,
which, in each case, as to the payment of dividends or distribution of
assets, including, without limitation, distributions to be made upon the
liquidation, dissolution or winding up of the Corporation, is senior to or
on a parity with the Series C Preferred Stock;
(ii) in any manner alter or change the terms, designations, powers,
preferences or relative, participating, optional or other special rights,
or the qualifications, limitations or restrictions, of the Series C
Preferred Stock;
(iii) reclassify the shares of any class or series of Junior Stock into
shares of any class or series of capital stock ranking, either as to
payment of dividends, distributions of assets or redemptions, including,
without limitation, distributions to be made upon the liquidation,
dissolution or winding up of the Corporation senior to or on a parity with
the Series C Preferred Stock;
(iv) take any action to voluntarily dissolve, liquidate or wind up the
Corporation; or
(v) take any action to cause any amendment, alteration or repeal of any
of the provisions of (i) the Amended and Restated Articles of Incorporation
or (ii) the By-laws, if such amendment, alteration or repeal would
adversely affect in any material respect the rights of the holders of the
Series C Preferred Stock in their capacity as such.
8. Affirmative Covenants of the Corporation.
(vi) The Corporation shall at all times preserve, renew and keep in full
force and effect its legal existence and material rights and franchises
with respect thereto, provided, however, that the Corporation shall not be
required to preserve any such right or franchise, if the Board of Directors
of the Corporation shall determine in its good faith judgment that the
preservation thereof is no longer desirable in the conduct of the business
of the Corporation and its subsidiaries, taken as a whole.
(vii) The Corporation shall comply in all material respects with all
applicable requirements of law, the necessity of compliance therewith in
good faith by appropriate proceedings diligently pursued, except where the
failure to so comply or contest would not reasonably be expected to have a
material adverse effect on the Corporation and its subsidiaries, taken as a
whole.
A-43
<PAGE>
(viii) The Corporation shall deliver to each holder of Series C
Preferred Stock:
1) as soon as available and in any event within one hundred (100)
days after the end of each Fiscal Year of the Corporation, an audited
or reviewed consolidated balance sheet of the Corporation and its
subsidiaries as of the end of such Fiscal Year and the related audited
or reviewed consolidated statements of income and cash flows for such
Fiscal Year, setting forth in each case in comparative form the figures
for the previous Fiscal Year;
2) as soon as available and in any event within fifty five (55) days
after the end of each fiscal quarter of each Fiscal Year of the
Corporation, a consolidated balance sheet of the Corporation and its
subsidiaries as of the end of such fiscal quarter and related
consolidated statements of income for such quarter and for the portion
of the Corporation's Fiscal Year then ended, setting forth in each case
in comparative form the figures for the corresponding fiscal quarter
and the corresponding portion of the Corporations's previous Fiscal
Year;
(ix) The Corporation shall file all material tax returns applicable to
the Corporation in a timely manner.
9. Holder; Notices. The term "holder" or "holders" wherever used herein with
respect to a holder or holders of shares of Series C Preferred Stock shall mean
the holder or holders of record of such shares as set forth on the stock
transfer records of the Corporation. Whenever any notice is required to be
given under this Certificate of Designation, such notice may be given
personally or by mail. Any notice given to a holder of any share of Series C
Preferred Stock shall be sufficient if given to the holder of record of such
share at the last address set forth for such holder on the stock transfer
records of the Corporation. Any notice given by mail shall be deemed to have
been given when deposited in the United States mail with postage thereon
prepaid. The Corporation shall send to the holders of the Series C Preferred
Stock copies of any notices, statements, or other communications sent to the
holders of the Common Stock and of the setting of a record date for the holders
of the Common Stock for any purpose.
10. Affiliate. The term "Affiliate" wherever used herein shall mean, as to
any person, any other person directly or indirectly controlling, controlled by
or under common control with such person (for which purpose "control" of any
person shall mean the power to direct the management of such person, whether by
ownership of securities or by contract or otherwise), including without
limitation any person who is the beneficial owner (within the meaning of Rule
13d-3 under the Securities Exchange Act of 1934, as amended) of 10% or more of
any class of voting securities of such person.
A-44
<PAGE>
IN WITNESS WHEREOF, Coyote Sports, Inc. has caused this Certificate of
Designation of the Series C Preferred Stock to be executed by its duly
authorized officers this day of , 1999.
Coyote Sports, Inc.
By: _________________________________
Name:
Title:
By: _________________________________
Name:
Title:
STATE OF )
SS.:
COUNTY OF )
On , 1999, personally appeared before me, a Notary Public, for the
State and County aforesaid, , as of Coyote Sports, Inc., who
acknowledged that he executed the above instrument.
-------------------------------------
Notary Public
[Notarial Seal]
A-45
<PAGE>
Annex A to Form of Certificate of Designation
Summary Terms of Potential Dividend Notes
<TABLE>
<C> <S>
Issuance Issuable upon conversion of Series C Preferred Stock
at Company's option, to the extent, if any, that
payment of accrued but unpaid dividends on Preferred
Stock converted is not then permitted by terms of
Company indebtedness or applicable law
Principal Amount Amount of such dividends accrued but unpaid prior to
conversion
Minimum Principal Amount No Note will be issued in a principal amount of less
than $1,000.00
Interest 6% interest per annum, compounded quarterly payable
at maturity (including upon prepayment)
Maturity 24 months from date of Note issuance; to the extent
that Company is not then permitted by terms of
Company indebtedness or applicable law to pay amounts
due on maturity of any Note, Company will satisfy
such Note on maturity by issuing shares of Company
Common Stock in a number equal to (x) cash amount due
in respect of such Note (including accrued interest)
divided by (y) average daily closing prices of
Company Common Stock on Nasdaq Small Cap Market (or
principal securities exchange or securities market on
which Common Stock is then being traded) over 20
consecutive days ending on trading day immediately
prior to maturity of such Note
Mandatory Prepayment Prepayment, without premium, required from time to
time to extent then permitted by terms of Company
indebtedness and applicable law, pro rata with
accrued but unpaid dividends on Preferred Stock still
outstanding
Ranking Junior in right of payment to Company's existing and
future senior and senior subordinated indebtedness;
senior to all other indebtedness of Company (i.e., to
any other indebtedness which is junior to senior and
senior subordinated indebtedness)
Covenants, etc. Covenants for payment of Notes in accordance with
Note terms, and as set forth in Section 8 of
Certificate of Designation with respect to Preferred
Stock; cross-defaults with other Company
indebtedness, with right to accelerate to extent
permitted by terms of such other indebtedness
</TABLE>
A-46
<PAGE>
Exhibit 3.4.1
Capital Stock of CSI
25,000,000 shares of Common Stock, par value $.001 per share
shares of CSI Preferred Stock, par value $.001 per share*
- --------
* Subject to the Exchange Ratio in the Merger.
A-47
<PAGE>
Exhibit 5.14(a)(i)
Stockholder Agreement Signatories
James M. Probst
Mel S. Stonebraker
Paragon Coyote Texas, Ltd.
Richard P. Johnston and Jayne A. Johnston Charitable Remainder Trust #3
David E. Johnston
Berenson Minella & Company, L.P.
Kenneth J. Warren
A-48
<PAGE>
Exhibit 5.14(a)(ii)
RP Voting Agreement Signatories
Kenneth J. Warren
Lawrence Bain
Richard P. Johnston and Jayne A. Johnston Charitable Remainder Trust #3
Berenson Minella & Company, L.P.
David E. Johnston
Danny Edwards
Ronald L. Chambers
A-49
<PAGE>
Exhibit 5.14(b)
CSI Voting Agreement Signatories
Paragon Coyote Texas, Ltd.
James M. Probst
Mel S. Stonebraker
A-50
<PAGE>
Annex B
LEHMAN BROTHERS
January 28, 1999
Board of Directors
Coyote Sports, Inc.
2291 Arapahoe Avenue
Boulder, CO 80302
Members of the Board:
We understand that Coyote Sports, Inc., a Nevada corporation ("Coyote" or
the "Company"), RP Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of Coyote ("Sub"), and Royal Precision, Inc., a Delaware corporation
("Royal"), are proposing to enter into an Agreement and Plan of Merger, dated
as of February 2, 1999 (the "Agreement"). The Agreement provides, among other
things, for Royal to combine with Sub or, at Coyote's option, directly with
Coyote (the "Merger" or the "Proposed Transaction"). Upon effectiveness of the
Merger, each issued and outstanding share of Royal's common stock ("Royal
Common Stock") shall be converted into the right to receive one share of a new
class of Coyote Convertible Preferred Stock (the "Preferred Stock"). The
Preferred Stock will have a liquidation preference and redemption price of
$6.00 per share, a quarterly cumulative cash dividend of 6% per annum, and will
be convertible into Coyote common stock initially representing an aggregate of
50% of the common stock outstanding at the effective time of the Merger on a
primary share basis (before dilution for certain events). Assuming conversion
of the Preferred Stock and using the average closing stock price for Coyote's
common stock for the five days prior to announcement, and without giving any
value to proposed dividends, the implied value of the consideration to be paid
for Royal common stock is $3.85 per share. The terms and conditions of the
Proposed Transaction and the Preferred Stock are set forth in more detail in
the Agreement.
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to
the Company of the consideration to be paid by the Company in the Proposed
Transaction. We have not been requested to opine as to, and our opinion does
not in any manner address, the Company's underlying business decision to
proceed with or effect the Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement and
the specific terms of the Proposed Transaction and the Preferred Stock, (2)
such publicly available information concerning the Company and Royal that we
believe to be relevant to our analysis, including Annual Reports on Form 10-K
for the fiscal years ended December 31, 1997 and May 31, 1998, respectively,
and Quarterly Reports on Form 10-Q for the quarters ended September 30, 1998
and November 30, 1998, respectively, (3) financial and operating information
with respect to the business, operations and prospects of the Company and Royal
furnished to us by the Company and Royal, including information relating to the
financial condition and results of operations of the Company for the fiscal
year ended December 31, 1998, (4) a trading history of Royal Common Stock from
September 2, 1997 to the present and a comparison of that trading history with
those of companies that we deemed relevant, (5) a trading history of Coyote
common stock from September 18, 1997 to the present and a comparison of that
trading history with those of companies that we deemed relevant, (6) a
comparison of the historical financial results and present financial condition
of the Company with those of other companies that we deemed relevant, (7) a
comparison of the historical financial results and present financial condition
of Royal with those of other companies that we deemed relevant, (8) a
comparison of the financial terms of the Proposed Transaction with the
financial terms of certain other transactions that we deemed relevant, (9) the
potential pro forma impact of the Proposed Transaction, including cost savings,
operating synergies and strategic benefits expected by management of the
Company to result from the combination of the businesses of Coyote and Royal,
and (10) the results of efforts by the Company and one of its financial
advisors to raise financing in connection with the Proposed Transaction. In
addition, we have had discussions with the management of the Company and Royal
concerning their business, operations, assets, financial condition and
prospects and have undertaken such other studies, analyses and investigations
as we deemed appropriate.
<PAGE>
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information used by us without assuming
any responsibility for independent verification of such information and have
further relied upon the assurances of managements of Coyote and Royal that they
are not aware of any facts or circumstances that would make such information
inaccurate or misleading. With respect to the financial projections of Coyote
and Royal, upon advice of the Company and Royal we have assumed that such
projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of the Company
and Royal as to the future financial performance of Coyote and Royal and that
Coyote and Royal will perform substantially in accordance with such
projections. With respect to the cost savings, operating synergies and
strategic benefits expected by the management of the Company and Royal to
result from a combination of the businesses of Coyote and Royal, upon advise of
the Company and Royal we have assumed that such cost savings, operating
synergies and strategic benefits will be achieved substantially in accordance
with such expectations. In arriving at our opinion, we have not conducted a
physical inspection of the properties and facilities of Royal or the Company
and have not made or obtained any evaluations or appraisals of the assets or
liabilities of Royal and the Company. Our opinion necessarily is based upon
market, economic and other conditions as they exist on, and can be evaluated as
of, the date of this letter.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the consideration to be paid
by the Company in the Proposed Transaction is fair to the Company.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is
contingent upon the consummation of the Proposed Transaction. In addition, the
Company has agreed to indemnify us for certain liabilities that may arise out
of the rendering of this opinion. We also have performed investment banking
services for the Company in the past and have received customary fees for such
services. In the ordinary course of our business, we may actively trade in the
debt and equity securities of the Company and Royal for our own account and for
the accounts of our customers and, accordingly, may at any time hold a long or
short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any stockholder of the Company as
to how such stockholder should vote with respect to the Proposed Transaction.
Very truly yours,
/s/ Lehman Brothers
<PAGE>
Annex C
January 29, 1999
The Board of Directors Royal Precision, Inc.
15170 North Hayden Road
Suite 1
Scottsdale, AZ 85260
Lady and Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, of the exchange ratio and the consideration to be received by the holders
of the common stock, par value $.001 per share (the "Shares"), of Royal
Precision, Inc. (the "Company") pursuant to an Agreement and Plan of Merger
dated as of the date hereof (the "Merger Agreement"), by and among the Company,
Coyote Sports, Inc. ("Coyote") and RP Acquisition Corp., which is a wholly-
owned subsidiary of Coyote ("Sub"). The Merger Agreement provides for, among
other things, the merger (the "Merger") of Sub into the Company pursuant to
which each Share will be converted into one share of the Convertible Preferred
Stock, par value $.001 per share, of Coyote (the "Coyote Preferred Stock").
NatCity Investments, Inc., as a customary part of its investment banking
business, is engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, private
placements and valuations for estate, corporate and other purposes. We have
acted as financial advisor to the Board of Directors of the Company in
connection with the transactions described above and will receive a fee for our
services.
In connection with this opinion, we have reviewed certain publicly available
financial information concerning the Company and Coyote and certain internal
financial analyses and other information furnished to us by the Company and
Coyote. We have also held discussions with members of the senior management of
the Company and Coyote regarding the business and prospects of their respective
enterprises. In addition, we have (i) reviewed the reported price and trading
activity for the Shares, and for the common stock, par value $.001 per share,
of Coyote; (ii) compared certain financial and stock market information for the
Company and Coyote, respectively, with similar information for certain
comparable companies whose securities are publicly traded; (iii) reviewed the
financial terms of certain recent business combinations which we deemed
comparable in whole or in part; and (iv) performed such other studies and
analyses and considered such other factors as we deemed appropriate.
We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy, completeness and fairness
thereof. With respect to information relating to the prospects of the Company
and Coyote, we have assumed that such information reflects the best currently
available estimates and judgments of the respective managements of the Company
and Coyote as to the likely future financial performance of the Company and
Coyote. In addition, we have not made an independent evaluation or appraisal of
the assets or liabilities of either the Company or Coyote, nor have we been
furnished with any such evaluation or appraisal. Our opinion is based on
market, economic and other conditions as they exist and can be evaluated as of
the date of this letter.
Our opinion set forth below is directed to the Board of Directors of the
Company and does not constitute a recommendation to any shareholder of the
Company with respect to the approval of the transactions contemplated by the
Agreement. This letter is for the information of the Board of Directors of the
Company only in connection with its consideration of the Merger Agreement and
may not be quoted or referred to, in whole or in part, in any document prepared
in connection with the transactions contemplated by the Merger Agreement, nor
shall this letter be used for any other purpose or publicly disclosed without
our prior written consent; provided, however, that the Company and Coyote are
authorized to include this letter in its entirety
1
<PAGE>
and, subject to our approval, summaries of the procedures we performed and
references to this letter in the proxy materials contemplated by the Merger
Agreement. It is understood that this letter and the proxy materials
contemplated by the Merger Agreement will be filed with the Securities and
Exchange Commission.
In the ordinary course of business, NatCity Investments, Inc. may actively
trade the equity securities of the Company and/or Coyote for its own account
and for the accounts of its customers and, accordingly, may at any time hold a
long or short position in such securities.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the exchange ratio and the receipt of the merger
consideration pursuant to the Merger Agreement is fair, from a financial point
of view, to the holders of the Shares of Royal Precision, Inc.
Very truly yours,
/s/ NATCITY INVESTMENTS, INC.
2
<PAGE>
Annex D--Delaware General Corporation Law
(S) 262. Appraisal rights. (a) Any stockholder of a corporation of this
State who holds shares of stock on the date of the making of a demand pursuant
to subsection (d) of this section with respect to such shares, who
continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this section
and who has neither voted in favor of the merger or consolidation nor
consented thereto in writing pursuant to ss. 228 of this title shall be
entitled to an appraisal by the Court of Chancery of the fair value of the
stockholder's shares of stock under the circumstances described in subsections
(b) and (c) of this section. As used in this section, the word "stockholder"
means a holder of record of stock in a stock corporation and also a member of
record of a nonstock corporation; the words "stock" and "share" mean and
include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely
of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to ss. 251 (other than a merger effected pursuant to ss.
251(g) of this title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264
of this title: (1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of stock,
which stock, or depository receipts in respect thereof, at the record date
fixed to determine the stockholders entitled to receive notice of and to vote
at the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held of
record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its approval
the vote of the stockholders of the surviving corporation as provided in
subsection (f) of ss. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to ss.ss. 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof)
or depository receipts at the effective date of the merger or consolidation
will be either listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or held of record by more
than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in
the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
3
<PAGE>
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsection (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to ss. 228 or
ss. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
4
<PAGE>
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such written
statement shall be mailed to the stockholder within 10 days after his written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings
until it is finally determined that he is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as
5
<PAGE>
the Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a written withdrawal of his
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Article X of the Coyote's Amended and Restated Articles of Incorporation
provides for the indemnification, to the maximum extent permitted by Nevada
law, of any person for liabilities or expenses that arise by reason of the fact
that the person is or was a director, officer, employee, fiduciary, or agent of
Coyote.
Section 78.7502 of the Nevada General Corporation Law ("NGCL") permits
indemnification only when the person acted in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of Coyote.
In criminal actions or proceedings the person may be indemnified only if he had
no reasonable cause to believe his conduct was unlawful. The termination of any
action upon the plea of nolo contendere or its equivalent, does not, of itself,
create a presumption that the person did not act in good faith and in a manner
which he reasonably believed to be in or not opposed to the best interests of
Coyote. Similarly, such a plea in any criminal action does not, of itself,
create a presumption that the person did not have reasonable cause to believe
his conduct was unlawful. To the extent that such person is successful on the
merits of any claim covered by the NGCL, Coyote shall indemnify him against any
expense, including attorneys' fees, actually and reasonably incurred by him in
connection with the defense.
Coyote maintains $5,000,000 of insurance to reimburse its directors and
officers for costs, charges and expenses in defense of certain claims against
them by reason of their being or having been directors or officers of Coyote.
Such insurance specifically excludes reimbursement of any director or officer
for certain costs, charges or expenses. Some examples of these specific
exclusions are claims made in connection with any claim of actual or alleged
bodily injury, sickness, disease, death, false arrest, false imprisonment,
assault, battery, invasion of privacy, damage to or destruction of tangible
property, or dishonest, fraudulent or criminal acts or omissions.
Item 21. Exhibits
<TABLE>
<C> <S>
3.4 --Form of certificate of designation of the series C preferred stock,
par value $.001 per share, filed herewith as Exhibit 1.4.1 to Annex A
to the joint proxy statement/prospectus which forms a part of this
registrant statement
5.1 --Opinion of Chrisman, Bynum & Johnson, P.C. regarding the validity of
the Coyote Series C Preferred Shares registered hereunder**
8.1 --Form of Tax Opinion of Fabian & Clendenin*
10.55 --Opinion of Lehman Brothers, Inc., dated as of January 28, 1999
(included as Annex B to this joint proxy statement/prospectus which
forms a part of this Registration Statement)
10.57 --Consulting Agreement, dated as of October 7, 1998 by and between
Coyote Sports, Inc. and Paragon Coyote Texas Ltd.*
10.58 --Form of Agreement dated by and among Coyote Sports, Inc. and the
certain investors*
23.1 --Consent of KPMG LLP
23.2 --Consent of Arthur Andersen LLP
23.3 --Consent of Chrisman, Bynum & Johnson, P.C. (contained in Exhibit
5.1)**
23.4 --Consent of Kramer Levin Naftalis & Frankel LLP (contained in Exhibit
5.2)**
23.5 --Consent of Fabian & Clendenin**
99.5 --Consent of Kenneth J. Warren**
</TABLE>
- --------
* Filed herewith
** To be filed by amendment
II-1
<PAGE>
Item 22. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include in any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of this Registration Statement (or most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in this Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the
maximum aggregate offering price may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) under the
Securities Act, if in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) above do not
apply is the Registration Statement if on Form S-3, Form S-8 or Form F-
3, and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed or
furnished to the Commission by the registrant pursuant to Section 13 or
15(d) of the Securities and Exchange Act of 1934 that are incorporated
by reference in the Registration Statement.
(2) That, for the purposes of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Registrant's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the Registration Statement shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
The Registrant undertakes that prior to any public reoffering of the
securities registered hereunder through use of a prospectus which is a part of
this Registration Statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the issuer undertakes that such
reoffering prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
The Registrant undertakes that every prospectus: (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the
II-2
<PAGE>
Registration Statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective; and (2) for the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies and has duly caused this Amendment No. 1 to this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, on the 3rd day of
May, 1999.
Coyote Sports, Inc.
/s/ James M. Probst
By: _________________________________
Director, Chief Executive Officer
and President (Principal Executive
Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James M. Probst and John Paul McNeill, his true
and lawful attorneys-in-fact and agents, with full power of substitution, for
him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto such attorneys-in-fact and agents and each of them full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to this Registration Statement has been signed by the following persons
on May 3, 1999 in the capacities indicated below.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ James M. Probst Director, Chief Executive Officer and
______________________________________ President (Principal Executive Officer)
James M. Probst
/s/ Mel S. Stonebraker Chairman of the Board and Secretary
______________________________________
Mel S. Stonebraker
/s/ John Paul McNeill Chief Financial Officer and Treasurer
______________________________________ (Principal Financial and Accounting
John Paul McNeill Officer)
/s/ Jeffrey T. Kates Director
______________________________________
Jeffrey T. Kates
/s/ Don A. Forte Director
______________________________________
Don A. Forte
/s/ Mark A. Pappas Director
______________________________________
Mark A. Pappas
</TABLE>
II-4
<PAGE>
EXHIBIT 8.1
May_____, 1999
Coyote Sports, Inc.
2291 Arapahoe Avenue
Boulder, Colorado 80302
Attention: President
Royal Precision, Inc.
15170 North Hayden Road
Scottsdale, Arizona 89260
Re: Agreement and Plan of Merger by and among Coyote Sports, Inc., Royal
Precision, Inc. and RP Acquisition Corp.
Gentlemen:
We have acted as counsel to Royal Precision, Inc., a Delaware corporation
("RP"), in connection with the proposed merger (the "Merger") of RP Acquisition
Corp., a Delaware corporation ("Merger Sub") and wholly-owned subsidiary of
Coyote Sports, Inc. ("Coyote") with and into RP pursuant to the terms of the
Agreement and Plan of Merger dated as of February 2, 1999, as amended and
restated (the "Merger Agreement") by and among Coyote, RP and Merger Sub. The
opinions expressed herein are being rendered at the request of RP for the
benefit of RP, Coyote and the stockholders of RP in connection with consummation
of the transactions contemplated by and set forth in the Merger Agreement, as
more fully described in the Proxy Statement/Prospectus (the "Prospectus") filed
in connection with the Merger. All capitalized terms, unless otherwise
specified, have the meaning assigned to them in the Merger Agreement. The CSI
Preferred Stock, as defined in the Merger Agreement, is herein referred to as
the series C preferred stock.
In connection with these opinions, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(i) the Merger Agreement, (ii) the Prospectus, and (iii) such other documents as
we have deemed necessary or appropriate in order to enable us to render the
opinions below. In our examination, we have assumed the genuineness of all
signatures, the legal capacity of all natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original
<PAGE>
Royal Precision, Inc.
Coyote Sports, Inc.
May __, 1999
Page 2
documents of all documents submitted to us as certified, conformed or
photostatic copies and the authenticity of the originals of such copies.
In rendering the opinions set forth below, we have relied upon the
representations and warranties of each of the parties as set forth in the Merger
Agreement and representations made by the management of RP and the management of
Coyote. With the permission of RP and Coyote, we have also assumed in rendering
the opinions set forth below that RP stockholders will not exercise dissenters'
rights as permitted under Section 262 of the Delaware General Corporation Law to
the extent that such exercise results in more than twenty percent (20%) of the
shares of RP common stock being exchanged pursuant to the Merger for
consideration other than series C preferred stock.
Based upon and subject to the foregoing, we are of the opinion that the Merger
will, under current law, constitute a reorganization under Section 368 of the
Code, and Coyote, RP and Merger Sub will each be a party to the reorganization
within the meaning of Section 368(b) of the Code. As a reorganization, the
Merger will have the following federal income tax consequences for Coyote, RP
and the stockholders of RP:
1. A RP stockholder will not recognize any income, gain or loss as a
result of the receipt of series C preferred stock in exchange for RP common
stock pursuant to the Merger, except with respect to the cash received in lieu
of a fractional share of series C preferred stock.
2. The aggregate tax basis to a RP stockholder of the series C preferred
stock received in exchange for RP common stock pursuant to the Merger will equal
such RP stockholder's tax basis in the RP common stock surrendered in exchange
therefor reduced by the portion of such basis allocable to cash received in lieu
of a fractional share of series C preferred stock.
3. The holding period of a RP stockholder for the series C preferred stock
received pursuant to the Merger will include the holding period of the RP common
stock surrendered in exchange therefor, provided that such RP common stock was
held as a capital asset at the Effective Date.
4. Neither RP, Coyote nor Merger Sub will recognize gain or loss as a
result of the Merger and the issuance of the Series C Preferred Stock to the RP
stockholders pursuant to the Merger.
5. A RP stockholder who receives cash in lieu of a fractional share
interest in series C preferred stock pursuant to the Merger will be treated as
having received such cash in exchange for such fractional share interest and,
provided that such fractional share is held as a capital asset at the Effective
Date, generally will recognize capital gain or loss
<PAGE>
Royal Precision, Inc.
Coyote Sports, Inc.
May __, 1999
Page 3
on such deemed exchange in an amount equal to the difference between the amount
of cash received and the basis of the RP common stock allocable to such
fractional share.
6. In addition to the above consequences of the Merger, a holder of series
C preferred stock will not recognize gain or loss upon the conversion of series
C preferred stock into Coyote common stock pursuant to the terms of the series C
preferred stock other than with respect to any Coyote common stock that may be
received attributable to accrued but unpaid dividends on the series C preferred
stock, which will be taxable as such. The aggregate tax basis and holding period
of the Coyote common stock received by a former RP stockholder who converts the
series C preferred stock into Coyote common stock will be the same as the
respective aggregate tax basis and holding period of the series C preferred
stock surrendered in any such conversion transaction, provided that such shares
of series C preferred stock converted were held as capital assets on the date of
conversion, except that with respect to any Coyote common stock received
attributable to accrued but unpaid dividends on the series C preferred stock,
the basis of such stock will be its fair market value and the holding period of
such stock will begin on the day following the conversion.
Except as set forth above, we express no opinion as to the consequences to any
party of the Merger or of any transactions related to the Merger or contemplated
by the Merger Agreement.
The opinions expressed herein are being furnished in connection with the Merger
and solely for the benefit of Coyote, RP and the RP stockholders in connection
with the Merger and is intended to be used as an exhibit to the Prospectus and
filings with various state securities authorities in connection with the Merger,
and all such persons and entities may rely upon such opinions as if addressed to
and delivered to them on the date hereof. Except for such use, neither this
opinion nor copies hereof may be relied upon by, delivered to any person or
entity, or quoted in whole or in part without the prior written consent of the
undersigned.
We consent to the reference to our name in the Prospectus and to the use of this
opinion as an exhibit to the Prospectus. In giving these consents, we do not
admit that we come within the category of persons whose consent is required
under the Securities Act of 1933, or the rules and regulations of the Securities
and Exchange Commission thereunder.
Very truly yours,
Fabian & Clendenin
<PAGE>
EXHIBIT 10.57
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT is made as of October 7, 1998 by and between
Coyote Sports, Inc., a Nevada corporation (the "Company"), and Paragon Coyote
Texas Ltd., a Texas limited partnership (the "Consultant").
W I T N E S S E T H:
WHEREAS, the Company designs, engineers, manufactures, markets and
distributes brand name sports equipment and recreational products worldwide (the
"Business");
WHEREAS, during the spring of 1998 the Company identified the need to
engage the services of a consultant with relevant expertise (financial and
otherwise) to assist the Company in the operation of the Business to the end of
maximizing long-term shareholder value;
WHEREAS, since the spring of 1998 the Consultant has provided such
consulting services to the Company (the "Past Services");
WHEREAS, the Company desires that the Consultant continue to provide
such consulting services on the terms and conditions hereinafter set forth;
WHEREAS, the Consultant is willing to continue to provide such
consulting services on such terms and conditions; and
WHEREAS, the parties desire to memorialize their understanding
regarding, among other things, the Company's payment of consideration for the
Past Services.
NOW, THEREFORE, in consideration of the premises and of other good and
valuable consideration, the receipt and sufficiency of which the parties hereby
acknowledge, the Company and the Consultant hereby agree as follows:
1. Engagement. The Company hereby engages the Consultant to provide
consulting services with respect to such aspects of the Business as the Company
reasonably may request from time to time on an "as-needed" basis pursuant to the
terms and conditions of this Agreement (the "Services") and the Consultant
hereby accepts such engagement.
2. Term of Agreement. Subject to earlier termination as herein provided,
the term of this Agreement shall be for a period commencing on the date hereof
and ending on the tenth anniversary of the date hereof (the "Term").
Consulting Agreement between Coyote Sports, Inc. and Paragon Texas Coyote Ltd.
As of October 7, 1998 - Page 1 of 7
<PAGE>
3. Performance of Services. During the Term, the Consultant shall
devote such time and effort that it reasonably may deem necessary or appropriate
to perform the Services; provided, however, that nothing in this Agreement is
intended, or shall be construed, to require that the Consultant devote any
particular level of staffing or time-commitment to perform the Services.
4. Compensation. In consideration of the Past Services and of the
Consultant's willingness to enter into this Agreement and to perform the
Services, the Company shall pay the Consultant upon the execution and delivery
hereof a one-time fee in the form of 378,261 shares of the Company's common
stock, par value $0.001 per share (the "Company Shares").
5. Company Representations and Warranties. The Company hereby
represents and warrants to the Consultant (with each such representation and
warranty's being conclusively and independently deemed material and relied upon
by the Consultant irrespective of whether such materiality and/or reliance
actually exists) as follows:
(a) the Company was duly incorporated and is validly existing and in
good standing under laws of the State of Nevada;
(b) the Company has all necessary corporate power and authority to
execute, deliver and perform its obligations under this Agreement;
(c) the Company has duly and effectively taken all corporate action on
the Company's part necessary for the due execution, delivery and
performance of this Agreement;
(d) this Agreement constitutes the Company's valid and binding
obligation, enforceable against the Company in accordance with its
terms (except to the extent that enforcement may be subject to any
applicable bankruptcy, insolvency or similar laws of general
application affecting the enforcement of creditors' rights);
(e) none of the Company's execution, delivery and performance of this
Agreement violates any provision of the Company articles of
incorporation or bylaws, or any contract, agreement, instrument or
governmental requirement to which the Company is a party or by
which the Company or its assets may be bound or affected;
(f) none of the Company's execution, delivery and performance of this
Agreement requires the consent or approval of any other person,
entity or governmental authority;
(g) all of the Company Shares (i) have been duly authorized and validly
issued, (ii) are fully-paid and nonassessable, (iii) have been
issued in compliance with all applicable laws and with all rules
and regulations of the National Association of
Consulting Agreement between Coyote Sports, Inc. and Paragon Texas Coyote Ltd.
As of October 7, 1998 - Page 2 of 7
<PAGE>
Securities Dealers, Inc. and (iv) are free and clear of any and all
liens, security interests, claims, pledges, restrictions,
limitations, charges, encumbrances, preemptive rights (whether
contractual or statutory), rights of first refusal, adverse
interests, constructive trusts or other trusts, attachments,
exceptions to or defects in title or other ownership interests of
any kind (other than any of the above that the Consultant may have
created); and
(h) the Company is entitled to register its securities under the
Securities Act of 1933, as amended (the "Securities Act"), on Form
S-3.
6. Company Covenants. The Company hereby covenants to the Consultant
(with each such covenant's being conclusively and independently deemed material
and relied upon by the Consultant irrespective of whether such materiality
and/or reliance actually exists) as follows:
(a) the Company's representations and warranties set forth in Section 5
hereof shall at all times from and after the date hereof remain true
and correct;
(b) the Company shall effect the registration of the Company Shares
under the Securities Act on Form S-3, on terms and conditions
satisfactory to the Consultant (acting in its reasonable
discretion), within ninety (90) days after the date hereof so that
the Consultant shall be able to sell the Company Shares without
further restriction from and after the date of the effectiveness of
such registration statement; and
(c) the Company shall ensure that the Company Shares are listed on the
NASDAQ Small Cap market system at the earliest possible time.
7. Early Termination.
(a) This Agreement (i) may be terminated by the Company prior to the
tenth anniversary of the date hereof either for Cause or without
Cause upon no more than sixty (60) and no less than thirty (30)
days' prior written notice to the Consultant, and (ii) shall
terminate automatically and without the necessity of further action
in the event that either James Probst or Mel Stonebraker shall cease
to be an executive officer of the Company with duties,
responsibilities and authority substantially similar to those in
effect on the date hereof.
(b) As used herein, (i) the term "Early Termination" shall mean any
termination of this Agreement pursuant to the provisions of
subsection (a) above, and (ii) the term "Cause" shall mean only the
material and continuing failure of the Consultant to fulfill its
obligations hereunder for at least thirty (30) days following the
Consultant's receipt of notice from the Company specifying such
default in
Consulting Agreement between Coyote Sports, Inc. and Paragon Texas Coyote Ltd.
As of October 7, 1998 - Page 3 of 7
<PAGE>
reasonable detail.
(c) In the event that either (i) the Company effects Early Termination
of this Agreement without Cause or (ii) this Agreement terminates
automatically pursuant to the provisions of subsection (a)(ii)
above, the Consultant shall have no further liability hereunder.
(d) In the event that the Company effects Early Termination with Cause,
the Company shall have such rights and remedies as may be accorded
by law subject, however, in all cases to the provisions of Section
8 hereof.
8. Confirmation of Ownership of Company Shares. The parties expressly
understand and agree that in no event (including but not limited to any Early
Termination of, or any dispute in connection with, this Agreement) shall the
Company be entitled to cancel, or to effect the return of, the Company Shares or
to take any action that would have the effect of (a) rendering any of the
Company's representations or warranties made in Section 5 hereof untrue in any,
(b) constituting a breach of any of the Company's covenants set forth in Section
6 hereof or (c) otherwise impairing in any way the Consultant's ownership
interest in the Company Shares or the Consultant's ability to exercise in full
any and all rights appurtenant to its ownership interest in the Company Shares.
9. Consultant Exculpation and Company Indemnity. Notwithstanding
anything in this Agreement to the contrary, in no event shall the Consultant or
any or its partners or any of their respective directors, officers, employees,
partners, affiliates (as such term is defined in Rule 12b-2 promulgated under
the Securities Exchange Act of 1934, as amended), members, controlling persons,
representatives or agents (collectively the "Exculpated Parties") be liable or
responsible in any manner for, or with respect to or in connection with, any
liabilities, obligations, claims, causes of action, debts, damages (including,
without limitation, consequential damages), losses, penalties, fines, disputes,
agreements, understandings, costs or expenses (including, without limitation,
attorneys' fees, court costs and costs of investigation) of any kind whatsoever,
whether absolute or contingent, known or unknown, at any time, directly or
indirectly arising from, based upon, relating to or in connection with this
Agreement, the Services or the performance (or lack or alleged lack of
performance) of the Services (each a "Claim"), even if such Claim is due, in
whole or in part, to the negligence of any Exculpated Party. THE COMPANY SHALL
INDEMNIFY, HOLD HARMLESS AND DEFEND, TO THE FULLEST EXTENT ALLOWED BY LAW, EACH
EXCULPATED PARTY FROM AND AGAINST ANY AND ALL CLAIMS, EVEN IF ANY SUCH CLAIM IS
DUE, IN WHOLE OR IN PART, TO THE NEGLIGENCE OF AN EXCULPATED PARTY. THE
INDEMNIFICATION OBLIGATION SET FORTH IN THE IMMEDIATELY-PRECEDING SENTENCE SHALL
NOT APPLY TO THE EXTENT THAT A CLAIM IS DUE TO THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF AN EXCULPATED PARTY.
Consulting Agreement between Coyote Sports, Inc. and Paragon Texas Coyote Ltd.
As of October 7, 1998 - Page 4 of 7
<PAGE>
10. Assignment. Neither party may assign its rights or obligations under
this Agreement without the written consent of the other party, which consent
shall not unreasonably be withheld or delayed.
11. Relationship between the Parties. The Company and the Consultant
hereby expressly acknowledge and agree that this Agreement constitutes only a
consulting agreement and that, with respect to the relationship between the
parties created by this Agreement, (a) the parties are not, and shall not be
deemed, joint venturers or partners, (b) the Consultant is not, and shall not be
deemed, an agent of the Company and (c) the Consultant constitutes an
independent contractor.
12. Notices. Any notice required or permitted to be given under or in
connection with this Agreement shall be in writing and shall be delivered (a) by
certified mail, return receipt requested, (b) by reputable overnight delivery
service, (c) by facsimile transmission, confirmed telephonically or (d)
personally to an executive officer of the receiving party. All such
communications shall be mailed, sent or delivered as follows:
If to the Company:
Coyote Sports, Inc.
2291 Arapahoe Avenue
Boulder, CO 80302
Attention: Chief Executive Officer
Telephone: 303/416-0942
Facsimile: 303/417-1700
If to the Consultant:
Paragon Coyote Texas Ltd.
307 West Seventh Street, Suite 1210
Fort Worth, TX 76102
Attention: Mr. Mark Pappas
Telephone: 817/810-0014
Facsimile: 817/810-0089
Any communication delivered in accordance with this Section shall be deemed
received (a), if delivered by certified mail, return receipt requested, on the
date of delivery indicated on the return receipt, (b), if delivered by overnight
delivery service, on the following business day, (c), if delivered by facsimile
transmission, on the date that the transmission is confirmed telephonically or
(d), if personally to an executive officer of the receiving party, on the date
of such delivery.
Consulting Agreement between Coyote Sports, Inc. and Paragon Texas Coyote Ltd.
As of October 7, 1998 - Page 5 of 7
<PAGE>
13. Amendments and Waivers. This Agreement may not be modified, amended
or terminated orally and no waiver of compliance with any provision or condition
hereof and no consent provided for herein shall be effective unless evidenced by
an instrument in writing duly executed by the party hereto sought to be charged
with such waiver or consent. No waiver of any term or provision hereof shall be
construed as a further or continuing waiver of such term or provision or any
other term or provision.
14. Severability. If any provision of this Agreement or the application
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Agreement and the application of such provision to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law as long as the economic or
legal substance of the transactions contemplated hereby is not affected in any
manner materially adverse to any party.
15. Survival. All of the Company's representations, warranties and
covenants set forth in this Agreement shall survive the termination of this
Agreement and shall never terminate.
16. Governing Law. This Agreement is a contract made under, and shall be
construed in accordance with and governed by, the laws of the State of Nevada
(other than any such laws that would result in the application of the laws of
any jurisdiction other than the State of Nevada).
17. Entire Agreement. This Agreement embodies the entire agreement and
understanding between the Company and the Consultant with respect to the subject
matter hereof and supersedes all prior agreements and understandings between
them in such regard.
18. Counterparts; Facsimile Signatures. This Agreement may be executed
in one or more counterparts, each of which shall be an original and all of which
taken together shall constitute one and the same instrument. Signatures
exchanged by facsimile transmission shall be deemed to constitute original,
manually-executed signatures and shall be fully binding.
19. Headings. Headings of the Sections of this Agreement are for the
convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
[The remainder of this page has intentionally been left blank.]
Consulting Agreement between Coyote Sports, Inc. and Paragon Texas Coyote Ltd.
As of October 7, 1998 - Page 6 of 7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Consulting Agreement
as of the date first above written.
COYOTE SPORTS, INC.,
a Nevada corporation
By: [signature appears here]
--------------------------------
Title: Chairman
PARAGON COYOTE TEXAS LTD.,
a Texas limited partnership
By: Paragon Management Group, Inc.,
a Texas corporation,
General Partner
By:
---------------------------
Mark A. Pappas, President
Consulting Agreement between Coyote Sports, Inc. and Paragon Texas Coyote Ltd.
As of October 7, 1998 - Page 7 of 7
<PAGE>
This AGREEMENT is made and entered into as of __________, 1999, by and
among COYOTE SPORTS, INC., a Nevada corporation (the "Company"), and the
investors named on Schedule I hereto (the "Investors") for the benefit of
themselves and all other Holders of Subject Securities as defined herein.
SECTION 1. DEFINITIONS. As used in this Agreement, the following terms
shall have the following meanings:
"Affiliate" of any Person shall mean any other Person who either directly or
indirectly is in control of, is controlled by, or is under common control with
such Person. The term "control" (including the terms "controlling," "controlled
by" and under "common control with") with respect to any Person means
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of such Person, whether through the ownership of
voting securities, by contract or otherwise.
"Business Day" shall mean any Monday, Tuesday, Wednesday, Thursday or Friday
that is not a day on which banking institutions in the City of New York are
authorized by law, regulation or executive order to close.
"Common Shares" shall mean the common stock, par value $0.001 per share, of
the Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended (or
any similar successor federal statute), and the rules and regulations
thereunder, as the same are in effect from time to time.
"Hold-Back Election" shall have the meaning set forth in Section 7(a) hereof.
"Holder" shall mean any Person who is the holder of record, on the date
hereof, of Common Shares or of shares of Common Stock, $.001 par value ("RP
Common Stock"), of Royal Precision, Inc. ("RP") to be converted into a right to
receive Subject Securities pursuant to the merger of Coyote Acquisition Corp.
with and into RP (the "Merger").
"Material Development Election" shall have the meaning set forth in Section
7(b) hereof.
"Person", shall mean an individual, partnership, corporation, limited
liability company, joint venture, trust or unincorporated organization, a
government or agency or political subdivision thereof or any other entity.
"Preferred Shares" shall mean the Series C Preferred Stock, par value $.001
per share, of the Company.
"Prospectus" shall mean the prospectus included in any Registration Statement,
as
<PAGE>
amended or supplemented by a prospectus supplement with respect to the terms
of the offering of any portion of the Registrable Securities covered by such
Registration Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments and all material incorporated by
reference in such prospectus.
"Subject Securities" shall mean (i) the Common Shares owned of record by the
Investors as of the date hereof; (ii) the Common Shares owned of record by
other Holders as of the date hereof; (iii) the Common Shares issuable upon
conversion or exercise of convertible securities or options or other rights to
acquire Common Shares outstanding as of the date hereof; (iv) the Preferred
Shares issuable to Holders pursuant to the Merger to holders of record of RP
Common Stock as of the date hereof and the Common Shares issuable to such
Holders upon conversion of such Preferred Shares; and (v) any other securities
issued or issuable as a result of or in connection with any stock dividend,
stock split or reverse stock split, combination, recapitalization,
reclassification, merger or consolidation, exchange or distribution in respect
of the securities referred to in clauses (i) through (iv) above; provided,
however, that any Subject Security shall cease to be such after either (x)
[_____, 2009] or (y) such time as such security has been transferred, with or
without consideration, to any Person other than a Holder.
"Registration Statement" shall mean any registration statement under the
Securities Act, including the Prospectus included therein, all amendments and
supplements to such Registration Statement, including post-effective amendments,
all exhibits and all material incorporated by reference in such Registration
Statement. Unless the context requires otherwise, "Registration Statement"
refers to a registration statement with respect to Subject Securities under this
Agreement.
"Rule 415" shall mean Rule 415 promulgated under the Securities Act or any
similar successor rule thereto that may be promulgated by the SEC.
"SEC" shall mean the Securities and Exchange Commission, or any other federal
agency at the time administering the Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as amended (or any
similar successor federal statute), and the rules and regulations thereunder, as
the same are in effect from time to time.
"Shelf Registration" shall mean the registration of securities for sale on a
continuous or delayed basis pursuant to Rule 415. Unless the context requires
otherwise, "Shelf Registration" refers to a registration of Subject Securities.
"Shelf Registration Statement" shall mean a Registration Statement filed in
connection with a Shelf Registration of Subject Securities.
"Underwritten Offering" shall mean a registered offering in which securities
are sold to one or more underwriters on a firm commitment basis for reoffering
to the public. Unless the context requires otherwise, "Underwritten Offering"
refers to an offering of Common Shares which constitute Subject Securities.
-2-
<PAGE>
"Unrestricted Securities" shall mean Common Shares that may be sold pursuant
to Rule 144(k) under the Securities Act, or any similar successor rule thereto
that may be promulgated by the SEC.
SECTION 2. SHELF REGISTRATION.
The Company anticipates filing with the SEC and maintaining in effect a Shelf
Registration Statement with respect to the Common Stock issuable upon conversion
of the Preferred Shares. The Company has agreed, for the benefit of the
Holders, to use its reasonable best efforts to obtain a nationally recognized
underwriter or underwriters for the purpose of underwriting a public offering of
Common Shares constituting Subject Securities hereunder pursuant to such Shelf
Registration Statement (or other Registration Statement, if necessary) to the
extent set forth below. In no event shall the total number of Underwritten
Offerings pursuant to Section 3 exceed one in any one-year period or five in the
aggregate. Subject to Section 7(a), nothing in this Agreement shall in any way
restrict any Holder from selling or otherwise transferring the risk or benefit
of ownership of securities of the Company in any manner not provided in this
Agreement, including any sale of Common Shares in the open market.
SECTION 3. UNDERWRITTEN OFFERINGS.
(a) Request. Upon the written request of a Holder or Holders holding Common
Shares, or Preferred Shares convertible into Common Shares, representing at
least 10% of the Common Shares issued and outstanding (assuming conversion in
full of the Preferred Shares), the Company shall use reasonable best efforts to
facilitate an Underwritten Offering under the Shelf Registration Statement (or
other Registration Statement, if necessary) in accordance with the provisions of
this Agreement.
(b) Notice of Request; Procedures. At least thirty (30) Business Days
prior to the time that any Holder or Holders propose to effect an Underwritten
Offering pursuant to Section 3(a), such Holders shall deliver to the Company a
written notice setting forth the proposed timing of such Underwritten Offering
and the number of Common Shares constituting Subject Securities to be offered.
Thereafter, the Company shall, as soon as reasonably practicable, prepare and
file any post-effective amendment or a supplement to the Prospectus as shall be
necessary in accordance with the rules of the SEC under the Securities Act to
include such Holders as selling shareholders in such Underwriting Offering under
the Shelf Registration Statement, or, if necessary, file a new Registration
Statement for such purpose, and perform any other procedures required to be
performed by the Company under this Agreement or that are reasonably necessary
or advisable to effect the proposed Underwritten Offering.
(c) Road Show. The Company will use its reasonable best efforts to cooperate
in a marketing effort in respect of any Underwritten Offering, including
participation in a "road show" with appropriate senior management, to assist the
Holders in selling Common Shares constituting Subject Securities in such
Underwritten Offering.
(d) Revocation of Request. A Holder or Holders requesting an Underwritten
Offering pursuant to this Section 3 may, at any time prior to the consummation
of such Underwritten Offering, revoke such request by providing written notice
of revocation to the
-3-
<PAGE>
Company and such Underwritten Offering shall not be deemed to be an Underwritten
Offering for purposes of Section 2; provided, however, that the Holder or
Holders revoking any request for an Underwritten Offering shall pay all
reasonable expenses (not to exceed $________) of the Company incurred with
respect to such revoked request in accordance with Section 8.
SECTION 4. OTHER DISPOSITIONS. If no underwriter as provided in Section 10
can be obtained or no registration and Underwritten Offering can be completed
on the basis provided in this Agreement, the Company shall use its reasonable
best efforts to otherwise facilitate an orderly and effective disposition of the
Common Shares requested to be included in such Underwritten Offering.
SECTION 5. PARTICIPATION IN OFFERINGS.
(a) Company Piggyback Right. If a Holder or Holders deliver a notice of a
proposed Underwritten Offering in accordance with Section 3(b), the Company may
elect to participate in the sale of Common Shares in such Underwritten Offering.
Such election shall be made by written notice of the Company delivered to the
Holders within ten (10) Business Days of the Company's receipt of the notice of
the Holders in respect of the Underwritten Offering, which notice shall specify
the number of Common Shares that the Company proposes to sell in the
Underwritten Offering. If the Company elects to participate in the Underwritten
Offering, the Company shall promptly file an amendment to the Shelf Registration
Statement or shall file a new Registration Statement, as may be required under
the Securities Act in order to permit the Company to sell Common Shares in the
Underwritten Offering. The Underwritten Offering shall thereafter be consummated
as soon as practicable after the earlier to occur of (x) the time the required
amendment to the Shelf Registration Statement or new Registration Statement
shall become effective under the Securities Act, provided that the Company shall
use its reasonable best efforts to cause such amendment or Registration
Statement to become effective as soon as practicable, and (y) sixty (60)
calendar days from the date of delivery by the Company to the Holders of the
notice of the Company's election to participate in the proposed Underwritten
Offering of the Holders.
(b) Holder Piggyback Right. If the Company at any time proposes to file a
registration statement with respect to the Underwritten Offering of Common
Shares, then the Company shall in each case give written notice of such proposed
filing to the Holders at least ten (10) Business Days before the anticipated
filing date of any such registration statement by the Company, and such notice
shall offer to all Holders the opportunity to have any Common Shares
constituting Subject Securities held by such Holders included in such
registration statement or otherwise included in such Unwritten Offering. Each
Holder desiring to have its Subject Securities registered under this Section
5(a)(iii) shall so advise the Company in writing within five (5) Business Days
after the date of receipt of the Company's aforesaid notice (which request shall
set forth the amount of Subject Securities for which registration is requested),
and the Company shall include in such Registration Statement all such Subject
Securities so requested to be included therein. If any such registration is not
a Shelf Registration, such Subject Securities shall be offered in the
Underwritten Offering together with the offering of Common Shares by the Company
with respect to which such Registration Statement has been filed. If any such
registration is a Shelf Registration, such Subject Securities shall be included
in the Registration Statement only for distribution in an Underwritten Offering
together with an Underwritten
-4-
<PAGE>
Offering of Common Shares by the Company.
(c) Holder Participation in a Company Underwritten Offering Under Previous
Registration. If the Company at any time proposes to effect an Underwritten
Offering of Common Shares, under a previously effective Registration Statement,
then the Company shall in each case give written notice of such proposed
offering to the Holders at least ten (10) Business Days before the anticipated
date of such Underwritten Offering, and such notice shall offer to all Holders
the opportunity to have any or all of the Common Shares constituting Subject
Securities then held by the Holders included in such Underwritten Offering, to
the extent such Subject Securities have previously been registered either under
the Shelf Registration Statement or a Registration Statement otherwise filed
pursuant to this Agreement. Each Holder desiring to have its Subject Securities
offered under this Section 5(a)(iv) shall so advise the Company in writing
within five (5) Business Days after the date of receipt of the Company's
aforesaid notice (which request shall set forth the amount of Subject Securities
proposed to be offered), and the Company shall cause to be included in such
Underwritten Offering all such Subject Securities so requested to be included
therein.
(d) Cutback. Notwithstanding the foregoing provisions of this Section 5, if
the managing underwriter or underwriters of any Underwritten Offering referred
to in Section 5(a),(b) or (c) have advised the Company in writing that the total
amount of Common Shares of the Holders, the Company and any other Persons
intended to be included in such Underwritten Offering is sufficiently large to
materially adversely affect the success of such offering, then the amount of
Common Shares to be offered in such public offering shall be allocated: (x) in
the case of Section 5(a), first, among the Holders in proportion to the number
of Common Shares proposed to be offered by each of them, and second, to the
Company and any other holders of Common Shares contractually entitled to
inclusion therein, in such proportion as they may determine; and (y) in the case
of Section 5(b) or 5(c), (i), if in connection with an offering for the account
of the Company, then first, to the Company, and second, among the Holders and
any other holders of Common Shares contractually entitled to inclusion therein,
pro rata in proportion to the number of Common Shares proposed to be offered by
each of them, and (ii), if in connection with an offering for the account of a
holder or holders of Common Shares other than a Holder, then first, to such
holder or holders, and second, to the Company and the Holders pro rata in
proportion to the number of Common Shares proposed to be offered by each of
them.
SECTION 6. PROCEDURES.
(a) General. In connection with the Company's obligations pursuant to
Section 2 hereof, the Company will:
(i) notify the selling Holders of Subject Securities and the managing
underwriters promptly (1) when a Prospectus or any Prospectus supplement or
post-effective amendment has been filed, and, with respect to any post-
effective amendment, when it has become effective (and with respect to any
Registration Statement other than the Shelf Registration Statement, when such
Registration Statement or any pre-effective amendment has been filed), (2) of
any request by the SEC for amendments or supplements to any Registration
Statement or Prospectus or for additional information, (3) of the issuance by
the SEC of any comments with respect to any filing, (4) of any stop
-5-
<PAGE>
order suspending the effectiveness of any Registration Statement or the
initiation of any proceedings for that purpose, (5) if at any time the
representations and warranties of the Company contemplated by paragraph (x)
below cease to be true and correct as of any time they are required to be true
and correct, (6) of any suspension of the qualification of the Subject
Securities for sale in any jurisdiction or the initiation or threatening of
any proceeding for such purpose and (7) of the happening of any event which
makes any statement of a material fact made in any Registration Statement,
Prospectus or any document incorporated therein by reference untrue or which
requires the making of any changes in any Registration Statement, Prospectus
or any document incorporated therein by reference in order to make the
statements therein (in the case of any Prospectus, in the light of the
circumstances under which they were made) not misleading; and use reasonable
best efforts to obtain as promptly as practicable the withdrawal of any order
or other action suspending the effectiveness of any Registration Statement or
suspending the qualification or registration (or exemption therefrom) of the
Subject Securities for sale in any jurisdiction;
(ii) if reasonably requested by the managing underwriter or underwriters
or the Holders of Subject Securities being sold in connection with an
Underwritten Offering, promptly incorporate in a Prospectus supplement or
post-effective amendment such information as the managing underwriters and the
Holders of the Subject Securities being sold in such Underwritten Offering
agree should be included therein relating to the sale of the Subject
Securities, including, without limitation, information with respect to the
aggregate number of shares of Subject Securities being sold to such
underwriters, the purchase price being paid therefor by such underwriters and
with respect to any other terms of the Underwritten Offering of the Subject
Securities to be sold in such offering; and promptly make all required filings
of such Prospectus supplement or post-effective amendment;
(iii) promptly after the filing of any document which is to be
incorporated by reference into a Registration Statement or Prospectus, provide
without charge copies of such document to the Holders of the Subject
Securities covered thereby and the underwriters, if any;
(iv) furnish to the selling Holders of Subject Securities and each managing
underwriter, without charge, at least one manually signed or "edgarized" copy,
and as many conformed copies as may reasonably be requested, of the then
effective Registration Statement and any post-effective amendments thereto,
including financial statements and schedules, all documents incorporated
therein by reference and all exhibits (including those incorporated by
reference);
(v) deliver to the selling Holders and the underwriters, if any, without
charge, as many copies of the then effective Prospectus (including each
prospectus subject to completion) and any amendments or supplements thereto as
such Persons may reasonably request;
(vi) use reasonable best efforts to register or qualify or cooperate with
the selling Holders, the underwriters, if any, and their respective counsel in
connection
-6-
<PAGE>
with the registration or qualification of such Subject Securities for offer
and sale under the securities or blue sky laws of such jurisdictions as any
selling Holder or underwriter reasonably requests in writing and do any and
all other acts or things reasonably necessary or advisable to enable the
disposition in such jurisdictions of the Subject Securities covered by the
then effective Registration Statement; provided, however, that the Company
will not be required to (1) qualify to do business in any jurisdiction where
it would not otherwise be required to qualify but for this paragraph (vi) or
(2) subject itself to general taxation in any such jurisdiction;
(vii) cooperate with the selling Holders and the managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Subject Securities to be sold and not bearing any restrictive legends; and
enable such Subject Securities to be in such denominations and registered in
such names as the managing underwriters may request at least two (2) Business
Days prior to any sale of Subject Securities to the underwriters;
(viii) upon the occurrence of any event contemplated by clause (7) of
paragraph (i) above, promptly prepare a supplement or post-effective amendment
to the Registration Statement or the related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the Subject Securities, the
Prospectus will not contain an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in the light
of the circumstances in which they were made, not misleading;
(ix) cause all Subject Securities covered by the Registration Statement
to be listed on each securities exchange (or quotation system operated by a
national securities association) on which identical securities issued by the
Company are then listed, and enter into customary agreements including, if
necessary, a listing application and indemnification agreement in customary
form, and provide a transfer agent for such Subject Securities;
(x) in the case of an Underwritten Offering, enter into an underwriting
agreement and take all such other actions in connection therewith in order to
expedite and facilitate the disposition of such Subject Securities, in each
case as the underwriters determine is reasonable and customary in transactions
of this kind, and in connection therewith: (1) make such representations and
warranties to the Holders of such Subject Securities and the underwriters in
form, substance and scope as are customarily made by issuers to underwriters
in secondary underwritten offerings; (2) obtain opinions of counsel to the
Company (which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the underwriters and the selling Holders of such
Subject Securities and shall cover the matters customarily covered in opinions
requested in secondary underwritten offerings and such other matters as may be
reasonably requested by such Holders and underwriters); (3) obtain "cold
comfort" letters from the independent public accountants of the Company
addressed to the selling Holders of such Subject Securities and the
underwriters, such letters to be in customary form and covering matters of the
type customarily covered in "cold comfort" letters in connection with
secondary underwritten offerings; and (4) deliver such documents and
certificates as may be
-7-
<PAGE>
reasonably requested by the selling Holders and the managing underwriters to
evidence compliance with clause (1) above and with any customary conditions
contained in the underwriting agreement or other agreement entered into by the
Company in respect of the relevant offering;
(xi) otherwise use its best efforts to comply with all applicable rules and
regulations of the SEC relating to such registration and the distribution of
the securities being offered and make generally available to its securities
holders earnings statements satisfying the provisions of Section 11(a) of the
Securities Act, no later than 60 days after the end of any 12-month period (or
90 days, if such period is a fiscal year) commencing at the end of any fiscal
quarter in which the Subject Securities are sold in an Underwritten Offering,
which earnings statements shall cover such 12-month periods;
(xii) cooperate and assist in any filings required to be made with the
National Association of Securities Dealers, Inc.; and
(xiii) make available for inspection by representatives of the Holders of
the Subject Securities covered by such Registration Statement, any
underwriters participating in any disposition pursuant to such registration,
and any attorneys or accountants retained by the selling Holders or the
underwriters, all financial and other records, pertinent corporate documents
and properties of the Company and cause the Company's officers, directors and
employees to supply all information reasonably requested by, and to cooperate
fully with, any such representative, underwriter, attorney or accountant in
connection with such registration, and otherwise to cooperate fully in
connection with any due diligence investigation, including making available
its officers during ordinary business hours, and permitting discussions with
the independent public accountants who have certified the Company's most
recent annual financial statements, in each case to the extent necessary to
enable any Holder or underwriter to conduct a "reasonable investigation" for
purposes of Section 11(a) of the Securities Act; provided that such
representatives, underwriters, attorneys or accountants enter into a
confidentiality agreement, in customary form and substance reasonably
satisfactory to the Company, prior to the release or disclosure to them of any
such information, records or documents.
(b) Holder Information. The Company may require each selling Holder to
furnish to the Company for use in connection with the transactions contemplated
hereby such information regarding such Holder and the distribution of Subject
Securities to be sold by such Holder as the Company may from time to time
reasonably request in writing.
(c) Occurrence of Certain Events. Each Holder of Subject Securities agrees
that, upon receipt of any notice from the Company of the happening of any event
of the kind described in Section 6(a)(i)(4), (6) or (7), such Holder will
forthwith refrain from disposing or discontinue disposition of Subject
Securities pursuant to the then current Prospectus until such Holder is advised
in writing by the Company that the use of the Prospectus may be resumed. The
Company shall use its reasonable best efforts to limit the duration of any
discontinuance with respect to the disposition of Subject Securities pursuant to
this paragraph.
-8-
<PAGE>
(d) Additional Procedures. If the Holders become entitled, pursuant to an
event described in clause (iv) of the definition of Subject Securities, to
receive any securities in respect of Subject Securities that were already
included in the Shelf Registration Statement subsequent to the date the Shelf
Registration Statement is declared effective, and the Company is unable under
the securities laws to add such securities to the Shelf Registration Statement,
the Company, as promptly as reasonably practicable, shall file, in accordance
with the procedures more particularly set forth in Section 6(a), an additional
Shelf Registration Statement with respect to any such Subject Securities. The
Company shall use its reasonable best efforts to have any such additional
Registration Statement declared effective as promptly as reasonably practicable
after such filing and to keep such additional Shelf Registration Statement
continuously effective for reasonable time thereafter not to exceed two years.
SECTION 7. HOLDBACK AGREEMENTS.
(a) Hold-Back Election. Subject to Section 7(c) and the final two
sentences of this Section 7(a), in the case of any Underwritten Offering
requested by such Holder, or in which such Holder is participating or is given a
substantial opportunity to participate, each Holder agrees, if and to the extent
requested in writing by the managing underwriter or underwriters administering
such offering as promptly as reasonably practicable prior to the commencement of
the 7-day period referred to below (a "Hold-Back Election"), not to effect any
public sale or distribution of securities of the Company except as part of such
Underwritten Offering, during the period beginning seven (7) days prior to the
closing date of such underwritten offering and during the period ending on the
earlier of (i) ninety (90) days after such closing date and (ii) the date such
sale or distribution is permitted by such managing underwriter or underwriters,
provided that, if and to the extent it is reasonable to do so, the Company will
request of the managing underwriter or underwriters to permit such sale or
distribution prior to the date permitted under clause (i) above.
(b) Material Development Election. Subject to Section 7(c), the Company shall
be entitled, for a period of time not to exceed sixty (60) consecutive days, to
require that the Holders refrain from effecting any distribution of their
Subject Securities pursuant to the Shelf Registration Statement if the chief
executive officer of the Company determines in his reasonable good faith
judgment that, in accordance with his understanding of the disclosure
requirements of applicable securities law, such distribution would require
disclosure of any financing (other than an underwritten secondary offering of
any securities of the Company), acquisition, corporate reorganization or other
transaction or development involving the Company or any subsidiary of the
Company that is or would be material to the Company and that, in the reasonable
good faith business judgment of such chief executive officer, such disclosure
would not at that time be in the best interests of the Company (a "Material
Development Election"). The Company shall, as promptly as practicable, give the
Holders written notice of any such Material Development Election. If the Holders
have been required to refrain from disposing of their Subject Securities as a
result of a Material Development Election, the Company shall, as promptly as
practicable following the determination that the Holders may recommence such
sales, notify such Holders in writing of such determination (but in any event no
later than the end of such 60-day period).
(c) Limitation. In no event shall the restrictions under Section 7(a)
or Section 7(b), pursuant to one or more Hold-Back Elections or Material
Development Elections, remain in
-9-
<PAGE>
effect for more than one hundred twenty (120) days in the aggregate in any
calendar year.
(d) Company Hold-Back. In the case of any Underwritten Offering of
Subject Securities pursuant to Section 3, the Company agrees, if and to the
extent requested in writing by the managing underwriter or underwriters
administering such offering, as promptly as reasonably practicable prior to the
commencement of the 7-day period referred to below, not to effect any public
sale or distribution for its own account (other than sales pursuant to the same
Registration Statement, as permitted under this Agreement and other than any
registration on Form S-8 or S-4 (or any successor or substantially similar form)
or of (A) an employee stock option, stock purchase or compensation plan or of
securities issued or issuable pursuant to any such plan, (B) securities proposed
to be issued in exchange for securities or assets of, or in connection with a
merger, combination or consolidation with, another corporation, or (C) a
dividend reinvestment plan) of any securities of the Company during the period
beginning seven (7) days prior to the closing date of each underwritten offering
of Subject Securities and during the period ending on the earlier of (i) forty-
five (45) days after such closing date and (ii) the date such sale or
distribution is permitted by such managing underwriter or underwriters; provided
that, if and to the extent it is reasonable to do so, the Holders will request
of the managing underwriter or underwriters to permit such sale or distribution
prior to the date permitted under clause (i) above.
SECTION 8. REGISTRATION EXPENSES. (a) General. Except as otherwise
set forth in this section, each of the Company, on the one hand, and the
Holders, on the other, will bear it own costs in connection with this Agreement,
including without limitation, internal expenses (including, without limitation,
all salaries and expenses of its officers and employees), fees and disbursements
of its outside counsel and its independent public accountants and fees and
expenses of any other experts or advisors.
(b) Company Expenses. The Company shall pay all printing expenses (including
expenses of printing and disseminating Prospectuses or any other necessary
documentation). The Company shall also pay all registration and filing fees and
fees and expenses of compliance with state securities or blue sky laws,
including reasonable fees and disbursements of counsel in connection with blue
sky qualifications or registrations (or the obtaining of exemptions therefrom),
except as provided in (c) below.
[(c) Holder Expenses. The Holders shall pay all expenses incurred by
the Company in connection with the participation in any "road show" of members
of the Company's management up to $________, as well as [ ].]
SECTION 9. INDEMNIFICATION.
(a) Indemnification by the Company. The Company agrees to indemnify
and hold harmless, to the full extent permitted by law, but without duplication,
each Holder, its officers, directors, employees, partners, principals, equity
holders, managed or advised accounts, advisors and agents, and each Person who
controls such Holder (within the meaning of the Securities Act), against all
losses, claims, damages, liabilities, expenses, actions and proceedings
(including reasonable costs of investigation and reasonable legal fees and
expenses) that arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in, or any omission or alleged
omission of a material fact required to be contained in, any
-10-
<PAGE>
Registration Statement or Prospectus or necessary to make the statements therein
(in the case of a Prospectus in light of the circumstances under which they were
made) not misleading, except insofar as the same are caused by or contained in
any information furnished in writing to the Company by any Holder or any
underwriters expressly for use therein. The Company will also indemnify
underwriters participating in the distribution, their officers, directors,
employees, partners and agents, and each Person who controls such underwriters
(within the meaning of the Securities Act), to the same extent as provided above
with respect to the indemnification of the Holders of Subject Securities, if so
reasonably requested.
(b) Indemnification by Holders of Subject Securities. In connection
with any Underwritten Offering or Registration Statement in which a Holder of
Subject Securities is participating, each such Holder will furnish to the
Company in writing such information as the Company reasonably requests for use
in connection with any such Underwritten Offering or Registration Statement or
Prospectus and agrees to indemnify and hold harmless, to the full extent
permitted by law, but without duplication, the Company, its officers, directors,
shareholders, employees, advisors and agents, and each Person who controls the
Company (within the meaning of the Securities Act) against any losses, claims,
damages, liabilities, expenses actions and proceedings (including reasonable
costs of investigation and reasonable legal fees and expenses) that arise out of
or are based upon any untrue statement or alleged untrue statement of a material
fact contained in, or any omission or alleged omission of a material fact
required to be contained in, the Registration Statement or Prospectus, or
necessary to make the statements therein (in the case of a Prospectus in light
of the circumstances under which they were made) not misleading, to the extent,
but only to the extent, that such untrue statement or omission is contained in
any information so furnished in writing by such Holder to the Company
specifically for inclusion therein. The Company and the other persons described
above shall be entitled to receive indemnities from underwriters participating
in the distribution, to the same extent as provided above with respect to
information so furnished in writing by such Persons specifically for inclusion
in any Prospectus or Registration Statement.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
indemnification hereunder will (i) give prompt notice to the indemnifying party
of any claim with respect to which it seeks indemnification and (ii) permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party; provided, however, that any Person
entitled to indemnification hereunder shall have the right to employ separate
counsel and to participate in the defense of such claim, but the fees and
expenses of such counsel shall be at the expense of such indemnified Person
unless (A) the indemnifying party has agreed to pay such fees or expenses, (B)
the indemnifying party shall have failed to assume the defense of such claim and
employ counsel reasonably satisfactory to the indemnified party in a timely
manner or (C) in the reasonable judgment of any such Person, based upon advice
of its counsel, a conflict of interest may exist between such person and the
indemnifying party with respect to such claims (in which case, if the Person
notifies the indemnifying party in writing that such Person elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such claim on behalf of
such person). The indemnifying party will not be subject to any liability for
any settlement made without its consent (but such consent will not be
unreasonably withheld). No indemnified party will be required to consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
-11-
<PAGE>
indemnified party of a release from all liability in respect of such claim or
litigation. An indemnifying party who is not entitled to, or elects not to,
assume the defense of the claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, as well as one local counsel in
each relevant jurisdiction.
(d) Contribution. If for any reason the indemnification provided for in
Section 9(a) or Section 9(b) is unavailable to an indemnified party or
insufficient to hold it harmless as contemplated by Section 9(a) and Section
9(b), then the indemnifying party shall contribute to the amount paid or payable
by the indemnified party as a result of such loss, claim, damage or liability in
such proportion as is appropriate to reflect not only the relative benefits
received by the indemnifying party and the indemnified party, but also the
relative fault of the indemnifying party and the indemnified party, as well as
any other relevant equitable considerations, provided, that no indemnifying
Holder shall be required to contribute an amount greater than the dollar amount
of the net proceeds received by such indemnifying Holder with respect to the
sale of the Subject Securities giving rise to such indemnification obligation.
The relative fault of any indemnifying or of any indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by such indemnifying or
indemnified party or its affiliates or representatives, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The parties hereto agree that it would not
be just and equitable if contribution pursuant to this Section 9(d) were
determined by (i) pro rata allocation (even if all Holders or any agents for
the Holders or any underwriters of the Subject Securities, or all of them, were
treated as one entity for such purpose), or (ii) by any other method that does
not take into account the equitable consideration referred to in this Section
9(d). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above shall be deemed to include any legal or other fees or
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action, proceeding or claim. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentations.
SECTION 10. UNDERWRITERS.
(a) Selection of Underwriters. Each underwriter for any Underwritten
Offering under the Shelf Registration Statement or otherwise contemplated by
this Agreement shall be a nationally recognized underwriter selected by the
Company and reasonably satisfactory to the Holders.
(b) Approved Underwriting Arrangements. No Holder may participate in
any Underwritten Offering of Subject Securities hereunder, unless such Holder
(i) agrees to sell such Holder's Subject Securities on the basis provided in any
underwriting arrangements approved by the managing underwriters for the
Underwritten Offering, and (ii) completes and executes all customary
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting arrangements.
Nothing in this Section 10 shall be construed to create any additional rights
regarding the registration of Subject
-12-
<PAGE>
Securities in any Person otherwise than as set forth herein.
SECTION 11. AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this Section 11, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, without the consent in writing of the Company and the Holders
at least [66 2/3]%, in the aggregate, of the Subject Securities outstanding.
SECTION 12. REMEDIES. Any Person having rights under any provision of this
Agreement shall be entitled to enforce such rights specifically or to recover
damages or to exercise any other remedy available to it at law or in equity. The
foregoing rights and remedies shall be cumulative and the exercise of any right
or remedy provided herein shall not preclude any Person from exercising any
other right or remedy provided herein. Each of the Company and the Holders agree
that monetary damages would not be adequate compensation for any loss incurred
by reason of a breach by it of any of the provisions of this Agreement and
hereby agrees to waive the defense in any action for specific performance that a
remedy at law would be adequate.
SECTION 13. NOTICES; DESIGNATED HOLDERS. (a) Delivery. All notices, documents
and other communications required or permitted to be delivered hereunder shall,
in the case of notices and communications, be in writing and shall be delivered
by hand-delivery, registered first-class mail, telecopier, or air-courier
guaranteeing overnight delivery:
If to the Holders, or any of them, to such Holders at their
respective addresses shown on the records of the Company from time to time,
with a copy to ________________;
If to the Company, _______, with a copy to ____________; or
At such other address as may be designated from time to time by
notice given in accordance with the provisions of this Section 13.
(b) Receipt. All such notices and other communications shall be
deemed to have been delivered and received (x) in the case of personal delivery,
telecopier or telegram, on the date of such delivery, (y) in the case of air
courier, on the Business Day after the date when sent and (z) in the case of
mailing, on the third Business Day following such mailing.
SECTION 14. SUCCESSORS AND ASSIGNS. This Agreement shall inure to
the benefit of and be binding upon the successors and permitted assigns of each
of the parties hereto, and all Holders. No party may assign its rights or
obligations under this Agreement to any other Person, except that any Holder may
assign its rights hereunder to any other Holder, or to such Holder's spouse or
child or a trust for the benefit of such Holder or such Holder's spouse or
child. This Agreement may be enforced by any Holder as though such person were
a party hereto.
SECTION 15. COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed
-13-
<PAGE>
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
SECTION 16. HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
SECTION 17. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
THE PRINCIPLES OF THE CONFLICT OF LAWS THEREOF.
SECTION 18. JURISDICTION; FORUM. Each party hereto consents and submits to the
exclusive jurisdiction of any state court sitting in the County of New York or
federal court sitting in the Southern District of the State of New York in
connection with any dispute arising out of or relating to this Agreement. Each
party hereto waives any objection to the laying of venue in such courts and any
claim that any such action has been brought in an inconvenient forum. To the
extent permitted by law, any judgment in respect of a dispute arising out of or
relating to this Agreement may be enforced in any other jurisdiction within or
outside the United States by suit on the judgment, a certified copy of such
judgment being conclusive evidence of the fact and amount of such judgment. Each
party hereto agrees that personal service of process may be effected by any of
the means specified in Section 13, addressed to such party. The foregoing shall
not limit the rights of any party to serve process in any other manner permitted
by law.
SECTION 19. SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
SECTION 20. ENTIRE AGREEMENT. This Agreement is intended by the parties as a
final expression of their agreement and is intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to such
subject matter.
SECTION 21. ATTORNEYS' FEES. In any proceeding brought to enforce any
provision of this Agreement, the successful party shall be entitled to recover
reasonable attorneys' fees in addition to its costs and expenses and any other
available remedy.
[Remainder of Page Intentionally Left Blank]
-14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
COYOTE SPORTS, INC.
By:_________________________________________
Name:
Title:
[Investors]
-15-
<PAGE>
APPENDIX I
-16-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Coyote Sports, Inc.:
We consent to the use of our report dated March 16, 1999 relating to the
consolidated balance sheets of Coyote Sports, Inc. and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, other comprehensive loss, stockholders' equity (deficit), and cash
flows for the years then ended, included herein, and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG LLP
Boulder, Colorado
May 3, 1999
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated July 2, 1998 for the year ended May 31, 1998 and to all references
to our Firm included in this registration statement.
/s/ Arthur Andersen LLP
Hartford, Connecticut
May 3, 1999
