<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-23085
COYOTE SPORTS, INC.
(Exact name of registrant as specified in its charter)
Nevada 88-0326730
[State or other jurisdiction [I.R.S. Employer
of incorporation or organization] Identification No.]
2291 Arapahoe Avenue
Boulder, Colorado 80302
[Address of principal executive offices] [Zip Code]
Registrant's telephone number, including area code: (303) 932-8794
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at May 12, 1999
----- ---------------------------
Common Stock, $.001 par value 5,777,692 shares
<PAGE>
COYOTE SPORTS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998............................................................. 1
Condensed Consolidated Statements of Operations (unaudited) for the three
months ended March 31, 1999 and 1998.............................................. 2
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited) for the three months ended March 31, 1999 and 1998.................... 3
Condensed Consolidated Statements of Cash Flows (unaudited) for the three
months ended March 31, 1999 and 1998.............................................. 4
Notes to Condensed Consolidated Financial Statements (unaudited)..................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. Not Applicable
Item 2. Changes in Securities and Use of Proceeds.......................................... Not Applicable
Item 3. Defaults Upon Senior Securities.................................................... Not Applicable
Item 5. Other Information.................................................................. Not Applicable
Item 6. Exhibits and Reports on Form 8-K................................................... 14
Signatures ................................................................................... 15
</TABLE>
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------------- ---------------
(unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 20,243 925,275
Restricted cash - 90,000
Trade receivables, net of allowance for doubtful accounts of
$561,000 and $390,000 for 1999 and 1998, respectively 6,134,766 4,693,788
Inventories, net 7,168,390 6,399,249
Prepaid expenses and other current assets 1,132,443 903,712
--------------- -------------
Total current assets 14,455,842 13,012,024
Property, plant and equipment, net 13,600,299 14,185,247
Investment in Unggul 1,930,942 1,930,942
Other assets, net 1,545,308 1,739,936
--------------- -------------
$ 31,532,391 30,868,149
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable $ 14,725,733 13,127,754
Current portion of long-term debt 6,151,947 6,151,947
Accounts payable 7,204,504 5,312,524
Accrued expenses 3,434,838 3,131,578
--------------- -------------
Total current liabilities 31,517,022 27,723,803
Long-term debt, net of current portion 716,967 893,408
Deferred taxes and other liabilities 1,210,340 1,200,330
--------------- -------------
Total liabilities 33,444,329 29,817,541
Redeemable preferred stock, $.001 par value. Authorized
4,000,000 shares; issued and outstanding 75,000 shares
redeemable at $20.00 per share 1,500,000 1,500,000
Stockholders' equity (deficit):
Common stock, $.001 par value. Authorized 25,000,000
shares; issued and outstanding 5,777,692 shares 5,778 5,778
Additional paid-in capital 18,180,202 18,180,202
Accumulated deficit (22,083,924) (19,188,377)
Accumulated other comprehensive income (loss) 486,006 553,005
--------------- -------------
Total stockholders' deficit (3,411,938) (449,392)
Commitments and contingencies --------------- -------------
$ 31,532,391 30,868,149
=============== =============
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1998 has
been derived from the audited consolidated financial statements at that
date but does not include all of the information and footnotes required
by generally accepted accounting principles for complete financial
statements.
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------
1999 1998
------------------ ----------------
<S> <C> <C>
Net sales $ 7,856,348 7,994,279
Cost of goods sold (7,282,987) (6,184,750)
------------------ ----------------
Gross profit 573,361 1,809,529
Selling, general and administrative expenses (2,588,829) (1,732,782)
------------------ ----------------
Operating income (loss) (2,015,468) 76,747
Other income (expense):
Interest expense (587,946) (93,218)
Debt financing costs (99,999) -
Other, net (190,534) (5,000)
------------------ ----------------
Loss before income taxes and minority interests (2,893,947) (21,471)
Income tax expense (1,600) (13,000)
Minority interests in subsidiaries' losses - 55,771
------------------ ----------------
Net income (loss) $ (2,895,547) 21,300
================== ================
Basic and diluted earnings (loss) per share $ (0.50) 0.01
================== ================
Shares used in calculating basic earnings
(loss) per share 5,777,692 4,055,678
================== ================
Shares used in calculating diluted earnings
(loss) per share 5,777,692 4,094,529
================== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OTHER
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1999 1998
------------- -----------
<S> <C> <C>
Net income (loss) $ (2,895,547) 21,300
Other comprehensive income (loss) (66,999) 161,675
------------- -----------
Comprehensive loss $ (2,962,546) 182,975
============= ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
1999 1998
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) (2,895,547) 21,300
Depreciation and amortization 777,718 124,236
Changes in working capital items, net (109,530) (1,131,267)
------------- ------------
Net cash used by operating activities (2,227,359) (985,731)
Cash flows from investing activities:
Purchase of property, plant and equipment (99,211) (1,464,124)
Acquisition of businesses, net of cash acquired - (3,129,774)
------------- ------------
Net cash used in investing activities (99,211) (4,593,898)
------------- ------------
Cash flows from financing activities:
Payments on borrowings from stockholder - 56,202
Proceeds (payments) from notes payable, net 1,597,979 (262,000)
Borrowings (payments) on long-term debt, net (176,441) 4,041,007
Sale of common stock - 1,563,062
------------- ------------
Net cash provided by financing activities 1,421,538 5,398,271
------------- ------------
Decrease in cash and equivalents (905,032) (181,358)
Cash and equivalents at beginning of period 925,275 726,290
------------- ------------
Cash and equivalents at end of period $ 20,243 544,932
============= ============
Supplemental disclosure of cash flow information
Non-cash financing activities:
Fair value of common stock issued for services $ - 504,000
============= ============
Fair value of common stock issued in connection
with long term debt $ - 600,000
============= ============
Fair value of common stock issued for acquisition $ - 1,500,000
============= ============
Fair value of common stock issued in connection
with notes payable $ - 59,062
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and instructions to Form 10-Q. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
Company believes that the disclosures are adequate to make the information
presented not misleading when read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's annual
report on form 10-KSB (File No. 000-23085) for the fiscal year ended December
31, 1998.
The financial information presented in this quarterly report on form 10-Q
reflects all adjustments, consisting only of normal recurring adjustments, which
are, in the opinion of management, necessary for a fair statement of the results
for the interim periods presented. The results for the interim periods are not
necessarily indicative of results to be expected for the full year. The Company
has experienced significant quarterly fluctuations in operating results and it
expects that these fluctuations in sales, expenses and net income or loss will
continue.
2. MERGER AGREEMENT
On February 2, 1999, the Boards of Directors of Coyote and Royal
Precision Inc. (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 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.
3. LIQUIDITY
The Company incurred a loss of $2,895,547 and had net income of $21,300
for the three months ending March 31, 1999 and 1998, respectively. As of March
31, 1999, the Company had outstanding balances on notes payable and long-term
debt as listed below.
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------
<S> <C>
Note payable under line of credit, variable interest rate of 1.5% plus LIBOR rate
(8.69% at March 31, 1999), interest payable quarterly $ 761,000
Note payable under line of credit, variable interest rate equal to the lender's
prime rate plus 1.5% (9.25% at March 31, 1999), interest payable monthly 2,406,000
Note payable under line of credit and term loan, variable interest rate of 1.5 %
over the lender's prime rate, interest payable monthly 2,690,585
Note payable under line of credit and term loan, variable interest rate of 1.5%
over the lender's prime rate, interest payable monthly 2,444,719
Note payable secured by accounts receivable, variable interest rate of 1.75% over
the lender's base rate (9.0% at March 31, 1999), interest payable monthly 260,000
Note payable, interest rate of 12%, interest payable quarterly 6,000,000
Note payable under term loan, variable interest rate of 1.75% plus LIBOR rate,
interest payable quarterly 581,000
Note payable, variable interest rate of 5% over the Federal Reserve discount rate
(10% at March 31, 1999), interest and note due May 31, 1999 (a) 5,500,000
Note payable, with interest payable as a warrant to purchase shares of the
Company's common stock, due June 18, 1999 (b) 923,429
Capital leases 27,914
-----------------
$21,594,647
=================
</TABLE>
5
<PAGE>
The original due dates on two notes payable have been extended to allow
for additional time for the refinancing of the Company's debt in connection with
the merger between Coyote and Royal Precision, Inc. (RP) to be completed. The
terms of these extensions are as follows:
(a) Principal and interest on the note payable for $5,500,000
originally due March 31, 1999 has been extended to the earlier of
the refinancing of the Company's debt or May 31, 1999. Interest
will continue to accrue at the original interest rate.
(b) Principal on the convertible note payable for $1,000,000 with
interest payable as a warrant to purchase 35,000 shares of the
Company's common stock was due and payable the earlier of the
refinancing of the Company's debt in connection with the merger
between Coyote and RP or May 1, 1999. The holder of the
promissory note has extended the due date to June 18, 1999 or
upon refinancing of the Company's debt in connection with the
merger at which time the holder will receive $260,608 in cash and
convert $739,392 into 246,464 shares of the Company's common
stock.
If the merger is consummated, the Company 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%, a subordinate note payable of
$8,000,000, at an interest rate of 13.00% and a $10,000,000 line of credit
facility with an interest rate of prime plus 1.25% with a minimum rate of 9.0%.
The $13,000,000 note payable is expected to be repaid over four years as
follows: year one $1,220,000; year two $3,680,000; year three $4,320,000; year
four $3,780,000 or earlier if cash flows exceed defined thresholds or if defined
assets or other defined transactions occur. The $12,000,000 note payable in
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 transactions occur. Coyote expects to use these proceeds
to repay the majority of its existing indebtedness.
As of March 31, 1999, the Company was not current with certain vendors.
Management believes that the combination of cash on hand of $20,243, its
borrowing availability of $271,000 at March 31, 1999, projected cash flows from
operations, extending the due dates of current debt agreements and entering into
new debt agreements will provide sufficient cash to pay past due amounts and to
meet its obligations as they come due. However, there can be no assurance that
operations will generate positive cash flows, that the debt agreements will be
extended or that new debt agreements will provide sufficient cash to meet its
obligations as they come due.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------------- -----------------
<S> <C> <C>
Raw materials $ 1,387,272 1,746,787
Work in process 2,053,859 1,682,018
Finished goods 4,828,352 4,151,757
----------------- -----------------
8,269,483 7,580,562
Valuation allowance (1,101,093) (1,181,313)
----------------- -----------------
$ 7,168,390 6,399,249
================= =================
</TABLE>
6
<PAGE>
5. EARNINGS (LOSS) PER SHARE
The following represents a reconciliation of the earnings (loss) and outstanding
shares used to compute earnings (loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Net income (loss) $ (2,895,547) $ 21,300
Common shares outstanding at beginning of the period as
adjusted for cancelled stock 5,777,692 3,855,000
Net effect of shares issued during the period - 200,678
---------------- ----------------
Shares used in computing basic income (loss) per share 5,777,692 4,055,678
Net effect of dilutive stock options - 38,851
---------------- ----------------
Shares used in computing diluted income (loss) per share 5,777,692 4,094,529
Basic and diluted income (loss) per share $ (0.50) $ 0.01
</TABLE>
6. 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 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
activities and segment assets:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------- ---------------------------------------------
Sports Advanced Sports Advanced
Equipment Materials Totals Equipment Materials Totals
------------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales to external
customers $ 6,191,521 1,664,827 7,856,348 6,466,371 1,527,908 7,994,279
Intersegment sales - 31,267 31,267 - - -
------------------ ------------- --------------- --------------- -------------- ---------------
Total net sales 6,191,521 1,696,094 7,887,615 6,466,371 1,527,908 7,994,279
Segment income (loss)
before income taxes,
and minority interest (2,574,727) (319,220) (2,893,947) 108,762 (130,233) (21,471)
Segment net income (loss) (2,575,527) (320,020) (2,895,547) 125,478 (104,178) 21,300
Segment assets $ 25,797,489 5,074,730 31,532,391 30,038,958 3,504,041 33,542,999
</TABLE>
7
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Coyote designs, engineers, manufactures, markets and distributes brand name
sports equipment and recreational products worldwide. 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 components, 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.
On February 2, 1999, the Boards of Directors of Coyote and Royal Precision
Inc. (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 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
would be convertible on a share-for-share basis into the Company's common stock.
The Series C Preferred Stock would be contractually obligated 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 (see Registration Statement No. 333-73309 as filed
with the S.E.C.), refinancing of debt and various other obligations identified
in the merger agreement. Management believes the merger will consummate with an
effective date in the second quarter of 1999. However, there can be no assurance
that the merger will be consummated.
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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data as a percentage of net sales. The 1999 data
reflects the consolidated results of all entities from January 1, 1999 through
March 31, 1999. The 1998 data reflects the consolidated results of all entities
except for Unifiber and West Coast Composites from January 1, 1998 through March
31, 1998. Unifiber was acquired on March 19, 1998 and is included in the
Company's results beginning April 1, 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 the Company's results beginning September 9, 1998.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1999 1998
------------- ------------
<S> <C> <C>
Net sales 100% 100%
Cost of goods sold (93) (77)
Gross profit 7 23
Operating expenses (33) (22)
Operating income (loss) (26) 1
Interest expense, net (7) (1)
</TABLE>
8
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED).
Debt financing costs (1) -
Other (3) -
Loss before income taxes and minority interests (37) -
Income tax (expense) benefit - -
Minority interests - -
Net income (loss) (37) -
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Net sales for the three months ended March 31, 1999 were $7,856,348 as
compared to $7,994,279 for the comparable period of 1998. The decrease in net
sales is primarily attributable to reduced product demand in golf shafts in the
United States and Europe and a decrease in the average selling price of pre-
impregnated materials. Gross profit for the three months ended March 31, 1999
and 1998 was 7% and 23% of net sales, respectively. Gross profit was negatively
effected by the addition of two graphite shaft manufacturing facilities through
the acquisition of Unifiber on March 19, 1998 and the acquisition of West Coast
Composites on September 9, 1998. In January of 1999, the Company consolidated
its graphite shaft manufacturing operations in the Carlsbad, California
facility, which management believes will improve gross profit in the future.
Operating expenses for the three months ended March 31, 1999 were 33% of
net sales as compared to 22% for the comparable period of 1998, as a result of
an increase in selling, general and administrative costs from the acquisition of
Unifiber and the acquisition of West Coast Composites.
The Company had an operating loss of $2,015,468 for the three months ended
March 31, 1999, as compared to operating income of $76,747 for the comparable
period in 1998. The operating loss for the three months ended March 31, 1999 is
a result of reduced product demand in golf shafts, a decrease in gross profit
from lower sales over a larger cost structure, and an increase in selling,
general and administrative costs from the acquisition of Unifiber and West Coast
Composites.
Interest expense was $572,632 for the three months ended March 31, 1999,
as compared to $93,218 for the comparable period of 1998. 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
Composites.
Minority interests in subsidiaries' losses were $55,771 for the three
months ended March 31, 1998. There were no minority interests in subsidiaries'
losses recorded for the three months ended March 31, 1999 since the net
investment by minority owners has been fully offset by minority interests in
subsidiaries' losses. Minority interests in subsidiaries' losses are a result of
the net effect on profits and losses of Sierra Materials and is based on the
minorities' percentage ownership in Sierra Materials (20%).
Net loss for the three months ended March 31, 1999 was $2,895,547 or $0.50
per share, as compared to net income of $21,300 or $0.01 per share for the
comparable period of 1998. Management attributes the net loss to a drop in
demand for golf shafts in the first quarter of 1999 and increased costs
associated with the acquisitions of Unifiber and West Coast Composites.
SEASONALITY
As a result of the Company's present operations being primarily dependent
upon golf shaft sales, management expects for the foreseeable future that the
Company's business will remain seasonal. The Company's customers have
historically built inventory in anticipation of purchases by golfers in the
spring and summer, the principal selling season for golf shafts, the Company's
primary product. The Company'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.
9
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED).
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 ("Year 2000 Issue"). 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 systems 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.
Management has identified certain key suppliers and customers and is currently
performing an assessment on the state of readiness and/or compliance of those
key suppliers and customers. 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. 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 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 March 31, 1999, Coyote had an accumulated deficit of $22,084,000
compared to an accumulated deficit of $19,188,000 at December 31, 1998. Net loss
for the three months ended March 31, 1999 was $2,896,000, compared to income of
$21,000 for the comparable period of 1998. As of March 31, 1999, the Company had
a working capital deficit of $17,061,000.
As of March 31, 1999, Coyote had nine outstanding notes payable. The notes
are broken out by operating entity and discussed below.
Parent
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 would cause the Note to be due immediately.
10
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED).
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, upon maturity of the loan and upon the prepayment,
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 Company's common stock
effective 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.
The Loan Agreement provides that the Note is secured by 1,430,000 shares
of the Company's common stock owned by Mel Stonebraker, Director, and by
1,170,000 shares of the 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, the Company entered into a convertible promissory
note for $1,000,000 with interest payable as a warrant to purchase 35,000 shares
of the Company's common stock at an exercise price of $0.01. Principal on the
note was due on or before May 1, 1999. On May 7, 1999, the Company amended the
$1,000,000 convertible promissory note and extended the maturity date to June
18, 1999 or three days after the close of the financing in connection with the
merger with Royal Precision, Inc., whichever is sooner. At the date of maturity,
the holder of the convertible promissory note will convert $739,392 of the note
to 246,464 shares of the Company's common stock. The remaining $260,608 of the
note will be paid in cash on the maturity date. The Company issued an additional
warrant to purchase 6,536 shares of the Company's common stock at an exercise
price of $0.01.
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 March 31,
1999) 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 March 31,
1999, $761,000 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 March 31, 1999) 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 March 31, 1999, $581,000 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 March 31, 1999, $260,000 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 (9.25% at March 31, 1999) secured by substantially all of the
assets of Apollo U.S. The lender has allowed for increased availability of
$250,000 as of March 31, 1999. 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 March 31, 1999, the outstanding balance under the
agreement was $2,406,000. Coyote may not declare or pay dividends on its common
stock without the written consent of the lender.
11
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED).
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 (9.25% at March 31, 1999). The lender
has allowed for increased availability of $180,000 as of March 31, 1999.
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 March 31, 1999, the
total outstanding balance under the agreement was $2,445,000. 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 May 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 (9.25% at March 31,
1999). Borrowings are secured by substantially all of the assets of Sierra
Materials and are guaranteed by Apollo U.S., 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 March 31, 1999, the
total outstanding balance under the Agreement was $2,691,000. Coyote may not
declare or pay dividends on its common stock without the written consent of the
lender.
Net cash used in operating activities was $2,227,359 for the three months
ended March 31, 1999, primarily due to the net loss.
Net cash used in investing activities of $99,211 for the three months
ended March 31, 1999, mainly related to equipment purchases at Unifiber and
Sierra Materials.
Net cash provided by financing activities was $1,421,538 for the three
months ended March 31, 1999, primarily due to the borrowings made on revolving
lines of credit.
As of March 31, 1999, the Company was not current with certain vendors.
Management believes that the combination of cash on hand of $20,243, its
borrowing availability of $271,000 at March 31, 1999, projected cash flows from
operations, extending the due dates of current debt agreements and entering into
new debt agreements will provide sufficient cash to pay past due amounts and to
meet its obligations as they come due. However, there can be no assurance that
operations will generate positive cash flows, that the debt agreements will be
extended or that new debt agreements will provide sufficient cash to meet its
obligations as they come due. The Company has current debt obligations of
$20,878,000 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. If the merger is consummated, the Company 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%, a subordinate note payable of
$8,000,000, at an interest rate of 13.00% and a $10,000,000 line of credit
facility with an interest rate of prime plus 1.25% with a minimum rate of 9.0%.
The $13,000,000 note payable is expected to be repaid over four years as
follows: year one $1,220,000; year two $3,680,000; year three $4,320,000; year
four $3,780,000 or earlier if cash flows exceed defined thresholds or if defined
assets or other defined transactions occur. The $12,000,000 note payable in
expected to mature with a balloon payment four years after the note commences or
12
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED).
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 transactions occur. Coyote expects to use these proceeds
to repay the majority of its existing indebtedness and the redeemable preferred
stock.
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 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.
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.
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 an acquisition in the future.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND ANALYST REPORTS
Certain written and oral statements made or incorporated by reference from time
to time by Coyote Sports, Inc., its subsidiaries and its representatives in this
report, other reports, filings with the Securities and Exchange Commission,
press releases, conferences, or otherwise, are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Act"). Forward-looking statements include, without limitation, any statement
that may predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result," or
words or phrases of similar meaning. Forward-looking statements involve risks
and uncertainties which may cause actual results to differ materially from the
forward-looking statements. The risks and uncertainties are detailed from time
to time in reports filed by Coyote Sports, Inc. with the S.E.C., including Forms
8-K, 10-QSB, 10-Q, and 10-KSB, and include, among others, the following: adverse
international, national and local general economic and market conditions,
general decreases in consumer spending for sports equipment and recreational
products, intense competition, including entry of new competitors, increased or
adverse governmental regulation, inadequate capital, unexpected costs, lower
revenues and net income than forecasted or greater losses, loss of significant
customers, price increases for raw materials, inability to raise prices, the
risk of litigation and administrative proceedings involving the Company and its
employees, higher than anticipated labor costs, labor disputes, the possible
fluctuation and volatility of the Company's operating results and financial
condition, adverse publicity and news coverage, adverse currency exchange rates,
inability to carry out marketing and sales plans, loss of key executives,
changes in interest rates, inflationary factors, and other factors referenced or
incorporated by reference in this report and other reports. The risks included
here are not exhaustive. Other sections of this report may include additional
factors which could adversely impact Coyote Sports, Inc.'s business and
financial performance. Moreover, Coyote Sports, Inc. operates in a very
competitive and rapidly changing environment. New risk factors emerge from time
to time and it is not possible for management to predict all such risk factors,
nor can it assess the impact of all such risk factors on Coyote Sports, Inc.'s
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
13
<PAGE>
PART II. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
2.1 -Amended and Restated Agreement and Plan of Merger, dated as
of February 2, 1999, by and among Royal Precision, Inc.,
Coyote Sports, Inc. and RP Acquisition Corp. (incorporated by
reference as Exhibit 2.1 in Form S-4, No. 333-73309)
10.1 -Stockholder Agreement, dated as of February 2, 1999, among
James M. Probst, Mel S. Stonebraker, Paragon Coyote Texas
Ltd., Richard P. Johnston and Jayne A. Johnston Charitable
Remainder Trust #3, David E. Johnston, Kenneth J. Warren and
Berenson Minella & Company, L.P. and Coyote Sports, Inc.
incorporated by reference as Exhibit 10.42 in Form S-4, No.
333-73309.
10.2 -Coyote Sports, Inc. Voting Agreement, dated as of February 2,
1999, by and between Royal Precision, Inc. and Mel S.
Stonebraker incorporated by reference as Exhibit 10.43 in Form
S-4, No. 333-73309
10.3 -Coyote Sports, Inc. Voting Agreement, dated as of February 2,
1999, by and between Royal Precision, Inc. and Paragon Coyote
Texas Ltd. incorporated by reference as Exhibit 10.44 in Form
S-4, No. 333-73309
10.4 -Coyote Sports, Inc. Voting Agreement, dated as of February 2,
1999, by and between Royal Precision, Inc. and James M. Probst
incorporated by reference as Exhibit 10.45 in Form S-4, No.
333-73309
10.5 -Royal Precision, Inc. Voting Agreement, dated as of February
2, 1999, by and between Coyote Sports, Inc. and Kenneth J.
Warren incorporated by reference as Exhibit 10.46 in Form S-4,
No. 333-73309
10.6 -Royal Precision, Inc. Voting Agreement, dated as of February
2, 1999, by and between Coyote Sports, Inc. and David E.
Johnston incorporated by reference as Exhibit 10.47 in Form S-
4, No. 333-73309
10.7 -Royal Precision, Inc. Voting Agreement, dated as of February
2, 1999, by and between Coyote Sports, Inc. and Danny Edwards
incorporated by reference as Exhibit 10.48 in Form S-4, No.
333-73309
10.8 -Royal Precision, Inc. Voting Agreement, dated as of February
2, 1999, by and between Coyote Sports, Inc. and Lawrence Bain
incorporated by reference as Exhibit 10.49 in Form S-4, No.
333-73309
10.9 -Royal Precision, Inc. Voting Agreement, dated as of February
2, 1999, by and between Coyote Sports, Inc. and Richard P.
Johnston and Jayne A. Johnston Charitable Remainder Trust #3
incorporated by reference as Exhibit 10.50 in Form S-4, No.
333-73309
10.10 -Royal Precision, Inc. Voting Agreement, dated as of February
2, 1999, by and between Coyote Sports, Inc. and Berenson
Minella & Company, L.P. incorporated by reference as Exhibit
10.51 in Form S-4, No. 333-73309
10.11 -Royal Precision, Inc. Voting Agreement, dated as of February
2, 1999, by and between Coyote Sports, Inc. and Ronald L.
Chalmers incorporated by reference as Exhibit 10.52 in Form S-
4, No. 333-73309
27.1 -Financial data schedule
(b) Reports on Form 8-K
Report on Form 8-K was filed by the registrant on January 26, 1999
reporting under Item 5 Other Events
Report on Form 8-K was filed by the registrant on February 11, 1999
reporting under Item 5 Other Events
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 12, 1999 COYOTE SPORTS, INC.
By: /s/ John Paul McNeill
----------------------
John Paul McNeill
Chief Financial Officer
(Principal Financial and Accounting Officer)
15
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 20,243
<SECURITIES> 0
<RECEIVABLES> 6,695,766
<ALLOWANCES> 561,000
<INVENTORY> 7,168,390
<CURRENT-ASSETS> 14,455,842
<PP&E> 15,634,560
<DEPRECIATION> 2,034,261
<TOTAL-ASSETS> 31,532,391
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<COMMON> 5,778
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<TOTAL-LIABILITY-AND-EQUITY> 31,532,391
<SALES> 7,856,348
<TOTAL-REVENUES> 7,856,348
<CGS> 7,282,987
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<OTHER-EXPENSES> 2,879,362
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<INTEREST-EXPENSE> 587,946
<INCOME-PRETAX> (2,893,947)
<INCOME-TAX> 1,600
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