- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
__________________________________
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0 - 22230
ROYAL GRIP, INC.
----------------
Nevada 86-0615648
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS employer identification number)
incorporation)
444 West Geneva Drive
Tempe, Arizona 85282
(602) 829-9000
-------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least 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 (November 8, 1996).
Common stock, $.001 par value: 2,734,678
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<PAGE>
ROYAL GRIP, INC. AND SUBSIDIARY
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets- 3
September 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Operations- 4
Three Months and Nine Months Ended
September 30, 1996 and September 30, 1995
Condensed Consolidated Statements of Cash Flows- 5
Nine Months Ended
September 30, 1996 and September 30, 1995
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
EXHIBITS
11 Computation of Net Income (Loss) Per Share 16
<PAGE>
Part I ROYAL GRIP, INC. AND SUBSIDIARY
Item 1
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 47,686 $ 413,345
Trade accounts receivable (net of allowance for
doubtful accounts of $335,637 and $227,070
as of September 30, 1996 and December 31, 1995,
respectively) 2,409,018 1,864,012
Income tax refund receivable - 101,139
Inventories 1,576,541 1,720,296
Prepaid expenses and other current assets 38,880 144,828
------------ ------------
Total current assets 4,072,125 4,243,620
------------ ------------
Property and equipment, net 5,215,123 6,258,292
Intangible assets, net 982,169 1,083,240
Other assets 50,813 58,675
------------ ------------
$ 10,320,230 $ 11,643,827
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 310,000 $ -
Current portion of long-term debt and capital leases 87,124 136,643
Accounts payable and accrued expenses 1,266,120 1,671,626
------------ ------------
Total current liabilities 1,663,244 1,808,269
------------ ------------
Long-term debt and capital leases, less current portion 97,253 161,422
Stockholders' equity:
Preferred stock, par value $.001 per share
Authorized 5,000,000 shares; none issued
Common stock, par value $.001 per share
Authorized 15,000,000 shares; issued and
outstanding 2,734,678 shares at September 30, 1996
and at December 31, 1995 2,735 2,735
Additional paid-in capital 12,223,049 12,199,288
Retained earnings (deficit) (3,666,051) (2,527,887)
------------ ------------
Total stockholders' equity 8,559,733 9,674,136
------------ ------------
$ 10,320,230 $ 11,643,827
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
ROYAL GRIP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 4,000,321 $ 4,482,760 $ 13,452,432 $ 13,945,742
Cost of goods sold 2,705,802 2,891,001 9,898,502 9,598,526
------------ ------------ ------------ ------------
Gross profit 1,294,519 1,591,759 3,553,930 4,347,216
Selling, general and administrative expenses 1,223,158 1,618,344 4,598,523 5,513,253
------------ ------------ ------------ ------------
Income (loss) from operations 71,361 (26,585) (1,044,593) (1,166,037)
Other expenses, net (64,995) (12,910) (93,571) (40,197)
------------ ------------ ------------ ------------
Income (loss) before income tax benefit 6,366 (39,495) (1,138,164) (1,206,234)
Income tax benefit - - - (300,000)
------------
Net Income (loss) $ 6,366 $ (39,495) $ (1,138,164) $ (906,234)
============ ============ ============ ============
Net Income (loss) per share $ 0.00 $ (0.01) $ (0.42) $ (0.33)
============ ============ ============ ============
Shares used in net income (loss) per share 2,734,678 2,734,678 2,734,678 2,734,678
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
ROYAL GRIP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,138,164) $ (906,234)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,249,165 1,461,018
Compensatory stock option grant 23,761 -
Writedown or loss on disposition of property and equipment 73,074 8,284
Decrease in deferred income taxes - (272,000)
Increase in trade accounts receivable (545,006) (783,063)
Decrease in income tax refund receivable 101,139 -
Decrease in inventories 143,755 512,897
Decrease in prepaid expenses and other current assets 105,948 38,497
Increase in other assets and intangibles (22,503) (60,976)
Increase (Decrease) in trade accounts payable plus accrued liabilities (405,506) 320,895
----------- -----------
Net cash provided by (used in) operating activities (414,337) 319,318
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (944,557) (658,033)
Proceeds from sale of property and equipment 796,923 500
----------- -----------
Net cash used in investing activities (147,634) (657,533)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under capital lease obligations (50,010) (20,844)
Deposit on subleased property 7,918 -
Proceeds from issuance of notes payable 26,309 36,154
Principal payments on notes payable (97,905) (94,610)
Increase (Decrease) in revolving line of credit 310,000 (200,000)
----------- -----------
Net cash provided by (used in) financing activities 196,312 (279,300)
Net decrease in cash (365,659) (617,515)
Cash at beginning of period 413,345 1,193,909
----------- -----------
Cash at end of period $ 47,686 $ 576,394
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
ROYAL GRIP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements
of Royal Grip, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information,
pursuant to rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management the accompanying condensed financial statements
include all adjustments (of a normal recurring nature) which are necessary for a
fair presentation of the Company's financial position and results of operations
for the interim periods presented. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements included in the Company's annual report on Form 10-K for the year
ended December 31, 1995, as filed with the Securities and Exchange Commission.
Results of operations in interim periods are not necessarily indicative of
results to be expected for a full year.
(2) Inventories
-----------
Inventories consist of the following:
September 30, December 31,
1996 1995
------------ -----------
Finished goods $968,228 $1,144,516
Work in process 66,467 188,677
Raw materials 561,846 575,306
---------- ----------
1,596,541 1,908,499
Less reserves (20,000) (188,203)
---------- ----------
$1,576,541 $1,720,296
========== ==========
6
<PAGE>
(3) Revolving line of credit
------------------------
The Company has a $1.2 million revolving line of credit with a
commercial bank in Phoenix, Arizona. Amounts outstanding bear interest at the
bank's prime rate plus 1/2% which was 8.75% on September 30, 1996. Interest is
payable monthly and principal balances are due when the line expires on May 30,
1997. At September 30, 1996, $310,000 was outstanding on the line. The revolving
line of credit agreement contains debt covenants for which the Company was in
compliance at September 30,1996.
(4) Deferred Income Taxes
---------------------
The Company accounts for income taxes under the asset and liability
method of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes."
No tax benefit is recognized in the third quarter of 1996 due to a 100%
valuation allowance related to the net operating loss carry-forward deferred tax
asset. This will have the effect of reducing income tax expense in future
periods in which the net operating loss carry forwards are realized.
7
<PAGE>
Part I
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. The Company's Form 10-K, this Form 10-Q,
any other Form 10-Q, any Form 8-K, or any other written or oral statements made
by or on behalf of the Company may include forward looking statements which
reflect the Company's current views with respect to future events and financial
performance. These forward looking statements are subject to certain
uncertainties and other factors that could cause actual results to differ
materially from such statements. These uncertainties and other factors include,
but are not limited to, uncertainties relating to economic conditions, customer
plans and commitments, the Company's cost of raw materials, the competitive
environment in which the Company operates, and changes in the financial markets
relating to the Company's capital structure and cost of capital. Statements in
this Form 10-Q, including the Notes to the Condensed Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations", describe factors among others, that could contribute to
or cause such differences. Additional factors that could cause actual results to
differ materially from those expressed in such forward looking statements are
detailed in the Company's Securities and Exchange Commission filings. The words
"believe," "expect," "anticipate," "project," and similar expressions identify
forward looking statements, which speak only as of the date the statement was
made. The Company undertakes no obligation to publicly update or revise any
forward looking statements, whether as a result of new information, future
events, or otherwise.
Introduction
During the quarter, the Company realized positive financial results as
a result of certain actions the Company initiated in the second quarter,
including the consolidation of headwear manufacturing at its Oklahoma City
facility, the conversion of its UK operations to a distributorship, the
subleasing of 10,700 square feet at the Company's Tempe, Arizona manufacturing
facility and the elimination of approximately 30 positions. The Company
continued to find efficiencies in its grip and headwear production facilities.
These efficiencies enabled the Company to eliminate the third shift of grip
production resulting in the reduction of 26 full time employees and 14 temporary
employees effective September 26, 1996. In headwear production, the Company
eliminated
8
<PAGE>
the third shift in embroidery resulting in a reduction of ten employees
effective late August 1996. Also, the results of the quarter were favorably
impacted by Danny Edwards, the Company's Chairman and Chief Executive Officer,
voluntarily reducing his salary from $250,000 to $0. Mr. Edwards will receive a
salary of $75,000 (annualized) for November and December 1996 and $150,000 for
the 1997 fiscal year.
9
<PAGE>
Results of Operations
The following table sets forth for the periods indicated the percentage
of net sales represented by each line item in the Company's statements of
operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 67.6 64.5 73.6 68.8
------ ------ ------ ------
Gross profit 32.4 35.5 26.4 31.2
Selling, general and administrative expenses 30.6 36.1 34.2 39.5
------ ------ ------ ------
Income (loss) from operations 1.8 (0.6) (7.8) (8.3)
Other expense net (1.6) (0.3) (0.7) (0.3)
------ ------ ------ ------
Income (loss) before income tax benefit 0.2 (0.9) (8.5) (8.6)
Income tax benefit - - - (2.1)
------ ------ ------ ------
Net Income / (loss) 0.2% (0.9%) (8.5%) (6.5%)
====== ====== ====== ======
</TABLE>
Net Sales. Net sales for the three months ended September 30, 1996 were
$4.0 million, a decrease of 11.1% over net sales of $4.5 million for the
corresponding period in the prior year. For the first nine months of 1996, net
sales were $13.5 million, a decrease of 2.9% over net sales of $13.9 million for
the same period last year. The decrease in net sales for the third quarter of
1996 from the same period of the prior year is directly attributable to a
decrease in grip sales of $468,000 primarily due to a decrease in sales to the
Company's Japanese distributor of $316,000. Net sales of headwear during the
quarter increased by $13,000, compared to the same quarter last year. Net sales
for the first nine months of 1996 decreased by $493,000. This decrease is
primarily a result of lower grip sales of $1.2 million due primarily to
decreased sales to the Company's Japanese distributor of 697,000. The decrease
in grip sales was partially offset by increased headwear sales of $798,000. This
reduction in grip sales for the nine months ended September 30, 1996 is due to a
reduced average unit selling price and to a decrease in unit sales of
approximately 500,000.
10
<PAGE>
Gross Profit. Gross profit decreased to $1.3 million in the third
quarter of 1996, down from $1.6 million in the third quarter of 1995. As a
percentage of net sales, gross profit decreased to 32.4% from 35.5%. The decline
in gross profit and the gross profit percentage primarily was attributable to
decreased higher margin grip sales as a percentage of total sales and the effect
of an adjustment in the third quarter of 1995 related to inventory subject to a
trade credit arrangement which reduced cost of sales in 1995 by $69,000. During
the third quarter, the margin on headwear sales increased by 10.2 percentage
points compared to the same quarter last year due to efficiencies gained in
production. The margin on grip sales decreased by 7.4 percentage points compared
to the same quarter last year primarily due to fixed costs being spread over
fewer units and the introduction of our $.99 Perf Wrap grip. For the nine month
period ended September 30, 1996, gross profit was $3.6 million compared to $4.3
million for the corresponding period in 1995. As a percentage of net sales,
gross profit declined to 26.4% from 31.2%. The decline in gross profit and gross
profit percentage primarily was attributable to increased lower margin headwear
sales and decreased higher margin grip sales as a percentage of total sales and
the effect of an adjustment during the nine month period ended September 30,
1995 related to inventory subject to a trade credit arrangement which increased
cost of sales for 1995 by $331,000.
Selling, General and Administrative. Selling, general and
administrative expenses decreased to $1.2 million in the third quarter of 1996
from $1.6 million in the comparable period of 1995. Selling, general and
administrative expenses decreased primarily due to a reduction in advertising
and promotion expenses of $242,000, the elimination of two Vice President
positions and the suspension of the salary payable to the Company's Chairman and
Chief Executive Officer.
11
<PAGE>
For the nine month period ended September 30, selling, general and
administrative expenses decreased to $4.6 million in 1996 from $5.5 million in
1995. The decrease in selling, general and administrative expenses is primarily
due to a reduction in advertising and promotion expenses of $711,000.
Other Income (Expense). Other expense was $65,000 in the third quarter
of 1996 compared to other expense of $13,000 in the same period of 1995. Other
expense in the third quarter of 1996 resulted primarily from recording a loss of
$34,000 related to the purchase of two assets which were previously financed via
a capital lease arrangement and interest expense. Other expense for the third
quarter 1995 was primarily attributable to interest expense. Other expense was
$94,000 in the first nine months of 1996 compared to $40,000 in the same period
of 1995. This expense resulted primarily from interest expense on long term
obligations and a revolving line of credit, and the purchase of assets mentioned
above.
Liquidity and Capital Resources
During the nine months ended September 30, 1996, the Company used
$414,337 to fund operating activities, reflecting a significant build up in
trade receivables and a reduction in trade payables. The Company attributes this
increase to the seasonality of its sales of golf grips. For the comparable
period of 1995, operations generated positive cash flow of $319,318. Cash and
cash equivalents decreased from $576,394 at December 31, 1995 to $47,686 at
September 30, 1996.
The Company funded its shortfall in cash from operations primarily
through the sale of property and equipment which generated $797,000 in proceeds,
and from borrowings under the Company's line of credit. Borrowings totaled
$310,000 at September 30, 1996, as compared to $0 at December 31, 1995.
12
<PAGE>
The Company's line of credit was renewed during the second quarter,
with the expiration date extended through May 1997. Under this facility, the
Company may borrow up to $1.2 million. Borrowings under the line of credit are
subject to a number of conditions, including compliance with covenants relating
to the Company's current ratio, tangible net worth, working capital and ratio of
total liabilities to tangible net worth. The Company was in compliance with
these ratios as of September 30, 1996.
The Company believes its available borrowings and expected cash flows
from operations will satisfy its working capital needs for the foreseeable
future. However, if operations were to deteriorate, or the Company were unable
to borrow under its line of credit, the Company would need to seek alternative
sources of financing for its operations. There can be no assurance that such
sources would be available.
13
<PAGE>
Part II
Other Information
Item 6. (a) Exhibit 11 - Computation of Net Income (Loss)
Per Share (attached).
(b) No reports on Form 8-K have been filed during the
quarter for which this report is filed.
14
<PAGE>
SIGNATURE
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 hereunto duly authorized.
ROYAL GRIP, INC.
Date: November 5, 1996 By: /s/ Thomas A. Schneider
------------------------------------------------
Thomas A. Schneider
Vice President - Finance
(Principal Financial and
Accounting Officer)
15
ROYAL GRIP, INC. AND SUBSIDIARY
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 6,366 $ (39,495) $(1,138,164) $ (906,234)
=========== =========== =========== ===========
Weighted Average Shares:
Common shares outstanding 2,734,678 2,734,678 2,734,678 2,734,678
Common equivalent shares issuable upon
exercise of employee stock options -- -- -- --
----------- ----------- ----------- -----------
Shares used in net income (loss) per share 2,734,678 2,734,678 2,734,678 2,734,678
=========== =========== =========== ===========
Net income (loss) per share $ 0.00 $ (0.01) $ (0.42) $ (0.33)
=========== =========== =========== ===========
</TABLE>
EXHIBIT 11
16
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000910568
<NAME> Royal Grip, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 47,686
<SECURITIES> 0
<RECEIVABLES> 2,744,655
<ALLOWANCES> 335,637
<INVENTORY> 1,576,541
<CURRENT-ASSETS> 4,072,125
<PP&E> 10,564,080
<DEPRECIATION> 5,348,957
<TOTAL-ASSETS> 10,320,230
<CURRENT-LIABILITIES> 1,663,244
<BONDS> 0
0
0
<COMMON> 2,735
<OTHER-SE> 12,223,049
<TOTAL-LIABILITY-AND-EQUITY> 10,320,230
<SALES> 13,452,432
<TOTAL-REVENUES> 13,452,432
<CGS> 9,898,502
<TOTAL-COSTS> 4,598,523
<OTHER-EXPENSES> 58,034
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,537
<INCOME-PRETAX> (1,138,164)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,138,164)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,138,164)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
</TABLE>
