U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to __________________
Commission File Number 0 - 22230
ROYAL GRIP, INC.
----------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 86-0615648
------ ----------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
15170 N. Hayden Road, Suite 1
Scottsdale, AZ 85260
(602) 627-0200
----------------------------------------
(Address of Principal Executive Offices)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes x No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECECING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13,or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes________ No________
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date (August 13, 1997).
Common stock, $.001 par value: 2,742,178.
Transitional Small Business Disclosure Format (check one):
Yes No x
----- -----
1
<PAGE>
- --------------------------------------------------------------------------------
ROYAL GRIP, INC. AND SUBSIDIARY
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets- 3
June 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations- 4
Three Months and Six Months Ended
June 30, 1997 and June 30, 1996
Condensed Consolidated Statements of Cash Flows- 5
Six Months Ended
June 30, 1997 and June 30, 1996
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 6. None 17
SIGNATURE 18
EXHIBITS
None
2
<PAGE>
Part I ROYAL GRIP, INC. AND SUBSIDIARY
Item 1 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 38,099
Trade accounts receivable (net of allowance for doubtful
accounts of $450,140 and $549,455 as of June 30, 1997
and December 31, 1996, respectively) 1,563,904 1,593,554
Inventories 784,608 1,381,215
Current portion of net investment in lease 223,022 214,506
Prepaid expenses and other current assets 60,752 132,557
------------ ------------
Total current assets 2,632,286 3,359,931
------------ ------------
Property and equipment, net 1,857,315 1,925,056
Net investment in capital lease, less current portion 2,793,813 2,907,494
Intangible assets, net 255,177 251,554
Other assets 23,750 51,250
------------ ------------
$ 7,562,341 $ 8,495,285
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 732,027 $ 60,000
Current portion of long-term debt and capital leases 226,500 207,230
Accounts payable and accrued expenses 1,147,249 1,928,037
Supply agreement credits 472,393 --
------------ ------------
Total current liabilities 2,578,169 2,195,267
------------ ------------
Long-term debt and capital leases, less current portion 515,417 671,054
Other liabilities 8,588 8,147
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 2,742,178 shares at June 30, 1997
and 2,734,678 at December 31, 1996 2,742 2,735
Additional paid-in capital 12,630,338 12,592,906
Accumulated deficit (8,172,913) (6,974,824)
------------ ------------
Total stockholders' equity 4,460,167 5,620,817
------------ ------------
$ 7,562,341 $ 8,495,285
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
ROYAL GRIP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 3,365,417 $ 5,094,490 $ 5,837,100 $ 9,452,111
Cost of goods sold 2,312,604 3,953,154 4,385,424 7,192,700
----------- ----------- ----------- -----------
Gross profit 1,052,813 1,141,336 1,451,676 2,259,411
Selling, general and administrative expenses 1,185,668 1,703,910 2,403,617 3,375,365
Merger Costs 279,861 -- 279,861 --
----------- ----------- ----------- -----------
Loss from operations (412,716) (562,574) (1,231,802) (1,115,954)
Other income (expenses), net 18,042 (12,709) 33,713 (28,576)
----------- ----------- ----------- -----------
Loss before income taxes (394,674) (575,283) (1,198,089) (1,144,530)
Income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $ (394,674) $ (575,283) $(1,198,089) $(1,144,530)
=========== =========== =========== ===========
Net loss per share $ (0.14) $ (0.21) $ (0.44) $ (0.42)
=========== =========== =========== ===========
Weighted average shares used in net loss per share 2,740,928 2,734,678 2,740,101 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 (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,198,089) $(1,144,530)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 263,811 835,131
Compensatory stock option grants 16,813 14,504
(Gain) Loss on disposition of property and equipment (30) 22,175
(Increase) decrease in trade accounts receivable 29,650 (1,048,856)
Decrease in income tax refund receivable -- 101,139
Decrease in inventories 596,607 252,337
Decrease in prepaid expenses and other current assets 71,805 97,575
(Increase) decrease in other assets and intangibles 16,341 (21,354)
Increase in supply agreement credits 472,393 --
Decrease in trade accounts payable and accrued expenses (780,788) (45,634)
----------- -----------
Net cash used by operating activities (511,487) (937,513)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (188,534) (578,075)
Principal payments received on capital lease receivable 105,165 --
Proceeds from sale of property and equipment 30 788,919
----------- -----------
Net cash provided by (used in) investing activities (83,339) 210,844
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations -- (15,161)
Net payments on notes payable (136,367) (65,528)
Exercise of employee options 20,626 --
Increase in revolving line of credit 672,027 425,000
Increase in other liabilities 441 --
----------- -----------
Net cash provided by financing activities 556,727 344,311
----------- -----------
Net decrease in cash (38,099) (382,358)
Cash at beginning of period 38,099 413,345
----------- -----------
Cash at end of period $ -- $ 30,987
=========== ===========
</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 condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles, pursuant
to rules and regulations of the Securities and Exchange Commission. 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 results for the interim periods presented. Certain
information and footnote disclosures have been condensed or omitted pursuant to
such rules and regulations. 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, 1996, 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. In February 1997, Financial Accounting Standards Board
issued Statement No. 128 "Earnings Per Share" which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
No. 128 on the calculation of primary and fully diluted earnings per share is
not expected to be material for the three and six months ended June 30, 1997 and
June 30, 1996.
(2) Inventories
-----------
Inventories consist of the following:
June 30, December 31,
1997 1996
---------- ----------
Finished goods $ 219,186 $ 804,769
Work in process 102,634 100,092
Raw materials 462,788 476,354
---------- ----------
$ 784,608 $1,381,215
========== ==========
6
<PAGE>
(3) Manufacturing and Supply Agreement
----------------------------------
In December 1996, the Company outsourced all of its production
of non-cord grips to Acushnet Rubber Company. During the first quarter of 1997,
Acushnet experienced startup delays in the production of grips. In light of
these difficulties, the Company and Acushnet renogotiated their agreement. In
connection with this renegotiation, Acushnet agreed to provide the Company with
a credit of $400,000 against future purchases of grips, to be applied against
current accounts payable due to Acushnet, and additional credits in the event
Acushnet fails to meet future production requirements. These credits may be
reduced, during 1997 only, depending upon Acushnet's production beyond levels
specified in the amendment to the Manufacturing and Supply Agreement, but only
to the extent that the Company orders grips above such specified levels. The
credits may also be reduced as a result of the cancellation of stock options
granted to Acushnet. Because of the contingent nature of this credit, the
Company recorded this amount as a liability under the Supply Agreement Credits
line item and a reduction in accounts payable to Acushnet. The Company intends
to recognize these credits as a reduction in cost of sales when it becomes
probable and estimable that Acushnet will not be able to earn back the credits
by either increasing its production or by virtue of a reduction in the Company's
orders below levels specified in the amendment. At June 30, 1997, the Company
has not recorded any of the credits as a reduction of cost of sales as Acushnet
can still earn back the credits and such amounts, if earned back, are payable in
cash.
During the quarter ended June 30, 1997, the Company recorded an
additional $72,000 of credits related to Acushnet's production shortfalls. The
total credit recorded as a liability at June 30, 1997 is approximately $472,000.
7
<PAGE>
(4) Revolving line of credit and term debt
--------------------------------------
In February 1997, the Company entered into a new line of credit
facility of $1.75 million and term loan of $700,000 with a commercial bank.
These credit arrangements mature on February 10, 2000 and contain net worth
requirements, prohibit dividend payments and limit capital expenditures. At
March 31, 1997, the Company was not in compliance with its quarterly net income
(loss), debt service, and net worth debt covenants and anticipated not meeting
many of its quarterly and monthly covenants during 1997. In April 1997, the
Company obtained an amended bank agreement which waived the existing net income
(loss), debt service, and net worth covenant defaults and amended the debt
agreement whereby the net income (loss) limits have been modified to a loss of
no more than $1 million for the quarter ending March 31, 1997 and a cumulative
loss of no more than $1.6 million for the quarter ending June 30, 1997, and for
each month thereafter in 1997. The agreement amended the net worth covenants to
correlate with the net loss covenants above. The quarterly debt service and
monthly loss limit covenants were waived by the bank for 1997. In addition, the
interest rate was amended to the bank's prime rate plus 3.0 percent effective
April 1, 1997, subject to change based on the operating results of the Company.
The Company was in compliance with the amended debt covenants at June 30, 1997.
At June 30, 1997, the Company believes that it is probable that the Company will
comply with the debt covenants at the measurement dates over the next twelve
months; therefore, the long-term portion of the Company's term loan is
classified as non-current in the balance sheet.
(5) Merger
------
In May 1997, the Company entered into a definitive merger agreement
with FM Precision Golf Corp. During the quarter ended June 30, 1997, the Company
expensed $280,000 in investment banking, legal and accounting fees related to
this transaction. The Company will also record merger costs of approximately
$400,000 (which approximates its fair value) for warrants to be issued to its
investment banker upon consummation of the merger. There can be no assurances as
to whether the merger will occur, or if it occurs, whether the ultimate terms of
the merger will be the same as those currently anticipated.
8
<PAGE>
(6) 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 available in the second quarter of 1997 due to a l00%
valuation allowance on a deferred tax asset. The Company recorded this valuation
allowance because it believed that it is more likely than not that the deferred
tax assets will not be realized.
9
<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, including
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
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.
10
<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 Six Months Ended
June 30, June 30,
--------- --------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 68.7 77.6 75.1 76.1
---- ---- ---- ----
Gross profit 31.3 22.4 24.9 23.9
Selling, general and administrative expenses 35.2 33.4 41.2 35.7
Merger Costs 8.3 0.0 4.8 0.0
---- ---- ---- ----
Loss from operations (12.2) (11.0) (21.1) (11.8)
Other income (expenses) net 0.5 (0.3) 0.6 (0.3)
---- ---- ---- ----
Loss before income taxes (11.7) (11.3) (20.5) (12.1)
Income taxes 0.0 0.0 0.0 0.0
---- ---- ---- ----
Net loss (11.7)% (11.3)% (20.5)% (12.1)%
======= ======= ======= =======
</TABLE>
Net Sales. Net sales for the three months ended June 30, 1997 (second
quarter) were $3.4 million, a decrease of 33.3% over net sales of $5.1 million
for the corresponding period in the prior year. For the six months ended June
30, 1997, net sales were $5.8 million, a decrease of 39.0% over net sales of
$9.5 million. The decrease in net sales of $1.7 million and $3.7 million for the
three and six months ended June 30, 1997, respectively, as compared to the same
periods of the prior year is primarily attributable to a decrease in grip sales
of $1.5 million and $3.4 million, respectively. The Company's grip sales for the
three and six months ended June 30, 1997 of $2.1 million and $3.3 million
compared to $3.6 million and $6.7 million, respectively, for the corresponding
periods in 1996. This decrease in grip sales is due to a lack of grip production
resulting from the transition of the Company's entire non-cord grip
manufacturing operation to Acushnet Rubber Company ("Acushnet").
The Company's headwear subsidiary, Roxxi Inc., reported a decrease in
sales of $181,000, or 12.1%, for the quarter ended June 30, 1997, as compared to
the same period of the prior year. For the six months ended June 30, 1997, net
sales of headwear have decreased $333,000 or 11.9%. These decreases in net sales
are due primarily to a reduction in production staffing in 1997 as compared to
1996. In the first two quarters of 1996, the Company still had two headwear
production facilities, the existing Oklahoma City facility and the Tempe plant
that was closed in June 1996.
11
<PAGE>
Roxxi accounted for $1.3 million, or 38.2%, and $2.5 million, or 43.1%,
of the Company's total net sales for the three and six months ended June 30,
1997 as compared to $1.5 million or 29.4%, and $2.8 million or 29.5%, for the
corresponding periods in 1996.
Gross Profit. Gross profit for the quarter ended June 30, 1997 was $1.1
million, or 31.3% of sales, compared to $1.1 million, or 22.4% of sales, for the
corresponding quarter in 1996. For the six months ended June 30, 1997, gross
profit was $1.5 million, or 24.9% of sales, as compared to $2.3 million, or
23.9% of net sales, for the same period in 1996. The decline in gross profit of
$808,000 for the six months ended June 30, 1997 was primarily attributable to
Acushnet's production delays resulting in significantly lower grip sales as
compared to the same period in 1996. In connection therewith, the Company
incurred significant expenses associated with facilitating the transition such
as travel costs for its employees and overnight shipping costs in order to
satisfy customer needs. The decrease in grip sales resulted in a reduction of
higher-margin grip sales as a percentage of the total sales mix. The increase in
the gross profit percentage for the three months ended June 30, 1997 as compared
to the three months ended June 30, 1996, is primarily the result of the
improvement in the gross profit percentage for Roxxi. For the three and six
months ended June 30, 1997, Roxxi reported a gross profit of $312,000, or 24.0%,
and $447,000, or 17.9%, respectively, of Roxxi's net sales as compared to losses
on gross profit of ($121,000) or (8.1%) and ($56,000) or (2.0%) for the
corresponding periods of 1996. This improvement in gross profit is the result of
closing the Tempe headwear facility in June of 1996, further elimination of
manufacturing overhead and improved production processes.
The gross profit on grip sales was $741,000, or 35.3%, and $1.0
million, or 30.3%, of total grip sales for the three and six months ended June
30, 1997, respectively, as compared to $1.2 million, or 33.3%, and $2.4 million,
or 35.8%, for the same periods in 1996. The improvement in the gross profit
percentage for the three months ended June 30, 1997 is primarily the result of
the lower cost fixed pricing structure.
12
<PAGE>
During the quarter ended March 31, 1997, the Company and Acushnet
renegotiated their agreement in light of Acushnet's production difficulties. In
connection with this renegotiation, Acushnet agreed to provide the Company with
a credit of $400,000 against future purchases of grips, and additional credits
in the event Acushnet fails to meet future production requirements. During the
quarter ended June 30, 1997, the Company recorded an additional $72,000 of
credits related to additional Acushnet production shortfalls. These credits may
be reduced depending upon Acushnet's production beyond levels specified in the
amendment to the Manufacturing and Supply Agreement or as a result of the
cancellation of stock options granted to Acushnet. These credits may be reduced
only to the extent that the Company orders grips above such specified levels.
Because of the contingent nature of the $472,000 credit, the Company recorded
the credit as a liability under the Supply Agreement Credits line item and a
reduction in accounts payable due Acushnet. The Company reduces its current
payment of invoices to Acushnet by the amount of such credits when issued. The
Company intends to recognize these credits as a reduction in cost of sales when
it becomes probable and estimable that Acushnet will not be able to earn back
the credits by either increasing its production or by virtue of a reduction in
the Company's orders below levels specified in the Amendment. At June 30, 1997,
the Company has not recorded any of the credits as a reduction in cost of sales
as Acushnet can still earn back the credits and such amounts, if earned back,
are payable in cash.
Selling, General and Administrative. Selling, general and
administrative expenses decreased to $1.2 million and $2.4 million in the three
and six months ended June 30, 1997, respectively, as compared to $1.7 million
and $3.4 million in the comparable periods of 1996. Selling, general and
administrative expenses decreased due to several factors. During the second and
third quarters of 1996, the Company eliminated many administrative and selling
employees resulting in a reduction in salaries of $99,000 and $197,000 for the
three and six months ended June 30, 1997 as compared to the same periods of
1996. As a result of lower sales caused by the production difficulties at
Acushnet and reduced headwear production as a result of the elimination of the
headwear production facility in Tempe, the Company paid $107,000 and $184,000
less in commission for the three and six months ended June 30, 1997 as compared
to the same periods last year. The Company has also improved its collection
procedures which has resulted in a reduction of bad debt expense of $69,000 and
$104,000 for the three and six months ended June 30, 1997 as compared to the
corresponding periods in 1996. The Company also has reduced many of its selling
expenses related to the advertising and promotion of its products.
13
<PAGE>
Merger Costs. In May 1997, the Company entered into a definitive merger
agreement with FM Precision Golf Corp. During the quarter ended June 30, 1997,
the Company expensed $280,000 in investment banking, legal and accounting fees
related to this transaction. The Company will also record merger costs of
approximately $400,000 (which approximates its fair value) for warrants to be
issued to its investment banker upon consummation of the merger.
Other Income (Expense). Other income was $18,000 in the second quarter
of 1997 compared to other expense of $13,000 in the same period of 1996. For the
six months ended June 30, 1997, the Company recorded other income of $34,000
compared to other expense of $29,000 in the same period of 1996. These
differences are primarily due to recording interest income of $60,000 and
$122,000 related to the capital lease receivable from Acushnet. For the same
periods, this interest income has been netted against interest expense of
$45,000 and $73,000 that was incurred on the Company's line of credit and term
loan. The expense in 1996 resulted primarily from interest expense incurred on a
revolving line of credit and a loss on fixed asset dispositions.
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 available in the first two quarters of 1997 due to a
100% valuation allowance on a deferred tax asset. The Company recorded this
valuation allowance because it believed that it is more likely than not that the
deferred tax assets will not be realized.
14
<PAGE>
Liquidity and Capital Resources
During the six months ended June 30, 1997, the Company used $511,000 to
fund operating activities as a result of a net loss of $1,198,000 and a
reduction in trade accounts payable and other accrued expenses of $780,000.
These factors were partially offset by a significant reduction in inventory of
$597,000 and an increase in supply agreement credits of $472,000. The Company
attributes the reduction in trade accounts payable to the application of
Acushnet credits to payments due Acushnet and the elimination of its grip
manufacturing operation thus eliminating purchases of raw material. The
inventory levels decreased substantially due to the Company ceasing its grip
manufacturing operation. Many of the grip shipments occurring in the first six
months of 1997 were from inventory produced prior to the transition of
manufacturing to Acushnet. As a result of the Acushnet transaction, the Company
intends to maintain substantially lower grip inventory levels in future periods
as compared to 1996.
The Company funded its shortfall in cash from borrowings under its line
of credit. Borrowings on the Company's line of credit totaled $732,000 at June
30, 1997. On July 31, 1997, the Company had $490,000 drawn on its line of credit
of $1.75 million. See Note (4) to the Condensed Consolidated Financial
Statements. Available borrowings on the line of credit at June 30, 1997 were
$546,000.
During the six months ended June 30, 1997, RG used $83,000 to fund
investing activities consisting of $188,000 of purchases of property and
equipment offset by $105,000 of payments received on the capital lease
receivable. RG estimates that its capital expenditures for 1997 will be
approximately $500,000.
In February 1997, the Company entered into a new line of credit
facility of $1.75 million and term loan of $700,000 with a commercial bank.
These credit arrangements mature on February 10, 2000 and contain net worth
requirements, prohibit dividend payments and limit capital expenditures. At
March 31, 1997, the Company was not in compliance with its quarterly net income
(loss), debt service, and net worth debt covenants and anticipated not meeting
many of its quarterly and monthly covenants during 1997. In April 1997, the
Company obtained an amended bank agreement which waived the existing net income
(loss), debt service, and net worth covenant defaults and amended the debt
agreement whereby the net income (loss) limits have been modified to a loss of
no more than $1 million for the quarter ending March 31, 1997 and a cumulative
loss of no more than $1.6 million for the quarter ending June 30, 1997, and for
each month thereafter in 1997. The agreement amended the net worth covenants to
correlate with the net loss covenants above. The quarterly debt service and
monthly loss limit covenants were waived by the bank for 1997. In addition, the
interest rate was amended to the bank's prime rate plus 3.0 percent effective
April 1, 1997, subject to change based on the operating results of the Company.
The Company was in compliance with the amended debt covenants at June 30, 1997.
At June 30, 1997, the Company believes that it is probable that the Company will
comply with the debt covenants at the measurement dates over the next twelve
months; therefore, the long-term portion of the Company's term loan is
classified as non-current in the balance sheet.
The Company's inability to meet its current or future loan covenants
could result in an acceleration of its indebtedness or restrict the Company's
access to such loans, which would impair the Company's ability to fund its
operations, unless or until the Company secures an alternative source of
funding, of which there can be no assurance.
The Company believes its available borrowings and expected cash flows
from operations will satisfy its working capital and capital expenditure
requirements 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 on terms and
conditions favorable or acceptable to the Company, if at all.
15
<PAGE>
Part II
Other Information
Item 6.
(a) Exhibits
Exhibit
Number Description of Exhibit
- ------ ----------------------
2 Agreement and Plan of Merger Incorporated by reference to
dated as of May 14, 1997 among Annex I of the Form S-4
Company, FM Precision Golf Corp. Proxy/Registration Statement
and FMPSUB, INC. of Company and FM Precision
Golf Corp., No. 333-28841.
27 Financial Data Schedule Filed herewith
(b) Reports on Form 8-K. During the second quarter of the 1997 fiscal
year, the Company filed one Current Report on Form 8-K on May 27,
1997, wherein the Company reported that it had executed a definitive
agreement to combine with FM Precision Golf Corp.
16
<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: August 15, 1997 By: /s/ Thomas A. Schneider
--------------------------------
Thomas A. Schneider
Vice President - Finance
(Principal Financial and
Accounting Officer)
17
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