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 March 31, 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 Identification No.)
Incorporation or Organization)
444 West Geneva Drive
Tempe, Arizona 85282
(602) 829-9000
----------------------------------------
(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 (May 8, 1997).
Common stock, $.001 par value: 2,740,928.
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
March 31, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations- 4
Three Months Ended
March 31, 1997 and March 31, 1996
Condensed Consolidated Statements of Cash Flows- 5
Three Months Ended
March 31, 1997 and March 31, 1996
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 13
SIGNATURE 14
EXHIBITS
None
2
<PAGE>
Part I ROYAL GRIP, INC. AND SUBSIDIARY
Item 1 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
March 31, 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 $464,511 and $549,455 as of March 31, 1997
and December 31, 1996, respectively) 1,350,149 1,593,554
Inventories 867,608 1,381,215
Current portion of net investment in lease 218,722 214,506
Prepaid expenses and other current assets 109,996 132,557
------------ ------------
Total current assets 2,546,475 3,359,931
------------ ------------
Property and equipment, net 1,920,455 1,925,056
Net investment in capital lease, less current portion 2,868,677 2,907,494
Intangible assets, net 247,831 251,554
Other assets 36,250 51,250
------------ ------------
$ 7,619,688 $ 8,495,285
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 496,133 $ 60,000
Current portion of long-term debt and capital leases 226,500 207,230
Accounts payable and accrued expenses 1,013,523 1,928,037
Deferred revenue 400,000 --
------------ ------------
Total current liabilities 2,136,156 2,195,267
------------ ------------
Long-term debt and capital leases, less current portion 632,389 671,054
Other liabilities 8,147 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 2,740,928 shares at March 31, 1997
and 2,734,678 at December 31, 1996 2,741 2,735
Additional paid-in capital 12,618,494 12,592,906
Accumulated deficit (7,778,239) (6,974,824)
------------ ------------
Total stockholders' equity 4,842,996 5,620,817
------------ ------------
$ 7,619,688 $ 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)
Three months ended
March 31,
1997 1996
----------- -----------
Net sales $ 2,471,683 $ 4,357,621
Cost of goods sold 2,072,820 3,239,546
----------- -----------
Gross profit 398,863 1,118,075
Selling, general and administrative expenses 1,217,949 1,671,455
----------- -----------
Loss from operation (819,086) (553,380)
Other income (expenses), net 15,671 (15,867)
----------- -----------
Loss before income tax benefit (803,415) (569,247)
Income tax benefit -- --
----------- -----------
Net loss $ (803,415) $ (569,247)
=========== ===========
Net loss per share $ (0.29) $ (0.21)
=========== ===========
Weighted average shares used in net loss per share 2,739,275 2,734,678
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
ROYAL GRIP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (803,415) $ (569,247)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 125,653 435,371
Compensatory stock option grants 8,406 --
Loss on disposition of property and equipment -- 7,387
(Increase) decrease in trade accounts receivable 243,405 (968,779)
Decrease in inventories 513,607 16,021
(Increase) decrease in prepaid expenses and other current assets 22,561 (7,183)
(Increase) decrease in other assets and intangibles 15,000 (16,025)
Increase in deferred revenue 400,000 --
Decrease in trade accounts payable and accrued expenses (914,514) (74,144)
----------- -----------
Net cash used by operating activities (389,297) (1,176,599)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (117,329) (352,337)
Principal payments received on capital lease receivable 34,601 --
Proceeds from sale of property and equipment -- 766,025
----------- -----------
Net cash provided by (used in) investing activities (82,728) 413,688
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations -- (7,606)
Net advances (payments) on notes payable (19,395) 7,172
Exercise of employee options 17,188 --
Increase in revolving line of credit 436,133 350,000
----------- -----------
Net cash provided by financing activities 433,926 349,566
----------- -----------
Net decrease in cash (38,099) (413,345)
Cash at beginning of period 38,099 413,345
----------- -----------
Cash at end of period $ -- $ --
=========== ===========
</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 first quarters ended March 31, 1997 and
March 31, 1996.
(2) Inventories
-----------
Inventories consist of the following: March 31, December 31,
1997 1996
-------- ----------
Finished goods $329,706 $ 804,769
Work in process 56,224 100,092
Raw materials 481,678 476,354
-------- ----------
$867,608 $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 have renegotiated their agreement.
In connection with this renegotiation Acushnet has 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.
These credits may be reduced depending upon Acushnet's production beyond
specified levels or as a result of the cancellation of stock options granted to
Acushnet. Because of the contingent nature of this credit, the Company recorded
the credit as deferred revenue.
(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. 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.
(5) 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 quarter of 1997 due to a l00%
valuation allowance on a 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.
8
<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:
Three Months Ended
March 31,
------------------------
1997 1996
---- ----
Net sales 100.0% 100.0%
Cost of goods sold 83.9 74.3
---- ----
Gross profit 16.1 25.7
Selling, general and administrative expenses 49.2 38.4
---- ----
Loss from operations (33.1) (12.7)
Other income (expense) net 0.6 (0.4)
--- -----
Loss before income tax benefit (32.5) (13.1)
Income tax benefit (0.0) (0.0)
----- -----
Net loss (32.5)% (13.1)%
======= =======
Net Sales. Net sales for the three months ended March 31, 1997 (first
quarter) were $2.5 million, a decrease of 43.2% over net sales of $4.4 million
for the corresponding period in the prior year. The decrease in net sales of
$1.9 million for the first quarter of 1997 from the same period of the prior
year is primarily attributable to a decrease in grip sales of $1,733,000. This
decrease in grip sales is due to a lack of grip production resulting from the
transition of the Company's entire grip manufacturing operation to Acushnet
Rubber Company ("Acushnet").
The Company's headwear subsidiary, Roxxi Inc., reported a decrease in
sales of $152,000, or 11.4%, for the quarter ended March 31, 1997, as compared
to the same period of the prior year. This decrease in net sales is due
primarily to reduced production staffing in 1997 as compared to 1996. In the
first quarter 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.
9
<PAGE>
Gross Profit. Gross profit decreased to $399,000 in the first quarter
of 1997 from $1.1 million in the first quarter of 1996. As a percentage of net
sales, gross profit decreased to 16.1% from 25.7%. The decline in gross profit
and the gross profit percentage primarily was attributable to Acushnet's
production delays resulting in significantly lower grip sales than the same
quarter last year. The decrease in grip sales caused a major shift in the sales
mix that affected the gross profit percentage by decreasing higher margin grip
sales as a percentage of the total sales mix. During the first quarter, the
margin on headwear sales increased by 6.4 percentage points compared to the same
quarter last year due to manufacturing cost reductions and efficiencies. The
gross profit on grip sales decreased by 14.3 percentage points compared to the
same quarter last year primarily due to a reduction in sales as a result of the
transition to Acushnet. Also, 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.
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 has 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.
These credits may be reduced depending upon Acushnet's production beyond
specified levels or as a result of the cancellation of stock options granted to
Acushnet. Because of the contingent nature of this credit, the Company recorded
the credit as deferred revenue.
Selling, General and Administrative. Selling, general and
administrative expenses decreased to $1.2 million in the first quarter of 1997
from $1.7 million in the comparable period
10
<PAGE>
of 1996. Selling, general and administrative expenses decreased due to several
factors. During 1996, the Company eliminated many administrative and selling
employees resulting in a reduction in salaries of $98,000 in the first quarter
of 1997 as compared to the same quarter last year. Also, the Company eliminated
many of its promotional product giveaways resulting in savings of $144,000. As a
result of lower sales caused by the production difficulties, the Company paid
$76,000 less in commission in the first quarter of 1997 as compared to the same
quarter last year.
Other Income (Expense). Other income was $16,000 in the first quarter
of 1997 compared to other expense of $16,000 in the same period of 1996. The
Company recorded $62,430 in interest income primarily related to the capital
lease receivable from Acushnet. This interest income has been netted against
interest expense of $28,486 on the Company's line of credit and term loan and a
$20,000 fee charged in connection with the Company's modified loan covenants.
The expense in 1996 resulted primarily from interest expense incurred on a
revolving line of credit and a loss on fixed asset dispositions.
Liquidity and Capital Resources
During the three months ended March 31, 1997, the Company used $389,297
to fund operating activities reflecting a loss and a reduction in trade accounts
payable and other accrued expenses. These factors were partially offset by a
significant reduction in inventory levels. The Company attributes the reduction
in trade accounts payable to the application of the Acushnet credit to payments
due Acushnet at March 31, 1997 and the elimination of its grip manufacturing
operation thus eliminating purchases of
11
<PAGE>
raw material. The inventory levels decreased substantially due to the Company
ceasing its grip manufacturing operation in December of 1996. Many of the
shipments occurring in the first quarter of 1997 were from inventory produced
prior to the transition of manufacturing. 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 $496,000 at March
31, 1997 as compared to $60,000 at December 31, 1996. On April 30, 1996, the
Company had $816,000 drawn on its line of credit of $1.75 million. See Note (4)
to the Condensed Consolidated Financial Statements.
Available borrowings on the line at March 31, 1997 were $394,000.
Due to Acushnet's start-up delays in the production of grips,
the Company's ability to satisfy its new loan covenants has been impaired, which
has caused the Company to obtain a waiver of any breaches of such covenants and
modification of such covenants in the future. 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.
12
<PAGE>
Part II
Other Information
Item 6.
(a) Exhibits - None
(b) Reports on Form 8k. During the first quarter of the
1997 fiscal year, the Company filed Current Reports on
Form 8-k on January 6, 1997, (the "January 8-k") and on
February 6, 1997 (the "February 8-k"). On the January
8-k, the Company reported that it had entered into a
manufacturing and supply agreement with Acushnet Rubber
Company, Inc. On the February 8-k, the Company reported
that it had entered into a letter of intent to combine
with FM Precision Golf Corporation.
13
<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: May 14, 1997 By: /s/ Thomas A. Schneider
--------------------------------
Thomas A. Schneider
Vice President - Finance
(Principal Financial and
Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,814,660
<ALLOWANCES> 464,511
<INVENTORY> 867,608
<CURRENT-ASSETS> 2,546,475
<PP&E> 3,308,297
<DEPRECIATION> 1,387,842
<TOTAL-ASSETS> 7,619,688
<CURRENT-LIABILITIES> 2,136,156
<BONDS> 0
0
0
<COMMON> 2,741
<OTHER-SE> 4,840,255
<TOTAL-LIABILITY-AND-EQUITY> 7,619,688
<SALES> 2,471,683
<TOTAL-REVENUES> 2,471,683
<CGS> 2,072,820
<TOTAL-COSTS> 1,217,949
<OTHER-EXPENSES> 18,273
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,486
<INCOME-PRETAX> (803,415)
<INCOME-TAX> 0
<INCOME-CONTINUING> (803,415)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (803,415)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
