-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TwMuRDEQZxdRPPYT4QfJw5wYq8Qw2XSv6rzoOjvJn3BDTuLfk/jX+guYHtQLKTG6 FuFHBhC3iJS3Jnr18fzYSA== 0000950147-00-000063.txt : 20000202 0000950147-00-000063.hdr.sgml : 20000202 ACCESSION NUMBER: 0000950147-00-000063 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYAL PRECISION INC CENTRAL INDEX KEY: 0001016395 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 061453896 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22889 FILM NUMBER: 507927 BUSINESS ADDRESS: STREET 1: 15170 NORTH HAYDEN ROAD STREET 2: SUITE 1 CITY: SCOTTSDALE STATE: AZ ZIP: 85260 BUSINESS PHONE: 6026270200 MAIL ADDRESS: STREET 1: 15170 NORTH HAYDEN ROAD STREET 2: SUITE 1 CITY: SCOTTSDALE STATE: AZ ZIP: 85260 FORMER COMPANY: FORMER CONFORMED NAME: FM PRECISION GOLF CORP DATE OF NAME CHANGE: 19970521 10-Q 1 QUARTERLY REPORT FOR THE QTR ENDED 11-30-99 U.S. 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 November 30, 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: 0-22889 ROYAL PRECISION, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 06-1453896 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 15170 North Hayden Road, Suite 1, Scottsdale, AZ 85260 (Address of Principal Executive Offices) (Zip code) (480) 627-0200 (Registrant's Telephone Number, Including Area Code) (Former Name, Former Address and Former Fiscal Year if Changed Since Last Report) 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 such 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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Title of each class Outstanding at January 10, 2000 ------------------- ------------------------------- Common Stock, par value $.001 5,672,885 Shares PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ROYAL PRECISION, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands)
November 30, May 31, 1999 1999 ------------ --------- ASSETS (unaudited) CURRENT ASSETS: Cash $ 62 $ 184 Accounts receivable, net of allowance for doubtful accounts of $381 at November 30, 1999 and $433 at May 31, 1999, respectively 3,513 4,617 Inventories 5,533 4,514 Other current assets 537 783 Deferred income taxes 647 647 -------- -------- Total current assets 10,292 10,745 -------- -------- PROPERTY, PLANT AND EQUIPMENT: Land 123 123 Furniture, fixtures and office equipment 513 499 Buildings and improvements 670 670 Machinery and equipment 4,190 4,144 Construction in progress 1,191 402 -------- -------- 6,687 5,838 Less - Accumulated depreciation (1,284) (929) -------- -------- 5,403 4,909 -------- -------- GOODWILL, net 8,614 8,857 -------- -------- DEFERRED INCOME TAXES 70 70 -------- -------- OTHER ASSETS 74 29 -------- -------- Total assets $ 24,453 $ 24,610 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations $ 911 $ 1,203 Accounts payable 1,390 1,839 Accrued salaries and benefits 681 595 Accrued pension liability 193 251 Other accrued expenses 1,248 1,079 -------- -------- Total current liabilities 4,423 4,967 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, net of current portion included above 6,219 6,191 -------- -------- Total liabilities 10,642 11,158 -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value; 1,000,000 shares authorized (reduced from 5,000,000 shares on October 19, 1999); no shares issued -- -- Common stock, $.001 par value; 10,000,000 shares authorized (reduced from 50,000,000 shares on October 19, 1999); 5,672,885 and 5,667,375 shares issued and outstanding at November 30, 1999 and May 31, 1999, respectively 6 6 Additional paid-in capital 13,898 13,897 Accumulated deficit (46) (404) Accumulated other comprehensive loss (47) (47) -------- -------- Total stockholders' equity 13,811 13,452 -------- -------- Total liabilities and stockholders' equity $ 24,453 $ 24,610 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. -2- ROYAL PRECISION, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended -------------------------- -------------------------- November 30, November 30, November 30, November 30, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ NET SALES: Golf club shafts $5,586 $ 3,041 $10,872 $ 8,042 Golf club grips 834 810 2,064 1,847 ------ -------- ------- ------- 6,420 3,851 12,936 9,889 ------ -------- ------- ------- COST OF SALES: Golf club shafts 4,031 1,946 7,250 5,220 Golf club grips 565 426 1,415 977 ------ -------- ------- ------- 4,596 2,372 8,665 6,197 ------ -------- ------- ------- Gross profit 1,824 1,479 4,271 3,692 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,485 1,356 3,124 3,121 AMORTIZATION OF GOODWILL 121 131 243 261 ------ -------- ------- ------- Operating income (loss) 218 (8) 904 310 INTEREST EXPENSE 147 228 298 389 OTHER INCOME 55 64 110 125 ------ -------- ------- ------- Income (loss) from continuing operations before provision for (benefit from) income taxes 126 (172) 716 46 PROVISION FOR (BENEFIT FROM) INCOME TAXES 62 (60) 358 (55) ------ -------- ------- ------- Income (loss) from continuing operations 64 (112) 358 101 DISCONTINUED OPERATIONS: Loss from operations of Roxxi, Inc. -- (179) -- (389) ------ -------- ------- ------- Net income (loss) $ 64 $ (291) $ 358 $ (288) ====== ======== ======= ======= BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: Income (loss) from continuing operations $ 0.01 $ (0.02) $ 0.06 $ 0.02 Loss from discontinued operations -- (0.03) -- (0.07) ------ -------- ------- ------- Net income (loss) $ 0.01 $ (0.05) $ 0.06 $ (0.05) ====== ======== ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. -3- ROYAL PRECISION, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
Six Months Ended -------------------------- November 30, November 30, 1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 358 $ (288) Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations-- Loss from discontinued operations -- 389 Depreciation and amortization 603 463 Loss on sale of fixed assets 7 -- Changes in operating assets and liabilities-- Accounts receivable, net 1,104 1,774 Inventories (1,019) (1,290) Other assets 201 46 Accounts payable and accrued expenses (252) (900) Other liabilities -- (44) ------- ------- Net cash provided by operating activities of continuing operations 1,002 150 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments from net investment in capital lease -- 137 Purchases of equipment, net (861) (617) ------- ------- Net cash used in investing activities of continuing operations (861) (480) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt -- 5,140 Proceeds from exercise of common stock options 1 17 Borrowings (repayments) under lines-of-credit, net 482 (730) Repayments of long-term debt and capital lease obligations (746) (3,810) ------- ------- Net cash (used in) provided by financing activities of continuing operations (263) 617 ------- ------- NET CASH USED IN DISCONTINUED OPERATIONS -- (244) ------- ------- (DECREASE) INCREASE IN CASH (122) 43 CASH, beginning of period 184 28 ------- ------- CASH, end of period $ 62 $ 71 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for-- Interest $ 316 $ 461 ======= ======= Income taxes $ 31 $ 28 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. -4- ROYAL PRECISION, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION -- The condensed consolidated financial statements of Royal Precision, Inc. and subsidiaries (collectively, "RP" or the "Company") presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto for the year ended May 31, 1999 included in the Company's Form 10-KSB. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company. Quarterly operating results are not necessarily indicative of the results that would be expected for the full year. ORGANIZATION -- The accompanying condensed consolidated financial statements include Royal Precision, Inc. and its three wholly-owned subsidiaries, FM Precision Golf Manufacturing Corp. ("FMP"), FM Precision Golf Sales Corp. ("FMP Sales") and Royal Grip, Inc. ("RG") which has a wholly-owned subsidiary, Royal Grip Headwear Company. All significant intercompany balances and transactions have been eliminated in consolidation. As discussed in Note 7, the Company disposed of the operating assets of Royal Grip Headwear Company (formerly known as Roxxi, Inc. "Roxxi") in March 1999. Results of operations for Roxxi for all periods through May 31, 1999 are reflected as discontinued operations. BUSINESS -- RP is a holding company which carries on its business operations through its subsidiaries. FMP is a manufacturer and distributor of golf club shafts which are sold to original equipment manufacturers ("OEMs") and to distributors and retailers for use in the replacement market. RG designs and distributes golf club grips. RP's products are sold throughout the United States as well as internationally, primarily in Japan, Australia, the United Kingdom and Canada. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements such as the estimate for impairment of long-lived assets and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. EARNINGS (LOSS) PER SHARE: The Company accounts for earnings (loss) per share in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings (loss) per share are based on the average number of common shares outstanding during the period. Diluted earnings (loss) per share assumes, in addition to the above, a dilutive effect of common share equivalents during the period. Common share equivalents represent dilutive stock options using the treasury stock method. The number of shares used in computing income (loss) from continuing operations per share for the three and six months ended November 30, 1999 and 1998 were as follows (in thousands): -5- Three Months Ended November 30, ------------------------------- 1999 1998 ---- ---- Basic: Average common shares outstanding 5,670 5,663 Diluted: Dilutive effect of stock options 125 -- ----- ----- Average common shares outstanding 5,795 5,663 ===== ===== Six Months Ended November 30, ----------------------------- 1999 1998 ---- ---- Basic: Average common shares outstanding 5,669 5,632 Diluted: Dilutive effect of stock options 130 -- ----- ----- Average common shares outstanding 5,799 5,632 ===== ===== For the three and six months ended November 30, 1998, basic and diluted average common shares outstanding for discontinued operations were 5,663,000 and 5,632,000, respectively. Basic and diluted earnings (loss) per share were the same for all periods presented. 3. NEW ACCOUNTING PRONOUNCEMENT: In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137 which deferred the effective date of SFAS No. 133. The Company will be required to adopt SFAS No. 133 during the fiscal year ending May 31, 2001. The Company does not anticipate any material impact resulting from the adoption of SFAS No. 133. 4. INVENTORIES: Inventories are valued at the lower of cost or market. Cost is determined on the first-in, first-out method. Inventories as of November 30, 1999 and May 31, 1999 consisted of the following (in thousands): November 30, 1999 May 31, 1999 ----------------- ------------ Raw materials $ 528 $ 471 Work-in-process 2,037 1,566 Finished goods 2,968 2,477 ------ ------ $5,533 $4,514 ====== ====== 5. BORROWING ARRANGEMENTS: FMP has a credit facility consisting of a term loan and a revolving line-of-credit. The FMP term loan of $3,047,000 at November 30, 1999 is due in monthly principal installments of $65,000 until its maturity in September 2002. The amount available for borrowings under the revolving line-of-credit is based upon the levels of eligible FMP accounts receivable and inventories, as defined, subject to a maximum borrowing of $5.0 million. As of November 30, 1999, FMP had $3,491,000 outstanding under its revolving line-of-credit and $865,000 available for additional borrowings. The FMP line-of-credit expires in September 2002. RG has a credit facility consisting of a term loan and a revolving line-of-credit. The RG term loan of $493,500 at November 30, 1999 is due in monthly principal installments of $10,500 until its maturity in September -6- 2002. The amount available for borrowings under the revolving line-of-credit is based upon the levels of eligible RG accounts receivable and inventories, as defined, subject to a maximum borrowing of $1.5 million. As of November 30, 1999, RG had $94,000 outstanding under its revolving line-of-credit and $532,000 available for additional borrowings. The RG line-of-credit expires in September 2002. The FMP and RG credit facilities were amended and restated on November 10, 1999 resulting in a reduction of interest rates by 1%, an extension of the maturity dates by one year, and a $1.0 million increase in the FMP line-of-credit. Effective November 10, 1999, borrowings under the term loans and revolving lines-of-credit of both credit facilities bear interest at a rate per annum equal to the prime rate (8.50% at November 30, 1999) plus 0.75% and 0.25%, respectively, and are secured by substantially all of the Company's assets. The FMP and RG credit facilities contain financial and other covenants which, among other things, limit annual capital expenditures and dividends and require the maintenance of minimum monthly and quarterly earnings or maximum monthly and quarterly losses, and minimum quarterly debt service coverage ratios, as defined. The Company was in compliance with all financial loan covenants at November 30, 1999. 6. INFORMATION ON SEGMENTS: The Company has two reportable segments in continuing operations: golf club shafts and golf club grips. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Form 10-KSB for the fiscal year ended May 31, 1999. The Company evaluates the performance of these segments based on segment operating income or loss and cash flows. The Company allocates certain administrative expenses to segments. The amounts in this illustration are the amounts in reports used by the chief operating officer as of November 30, 1999 (in thousands): Three Months Ended November 30, 1999 ------------------------------------ Golf Golf Shafts Grips Total ------ -------- --------- Net sales $ 5,586 $ 834 $ 6,420 Operating income (loss) 263 (45) 218 Depreciation and amortization 87 213 300 Assets 12,311 18,262 30,573 Total assets for reportable segments $ 30,573 Elimination of investment in subsidiaries (6,120) -------- Consolidated total assets $ 24,453 ======== Three Months Ended November 30, 1998 ------------------------------------ Golf Golf Shafts Grips Total ------ -------- --------- Net sales $3,041 $ 810 $ 3,851 Operating income (loss) 24 (32) (8) Depreciation and amortization 63 140 203 Assets 9,698 21,229 30,927 Total assets for reportable segments $ 30,927 Assets of discontinued operation 1,615 Elimination of investment in subsidiaries (7,271) -------- Consolidated total assets $ 25,271 ======== -7- Six Months Ended November 30, 1999 ---------------------------------- Golf Golf Shafts Grips Total ------ ----- ----- Net sales $10,872 $ 2,064 $12,936 Operating income (loss) 996 (92) 904 Depreciation and amortization 174 429 603 Six Months Ended November 30, 1998 ---------------------------------- Golf Golf Shafts Grips Total ------ ----- ----- Net sales $8,042 $1,847 $9,889 Operating income 284 26 310 Depreciation and amortization 137 326 463 7. DISCONTINUED OPERATIONS: In March 1999, the operating assets of Roxxi were disposed of through two separate transactions. Roxxi sold its trade name, customer list, design database and related computer software and hardware for a royalty of 16% of the buyer's net sales of Roxxi-licensed products for the two-year period beginning May 1, 1999. Roxxi also sold its headwear manufacturing equipment, headwear inventory and raw materials to another company for $300,000 and a royalty of 2% of the buyer's net sales until the buyer has paid an additional $200,000. Subsequently, Roxxi's name was changed to Royal Grip Headwear Company. The Company is accounting for royalties as income is earned during the two year period beginning May 1, 1999. For the three and six months ended November 30, 1999, royalties of $51,000 and $89,000 were recorded, respectively, and are reflected as other income in the accompanying condensed consolidated statements of operations. Selected financial data for the discontinued operations is as follows for the six months ended November 30, 1998 (in thousands): Net sales $1,446 Loss from operations 389 Depreciation 145 8. TERMINATION OF MANUFACTURING SUPPLY CONTRACT: In May 1999, RG and Acushnet Rubber Company ("Acushnet") executed a mutual release agreement terminating their manufacturing and supply agreement and capital lease agreement (the "Termination Agreement"). As a result in May 1999, RG received $1.5 million in cash and $1.0 million in purchase credits from Acushnet to be applied against current and future amounts owed to Acushnet for the production of grips. As of November 30, 1999, $0.5 million of the purchase credits had been utilized and the remaining $0.5 million is included in other current assets in the accompanying condensed consolidated balance sheet. In connection with the Termination Agreement, RG is entitled to receive the manufacturing equipment which was leased to Acushnet and Acushnet's obligation to make additional payments to RG under the capital lease was terminated. Additionally, Acushnet is obligated to continue producing grips for RG through January 2000 and to pay up to $100,000 for shipping and installation of the manufacturing equipment at a new location. RG currently purchases the majority of its supply of non-cord, injected grips from Acushnet and has no immediate replacement supply source. The Company believes that it can obtain a sufficient supply of grips from Acushnet and other existing vendors to satisfy customer demand through December 31, 2000. Included in finished goods inventories at November 30, 1999 are grips at a cost of approximately $0.8 million located at Acushnet. The Company has identified and is in various stages of negotiations with three separate grip manufacturers which the Company believes can maintain RG's standard of product quality and will facilitate a smooth transition. There can be no assurances that the Company will be able to secure a source for grips on as favorable terms or with the same or better quality as Acushnet. In addition, there can be no assurances that a transition to new suppliers will not result in production delays, the loss of sales and key customers which would materially affect RG's financial condition and results of operations. -8- Acushnet warehoused and distributed RG's grips under the manufacturing and supply agreement. In connection with the Termination Agreement, the Company will assume responsibility for these functions. In September 1999, $0.2 million of grips were transferred from the Acushnet facility to the Company's manufacturing and distribution facility in Torrington, Connecticut and are included in finished goods inventories at November 30, 1999. The Torrington warehouse has been configured to accommodate storage and shipment of grips. In November 1999, the Company entered into a lease of approximately 9,000 square feet of warehouse space in Scottsdale, Arizona which will serve as a West Coast distribution center. In December 1999, approximately $0.3 million of grips were transferred from the Acushnet facility to the Company's Scottsdale warehouse. When Acushnet has fulfilled its manufacturing obligations under the Termination Agreement, all remaining inventory will be transferred from the Acushnet facility to the Torrington and Scottsdale warehouses. The Company will warehouse and distribute its grips from both the Scottsdale and Torrington locations when the relationship with Acushnet is completed. 9. TERMINATED MERGER AGREEMENT: In February 1999, the Company and Coyote Sports, Inc. ("Coyote") entered into a merger agreement pursuant to which RP would become a wholly-owned subsidiary of Coyote (the "RP-Coyote Merger"). In June 1999, the RP-Coyote Merger agreement was terminated at the request of the Company due to a material change in the business of Coyote resulting in an inability to obtain suitable long-term financing. The Company incurred professional fees of $975,000 related to the RP-Coyote Merger during the second half of the fiscal year ended May 31, 1999. 10. LITIGATION: In November 1999, a lawsuit was commenced in an Arizona state court by R. R. Donnelley & Sons Company ("Donnelley") against RP. Donnelley alleges that RP is liable for approximately $280,000 in fees arising from the preparation of a Joint Proxy Statement/Prospectus related to the RP-Coyote Merger. Management believes that the action is without merit and intends to defend it vigorously. -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS -- The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. The Company believes it has made forward-looking statements within the meaning of the Litigation Reform Act in this Form 10-Q, Forms 10-QSB, Forms 10-KSB, Forms 8-K, and other written or oral statements made by or on behalf of RP which reflect RP'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 international, national, and local economic conditions, RP's dependence on discretionary consumer spending, customer concentration and their plans and commitments, RP's cost and available supply of raw materials, the competitive environment in which RP operates, the timeliness and market acceptance of RP's new product introductions, RP's limited operating history, RP's ability to protect its intellectual property rights, seasonality of sales, fluctuations in operating results, and changes in the financial markets relating to RP's capital structure and cost of capital. Statements in this Form 10-Q, including the Notes to the Condensed Consolidated Financial Statements ("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 RP's Form 10-KSB for the fiscal year ended May 31, 1999. Please refer to "Risk Factors" therein. The words "believe," "expect," "anticipate," "project," and similar expressions identify forward looking statements, which speak only as of the date the statement was made. OVERVIEW -- Royal Precision, Inc. ("RP" or the "Company") is a holding company with three wholly-owned subsidiaries which are FM Precision Golf Manufacturing Corp. ("FMP"), FM Precision Golf Sales Corp. ("FMP Sales"), and Royal Grip, Inc. ("RG") which has a wholly-owned subsidiary, Royal Grip Headwear Company. RP acquired RG on August 29, 1997 by means of a merger whereby FMPSUB, Inc. (a wholly-owned subsidiary of RP created for such purpose) merged with and into RG (the "FMP-RG Merger"). RG was the surviving corporation and became a wholly-owned subsidiary of RP. As discussed in Note 7 to the Financial Statements, the Company disposed of the operating assets of Royal Grip Headwear Company (formerly known as Roxxi, Inc. "Roxxi") in March 1999. Results of operations for Roxxi in all periods through May 31, 1999 are reflected as discontinued operations. FMP is a manufacturer and distributor of golf club shafts that are sold to original equipment manufacturers ("OEMs") and to distributors and retailers for use in the replacement market. The majority of FMP's sales are to OEMs. FMP also sells golf club shafts in foreign markets including Japan, Australia, the United Kingdom, and Canada. RG designs and distributes golf club grips. RG's products are sold primarily throughout the United States, Japan, and the United Kingdom. The majority of RG's grip sales are to its Japanese distributor. In December 1996, RG outsourced the manufacturing of its non-cord grips to Acushnet Rubber Company ("Acushnet"). In May 1999, RG and Acushnet executed a mutual release agreement terminating their manufacturing and supply agreement and capital lease agreement. See Note 8 to the Financial Statements and Reliance on Third Party Suppliers under Business Environment and Future Results below. The Company principally operates in the golf equipment industry which has historically been seasonal in nature with consumer demand for product being the strongest during the spring and summer months. THREE MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED NOVEMBER 30, 1998-- NET SALES. Net sales from continuing operations for the three months ended November 30, 1999 were $6.4 million, an increase of $2.6 million or 67% over net sales from continuing operations of $3.9 million during the corresponding period in 1998. Net sales of golf club shafts increased by $2.5 million or 84% and net sales of golf club grips increased by $24,000 or 3%. The increased golf club shaft sales reflect continued strong demand for the Company's proprietary "Rifle" shafts. Net sales of the Company's higher priced, pro grade golf club shafts including the "Rifle" increased by $2.6 million or 113%. Sales of the Company's lower priced, commercial grade golf club shafts were consistent at $0.8 million during both of the three month periods ended November 30, 1999 and 1998. -10- COST OF SALES. Cost of goods sold from continuing operations for the three months ended November 30, 1999 was $4.6 million, an increase of $2.2 million or 94% over cost of goods sold from continuing operations of $2.4 million during the corresponding period in 1998. Golf club shafts cost of goods sold increased by $2.1 million or 107% and golf club grips cost of goods sold increased by $0.1 million or 33%, both as a result of higher total net sales. GROSS PROFIT. Gross profit from continuing operations for the three months ended November 30, 1999 was $1.8 million, an increase of $0.3 million or 23% from gross profit from continuing operations of $1.5 million for the corresponding period in 1998. Gross profit from sales of golf club shafts increased by $0.5 million or 42% to $1.6 million due to higher total net sales. As a percentage of sales, the gross profit on sales of golf club shafts decreased from 36% to 28% due to several factors, principally the mix of products sold during the two periods. Sales of pro grade golf club shafts during the three months ended November 30, 1999 consisted principally of products which are not subject to the Company's Frequency Coefficient Matching ("FCM") technology and are sold at a lower price and a lower profit margin than the Company's FCM products. Conversely, a majority of the pro grade shaft sales during the three months ended November 30, 1998 were FCM products. Additionally, the FMP manufacturing facility was operating at high levels of production of pro grade shafts during the three months ended November 30, 1999 to fulfill significant OEM orders during the quarter. Additional production costs such as overtime wages, additional supplies and machinery maintenance were incurred to ramp up production to levels not typically required until the third and fourth fiscal quarters. These additional costs resulted in a higher average unit production cost during the three months ended November 30, 1999 than during the corresponding period in 1998. Finally, inventory write-downs totaling $0.1 million were recorded during the three months ended November 30, 1999 to reduce the book value of certain slow moving inventory items, principally graphite shafts purchased for resale, to estimated net realizable value. Gross profit from sales of golf club grips decreased by $0.1 million or 30% to $0.3 million despite a slight increase in net sales. As a percentage of sales, the gross profit on sales of golf club grips decreased from 47% to 32%. This decreased margin reflects a different mix of products sold during the two periods. Beginning in November 1998, the Company introduced a buffed golf club grip product for the Japanese market which is being manufactured at a higher cost and is being sold at a lower profit margin than other RG products. Sales of this buffed product represented 25% of sales during the three months ended November 30, 1999 compared to only 1% during the corresponding period in 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the three months ended November 30, 1999 were $1.5 million, an increase of 10% from selling, general and administrative expenses of $1.4 million during the corresponding period in 1998. Additional advertising costs of approximately $175,000 were incurred during the three months ended November 30, 1999 which contributed to the higher sales volumes realized during the period. As a percentage of sales, selling, general and administrative expenses declined from 35% during the three months ended November 30, 1998 to 23% during the corresponding period in 1999. AMORTIZATION OF GOODWILL. Goodwill was reduced in the fourth quarter of fiscal 1999 as a result of the utilization of pre-merger NOL carryforwards and partial reversal of the valuation allowance on pre-merger deferred tax assets. Therefore, amortization expense was reduced from $131,000 during the three months ended November 30, 1998 to $121,000 during the corresponding period in 1999. INTEREST EXPENSE. In October 1998, FMP entered into a new credit facility with RG's lender and paid off all existing loans to FMP's previous lender. A prepayment penalty of $75,000 was incurred related to this transaction and was reflected as a component of the $0.2 million interest expense during the three months ended November 30, 1998. Interest expense during the corresponding period in 1999 was $0.1 million. OTHER INCOME. Other income of $55,000 for the three months ended November 30, 1999 is principally comprised of royalties earned on sales of Roxxi headwear products. Other income of $64,000 for the three months ended November 30, 1998 is principally comprised of interest income on the Acushnet capital lease receivable. PROVISION FOR (BENEFIT FROM) INCOME TAXES. A provision of $62,000 was recorded for taxes on income from continuing operations during the three months ended November 30, 1999 and a benefit of $60,000 was recorded on the loss from continuing operations during the corresponding period in 1998. Taxes are provided based on the estimated effective tax rate for the year which considers the effect of nondeductible goodwill amortization. DISCONTINUED OPERATIONS. As discussed in Note 7 to the Financial Statements, the Company disposed of the operating assets of Roxxi in March 1999. Losses from the operations of Roxxi for the three months ended November 30, 1998 were $0.2 million. -11- SIX MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO THE SIX MONTHS ENDED NOVEMBER 30, 1998-- NET SALES. Net sales from continuing operations for the six months ended November 30, 1999 were $12.9 million, an increase of $3.0 million or 31% from net sales from continuing operations of $9.9 million during the corresponding period in 1998. Net sales of golf club shafts increased by $2.8 million or 35% and net sales of golf club grips increased by $0.2 million or 12%. The increased golf club shaft sales reflect continued strong demand for the Company's proprietary "Rifle" shafts. Net sales of the Company's higher priced, pro grade golf club shafts including the "Rifle" increased by $3.5 million or 58%. Sales of the Company's lower priced, commercial grade golf club shafts decreased by $0.7 million or 33%. Sales of this product have been negatively impacted since the Company instituted a significant price increase during the first quarter of fiscal 1999. In response to these unfavorable results, the Company subsequently modified its pricing structure in an effort to increase sales of this product in future periods. The increased golf club grip sales reflect the success of the new buffed product introduced to the Japanese market in November 1998. Sales of this product for the six months ended November 30, 1999 were $0.8 million compared to $10,000 during the corresponding period in 1998. COST OF SALES. Cost of goods sold from continuing operations for the six months ended November 30, 1999 was $8.7 million, an increase of $2.5 million or 40% from cost of goods sold from continuing operations of $6.2 million during the corresponding period in 1998. Golf club shafts cost of goods sold increased by $2.0 million or 39% and golf club grips cost of goods sold increased by $0.4 million or 45%, both as a result of higher total net sales. GROSS PROFIT. Gross profit from continuing operations for the six months ended November 30, 1999 was $4.3 million, an increase of $0.6 million or 16% from gross profit from continuing operations of $3.7 million for the corresponding period in 1998. Gross profit from sales of golf club shafts increased by $0.8 million or 28% to $3.6 million due to higher total net sales. As a percentage of sales, the gross profit on sales of golf club shafts decreased from 35% to 33% due to several factors, principally the mix of products sold during the two periods. Sales of pro grade golf club shafts during the six months ended November 30, 1999 consisted principally of products which are not subject to the Company's FCM technology and are sold at a lower price and a lower profit margin than the Company's FCM products. Conversely, a majority of the pro grade shaft sales during the six months ended November 30, 1998 were FCM products. Additionally, inventory write-downs totaling $0.2 million were recorded during the six months ended November 30, 1999 to reduce the book value of certain slow moving inventory items, principally graphite shafts purchased for resale, to estimated net realizable value. Gross profit from sales of golf club grips decreased by $0.2 million or 25% to $0.6 million despite an increase in net sales. As a percentage of sales, the gross profit on sales of golf club grips decreased from 47% to 31%. This decreased margin reflects a different mix of products sold during the two periods. Beginning in November 1998, the Company introduced the new buffed product for the Japanese market which is being manufactured at a higher cost and is being sold at a lower profit margin than other RG products. Sales of this product represented 37% of sales during the six months ended November 30, 1999 compared to only 1% during the corresponding period in 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the six months ended November 30, 1999 and 1998 were consistent at $3.1 million. Additional advertising costs of approximately $184,000 were incurred during the six months ended November 30, 1999 which contributed to the higher sales volumes realized during the period. As a percentage of sales, selling, general and administrative expenses declined from 32% during the six months ended November 30, 1998 to 24% during the corresponding period in 1999. AMORTIZATION OF GOODWILL. Goodwill was reduced in the fourth quarter of fiscal 1999 as a result of the utilization of pre-merger NOL carryforwards and partial reversal of the valuation allowance on pre-merger deferred tax assets. Therefore, amortization expense was reduced from $261,000 during the six months ended November 30, 1998 to $243,000 during the corresponding period in 1999. INTEREST EXPENSE. In October 1998, FMP entered into a new credit facility with RG's lender and paid off all existing loans to FMP's previous lender. A prepayment penalty of $75,000 was incurred related to this transaction and was reflected as a component of the $0.4 million interest expense during the six months ended November 30, 1998. Interest expense during the corresponding period in 1999 was $0.3 million. -12- OTHER INCOME. Other income of $110,000 for the six months ended November 30, 1999 is principally comprised of royalties earned on sales of Roxxi headwear products. Other income of $125,000 for the six months ended November 30, 1998 is principally comprised of interest income on the Acushnet capital lease receivable. PROVISION FOR (BENEFIT FROM) INCOME TAXES. A provision of $358,000 was recorded for taxes on income from continuing operations during the six months ended November 30, 1999 and a benefit of $55,000 was recorded on the loss from continuing operations during the corresponding period in 1998. Taxes are provided based on the estimated effective tax rate for the year which considers the effect of nondeductible goodwill amortization. DISCONTINUED OPERATIONS. As discussed in Note 7 to the Financial Statements, the Company disposed of the operating assets of Roxxi in March 1999. Losses from the operations of Roxxi for the six months ended November 30, 1998 were $0.4 million. LIQUIDITY AND CAPITAL RESOURCES-- At November 30, 1999, RP had working capital of $5.9 million and a current ratio of 2.3 to 1 as compared to working capital of $5.8 million and a current ratio of 2.2 to 1 at May 31, 1999. FMP has a credit facility consisting of a term loan and a revolving line-of-credit. The FMP term loan of $3,047,000 at November 30, 1999 is due in monthly principal installments of $65,000 until its maturity in September 2002. The amount available for borrowings under the revolving line-of-credit is based upon the levels of eligible FMP accounts receivable and inventories, as defined, subject to a maximum borrowing of $5.0 million. As of November 30, 1999, FMP had $3,491,000 outstanding under its revolving line-of-credit and $865,000 available for additional borrowings. The FMP line-of-credit expires in September 2002. RG has a credit facility consisting of a term loan and a revolving line-of-credit. The RG term loan of $493,500 at November 30, 1999 is due in monthly principal installments of $10,500 until its maturity in September 2002. The amount available for borrowings under the revolving line-of-credit is based upon the levels of eligible RG accounts receivable and inventories, as defined, subject to a maximum borrowing of $1.5 million. As of November 30, 1999, RG had $94,000 outstanding under its revolving line-of-credit and $532,000 available for additional borrowings. The RG line-of-credit expires in September 2002. The FMP and RG credit facilities were amended and restated on November 10, 1999 resulting in a reduction of interest rates by 1%, an extension of the maturity dates by one year, and a $1.0 million increase in the FMP line of credit. Effective November 10, 1999, borrowings under the term loans and revolving lines-of-credit of both credit facilities bear interest at a rate per annum equal to the prime rate (8.50% at November 30, 1999) plus 0.75% and 0.25%, respectively, and are secured by substantially all of the Company's assets. The FMP and RG credit facilities contain financial and other covenants which, among other things, limit annual capital expenditures and dividends and require the maintenance of minimum monthly and quarterly earnings or maximum monthly and quarterly losses, and minimum quarterly debt service coverage ratios, as defined. The Company was in compliance with all financial loan covenants at November 30, 1999. The Company believes that its existing capital resources and credit lines available are sufficient to fund its operations and capital requirements as presently planned over the next twelve months. During the six months ended November 30, 1999, net cash provided by operating activities was $1.0 million which primarily resulted from net income of $0.4 million, depreciation and amortization of $0.6 million and a decrease in accounts receivable of $1.1 million. Cash provided by operating activities was reduced by an increase in inventories of $1.0 million. Net cash used in investing activities for the six months ended November 30, 1999 was $0.9 million for the purchase of property, plant and equipment. The Company estimates that capital expenditures for the fiscal year ending May 31, 2000 will be approximately $2.0 million including $0.8 million to complete the upgrade of FMP's wastewater treatment facilities. To finance a portion of the estimated $1.0 million total cost of the wastewater treatment project, the Company has received a funding commitment of $750,000 from the Connecticut Development Authority which can be advanced to the Company upon the completion of the -13- facility and approval by the Connecticut Department of Environmental Protection. The Company is assessing its steel golf shaft manufacturing capacities compared to the current and anticipated future volume of customer orders. Based on this assessment and the success of ongoing projects to increase production volumes, significant future capital expenditures may be required at the FMP manufacturing facility. Net cash used in financing activities for the six months ended November 30, 1999, was $0.3 million resulting from repayments of long term debt and capital lease obligations of $0.7 million and net borrowings under lines-of-credit of $0.5 million. YEAR 2000 ASSESSMENT -- The following Year 2000 discussion contains various forward-looking statements that represent the Company's beliefs or expectations regarding future events. When used in the Year 2000 discussion, the words "believe," "expects," "estimates" and other similar expressions are intended to identify forward-looking statements. Forward-looking statements include, without limitation, the Company's expectations as to when it and its significant distributors, customers and suppliers will complete the implementation and compliance phases of the Year 2000 plan, and the Company's belief that its internal systems and equipment are Year 2000 compliant. All forward-looking statements involve a number of risks and uncertainties that could cause the actual results to differ materially from the projected results. Factors that may cause these differences include, but are not limited to, the availability of qualified personnel and other information technology resources; the ability to identify and rectify all date sensitive lines of code or to replace embedded chips in affected systems or equipment; unanticipated delays or expenses related to correction of the problems; and the actions of independent third-parties with respect to Year 2000 problems. During the previous two-year period, the Company expended approximately $100,000 to purchase and install new computer hardware and software resulting in all Company hardware and software being Year 2000 compliant. Expenses associated with evaluation of the Company's internal systems for Year 2000 problems were approximately $20,000. The Company believes that any future internal Year 2000 costs will be immaterial. Due to the Company's extensive internal Year 2000 analysis and completion of the Year 2000 project, the Company determined that an internal contingency plan was not necessary. The Company completed a review of its significant suppliers to determine that the suppliers' operations and the products and services they provide are Year 2000 compliant. All significant suppliers and utilities indicated that their products and company are Year 2000 compliant. The primary supplier of the Company's golf club grips recently completed a conversion of its accounting system and indicated that its operations, products and services it provides are Year 2000 compliant. The Company has no practical means to verify the information provided by these independent third parties. Based upon this assessment and where practicable, the Company will attempt to mitigate its risks with respect to any suppliers that may not meet the requirements, including seeking alternative suppliers. Some independent sales representatives that the Company uses may have applications that are not Year 2000 compliant. The Company does not believe this is a material concern since product orders are either manually written and submitted via fax, or are submitted on a Company supplied automated order form that is Year 2000 compliant. The Company's comprehensive evaluation of its internal systems and equipment addressed both information technology systems ("IT," i.e. business systems and the software development environment) and non-IT systems, (i.e. elevators, building security and HVAC systems) including hardware, software and firmware. The Company's critical internal systems including versions of Macola, ADP, Oracle, Microsoft Exchange, Microsoft Office 97, Microsoft Windows NT, Microsoft Windows 9x, and Microsoft SQL Server products operated successfully during the transition from 1999 to 2000. However, there can be no assurance that the Company will not experience disruptions in its ability to conduct business because of Year 2000 problems experienced by the Company's distributors or vendors, such problems remain a possibility and could have an adverse impact on the Company's results of operations and financial condition. To the extent that its key distributors or vendors experience problems relative to achieving Year 2000 compliance, the Company could suffer unanticipated revenue losses. Some commentators have predicted significant litigation regarding Year 2000 compliance issues. Because of the unprecedented nature of such litigation, it is uncertain whether, or to what extent, the Company may be affected. However, at this time the Company believes that it is not likely to have a material adverse effect on the Company or its operations. -14- BUSINESS ENVIRONMENT AND FUTURE RESULTS -- RELIANCE ON THIRD PARTY SUPPLIERS. In May 1999, RG and Acushnet Rubber Company ("Acushnet") executed a mutual release agreement terminating their manufacturing and supply agreement and capital lease agreement (the "Termination Agreement"). As a result in May 1999, RG received $1.5 million in cash and $1.0 million in purchase credits from Acushnet to be applied against current and future amounts owed to Acushnet for the production of grips. As of November 30, 1999, $0.5 million of the purchase credits had been utilized and the remaining $0.5 million is included in other current assets in the accompanying condensed consolidated balance sheet. In connection with the Termination Agreement, RG is entitled to receive the manufacturing equipment which was leased to Acushnet and Acushnet's obligation to make additional payments to RG under the capital lease was terminated. Additionally, Acushnet is obligated to continue producing grips for RG through January 2000 and to pay up to $100,000 for shipping and installation of the manufacturing equipment at a new location. RG currently purchases the majority of its supply of non-cord, injected grips from Acushnet and has no immediate replacement supply source. The Company believes that it can obtain a sufficient supply of grips from Acushnet and other existing vendors to satisfy customer demand through December 31, 2000. Included in finished goods inventories at November 30, 1999 are grips at a cost of approximately $0.8 million located at Acushnet. The Company has identified and is in various stages of negotiations with three separate grip manufacturers which the Company believes can maintain RG's standard of product quality and will facilitate a smooth transition. There can be no assurances that the Company will be able to secure a source for grips on as favorable terms or with the same or better quality as Acushnet. In addition, there can be no assurances that a transition to new suppliers will not result in production delays, the loss of sales and key customers which would materially affect RG's financial condition and results of operations. Acushnet warehoused and distributed RG's grips under the manufacturing and supply agreement. In connection with the Termination Agreement, the Company will assume responsibility for these functions. In September 1999, approximately $0.2 million of grips were transferred from the Acushnet facility to the Company's manufacturing and distribution facility in Torrington, Connecticut and are included in finished goods inventories at November 30, 1999. The Torrington warehouse has been configured to accommodate storage and shipment of grips. In November 1999, the Company entered into a lease of approximately 9,000 square feet of warehouse space in Scottsdale, Arizona which will serve as a West Coast distribution center. In December 1999, approximately $0.3 million of grips were transferred from the Acushnet facility to the Company's Scottsdale warehouse. When Acushnet has fulfilled its manufacturing obligations under the Termination Agreement, all remaining inventory will be transferred from the Acushnet facility to the Torrington and Scottsdale warehouses. The Company will warehouse and distribute its grips from both the Scottsdale and Torrington locations when the relationship with Acushnet is completed. DISCONTINUED OPERATIONS. In March 1999, the operating assets of Roxxi were disposed of through two separate transactions. Roxxi sold its trade name, customer list, design database and related computer software and hardware for a royalty of 16% of the buyer's net sales of Roxxi-licensed products for the two-year period beginning May 1, 1999. Roxxi also sold its headwear manufacturing equipment, headwear inventory and raw materials to another company for $300,000 and a royalty of 2% of the buyer's net sales until the buyer has paid an additional $200,000. Subsequently, Roxxi's name was changed to Royal Grip Headwear Company. The Company is accounting for royalties as income is earned during the two year period beginning May 1, 1999. For the three and six months ended November 30, 1999, royalties of $51,000 and $89,000 were recorded, respectively, and are reflected as other income in the accompanying condensed consolidated statements of operations. -15- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE COMMODITY INSTRUMENTS. At November 30, 1999, the Company did not participate in any derivative financial instruments or other financial and commodity instruments for which fair value disclosure would be required under Statement of Financial Accounting Standards No. 107. The Company holds no investment securities that would require disclosure of market risk. PRIMARY MARKET RISK EXPOSURE. The Company's primary market risk exposure relates to its variable rate debt obligations which are fully described in Note 5 to the Financial Statements. A one percent change in the prime lending rate would have an effect of $17,000 and $33,000 on interest expense for the three and six months ended November 30, 1999, respectively. -16- PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On November 2, 1999, R. R. Donnelley & Sons Company, Plaintiff, vs. Royal Precision, Inc., Defendant, was filed in Superior Court, Maricopa County, Arizona. In the matter, R. R. Donnelley & Sons Company ("Donnelley") alleges that the Company is liable under breach of contract for approximately $280,000 in printing costs arising from the preparation of a Joint Proxy Statement/Prospectus related to a proposed merger agreement between the Company and Coyote Sports, Inc. which was terminated prior to the effective date of the merger. Management believes that the action is without merit and intends to defend it vigorously. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. The Amended and Restated Certificate of Incorporation was amended on October 19, 1999 as approved by the stockholders of the Company at their Annual Meeting held October 12, 1999, which amendment decreased the number of authorized shares of Preferred Stock from 5,000,000 to 1,000,000 and decreased the number of authorized shares of Common Stock from 50,000,000 to 10,000,000. This amendment had no effect upon the rights of the holders of such securities. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) The annual meeting of stockholders was held on October 12, 1999. (b) At the annual meeting, David E. Johnston and Thomas A. Schneider were elected as directors, each to serve a term of three years. Other directors whose terms of office continued after the annual meeting are Danny Edwards, Richard P. Johnston and Raymond J. Minella. (c) The only matters voted on at the annual meeting were the election of directors and approval of an amendment to the Amended and Restated Certificate of Incorporation. Results of the voting were as follows: Total number of shares entitled to vote present or represented at the annual meeting: 3,334,411 Election of Directors: For Authority Withheld --- ------------------ David E. Johnston 3,334,011 400 Thomas A. Schneider 3,334,061 350 Approval of amendment to Certificate of Incorporation: For Against Abstain Not Voted --- ------- ------- --------- 3,334,211 200 -0- -0- ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. -17- (3) Certificate of Incorporation and Bylaws Exhibit 3.1. Amended and Restated Certificate of Incorporation of Royal Precision, Inc., as amended (restated to reflect amendment filed with the Secretary of State of Delaware on October 19, 1999). Exhibit 3.2. Bylaws of Royal Precision, Inc. (incorporated by reference to Annex IV to the Company's Form S-4; No. 333-28841 (the "Form S-4")). (4) Instruments Defining the Rights of Security Holders Exhibit 4. 1. See Articles FOUR, FIVE and SEVEN of the Amended and Restated Certificate of Incorporation at Exhibit 3.1. Exhibit 4.2. See Article I, Sections 2.1 and 2.2 of Article II and Section 7.3 of Article VII of the Bylaws of Royal Precision, Inc. (incorporated by reference to Exhibit 3.2 to the Form S-4). (10) Material Contracts Exhibit 10.1. Royal Precision Stock Option Plan (restated to reflect amendments adopted by the Board of Directors on November 30, 1999 pursuant to authority granted in the Plan). Exhibit 10.2. Second Amendment to Credit and Security Agreement between FM Precision Golf Manufacturing Corp., FM Precision Golf Sales Corp. and Wells Fargo Business Credit, Inc. dated November 10, 1999. Exhibit 10.3. Third Amendment to Amended and Restated Credit and Security Agreement between Royal Grip, Inc., Royal Grip Headwear Company and Wells Fargo Business Credit, Inc. dated November 10, 1999. Exhibit 27. Financial Data Schedule (submitted electronically for SEC information only) (b) Reports on Form 8-K. There were no reports on Form 8-K filed by the Registrant during the quarter ended November 30, 1999. -18- SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROYAL PRECISION, INC. Date January 10, 2000 By /s/ Thomas Schneider -------------------------------------- Thomas Schneider, President By /s/ Kevin Neill -------------------------------------- Kevin Neill, Vice President - Finance and Chief Financial Officer (chief accounting officer) -19- EXHIBIT INDEX PAGE IN SEQUENTIALLY NUMBERED EXHIBIT COPY 3.1 Amended and Restated Certificate of Incorporation of 21 Royal Precision, Inc., as amended (restated to reflect amendment filed with the Secretary of State of Delaware on October 19, 1999). 3.2 Bylaws of Royal Precision, Inc. (incorporated by reference * to Annex IV to the Company's Form S-4; No. 333-28841 (the "Form S-4")). 4.1 See Articles FOUR, FIVE and SEVEN of the Amended and Restated Certificate of Incorporation of the registrant at Exhibit 3.1. 4.2 See Article I, Sections 2.1 and 2.2 of Article II and Section 7.3 of Article VII of the Bylaws of Royal Precision, Inc. (incorporated by reference to Exhibit 3.2 to the Form S-4). 10.1 Royal Precision Stock Option Plan (restated to reflect 26 amendments adopted by the Board of Directors on November 30, 1999 pursuant to authority granted in the Plan). 10.2 Second Amendment to Credit and Security Agreement between 47 FM Precision Golf Manufacturing Corp., FM Precision Golf Sales Corp. and Wells Fargo Business Credit, Inc. dated November 10, 1999. 10.3 Third Amendment to Amended and Restated Credit and 54 Security Agreement between Royal Grip, Inc., Royal Grip Headwear Company and Wells Fargo Business Credit, Inc. dated November 10, 1999. 27. Financial Data Schedule (submitted electronically for SEC information only). - ---------- *Incorporated by reference EX-3.1 2 AMENDED & RESTATED CERT. OF INCORPORATION AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF ROYAL PRECISION, INC. (Restated to reflect Amendment of October 19, 1999) FIRST: The name of the Corporation is Royal Precision, Inc. SECOND: The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle. The name of its registered agent at that address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: Section 1. AUTHORIZED SHARES. The total number of shares of stock which the Corporation shall have the authority to issue is 11,000,000 of which 1,000,000 are shares of Preferred Stock with a par value of one mil ($0.001) per share ("Preferred Stock"), and 10,000,000 are shares of Common Stock with a par value of one mil ($0.001) per share ("Common Stock"). Section 2. PREFERRED STOCK. The Board of Directors is expressly authorized to adopt, from time to time, a resolution or resolutions providing for the issuance of Preferred Stock in one or more series, to fix the number of shares in each such series and to fix the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions thereof, of each such series. Section 3. COMMON STOCK. Holders of the issued and outstanding shares of Common Stock shall be entitled to receive ratably, in proportion to the number of shares of Common Stock held by them, (a) such dividends as may be declared by the Board of Directors, from time to time, out of the assets or funds of the Corporation legally available for the payment of dividends, and (b) upon the liquidation, dissolution or winding up of the Corporation, the assets of the Corporation remaining after the payment of creditors and the holders of shares of any class or series of Preferred Stock to the extent that the then existing terms of such class or series grant them priority over the holders of shares of Common Stock. Neither the merger or consolidation of the Corporation into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Corporation, nor the sale, lease, exchange or other disposition (for cash, shares of stock, securities or other consideration) of all or substantially all of the assets of the Corporation, shall be deemed to be a dissolution, liquidation, or winding up, voluntary or involuntary, of the Corporation. Each share of Common Stock entitles the holder thereof to one vote on all matters submitted to a vote of the holders of Common Stock. FIFTH: Section 1. CLASSIFIED DIRECTORS. (a) The Board of Directors shall be divided into three classes; the term of office of those of the first class to expire at the annual meeting next ensuing; of the second class one year thereafter; of the third class two years thereafter; and at each annual election held after the initial classification of the Board of Directors and election of directors to such classes, directors shall be chosen for a full term of three years, as the case may be, to succeed those whose terms expire. The total number of directors constituting the full Board of Directors and the number of directors in each class shall be fixed by, or in the manner provided in the by-laws, but the total number of directors shall not exceed seventeen (17) nor shall the number of directors in any class exceed six (6). Subject to the foregoing, the classes of directors need not have the same number of members. No reduction in the total number of directors or in the number of directors in any class shall be effective to remove any director or to reduce the term of any director. If the Board of Directors increases the number of directors in a class, it may fill the vacancy created thereby for the full remaining term of a director in that class even though such term may extend beyond the next annual election. The Board of Directors may fill any vacancy occurring for any other reason for the full remaining term of the director whose death, resignation or removal caused the vacancy, even though such term may extend beyond the next annual election. (b) Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the express terms of such class or series, and such directors so elected shall not be divided into classes pursuant to this Article FIFTH unless expressly provided by such terms. (c) Any director or the entire Board of Directors may be removed by the holders of a majority of the shares then entitled to vote at an election of directors only for cause. A director shall hold office until the annual meeting for the year in which his term expires and until his successor is elected and qualified, or until his earlier resignation or removal from office for cause. Section 2. BALLOTS. Elections of directors at a special or annual meeting of stockholders need not be by written ballot unless the by-laws of the Corporation shall provide otherwise. SIXTH: The Board of Directors shall have the power to adopt, amend or repeal the by-laws. -2- SEVENTH: Action shall be taken by the stockholders of the Corporation only at an annual or special meeting of stockholders, and stockholders may not act by written consent. Special meetings of the Corporation may be called only as provided in the by-laws. EIGHTH: A director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of any fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which the director derives an improper personal benefit. If the General Corporation Law of the State of Delaware is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. The foregoing limitation on liability shall not apply to acts or omissions occurring prior to the effective date of this Article. NINTH: Section 1. INDEMNIFICATION. The Corporation shall indemnify any director or officer who was or is a party or is threatened to be made a party to: (a) DIRECT ACTIONS. Any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful; the termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful; or (b) DERIVATIVE ACTIONS. Any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the -3- Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. The Corporation may indemnify any of its other employees or agents to the same extent and subject to the same procedures and limitations as are set forth in this Section 1 and Section 3 below as it is required to indemnify its directors and officers by this Section 1. Section 2. SUCCESSFUL DEFENSE. To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1 of this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 3. STANDARD OF CONDUCT. Any indemnification under Section 1 of this Article (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in said Section 1 of this Article. Such determination shall be made (1) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. Section 4. PAYMENT OF EXPENSES. Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article NINTH. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. Section 5. NOT EXCLUSIVE. The indemnification and advancement of expenses provided by, or granted pursuant to, the provisions of this Article NINTH shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the certificate of incorporation, or any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. -4- Section 6. INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this section. Section 7. DEFINITIONS. (a) THE CORPORATION. For purposes of this Article NINTH, references to "the Corporation" shall include, in addition to the Corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this NINTH with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (b) OTHER ENTERPRISES. For purposes of this Article NINTH, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article NINTH. Section 8. CONTRACTUAL NATURE. This Article NINTH shall be deemed to be a contract between the Corporation and each director and officer who serves as such at any time while this Article NINTH is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon such state of facts. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article NINTH shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. TENTH: Effective upon the filing of this Amended and Restated Certificate of Incorporation, each share of the Common Stock, par value $.01 per share, of the Corporation theretofore issued and outstanding ("Old Common Stock") shall be split into 10 shares of the Common Stock described in Section 3 of Article -5- FOURTH above ("New Common Stock") and each holder of a certificate representing Old Common Stock (an "Old Certificate") shall be entitled to receive a certificate representing the number of shares of New Common Stock into which the shares of Old Common Stock represented by the Older Certificate were split upon surrender of such Old Certificate to the Corporation. -6- EX-10.1 3 STOCK OPTION PLAN ROYAL PRECISION, INC. STOCK OPTION PLAN ---------- OCTOBER 5, 1997 (RESTATED TO REFLECT AMENDMENT ADOPTED NOVEMBER 30, 1999) ---------- PREAMBLE: 1. Royal Precision, Inc. a Delaware corporation (the "COMPANY"), by means of this Stock Option Plan (the "PLAN"), desires to attract and retain capable employees, officers, directors and consultants and to provide them with long term incentives to continue their services to the Company, to maximize the value of the Company to its stockholders and to acquire a continuing ownership interest in the Company. 2. The Company has determined that the foregoing objectives will be promoted by granting Options (as hereinafter defined) under this Plan to certain employees, officers, directors and consultants of the Company and of its Parent and Subsidiaries, if any, pursuant to this Plan. TERMS: ARTICLE 1. DEFINITIONS. Section 1.1. GENERAL. Certain words and phrases used in this Plan shall have the meanings given to them below in this section: "BOARD OF DIRECTORS" means the board of directors of the Company. "CODE" means the Internal Revenue Code of 1986 and the regulations thereunder, as now in effect or hereafter amended. "COMMITTEE" means the Board of Directors or a committee of the Board of Directors that administers the Plan under Section 2.1 below. "COMMON STOCK" means the common stock with a par value of one mil ($0.001) per share, of the Company. "CONSULTANT" means any person who provides services to any Employer (other than as an Employee or a Director or in connection with the offer or sale of securities of the Employer in a capital raising transaction) and who is a consultant or an adviser to the Employer within the meaning of General Instruction A.1. to Form S-8 promulgated by the SEC under the Securities Act of 1933. "DATE OF GRANT" means the date an Option is first granted. "DIRECTOR" means a member of the Board of Directors. "EFFECTIVE DATE" means the date this Plan is first adopted by the Board of Directors. "EMPLOYEE" means any common law employee of an Employer. "EMPLOYER" means the Company or any Parent or Subsidiary of the Company which employs a given Employee or has engaged a given Consultant. "EXCHANGE ACT" means the Securities Exchange Act of 1934 and the regulations thereunder, as now in effect or hereafter amended. "EXERCISE PRICE" means, with respect to an Option, the amount of consideration that must be delivered to the Company in order to purchase a single Share thereunder. "FAIR MARKET VALUE OF A SHARE" means the amount determined to be the fair market value of a single Share by the Committee based upon the trading price of the Shares, their offering price in public and private offerings by the Company and such other factors as it deems relevant. In the absence of such a determination, the Fair Market Value of a Share shall be deemed to be (a) if the Shares are listed or admitted to trading on a national securities exchange or the NASDAQ - National Market System, the per Share closing price regular way on the principal national securities exchange or the NASDAQ - National Market System on which the Shares are listed or admitted to trading on the day prior to the date of determination or, if no closing price can be determined for the date of determination, the most recent date for which such price can reasonably be ascertained, or (b) if the Shares are not listed or admitted to trading on a national securities exchange or the NASDAQ - National Market System, the mean between the representative bid and asked per Share prices in the over-the-counter market at the closing of the day prior to the date of determination or the most recent such bid and asked prices then available, as reported by NASDAQ or if the Shares are not then quoted by NASDAQ as furnished by any market maker selected from time to time by the Company for that purpose. "GRANTEE" means any Participant to whom an Option has been granted. "HOLDER" means any Grantee who holds a valid Option and any heir or legal representative to whom such Grantee's Option has been transferred by will or the laws of descent and distribution. "INCENTIVE STOCK OPTION" or "ISO" means a Stock Option intended to comply with the terms and conditions set forth in Section 422 of the Code. "MEETING DATE" means the date of each annual meeting of the stockholders of the Company at which Directors are elected. "NONQUALIFIED OPTION" means a Stock Option other than an Incentive Stock Option. "OFFICER" means an officer of the Company as defined in 17 C.F.R.ss. 240.16a-1(f) as now in effect or hereafter amended. "OPTION" or "STOCK OPTION" means a right granted under Article 5, 6 or 7 of the Plan to a Grantee to purchase a stated number of Shares at a stated Exercise Price. "OPTION AGREEMENT" means an agreement evidencing an Option substantially in the form of Exhibit A, Exhibit B or Exhibit C attached hereto. "PARENT" means a parent of a given corporation as such term is defined in Section 424(e) of the Code. "PARTICIPANT" means a person who is eligible to receive an Option under the Plan. "PLAN" means this Plan as it may be amended or restated from time to time. "RULE 16b-3" means Rule 16b-3 (17 C.F.R. ss. 240.16b-3) promulgated under Section 16(b) of the Exchange Act as now in effect or hereafter amended. "SEC" means the Securities and Exchange Commission. "SHARES" means shares of Common Stock. "SUBSIDIARY" means a subsidiary of a given corporation as such term is defined in Section 424(f) of the Code. "TAX OFFSET PAYMENT" means a payment in cash which may be authorized by the Committee to be paid to a Grantee of a Nonqualified Option in an amount determined by the following formula: 1-[A + (1-A) + B] ----------------- - C = D C where "A" is the maximum federal marginal income tax rate imposed on individuals, "B" is the maximum marginal income tax rate imposed on individuals by the State in which the Grantee is domiciled, "C" is the difference between the Exercise Price and the Fair Market Value of a Share at the time of exercise, times the number of Shares subject to such exercise, and "D" is the amount of -2- the Tax Offset Payment. If at the time of exercise of a Nonqualified Option with respect to which a Tax Offset Payment has been authorized, in the reasonable opinion of the chief financial officer of the Company, (a) the Company may offset from income an amount equal to the full amount of the Tax Offset Payment, the Tax Offset Payment shall be paid at such time by first paying any withholding taxes due with respect to the exercise and grant of the Tax Offset Payment, and then by paying to the Grantee the balance, or (b) the Company may not offset from income an amount equal to the full amount of the Tax Offset Payment, only that portion of the Tax Offset Payment, if any, equal to the amount of the tax benefit available to the Company or its stockholders (the "Partial Tax Offset Payment") shall be paid at such time by first paying any withholding taxes due with respect to the exercise and grant of the Tax Offset Payment, and then by paying to the Grantee the balance, if any, of the Partial Tax Offset Payment. The balance of the Tax Offset Payment shall be paid to such Grantee as and when the Company may utilize the tax benefit resulting therefrom. "TEN PERCENT STOCKHOLDER" means a person who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company. Ownership shall, for the purposes of the previous sentence, be determined under the rules set forth in Section 424 of the Code. "TERMINATION WITHOUT CAUSE" means a termination by an Employer of the employment or consulting relationship of a Grantee with the Employer that is not for cause and is not occasioned by the resignation, death or disability of the Grantee. Section 1.2. ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles. Section 1.3. EFFECT OF DEFINITIONS. The definitions set forth in Section 1.1 above shall apply equally to the singular, plural, adjectival, adverbial and other forms of any of the words and phrases defined regardless of whether they are capitalized. ARTICLE 2. ADMINISTRATION. Section 2.1. COMMITTEE. The Plan shall be administered by a committee of the Board of Directors consisting of two or more Directors, each of whom is a "Non-Employee Director" as described in paragraph (b)(3) of Rule 16b-3 and is an "outside director" as described in Code Section 162(m) and the regulations thereunder. Unless the Board of Directors designates another of its committees to administer the Plan, the Plan shall be administered by (a) a committee consisting of those members of the Compensation Committee of the Board of Directors who are disinterested persons and are outside directors, but, if the Compensation Committee is abolished or its membership does not contain two persons who comply with the requirements of the first sentence of this Section 2.1, the Board of Directors shall either reconstitute the Compensation Committee in compliance with, or create another Committee that complies with, the requirements of the first sentence of this Section 2.1 to administer the Plan or (b) the Board of Directors. Section 2.2. AUTHORITY. Subject to the express provisions of the Plan and in addition to the powers granted by other sections of the Plan, the Committee has the authority, in its discretion, to (a) determine the Participants, grant Options, determine whether Tax Offset Payments should be authorized and, if authorized, the percentage of such Tax Offset Payment, and determine the timing, pricing and amount of the Options; (b) define, prescribe, amend and rescind rules, regulations, procedures, terms and conditions relating to the Plan; (c) make all other determinations necessary or advisable for administering the Plan including, but not limited to, interpreting the Plan, correcting defects, reconciling inconsistencies and resolving ambiguities; and (d) review and resolve all claims of Employees, Consultants, Directors, Grantees, Holders and Participants. The actions and determinations of the Committee on matters related to the Plan shall be conclusive and binding upon the Company and all Employees, Consultants, Directors, Grantees, Holders and Participants. ARTICLE 3. SHARES. Section 3.1. NUMBER. The aggregate number of Shares in respect of which Options may be granted under the Plan shall not exceed 750,000, which number of -3- Shares is hereby reserved for issuance under the Plan out of the authorized but unissued Shares. Section 3.2. CANCELLATIONS. If any portion of an Option is canceled, terminates or expires for any reason without having been exercised, the Shares related to such unexercised portion, shall be available again for the purposes of the Plan. Section 3.3. ANTI-DILUTION. (a) If the Shares are split or if a dividend of Shares is paid on the Shares, the number of Shares on which each then outstanding Option is based and the number of Shares as to which Options may be granted under this Plan shall be increased automatically by the ratio between the number of Shares outstanding immediately after such event and the number of Shares outstanding immediately before such event (ignoring for this purpose any provision for the repurchase or cash payment of fractional shares) and the Exercise Price thereof shall be decreased automatically by the same ratio. If the Shares are combined into a lesser number of Shares, the number of Shares for which each then outstanding Option is based and the number of Shares as to which Options may be granted under the Plan shall be decreased automatically by such ratio and the Exercise Price thereof shall be increased automatically by such ratio. (b) If any other change occurs in the Shares, through recapitalization, merger, consolidation or exchange of shares or otherwise, there shall automatically be substituted for each Share subject to an unexercised Option and each Share available for additional grants of Options, the number and kind of shares or other securities or property into which each outstanding Share was changed, and the Exercise Price shall be increased or decreased proportionally so that the aggregate Exercise Price for the securities subject to each Option shall remain the same as immediately before such event. In addition, the Committee may make such further equitable adjustments in the Plan and the then outstanding Options as are deemed necessary and appropriate by the Committee including, but not limited to, changing the number of Shares reserved under the Plan or covered by outstanding Options, the Exercise Price of outstanding Options and the vesting conditions of outstanding Options. Section 3.4. SOURCE. Except as otherwise determined by the Board of Directors, the Shares issued under the Plan shall be drawn from the Company's authorized but unissued Shares. However, Shares which are to be delivered under the Plan may be obtained by the Company from its treasury, by purchases on the open market or from private sources, as well as by issuing authorized but unissued Shares. The proceeds of the exercise of any Option shall be general corporate funds of the Company. No Shares may be sold under any Option Agreement for less than the par value thereof. No fractional Shares shall be issued or sold under the Plan nor will any cash payment be made in lieu of fractional Shares. Section 3.5. RIGHTS OF A STOCKHOLDER. No Holder nor any person claiming under or through any Holder shall have any right, title or interest in or to any Shares allocated or reserved under the Plan or subject to any Option except as to such Shares, if any, for which certificates representing such Shares have been issued to such Holder upon the due exercise of an Option. Section 3.6. SECURITIES LAWS. No Option shall be exercised nor shall any Shares or other securities be issued or transferred pursuant to an Option unless and until all applicable requirements imposed by federal and state securities laws and by any stock exchanges upon which the Shares may be listed, have been fully complied with. As a condition precedent to the exercise of an Option or the issuance of Shares pursuant to the grant or exercise of an Option, the Company may require the Holder to take any reasonable action to meet such requirements including providing undertakings as to the investment intent of the Holder, accepting transfer restrictions on the Shares issuable thereunder and providing opinions of counsel, in form and substance acceptable to the Company, as to the availability of exemptions from such requirements. ARTICLE 4. ELIGIBILITY. Section 4.1. ARTICLE 5. Only Employees shall be eligible to receive Options under Article 5 below. Section 4.2. ARTICLE 6. Only Consultants shall be eligible to receive Options under Article 6 below. -4- Section 4.3. ARTICLE 7. Only Directors shall be eligible to receive Options under Article 7 below. ARTICLE 5. EMPLOYEES' STOCK OPTIONS. Section 5.1. DETERMINATIONS. The Committee shall determine which Participants shall be granted Options, which Participants will be granted Tax Offset Payments and the percentage of Tax Offset Payments, the manner of payment, the number of Shares for which the Options may be exercised, the times when they shall receive them and the terms and conditions of individual Option grants (which need not be identical). Section 5.2. EXERCISE PRICE. The Committee shall determine the Exercise Price of each Option at the time that it is granted, but in no event shall the Exercise Price of an Option be less than the Fair Market Value of a Share on the Date of Grant. If no express determination of the Exercise Price of an Option is made by the Committee, the Exercise Price thereof is equal to the Fair Market Value of a Share on the Date of Grant. Section 5.3. TERM. Subject to the rule set forth in the next sentence, the Committee shall determine the times when an Option vests and the term during which an Option is exercisable at the time that it is granted. No Option shall be exercisable after the expiration of ten years from the Date of Grant. If no express determination of the times when Options are exercisable is made by the Committee: (a) each Option shall vest and first become exercisable (subject to the rule set forth in Section 5.4(c) below) as to 25% of the Shares subject to such Option on each of the first four anniversaries of the Date of Grant provided the Grantee has been an Employee continuously during the time beginning on the Date of Grant and ending on the date when such portion vests and first becomes exercisable and further provided that no portion of an Option shall vest and become exercisable after the employment of the Grantee by his Employer has terminated, regardless of the reason for such termination. (b) any portion of an Option that has vested and become exercisable shall lapse and cease to be exercisable upon the earliest of: (i) the expiration of ten years from the Date of Grant, (ii) subject to the rule set forth in Section 5.4(d) below, nine months after the Grantee ceases to be an Employee because of death or disability, (iii) three months after the termination without cause of the Grantee's employment with all Employers, or (iv) immediately upon termination of the Grantee's employment with all Employers by the applicable Employers for cause or by the Grantee's resignation. Where both an Incentive Stock Option and a Nonqualified Option are granted, the number of Shares which become exercisable under clause (a) of the previous sentence at any time shall be calculated on the basis of the total of the Shares subject to both Options and the Options shall become exercisable as to that number of Shares first under the Incentive Stock Option and then under the Nonqualified Option, unless the rule set forth in Section 5.4(c) below would defer the exercisability of such Incentive Stock Option, in which case such Nonqualified Options shall become exercisable first. Section 5.4. INCENTIVE STOCK OPTIONS. (a) The Committee shall determine whether any Option is an Incentive Stock Option or a Nonqualified Option at the time that it is granted and, if no express determination is made by the Committee, all Options shall be Nonqualified Options. (b) If the Committee grants Incentive Stock Options, they shall be on such terms and conditions as may be necessary to render them "incentive stock options" pursuant to Section 422 of the Code. (c) The aggregate Fair Market Value of the Shares, determined as of the time the Option is granted, which first become exercisable under all Incentive Stock Options granted to any one Grantee under this Plan or any other plan of the Company or any Parent or Subsidiary of the Company, shall not exceed $100,000 during any calendar year and, if the foregoing limit would be exceeded -5- in any given calendar year by the terms of any Incentive Stock Option granted hereunder, the exercisability of such portion of such Option as would exceed such limit shall be deferred to the first day of the next calendar year and, if such excess involves more than one Option, the exercisability of the most recently granted Option shall be deferred first. (d) If the employment of a Grantee, who holds an ISO, with any Employer is terminated because of a "disability" (within the meaning of Section 22(e)(3) of the Code), the unexercised portion of the ISO may be exercised only within six months after the date on which employment was terminated, and only to the extent that such Grantee could have otherwise exercised such ISO as of the date of termination. If a Grantee, who holds an ISO, dies while employed by an Employer (or within six months after termination of employment by reason of a disability or within 30 days after termination of employment without cause), the unexercised portion of the ISO at the time of death may be exercised only within six months after the date of death, and only to the extent that the Grantee could have otherwise exercised such ISO at the time of death. In such event, such ISO may be exercised by the executor or administrator of the Grantee's estate or by any Holder. (e) No Ten Percent Stockholder shall be granted an Incentive Stock Option unless, at the time such Incentive Stock Option is granted, the Exercise Price thereof is at least 110% of the Fair Market Value of a Share on the Date of Grant and the Incentive Stock Option, by its terms, is not exercisable after the expiration of five years from the Date of Grant. (f) If a Holder exercises an Incentive Stock Option and disposes of any of the Shares received by such Holder as a result of such exercise within two years from the Date of Grant or within one year after the issuance of such Shares to such Holder upon such exercise, such Holder shall notify the Company of such disposition and the consideration received as a result thereof and pay or provide for the withholding taxes on such disposition as required by Section 8.3 below. (g) An Option that is designated as a Nonqualified Option under this Plan shall not be treated as an "incentive stock option" as such term is defined in Section 422(b) of the Code. Section 5.5. EXERCISE. (a) An Option shall be exercised by the delivery of the Option Agreement therefor, with the notice of exercise attached thereto properly completed and duly executed by the Holder, to the Treasurer of the Company, together with the aggregate Exercise Price for the number of Shares as to which the Option is being exercised, after the Option has vested and become exercisable and before it has lapsed and ceased to be exercisable. (b) An Option may be exercised as to less than all of the Shares purchasable thereunder, but not for a fractional share. No Option may be exercised as to less than 100 Shares unless it is exercised as to all of the Shares then available thereunder. If an Option is exercised as to less than all of the Shares purchasable thereunder, a new duly executed Option Agreement reflecting the decreased number of Shares exercisable under such Option, but otherwise of the same tenor, shall be returned to the Holder. (c) The Committee may, in its sole discretion and upon such terms and conditions as it shall determine at or after the Date of Grant, permit the Exercise Price to be paid in cash, by the tender to the Company of Shares owned by the Holder, or by a combination thereof. If the Committee does not make such determination, the Exercise Price shall be paid in cash. (d) If any portion of the Exercise Price of an Option is payable in cash, it may be paid by (i) delivery of a certified or cashier's check payable to the order of the Company in such amount, (ii) wire transfer of immediately available funds to a bank account designated by the Company or (iii) reduction of a debt of the Company to the Holder. (e) If any portion of the Exercise Price of an Option is payable in Shares, it may be paid by delivery of certificates representing a number of Shares having a total fair market value on the date of exercise equal to or greater than the required amount, duly endorsed for transfer with all signatures -6- guaranteed by a medallion signature guarantee. If more Shares than are necessary to pay such Exercise Price based on their fair market value on the date of exercise are delivered to the Company, it shall return to the Holder a certificate for the balance of the whole number of Shares and a check payable to the order of the Holder for any fraction of a Share. Shares may not be delivered to the Company as payment for the exercise of an Option if such Shares have been owned by the Holder (together with his decedent or testator) for less than six months or if the disposition of such Shares would require the giving of a notice under Section 5.4(f) above. (f) Promptly after an Option is properly exercised, the Company shall issue to the Holder a certificate representing the Shares purchased thereunder. Section 5.6. OPTION AGREEMENT. Promptly after the Date of Grant, the Company shall duly execute and deliver to the Grantee an Option Agreement setting forth the terms of the Option. Option Agreements are not negotiable instruments or securities (as such term is defined in Article 8 of the Uniform Commercial Code). Lost and destroyed Option Agreements may be replaced without bond. Section 5.7. NEW HIRES. A person to whom the Company is offering employment may be granted a Nonqualified Option under this Article 5, but any such grant shall lapse if the person does not subsequently become an Employee pursuant to such offer. ARTICLE 6. CONSULTANTS' STOCK OPTIONS. Section 6.1. DETERMINATIONS. The Committee shall determine which Participants shall be granted Options, the number of Shares for which the Options may be exercised, the times when they shall receive them and the terms and conditions of individual Option grants (which need not be identical). Section 6.2. EXERCISE PRICE. The Committee shall determine the Exercise Price of each Option at the time that it is granted, but in no event shall the Exercise Price of an Option be less than the Fair Market Value of a Share on the Date of Grant. If no express determination of the Exercise Price of an Option is made by the Committee, the Exercise Price thereof is equal to the Fair Market Value of a Share on the Date of Grant. Section 6.3. TERM. Subject to the rule set forth in the next sentence, the Committee shall determine the times when an Option vests and the term during which an Option is exercisable at the time that it is granted. No Option shall be exercisable after the expiration of ten years from the Date of Grant. If no express determination of the times when Options are exercisable is made by the Committee: (a) each Option shall vest and first become exercisable as to 25% of the Shares subject to such Option on each of the first four anniversaries of the Date of Grant provided the Grantee has been a Consultant continuously during the time beginning on the Date of Grant and ending on the date when such portion vests and first becomes exercisable and further provided that no portion of an Option shall vest and become exercisable after the termination of the Grantee's consulting relation with his Employer, regardless of the reason for such termination. (b) any portion of an Option that has vested and become exercisable shall lapse and cease to be exercisable upon the earliest of: (i) the expiration of ten years from the Date of Grant, (ii) nine months after the Grantee ceases to be a Consultant because of death or disability, or (iii) three months after the termination without cause of the Grantee's consulting relation with the Employer, or (iv) immediately upon termination of the Grantee's consulting relation with the Employer for cause or by the Grantee's resignation. Section 6.4. NOT INCENTIVE STOCK OPTIONS. An Option under this Article 6 shall not be treated as an Incentive Stock Option. Section 6.5. EXERCISE. (a) An Option shall be exercised by the delivery of the Option Agreement therefor, with the notice of exercise attached thereto properly -7- completed and duly executed by the Holder, to the Treasurer of the Company, together with the aggregate Exercise Price for the number of Shares as to which the Option is being exercised, after the Option has vested and become exercisable and before it has lapsed and ceased to be exercisable. (b) An Option may be exercised as to less than all of the Shares purchasable thereunder, but not for a fractional share. No Option may be exercised as to less than 100 Shares unless it is exercised as to all of the Shares then available thereunder. If an Option is exercised as to less than all of the Shares purchasable thereunder, a new duly executed Option Agreement reflecting the decreased number of Shares exercisable under such Option, but otherwise of the same tenor, shall be returned to the Holder. (c) The Committee may, in its sole discretion and upon such terms and conditions as it shall determine at or after the Date of Grant, permit the Exercise Price to be paid in cash, by the tender to the Company of Shares owned by the Holder, or by a combination thereof. If the Committee does not make such determination, the Exercise Price shall be paid in cash. (d) If any portion of the Exercise Price of an Option is payable in cash, it may be paid by (i) delivery of a certified or cashier's check payable to the order of the Company in such amount, (ii) wire transfer of immediately available funds to a bank account designated by the Company or (iii) reduction of a debt of the Company to the Holder. (e) If any portion of the Exercise Price of an Option is payable in Shares, it may be paid by delivery of certificates representing a number of Shares having a total fair market value on the date of exercise equal to or greater than the required amount, duly endorsed for transfer with all signatures guaranteed by a medallion signature guarantee. If more Shares than are necessary to pay such Exercise Price based on their fair market value on the date of exercise are delivered to the Company, it shall return to the Holder a certificate for the balance of the whole number of Shares and a check payable to the order of the Holder for any fraction of a Share. Shares may not be delivered to the Company as payment for the exercise of an Option if such Shares have been owned by the Holder (together with his decedent or testator) for less than six months or if the disposition of such Shares would require the giving of a notice under Section 5.4(f) above. (f) Promptly after an Option is properly exercised, the Company shall issue to the Holder a certificate representing the Shares purchased thereunder. Section 6.6. OPTION AGREEMENT. Promptly after the Date of Grant, the Company shall duly execute and deliver to the Grantee an Option Agreement setting forth the terms of the Option. Option Agreements are neither negotiable instruments nor securities (as such term is defined in Article 8 of the Uniform Commercial Code). Lost and destroyed Option Agreements may be replaced without bond. ARTICLE 7. DIRECTORS' OPTIONS. Section 7.1. GRANT. On each Meeting Date, an Option shall be automatically granted to each Director who is eligible to receive Options under Section 4.3 above and who attended at least seventy five per cent (75%) of the total number of meetings of the Board of Directors (and committees thereof of which he is a member) during the most recently ended fiscal year of the Company. The number of Shares subject to each Option granted under this Section 7.1 shall be determined by a resolution adopted by the [{Committee}{Board of Directors}] on or before a Meeting Date, uniformly applying to all eligible Directors, which establishes, increases or decreases the number of Shares subject to such Option Any such resolution shall continue in force for the next Meeting Date, unless it is amended or repealed, the Meeting Date is more than ten years after the Effective Date or there are not a sufficient number of Shares remaining available under Section 3.1 above. This Section 7.1 shall not be operative until such time as such a resolution is adopted. Section 7.2. EXERCISE PRICE. The Exercise Price of an Option shall be equal to the Fair Market Value of a Share on the Date of Grant. Section 7.3. TERM. (a) Each Option shall vest and first become exercisable as to 25% of the Shares originally subject to the Option on each Meeting Date which is held -8- more than six months after the Date of Grant if the Grantee is a Director at the time of the adjournment of the meeting of stockholders held on such Meeting Date and further provided that no portion of an Option shall vest and become exercisable after the Grantee has ceased to be a Director, regardless of the reason for such cessation. (b) any portion of an Option that has vested and become exercisable shall lapse and cease to be exercisable upon the earliest of: (i) the expiration of ten years from the Date of Grant, (ii) nine months after the Grantee ceases to be a Director because of his death or disability, (iii) immediately upon resignation by the Grantee as a Director, or (iv) three months after the Grantee ceases to be a Director for any reason other than his death, disability or resignation. Section 7.4. NOT INCENTIVE STOCK OPTIONS. An Option under this Article 7 shall not be treated as an Incentive Stock Option. Section 7.5. EXERCISE. (a) An Option shall be exercised by the delivery of the Option Agreement therefor, with the notice of exercise attached thereto properly completed and duly executed by the Holder, to the Treasurer of the Company, together with the aggregate Exercise Price for the number of Shares as to which the Option is being exercised, after the Option has vested and become exercisable and before it has lapsed and ceased to be exercisable. (b) An Option may be exercised as to less than all of the Shares purchasable thereunder but not for a fractional Share. No Option may be exercised as to less than 100 Shares unless it is exercised as to all of the Shares then available thereunder. If an Option is exercised as to less than all of the Shares purchasable thereunder, a new duly executed Option Agreement reflecting the decreased number of Shares exercisable under such Option, but otherwise of the same tenor, shall be returned to the Holder. (c) The Committee may, in its sole discretion and upon such terms and conditions as it shall determine at or after the Date of Grant, permit the Exercise Price to be paid in cash, by the tender to the Company of Shares owned by the Holder, or by a combination thereof. If the Committee does not make such determination, the Exercise Price shall be paid in cash. (d) If any portion of the Exercise Price of an Option is payable in cash, it may be paid by (i) delivery of a certified or cashier's check payable to the order of the Company in such amount, (ii) wire transfer of immediately available funds to a bank account designated by the Company or (iii) reduction of a debt of the Company to the Holder. (e) If any portion of the Exercise Price of an Option is payable in Shares, it may be paid by delivery of certificates representing a number of Shares having a total fair market value on the date of exercise equal to or greater than the required amount, duly endorsed for transfer with all signatures guaranteed by a medallion signature guarantee. If more Shares than are necessary to pay such Exercise Price based on their fair market value on the date of exercise are delivered to the Company, it shall return to the Holder a certificate for the balance of the whole number of Shares and a check payable to the order of the Holder for any fraction of a Share. Shares may not be delivered to the Company as payment for the exercise of an Option if such Shares have been owned by the Holder (together with his decedent or testator) for less than six months or if the disposition of such Shares would require the giving of a notice under Section 5.4(f) above. (f) Promptly after an Option is properly exercised, the Company shall issue to the Holder a certificate representing the Shares purchased thereunder. Section 7.6. OPTION AGREEMENT. Promptly after the Date of Grant, the Company shall duly execute and deliver to the Grantee an Option Agreement setting forth the terms of the Option. Option Agreements are neither negotiable instruments nor securities (as such term is defined in Article 8 of the Uniform Commercial Code). Lost and destroyed Option Agreements may be replaced without bond. -9- ARTICLE 8. PROVISIONS APPLICABLE TO ALL TYPES OF OPTIONS. Section 8.1. MAXIMUM SHARES. Notwithstanding any other provision of this Plan, the maximum number of Shares with respect to which Options may be granted during any fiscal year of the Company to any Employee shall be 250,000 Shares. Section 8.2. CORPORATE MERGERS AND ACQUISITIONS. The Committee may grant Options having terms and conditions which vary from those specified in the Plan if such Options are granted in substitution for, or in connection with the assumption of, existing options granted by another business entity and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a merger or consolidation of or acquisition of substantially all of the assets or stock of another business entity that is not a Subsidiary of the Company prior to such acquisition, with or by the Company or its Subsidiaries. Section 8.3. WITHHOLDING. The Company shall have the right to withhold from any payments due under any Option or due to any Holder from the Company as compensation or otherwise the amounts of any federal, state or local withholding taxes not paid by the Holder at the time of the exercise or vesting of any Option or upon a disposition of Shares received upon the exercise of an Incentive Stock Option. If cash payments sufficient to allow for withholding of taxes are not made at the time of exercise or vesting of an Option, the Holder exercising such Option shall pay to the Company an amount equal to the withholding required to be made less the withholding otherwise made in cash or, if allowed by the Committee in its discretion and pursuant to rules adopted by the Committee consistent with Section 5.5 above, Shares previously owned by the Holder. The Company may make such other provisions as it deems appropriate to withhold any taxes the Company determines are required to be withheld in connection with the exercise of any Option or upon a disqualifying disposition of Shares received upon the exercise of an Incentive Stock Option, including, but not limited to, the withholding of Shares from an Option upon such terms and conditions as the Committee may provide. The Company may require the Holder to satisfy any relevant withholding requirements before issuing Shares or delivering any Option to the Holder. Section 8.4. DISABILITY. If a Grantee who is an Employee or a Consultant is absent from work because of a physical or mental disability, for purposes of the Plan such Grantee will not be considered to have ended his employment or consulting relationship with the Company while such Grantee has that disability, unless he resigns or terminates such relationship or the Committee decides otherwise. If a Grantee who is a Director is absent from meetings of the Board of Directors because of a physical or mental disability, for purposes of the Plan such Grantee will not be considered to have ended his service with the Board of Directors while such Grantee has that disability, unless he resigns or is not re-elected by the stockholders. Section 8.5. MERGER OF THE COMPANY. If the Company merges or consolidates with or sells substantially all of its assets to a person that was not one of its affiliates before such transaction, or any such unaffiliated person or corporation has publicly announced a tender offer to purchase more than 20% of the outstanding voting securities of the Company, all Options shall immediately vest and may thereafter, but not beyond the ten year period referred to in Sections 5.3, 6.3, and 7.3 above and the five year period referred to in Section 5.4(e) above, be exercised in whole or in part If such transaction is not timely completed, any exercise or vesting of any Option shall be unwound. Section 8.6. SURRENDER AND EXCHANGE. The Committee may permit the voluntary surrender of all or a portion of any Option to be conditioned upon the granting to the Holder of a new Option for the same or a different number of Shares as the Option surrendered, or may require such voluntary surrender as a condition precedent to a grant of a new Option to such Holder. Subject to the provisions of the Plan, such new Option shall be exercisable at the price, during the period and on such other terms and conditions as are specified by the Committee at the time the new Option is granted. Upon surrender, the Option surrendered shall be canceled and the Shares previously subject to it shall be available for the grant of other Options. -10- Section 8.7. ACCELERATION. Notwithstanding anything else in the Plan, the Committee may, in its sole discretion, at any time or from time to time, accelerate the time at which any Options mature or vest or waive any provisions of the Plan relating to the manner of payment or procedures for the exercise or maturity of any Option. Any such acceleration may be made effective (a) with respect to one or more or all Holders, (b) with respect to some or all of the Shares subject to or forming the basis for any Option to any Holder or (c) for a period of time ending at or before the expiration date of any Option. Section 8.8. ACTIONS BY COMMITTEE AFTER GRANT. The Committee shall have, subject to the written consent of the Holder where the action impairs or adversely alters the rights of the Holder, the right, at any time and from time to time after the Date of Grant of any Option, to modify the terms of any Option. ARTICLE 9. GENERAL PROVISIONS. Section 9.1. NO RIGHT TO EMPLOYMENT. Nothing in the Plan or any Option or any instrument executed pursuant to the Plan will confer upon any Grantee any right to continue to be employed by or provide services to the Company or affect the right of the Company to terminate the employment of any Grantee or its other relationship with any Grantee. Nothing in the Plan or any Option or any instrument executed pursuant to the Plan will confer upon any Grantee any right to continue to be a Director of the Company or affect the right of the stockholders to terminate the directorship of any Grantee. Section 9.2. LIMITED LIABILITY. The liability of the Company under this Plan or in connection with any exercise of any Option is limited to the obligations expressly set forth in the Plan and in the grant of any Option, and no term or provision of this Plan nor of any Option shall be construed to impose any duty, obligation or liability on the Company not expressly set forth in the Plan or any grant of any Option. Section 9.3. ASSUMPTION OF OPTIONS. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more other entities as a result of which the Company is not the surviving entity, or upon a sale of substantially all the assets of the Company to another entity, any Options outstanding theretofore granted or sold hereunder must be assumed by the surviving or purchasing entity, with appropriate adjustments as to the number and kind of shares and price. Section 9.4. NO TRANSFER. No Option or other benefit under the Plan may be sold, pledged or otherwise transferred other than by will or the laws of descent and distribution; and no Option may be exercised during the life of the Grantee to whom it was granted except by such Grantee. Section 9.5. EXPENSES. All costs and expenses incurred in connection with the administration of the Plan including any excise tax imposed upon the transfer of Shares pursuant to the exercise of an Option shall be borne by the Company. Section 9.6. NOTICES. Notices and other communications required or permitted to be made under the Plan shall be in writing and shall be deemed to have been duly given only if personally delivered or if sent by first class mail addressed (a) if to a Holder, at his residence address set forth in the records of the Company or (b) if to the Company, to its President at its principal executive office. Section 9.7. THIRD PARTIES. Nothing herein expressed or implied is intended or shall be construed to give any person other than the Holders any rights or remedies under this Plan. -11- Section 9.8. SATURDAYS, SUNDAYS AND HOLIDAYS. Where this Plan authorizes or requires a payment or performance on a Saturday, Sunday or public holiday, such payment or performance shall be deemed to be timely if made on the next succeeding business day; PROVIDED, HOWEVER, that this Section 9.8 shall not be construed to extend the ten year period referred to in Sections 5.3, 6.3, and 7.3 above or the five year period referred to in Section 5.4(e) above. Section 9.9. RULES OF CONSTRUCTION. The captions and section numbers appearing in this Plan are inserted only as a matter of convenience. They do not define, limit or describe the scope or intent of the provisions of this Plan. In this Plan words in the singular number include the plural, and in the plural include the singular; and words of the masculine gender include the feminine and the neuter and, when the sense so indicates, words of the neuter gender may refer to any gender. Section 9.10. GOVERNING LAW. The validity, terms, performance and enforcement of this Plan shall be governed by laws of the State of Delaware that are applicable to agreements negotiated, executed, delivered and performed solely in the State of Delaware. Section 9.11. EFFECTIVE DATE OF THE PLAN. The Plan shall become effective upon its approval by the affirmative vote of the holders of a majority of the outstanding Shares present or represented and entitled to vote at a meeting of the stockholders of the Company. Options may be granted by the Committee before such approval, but all Options so granted shall be conditioned on such approval and shall be void if such approval is not given within 12 months after the Effective Date. Section 9.12. AMENDMENT AND TERMINATION. No Option shall be granted under the Plan more than ten years after the Effective Date. The Board of Directors may at any time terminate the Plan or make such amendment of the Plan as it may deem advisable; PROVIDED, HOWEVER, that no amendment shall be effective without the approval of the stockholders of the Company by the affirmative vote of the holders of a majority of the outstanding Shares present or represented and entitled to vote at a meeting of stockholders duly held, if it were to: (a) authorize the grant of Options that may be exercised more than ten years after the Date of Grant or that have an Exercise Price which is less than the Fair Market Value of a Share on the Date of Grant; or (b) materially increase the number of Shares which may be issued under the Plan; and, FURTHER, PROVIDED, HOWEVER, that no amendment or termination of the Plan shall be effective to materially impair the rights of a Holder under any Option granted before the adoption of such amendment or termination by the Board of Directors, without the written consent of such Holder. No termination or amendment of this Plan or any Option nor waiver of any right or requirement under this Plan or any Option shall be binding on the Company unless it is in a writing duly entered into its records and executed by a duly authorized Officer. -12- EXHIBIT A EMPLOYEES' OPTION AGREEMENT ROYAL PRECISION, INC. 15170 N. HAYDEN ROAD, SUITE 1 SCOTTSDALE, AZ 85260 (Date of Grant) (Name of Grantee) (Street) (City, State, Zip) Congratulations. You have been granted a Stock Option under the Company's Stock Option Plan dated October 5, 1997 (the "PLAN") on the following terms: 1. NUMBER OF SHARES. The number of Shares of Common Stock of the Company that you may purchase under this Option is: (Number) 2. EXERCISE PRICE. The Exercise Price to purchase Shares under this Option is: $(Price) per Share. 3. VESTING. [25%] of the Shares originally subject to this Option will vest and become exercisable on the first [four] anniversaries of the date of this Agreement if you have been an Employee of the Company continuously from the date of this Agreement through the date when such portion of the Option vests[ subject to the special rule referred to in paragraph 5 below]. No portion of this Option shall vest and become exercisable after your employment with your Employer has terminated, regardless of the reason for such termination. 4. LAPSE. This Option will lapse and cease to be exercisable upon the earliest of: (i) the expiration of 10 years from the date of this Agreement, (ii) nine [six] months after you cease to be an Employee because of your death or disability, (iii) three months after a termination without cause of your employment with your Employer, or (iv) immediately upon termination of your employment with your Employer by such Employer for cause or by your resignation. 5. TAXATION. This Option is [an Incentive Stock Option][a Nonqualified Option]. [Because this Option is an Incentive Stock Option vesting of a portion of this Option or of other Incentive Stock Options held by you may be deferred under a special rule set forth in Section 5.4 (c) of the Plan. If you exercise this Option and dispose of any of the Shares received by you as a result of such exercise within two years from the date above or within one year after the issuance of such Shares to you upon such exercise, you must notify the Company of such disposition and the amount received as a result thereof and pay or provide for the withholding taxes on such disposition.] [You will have taxable income upon the exercise of this Option. At that time, you must pay to the Company an amount equal to the required federal, state, and local tax withholding less any withholding otherwise made from your salary or bonus. You must satisfy any relevant withholding requirements before the Company issues Shares to you.] 6. EXERCISE. This Option may be exercised by the delivery of this Agreement, with the notice of exercise attached hereto properly completed and signed by you, to the Treasurer of the Company, together with the aggregate Exercise Price for the number of Shares as to which the Option is being exercised, after the Option has become exercisable and before it has ceased to be exercisable. The Exercise Price must be paid in cash by (a) delivery of a certified or cashier's check payable to the order of the Company in such amount, (b) wire transfer of immediately available funds to a bank account designated by the Company, or (c) reduction of a debt of the Company to you. This Option may be exercised as to less than all of the Shares purchasable hereunder, but not for a fractional share, nor may it be exercised as to less than 100 Shares unless it is exercised as to all of the Shares then available hereunder. [You have been granted a ____% Tax Offset Payment.] 7. NO TRANSFER. This Option may not be sold, pledged nor otherwise transferred other than by will or the laws of descent and distribution; and it may be exercised during your lifetime only by you. This Agreement is neither a negotiable instrument nor a security (as such term is defined in Article 8 of the Uniform Commercial Code). 8. NOT AN EMPLOYMENT AGREEMENT. This Agreement is not an employment agreement and nothing contained herein gives you any right to continue to be employed by or provide services to the Company or affects the right of the Company to terminate your employment or other relationship with you. 9. PLAN CONTROLS. This Agreement is an Option Agreement (as such term is defined in the Plan) under Article 5 of the Plan. The terms of this Agreement are subject to, and controlled by, the terms of the Plan, as it is now in effect or may be amended from time to time hereafter, which are incorporated herein as if they were set forth in full. Any words or phrases defined in the Plan have the same meanings in this Agreement. The Company will provide you with a copy of the Plan promptly upon your written or oral request made to its Treasurer. 10. MISCELLANEOUS. This Agreement sets forth the entire agreement of the parties with respect to the subject matter hereof and it supersedes and discharges all prior agreements (written or oral) and negotiations and all contemporaneous oral agreements concerning such subject matter. This Agreement may not be amended or terminated except by a writing signed by the party against whom any such amendment or termination is sought. If any one or more provisions of this Agreement shall be found to be illegal or unenforceable in any respect, the validity and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. This Agreement shall be governed by the laws of the State of Delaware. Please acknowledge your acceptance of this Agreement by signing the enclosed copy in the space provided below and returning it promptly to the Company. ROYAL PRECISION, INC. By: _________________________________________ (Name of Officer), (Title) Accepted and Agreed to as of the date first set forth above: - -------------------------------------------- (Name of Grantee) -2- OPTION EXERCISE FORM The undersigned hereby exercises the right to purchase ________________ shares of Common Stock of the Company pursuant to the Option Agreement dated (Date of Grant) under the Company's Stock Option Plan dated October 5, 1997. The undersigned hereby represents and warrants to the Company that he is not exercising such rights or planning to transfer such shares while in the possession of material inside information relating to the Company. Date: _____________________ ________________________________________ (Name of Holder) ______________________________________________________________ Sign and complete this Option Exercise Form and deliver it to: ROYAL PRECISION, INC. Attn.: Treasurer 15170 N. Hayden Road, Suite 1 Scottsdale, AZ 85260 together with the Exercise Price in cash by (a) delivery of a certified or cashier's check payable to the order of the Company in such amount, (b) wire transfer of immediately available funds to a bank account designated by the Company, or (c) reduction of a debt of the Company to you. -3- EXHIBIT B CONSULTANTS' OPTION AGREEMENT ROYAL PRECISION, INC. 15170 N. HAYDEN ROAD, SUITE 1 SCOTTSDALE, AZ 85260 (Date of Grant) (Name of Grantee) (Street) (City, State, Zip) Congratulations. You have been granted a Stock Option under the Company's Stock Option Plan dated October 5, 1997 (the "PLAN") on the following terms: 1. NUMBER OF SHARES. The number of Shares of Common Stock of the Company that you may purchase under this Option is: (Number) 2. EXERCISE PRICE. The exercise price to purchase Shares under this Option is: $(Price) per Share. 3. VESTING. [25%] of the Shares originally subject to this Option will vest and become exercisable on the first [four] anniversaries of the date of this Agreement if you have been a Consultant to the Company continuously from the date of this Agreement through the date when such portion of the Option vests. No portion of this Option shall vest and become exercisable after the termination of the your consulting relation with your Employer, regardless of the reason for such termination. 4. LAPSE. This Option will lapse and cease to be exercisable upon the earliest of: (i) the expiration of 10 years from the date of this Agreement, (ii) nine months after you cease to be a Consultant because of your death or disability, (iii) three months after a termination without cause of your consulting relationship with your Employer; or (iv) immediately upon termination of your consulting relationship with your Employer for cause or by your resignation. 5. TAXATION. This Option is a Nonqualified Option. You will have taxable income upon the exercise of this Option. At that time, you must pay to the Company an amount equal to the required federal, state, and local tax withholding less any withholding otherwise made from compensation payable to you. You must satisfy any relevant withholding requirements before the Company issues Shares to you. 6. EXERCISE. This Option may be exercised by the delivery of this Agreement, with the notice of exercise attached hereto properly completed and signed by you, to the Treasurer of the Company, together with the aggregate Exercise Price for the number of Shares as to which the Option is being exercised, after the Option has become exercisable and before it has ceased to be exercisable. The Exercise Price must be paid in cash by (a) delivery of a certified or cashier's check payable to the order of the Company in such amount, (b) wire transfer of immediately available funds to a bank account designated by the Company, or (c) reduction of a debt of the Company to you. This Option may be exercised as to less than all of the Shares purchasable hereunder, but not for a fractional share, nor may it be exercised as to less than 100 Shares unless it is exercised as to all of the Shares then available hereunder. 7. NO TRANSFER. This Option may not be sold, pledged nor otherwise transferred other than by will or the laws of descent and distribution; and it may be exercised during your lifetime only by you. This Agreement is neither a negotiable instrument nor a security (as such term is defined in Article 8 of the Uniform Commercial Code). 8. NOT A CONSULTING AGREEMENT. This Agreement is not a consulting agreement and nothing contained herein gives you any right to continue to provide services to the Company or affect the right of the Company to terminate the consulting relationship with you. 9. PLAN CONTROLS. This Agreement is an Option Agreement (as such term is defined in the Plan) under Article 6 of the Plan. The terms of this Agreement are subject to, and controlled by, the terms of the Plan, as it is now in effect or may be amended from time to time hereafter, which are incorporated herein as if they were set forth in full. Any words or phrases defined in the Plan have the same meanings in this Agreement. The Company will provide you with a copy of the Plan promptly upon your written or oral request made to its Treasurer. 10. MISCELLANEOUS. This Agreement sets forth the entire agreement of the parties with respect to the subject matter hereof and it supersedes and discharges all prior agreements (written or oral) and negotiations and all contemporaneous oral agreements concerning such subject matter. This Agreement may not be amended or terminated except by a writing signed by the party against whom any such amendment or termination is sought. If any one or more provisions of this Agreement shall be found to be illegal or unenforceable in any respect, the validity and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. This Agreement shall be governed by the laws of the State of Delaware. Please acknowledge your acceptance of this Agreement by signing the enclosed copy in the space provided below and returning it promptly to the Company. ROYAL PRECISION, INC. By: ______________________________________ (Name of Officer), (Title) Accepted and Agreed to as of the date first set forth above: - ------------------------------------------------------------ (Name of Grantee) -2- OPTION EXERCISE FORM The undersigned hereby exercises the right to purchase ________________ shares of Common Stock of the Company pursuant to the Option Agreement dated (Date of Grant) under the Company's Stock Option Plan dated October 5, 1997. Date: __________________________ ________________________________________ (Name of Holder) - -------------------------------------------------------------- Sign and complete this Option Exercise Form and deliver it to: ROYAL PRECISION, INC. Attn.: Treasurer 15170 N. Hayden Road, Suite 1 Scottsdale, AZ 85260 together with the Exercise Price in cash by (a) delivery of a certified or cashier's check payable to the order of the Company in such amount, (b) wire transfer of immediately available funds to a bank account designated by the Company, or (c) reduction of a debt of the Company to you. -3- EXHIBIT C DIRECTORS' OPTION AGREEMENT ROYAL PRECISION, INC. 15170 N. HAYDEN ROAD, SUITE 1 SCOTTSDALE, AZ 85260 (Date of Grant) (Name of Grantee) (Street) (City, State, Zip) Congratulations. You have been granted a Stock Option under the Company's Stock Option Plan dated October 5, 1997 (the "PLAN") on the following terms: 1. NUMBER OF SHARES. The number of Shares of Common Stock of the Company that you may purchase under this Option is:(Number) 2. EXERCISE PRICE. The exercise price to purchase Shares under this Option is: $(Price) per Share. 3. VESTING. [25%] of the Shares originally subject to this Option will vest and become exercisable on each Meeting Date which occurs more than six months after the date of this Agreement if you are a Director at the time of the adjournment of the meeting of stockholders held on such Meeting Date. 4. LAPSE. This Option will lapse and cease to be exercisable upon the earliest of: (i) the expiration of 10 years from the date of this Agreement, (ii) nine months after you cease to be a Director because of your death or Disability, (iii) immediately upon your resignation as a Director, or (iv) three months after you cease to be a Director for any reason other than your death, disability or resignation. 5. TAXATION. This Option is a Nonqualified Option. You will have taxable income upon the exercise of this Option. 6. EXERCISE. This Option may be exercised by the delivery of this Agreement, with the notice of exercise attached hereto properly completed and signed by you, to the Treasurer of the Company, together with the aggregate Exercise Price for the number of Shares as to which the Option is being exercised, after the Option has become exercisable and before it has ceased to be exercisable. The Exercise Price must be paid in cash by (a) delivery of a certified or cashier's check payable to the order of the Company in such amount, (b) wire transfer of immediately available funds to a bank account designated by the Company, or (c) reduction of a debt of the Company to you. This Option may be exercised as to less than all of the Shares purchasable hereunder, but not for a fractional share, nor may it be exercised as to less than 100 Shares unless it is exercised as to all of the Shares then available hereunder. 7. NO TRANSFER. This Option may not be sold, pledged nor otherwise transferred other than by will or the laws of descent and distribution; and it may be exercised during your lifetime only by you. This Agreement is neither a negotiable instrument nor a security (as such term is defined in Article 8 of the Uniform Commercial Code). 8. NOT AN EMPLOYMENT AGREEMENT. This Agreement is not an employment agreement and nothing contained herein gives you any right to continue to be a Director of the Company or affect the right of the stockholders to terminate your directorship. 9. PLAN CONTROLS. This Agreement is an Option Agreement (as such term is defined in the Plan) under Article 7 of the Plan. The terms of this Agreement are subject to, and controlled by, the terms of the Plan, as it is now in effect or may be amended from time to time hereafter, which are incorporated herein as if they were set forth in full. Any words or phrases defined in the Plan have the same meanings in this Agreement. The Company will provide you with a copy of the Plan promptly upon your written or oral request made to its Treasurer. 10. MISCELLANEOUS. This Agreement sets forth the entire agreement of the parties with respect to the subject matter hereof and it supersedes and discharges all prior agreements (written or oral) and negotiations and all contemporaneous oral agreements concerning such subject matter. This Agreement may not be amended or terminated except by a writing signed by the party against whom any such amendment or termination is sought. If any one or more provisions of this Agreement shall be found to be illegal or unenforceable in any respect, the validity and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. This Agreement shall be governed by the laws of the State of Delaware. Please acknowledge your acceptance of this Agreement by signing the enclosed copy in the space provided below and returning it promptly to the Company. ROYAL PRECISION, INC. By: ______________________________________ (Name of Officer), (Title) Accepted and Agreed to as of the date first set forth above: - ------------------------------------------- (Name of Grantee) OPTION EXERCISE FORM The undersigned hereby exercises the right to purchase ________________ shares of Common Stock of the Company pursuant to the Option Agreement dated (Date of Grant) under the Company's Stock Option Plan, dated October 5, 1997. Date: _____________________ ________________________________________ (Name of Holder) - -------------------------------------------------------------- Sign and complete this Option Exercise Form and deliver it to: ROYAL PRECISION, INC. Attn.: Treasurer 15170 N. Hayden Road, Suite 1 Scottsdale, AZ 85260 together with the Exercise Price in cash by (a) delivery of a certified or cashier's check payable to the order of the Company in such amount, (b) wire transfer of immediately available funds to a bank account designated by the Company, or (c) reduction of a debt of the Company to you. EX-10.2 4 SECOND AMEND. TO CREDIT & SECURITY AGREE. SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMENT This Amendment, dated as of November 10, 1999, is made by and between FM PRECISION GOLF MANUFACTURING CORP., a Delaware corporation, and FM PRECISION GOLF SALES CORP., a Delaware corporation (collectively, jointly and severally, the "Borrower"), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation, formerly known as Norwest Business Credit, Inc. (the "Lender"). Recitals The Borrower and the Lender have entered into a Credit and Security Agreement dated as of October 9, 1998, as amended by that certain Amendment to Credit and Security Agreement and Waiver of Defaults dated April 13, 1999 (collectively, the "Credit Agreement"). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified. The Borrower has requested that certain amendments be made to the Credit Agreement, which the Lender is willing to make pursuant to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. DEFINED TERMS. Capitalized terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. 2. AMENDMENTS. The Credit Agreement is hereby amended as follows: (a) The definition of "Base Rate" contained in Section 1.1 of the Credit Agreement is hereby deleted in its entirety and replaced with the following definition of "Prime Rate": "PRIME RATE" means the rate of interest publicly announced from time to time by Wells Fargo Bank, N.A. as its "prime rate" or, if such bank ceases to announce a rate so designated, any similar successor rate designated by the Lender. (b) Each and every reference to "Base Rate" contained in the Credit Agreement is hereby deleted and replaced with the term "Prime Rate". (c) The definition of "Borrowing Base" contained in Section 1.1 of the Credit Agreement is hereby deleted in its entirety and replaced as follows: "BORROWING BASE" means, at any time the lesser of: (a) the Maximum Line; or (b) subject to change from time to time in the Lender's sole discretion, the sum of: 1 (A) the lesser of (x) 85% of Eligible Accounts, or (y) $5,000,000.00, plus (B) the lesser of (x) 60% of Eligible Inventory (exclusive of Eligible Raw Materials Inventory), or (y) $2,500,000.00 from March 1 through September 30 of each year and $3,500,000.00 from October 1 of each year through February 28 of each subsequent year. (C) the lesser of (x) 50% of Eligible Raw Materials Inventory, or (y) $2,500,000.00 from March 1 through September 30 of each year and $3,500,000.00 from October 1 of each year through February 28 of each subsequent year. (d) The definition of "Debt Service Coverage Ratio" contained in Section 1.1 of the Credit Agreement is hereby deleted and replaced as follows: "Debt Service Coverage Ratio" means the ratio of (i) the sum of (A) Funds from Operations plus (estimated taxes less cash tax payments) plus (B) Interest Expense minus (C) unfinanced portion of Capital Expenditures (exclusive of not more than $750,000.00 of Capital Expenditures (the "Wastewater Capital Expenditures") related to the construction of a wastewater treatment facility) to (ii) the sum of (A) Current Maturities of Long Term Debt (actually paid during the period) plus (B) Interest Expense. The Borrower acknowledges that in the event the Wastewater Capital Expenditures are not refinanced in full on or before May 30, 2000, the Wastewater Capital Expenditures shall be included in said ratio. (e) The year "2001" contained in the definition of "Maturity Date" contained in Section 1.1 of the Credit Agreement is hereby deleted and replaced with the year "2002". (f) The figure "$4,000,000.00" contained in the definition of "Maximum Line" contained in Section 1.1 of the Credit Agreement is hereby deleted and replaced with the figure "$5,000,000.00". (g) The definition of "Revolving Floating Rate" contained in Section 1.1 of the Credit Agreement is hereby deleted and replaced as follows: "Revolving Floating Rate" means an annual rate equal to the sum of the Prime Rate plus one-quarter of one percent (0.25%), which annual rate shall change when and as the Prime Rate changes. (h) The definition of "Term Floating Rate" contained in Section 1.1 of the Credit Agreement is hereby deleted and replaced as follows: 2 "Term Floating Rate" means an annual rate equal to the sum of the Prime Rate plus three-quarters of one percent (0.75%), which annual rate shall change when and as the Prime Rate changes. (i) There is hereby added to Section 1.1 of the Credit Agreement a new definition for "Wells Fargo Bank, N.A." which provides as follows: "Wells Fargo Bank, N.A." means Wells Fargo Bank, National Association. (j) The introductory sentence of Section 2.8 of the Credit Agreement is hereby deleted and replaced as follows: INTEREST; MINIMUM INTEREST CHARGE; DEFAULT INTEREST; PARTICIPATIONS; USURY. Interest accruing on the Notes shall be due and payable in arrears on the first day of each month. (k) Section 2.9(a) of the Credit Agreement is hereby deleted and replaced as follows: (a) UNUSED LINE FEE. For the purposes of this Section 2.9(b), "Unused Amount" means the $4,500,000.00 reduced by (1) outstanding Revolving Advances and (2) the L/C Amount, until such time as the outstanding Revolving Advances are greater than $4,500,000.00 at which point (regardless of whether or not at some point thereafter the outstanding Revolving Advances are less than $4,500,000.00) the term "Unused Amount" means the Maximum Line reduced by (1) outstanding Revolving Advances and (2) the L/C Amount. (l) The figure "$60.00" contained in Section 2.9(d) of the Credit Agreement is hereby deleted and replaced with the figure "$75.00". (m) Sections 2.13(a) and 2.13(b) of the Credit Agreement are hereby deleted and replaced as follows: (a) TERMINATION AND LINE REDUCTION FEES. If the Credit Facility is terminated for any reason as of a date other than the Maturity Date, or the Borrower reduces the Maximum Line, the Borrower shall pay the Lender a fee in an amount equal to a percentage of $4,500,000.00, until such time as the outstanding Revolving Advances are greater than $4,500,000.00, at which time said figure shall automatically be increased to the Maximum Line regardless of whether or not at some point thereafter the outstanding Revolving Advances are less than $4,500,000.00 (or the reduction, as the case may be) as follows: (i) three percent (3%) if the termination or reduction occurs on or before September 30, 2000; (ii) two percent (2%) if the termination or reduction occurs after September 30, 2000 but on or before September 30, 2001; and (iii) one percent (1%) if the termination or reduction occurs after September 30, 2001. 3 (b) PREPAYMENT FEES. If the Term Note is prepaid as of a date other than the Maturity Date for any reason except in accordance with Section 2.7, the Borrower shall pay to the Lender a fee in an amount equal to a percentage of the amount prepaid as follows: (i) three percent (3%) if prepayment occurs on or before September 30, 2000; (ii) two percent (2%) if prepayment occurs after September 30, 2000 but on or before September 30, 2001; and (iii) one percent (1%) if prepayment occurs after September 30, 2001. (n) Section 6.12 of the Credit Agreement is hereby deleted in its entirety and replaced as follows: DEBT SERVICE COVERAGE RATIO. The Borrower covenants that FMM and FMS and the Covenant Entities shall, as of the last day of each fiscal quarter, on and after November 30, 1999, maintain a consolidated average minimum debt service coverage ratio (based upon the period set forth below) as follows: Quarter Ending Debt Service Coverage Ratio -------------- --------------------------- November 30, 1999 .0001 based upon the immediately preceding six month period February 29, 2000 .50 to 1 based upon the immediately preceding nine month period May 31, 2000 and each May 31 1.05 to 1 based upon the immediately thereafter preceding twelve month period August 31, 2000 and each August 31 1.05 to 1 based upon the immediately thereafter preceding twelve month period November 30, 2000 and each 1.05 to 1 based upon the immediately November 30 thereafter preceding twelve month period February 28, 2001 and each 1.05 to 1 based upon the immediately February 28 thereafter preceding twelve month period (o) Section 6.15 of the Credit Agreement is hereby deleted in its entirety and replaced as follows: MONTHLY NET INCOME/NET LOSS. The Borrower covenants that beginning with June, 1999, and continuing for each month thereafter, FMM, FMS and the Covenant Entities shall achieve an aggregate consolidated Net Income of not less than (or in the event a Net Loss is permitted, a Net Loss of not more than) the amounts set forth below for each month as measured from the last day of the immediately preceding month. 4 Month Net Income/(Net Loss) ----- --------------------- June, 1999 $50,000.00 July, 1999 $0.00 August, 1999 ($400,000.00) September, 1999 ($150,000.00) October, 1999 ($200,000.00) November, 1999 ($200,000.00) December, 1999 ($350,000.00) January, 2000 ($100,000.00) February, 2000 $0.00 March, 2000 $50,000.00 April, 2000 $75,000.00 May, 2000 $75,000.00 June of each year thereafter $0.00 July of each year thereafter $0.00 August of each year thereafter ($300,000.00) September of each year thereafter ($150,000.00) October of each year thereafter ($200,000.00) November of each year thereafter ($100,000.00) December of each year thereafter ($350,000.00) January of each year thereafter ($50,000.00) February of each year thereafter $0.00 March of each year thereafter $0.00 April of each year thereafter $0.00 May of each year thereafter $0.00 (p) Section 6.16 of the Credit Agreement is hereby deleted without replacement. 5 (q) Section 7.4(a)(iv) of the Credit Agreement is hereby deleted in its entirety and replaced as follows: (iv) loans, advances or any other credits at any time disbursed and outstanding after the date of this Agreement shown on the balance sheet of Borrower granted to the Covenant Entities for fair and adequate consideration which will not increase from the date hereof by more than in the aggregate (i) $1,500,000.00 through September 30, 2000, (ii) $2,250,000.00 after September 30, 2000 through September 30, 2001, and (iii) $3,000,000.00 after September 30, 2001 through the Termination Date. This subsection (iv) shall not apply to the payment of Expense Reimbursements, as hereafter defined, to Guarantor. (r) Section 7.22 of the Credit Agreement is hereby deleted without replacement. (s) Section 7.10 of the Credit Agreement is hereby deleted and replaced as follows: CAPITAL EXPENDITURES. During each fiscal year, FMM, FMS and the Covenant Entities will not incur or contract to incur Capital Expenditures in the aggregate of more than $2,000,000.00. In addition, during each fiscal year, FMM, FMS and the Covenant Entities will not incur or contract to incur Capital Expenditures paid with working capital in the aggregate of more than $1,250,000.00. The Borrower acknowledges that in the event the Wastewater Capital Expenditures are not refinanced in full on or before May 30, 2000, the Wastewater Capital Expenditures shall be considered Capital Expenditures paid with working capital. (t) Section 7.19 of the Credit Agreement is hereby deleted in its entirety and replaced as follows: PAYMENTS TO AFFILIATES. Neither FMM nor FMS shall, without the express written consent of Lender, which consent may be granted or withheld in Lender's sole discretion, make any transfer, conveyance, loan or payment of any kind ("Payment") to FMM (from FMS), FMS (from FMM), to any Covenant Entity or to any other Affiliate which is not for fair and adequate consideration or which is in the aggregate in excess of $1,500,000.00 for any fiscal year. Notwithstanding the above, FMM and FMS may make Payments to Guarantor on their behalf so long as such Payments are a reimbursement of expenses which are related solely to the costs associated with FMM's and FMS's normal and customary day to day operations ("Expense Reimbursements"). 6 (u) Section 7.17 of the Credit Agreement is hereby deleted in its entirety and replaced as follows: SALARIES. The Borrower will not pay excessive or unreasonable salaries, bonuses, commissions, consultant fees or other compensation; or increase the salary, bonus, commissions, consultant fees or other compensation of any director in a director capacity, officer or any member of their families, by more than 20% in any one year, either individually or for all such persons in the aggregate, or pay any such increase from any source other than profits earned in the year of payment. Notwithstanding the above, so long as there is not a then existing Event of Default or Default Period, Borrower may make payments to Borrower's executives in accordance with the terms of that certain Executive Bonus Plan dated September 14, 1999. The Executive Bonus Plan will not be amended without the consent of the Lender. 3. SATISFACTION OF CONDITIONS. Upon the terms and subject to the conditions set forth in this Amendment, the Lender hereby acknowledges that the conditions contained in the Lender's October 14, 1999 letter have been satisfied. 4. AMENDMENT FEE. The Borrower shall pay the Lender a fully earned, non-refundable fee in the amount of $10,000.00 in consideration of the Lender's execution of this Amendment. Said fee shall be due and payable as follows: (i) $5,000.00 as of the date hereof, and (ii) $5,000.00 as of that date on which the outstanding Revolving Advances are greater than $4,500,000.00. 5. NO OTHER CHANGES. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance or letter of credit thereunder. 6. CONDITIONS PRECEDENT. This Amendment, and the waiver set forth in Paragraph 4 hereof, shall be effective when the Lender shall have received an executed original hereof, together with each of the following, each in substance and form acceptable to the Lender in its sole discretion: (a) The replacement revolving note substantially in the form of Exhibit A-2 hereto, duly executed on behalf of the Borrower (the "Replacement Note"). (b) The Acknowledgment and Agreement of Guarantor set forth at the end of this Amendment, duly executed by the Guarantor. (c) A Certificate of the Secretary of the Borrower certifying as to (i) the resolutions of the board of directors of the Borrower approving the execution and delivery of this Amendment, (ii) the fact that the articles of incorporation and bylaws of the Borrower, which were certified and delivered to the Lender pursuant to the Certificate of Authority of the Borrower's secretary or assistant secretary dated as of October 9, 1998 in connection with the execution and delivery of the Credit Agreement continue in full force and effect and have not been amended or otherwise modified except as set forth in the Certificate to be delivered, and (iii) certifying that the officers and agents 7 of the Borrower who have been certified to the Lender, pursuant to the Certificate of Authority of the Borrower's secretary or assistant secretary dated as of October 9, 1998, as being authorized to sign and to act on behalf of the Borrower continue to be so authorized or setting forth the sample signatures of each of the officers and agents of the Borrower authorized to execute and deliver this Amendment and all other documents, agreements and certificates on behalf of the Borrower. (d) An opinion of the Borrower's counsel as to the matters set forth in paragraphs 7(a) and 7(b) hereof and as to such other matters as the Lender shall require. 7. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants to the Lender as follows: (a) The Borrower has all requisite corporate power and authority to execute this Amendment and the Replacement Note and to perform all of its obligations hereunder, and this Amendment and the Replacement Note have been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Amendment and the Replacement Note have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 8. WAIVER OF INTEREST. That portion of accrued but unpaid interest (which accrued commencing on January 1, 1999 through the date hereof at a rate of 1% of the Revolving Advances and 1% of the Term Advances) which was, prior to the effectiveness of this Amendment, due and payable by Borrower upon the prepayment in whole of the Obligations is hereby forgiven by Lender. 9. REFERENCES. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. Upon the satisfaction of each of the conditions set forth in paragraph 5 hereof, the definition of "Revolving Note" and all references thereto in the Credit Agreement shall be deemed amended to describe the Replacement Note, which Replacement Note shall be issued by the Borrower to the Lender in replacement, renewal and amendment, but not in repayment, of the Note. 8 10. NO WAIVER. Except as set forth above with respect to Lender's October 14, 1999 letter, the execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default or Default Period under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment. 11. RELEASE. The Borrower, and Guarantor by signing the Acknowledgment and Agreement of Guarantor set forth below, each hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower or Guarantor has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 12. COSTS AND EXPENSES. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses, and the fee required under paragraph 6 hereof. 13. MISCELLANEOUS. This Amendment and the Acknowledgment and Agreement of Guarantor may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. WELLS FARGO BUSINESS CREDIT, INC. By /s/ Clifton Moschnik ------------------------------------- Its Business Banking Officer 9 FM PRECISION GOLF MANUFACTURING CORP., a Delaware corporation By /s/ Thomas A. Schneider ------------------------------------- Its President FM PRECISION GOLF SALES CORP., a Delaware corporation By /s/ Thomas A. Schneider ------------------------------------- Its President 10 ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR The undersigned, a guarantor of the indebtedness of FM Precision Golf Manufacturing Corp., and FM Precision Golf Sales Corp., each Delaware corporations (collectively, jointly and severally, the "Borrowers") to Wells Fargo Business Credit, Inc., formerly known as Norwest Business Credit, Inc. (the "Lender") pursuant to a Guaranty dated as of October 9, 1998 (the "Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii) consents to the terms (including without limitation the release set forth in paragraph 11 of the Amendment) and execution thereof; (iii) reaffirms its obligations to the Lender pursuant to the terms of its Guaranty; and (iv) acknowledges that the Lender may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of the Borrower, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under the Guaranty for all of the Borrowers' present and future indebtedness to the Lender. ROYAL PRECISION, INC., a Delaware corporation By /s/ Thomas A. Schneider ------------------------------------- Its President 11 EXHIBIT A-2 REPLACEMENT REVOLVING NOTE $5,000,000.00 Phoenix, Arizona _________, 1999 For value received, the undersigned, FM PRECISION GOLF MANUFACTURING CORP., a Delaware corporation, and FM PRECISION GOLF SALES CORP., a Delaware corporation (collectively, jointly and severally, "Borrower"), hereby jointly and severally promise to pay on the Termination Date under the Credit Agreement (defined below), to the order of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its main office in Phoenix, Arizona, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of FIVE MILLION and N0/100 Dollars ($5,000,000.00) or, if less, the aggregate unpaid principal amount of all Revolving Advances made by the Lender to the Borrower under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Credit and Security Agreement dated October 8, 1998, as amended from time to time (as the same may hereafter be amended, supplemented or restated from time to time, the "Credit Agreement") by and between the Lender and the Borrower. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Revolving Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. Both entities constituting the Borrower hereby jointly and severally agree to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. This Note, upon its execution, is a replacement of, issued in substitution and not in satisfaction of a promissory note, and a portion of the indebtedness hereunder is the same indebtedness evidenced by that certain Revolving Note in the amount of $4,000,000.00, made by the undersigned, which Revolving Note was executed pursuant to the Credit Agreement. The indebtedness evidenced by said Revolving Note is not extinguished hereby. 12 Presentment or other demand for payment, notice of dishonor and protest are expressly waived. FM PRECISION GOLF MANUFACTURING CORP., a Delaware corporation By ------------------------------------- Its --------------------------------- FM PRECISION GOLF SALES CORP., a Delaware corporation By ------------------------------------- Its --------------------------------- 13 EX-10.3 5 3RD AMEND. TO CREDIT & SECURITY AGRMNT THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT This Amendment, dated as of November 10, 1999, is made by and between ROYAL GRIP, INC., a Nevada corporation and ROYAL GRIP HEADWEAR COMPANY, a Nevada corporation, formerly known as ROXXI, INC. (collectively, jointly and severally, the "Borrower"), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation, formerly known as Norwest Business Credit, Inc. (the "Lender"). Recitals The Borrower and the Lender have entered into an Amended and Restated Credit and Security Agreement dated as of October 9, 1998, as amended by that certain Amendment to Amended and Restated Credit and Security Agreement and Waiver of Defaults dated March 16, 1999, as amended by that certain Second Amendment to Credit and Security Agreement and Waiver of Defaults dated April 14, 1999 (collectively, the "Credit Agreement"). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified. The Borrower has requested that certain amendments be made to the Credit Agreement, which the Lender is willing to make pursuant to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Defined Terms. Capitalized terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. 2. Amendments. The Credit Agreement is hereby amended as follows: (a) The definition of "Base Rate" contained in Section 1.1 of the Credit Agreement is hereby deleted in its entirety and replaced with the following definition of "Prime Rate": "Prime Rate" means the rate of interest publicly announced from time to time by Wells Fargo Bank, N.A. as its "prime rate" or, if such bank ceases to announce a rate so designated, any similar successor rate designated by the Lender. (b) Each and every reference to "Base Rate" contained in the Credit Agreement is hereby deleted and replaced with the term "Prime Rate". (c) The definition of Borrowing Base contained in Section 1.1 of the Credit Agreement is hereby deleted in its entirety and replaced as follows: "Borrowing Base" means, at any time the lesser of: (a) the Maximum Line; or 1 (b) subject to change from time to time in the Lender's sole discretion, the sum of: (A) the lesser of (x) 80% of Eligible Accounts, or (y) $1,500,000.00, plus (B) the lesser of (x) 60% of Eligible Royal Grip Inventory, or (y) $1,000,000.00. (d) The definition of "Debt Service Coverage Ratio" contained in Section 1.1 of the Credit Agreement is hereby deleted and replaced as follows: "Debt Service Coverage Ratio" means the ratio of (i) the sum of (A) Funds from Operations plus (estimated taxes less cash tax payments) plus (B) Interest Expense minus (C) unfinanced portion of Capital Expenditures (exclusive of not more than $750,000.00 of Capital Expenditures (the "Wastewater Capital Expenditures") incurred by FMM related to the construction of a wastewater treatment facility) to (ii) the sum of (A) Current Maturities of Long Term Debt (actually paid during the period) plus (B) Interest Expense. The Borrower acknowledges that in the event the Wastewater Capital Expenditures are not refinanced in full on or before May 30, 2000, the Wastewater Capital Expenditures shall be included in said ratio. (e) The year "2001" contained in the definition of "Maturity Date" contained in Section 1.1 of the Credit Agreement is hereby deleted and replaced with the year "2002". (f) The definition of "Revolving Floating Rate" contained in Section 1.1 of the Credit Agreement is hereby deleted and replaced as follows: "Revolving Floating Rate" means an annual rate equal to the sum of the Prime Rate plus one-quarter of one percent (0.25%), which annual rate shall change when and as the Prime Rate changes. (g) The definition of "Roxxi" contained in Section 1.1 of the Credit Agreement is hereby deleted without replacement. (h) There is hereby added to Section 1.1 of the Credit Agreement a new definition of "Royal Headwear" which provides as follows: "Royal Headwear" means Royal Grip Headwear Company, a Nevada corporation formerly known as Roxxi, Inc. (i) Each and every reference to "Roxxi" contained in the Credit Agreement is hereby deleted and replaced with "Royal Headwear". 2 (j) The definition of "Term Floating Rate" contained in Section 1.1 of the Credit Agreement is hereby deleted and replaced as follows: "Term Floating Rate" means an annual rate equal to the sum of the Prime Rate plus three-quarters of one percent (0.75%), which annual rate shall change when and as the Prime Rate changes. (k) There is hereby added to Section 1.1 of the Credit Agreement a new definition for "Wells Fargo Bank, N.A." which provides as follows: "Wells Fargo Bank, N.A." means Wells Fargo Bank, National Association. (l) The introductory sentence of Section 2.8 of the Credit Agreement is hereby deleted and replaced as follows: INTEREST; MINIMUM INTEREST CHARGE; DEFAULT INTEREST; PARTICIPATIONS; USURY. Interest accruing on the Notes shall be due and payable in arrears on the first day of each month. (m) The dollar figure "$6,500.00" contained in Section 2.8(c) of the Credit Agreement is hereby deleted and replaced with the dollar figure "$4,000.00". (n) The figure "$60.00" contained in Section 2.9(d) of the Credit Agreement is hereby deleted and replaced with the figure "$75.00". (o) Sections 2.13(a) and 2.13(b) of the Credit Agreement are hereby deleted and replaced as follows: (a) TERMINATION AND LINE REDUCTION FEES. If the Credit Facility is terminated for any reason as of a date other than the Maturity Date, or the Borrower reduces the Maximum Line, the Borrower shall pay the Lender a fee in an amount equal to a percentage of the Maximum Line (or the reduction, as the case may be) as follows: (i) three percent (3%) if the termination or reduction occurs on or before September 30, 2000; (ii) two percent (2%) if the termination or reduction occurs after September 30, 2000, but on or before September 30, 2001; and (iii) one percent (1%) if the termination or reduction occurs after September 30, 2001. (b) PREPAYMENT FEES. If the Term Note is prepaid as of any date other than the Maturity Date for any reason except in accordance with Section 2.7, the Borrower shall pay to the Lender a fee in an amount equal to a percentage of the amount prepaid as follows: (i) three percent (3%) if prepayment occurs on or before September 30, 2000; (ii) two percent (2%) if prepayment occurs after September 30, 2000 but on or before September 30, 2001; and (iii) one percent (1%) if prepayment occurs after September 30, 2001. 3 (p) Section 6.12 of the Credit Agreement is hereby deleted in its entirety and replaced as follows: DEBT SERVICE COVERAGE RATIO. The Borrower covenants that Royal Grip and Royal Headwear and the Covenant Entities shall, as of the last day of each fiscal quarter, on and after November 30, 1999, maintain a consolidated average minimum debt service coverage ratio (based upon the period set forth below) as follows: Quarter Ending Debt Service Coverage Ratio -------------- --------------------------- November 30, 1999 .0001 based upon the immediately preceding six month period February 29, 2000 .50 to 1 based upon the immediately preceding nine month period May 31, 2000 and each May 31 1.05 to 1 based upon the immediately thereafter preceding twelve month period August 31, 2000 and each August 31 1.05 to 1 based upon the immediately thereafter preceding twelve month period November 30, 2000 and each 1.05 to 1 based upon the immediately November 30 thereafter preceding twelve month period February 28, 2001 and each 1.05 to 1 based upon the immediately February 28 thereafter preceding twelve month period (q) Section 6.15 of the Credit Agreement is hereby deleted in its entirety and replaced as follows: MONTHLY NET INCOME/NET LOSS. The Borrower covenants that beginning with June, 1999, and continuing for each month thereafter, Royal Grip and Royal Headwear and the Covenant Entities shall achieve an aggregate consolidated Net Income of not less than (or in the event a Net Loss is permitted, a Net Loss of not more than) the amounts set forth below for each month as measured from the last day of the immediately preceding month. Month Net Income/(Net Loss) ----- --------------------- June, 1999 $50,000.00 July, 1999 $0.00 August, 1999 ($400,000.00) September, 1999 ($150,000.00) October, 1999 ($200,000.00) November, 1999 ($200,000.00) 4 December, 1999 ($350,000.00) January, 2000 ($100,000.00) February, 2000 $0.00 March, 2000 $50,000.00 April, 2000 $75,000.00 May, 2000 $75,000.00 June of each year thereafter $0.00 July of each year thereafter $0.00 August of each year thereafter ($300,000.00) September of each year thereafter ($150,000.00) October of each year thereafter ($200,000.00) November of each year thereafter ($100,000.00) December of each year thereafter ($350,000.00) January of each year thereafter ($50,000.00) February of each year thereafter $0.00 March of each year thereafter $0.00 April of each year thereafter $0.00 May of each year thereafter $0.00 (r) Section 6.16 of the Credit Agreement is hereby deleted without replacement. (s) Section 7.4(a)(iv) of the Credit Agreement is hereby deleted in its entirety and replaced as follows: (iv) loans, advances or any other credits at any time disbursed and outstanding after the date of this Agreement shown on the balance sheet of Borrower granted to the Covenant Entities for fair and adequate consideration which will not increase from the date hereof by more than in the aggregate (i) $1,500,000.00 through September 30, 2000, (ii) $2,250,000.00 after September 30, 2000 through September 30, 2001, and (iii) $3,000,000.00 after September 30, 2001 through the Termination Date. This subsection (iv) shall not apply to the payment of Expense Reimbursements, as hereafter defined, to Guarantor. 5 (t) Section 7.10 of the Credit Agreement is hereby deleted and replaced as follows: CAPITAL EXPENDITURES. During each fiscal year, Royal Grip, Royal Headwear, and the Covenant Entities will not incur or contract to incur Capital Expenditures in the aggregate of more than $2,000,000.00. In addition, during each fiscal year, Royal Grip, Royal Headwear, and the Covenant Entities will not incur or contract to incur Capital Expenditures paid with working capital in the aggregate of more than $1,250,000.00. The Borrower acknowledges that in the event the Wastewater Capital Expenditures are not refinanced in full on or before May 30, 2000, the Wastewater Capital Expenditures shall be considered Capital Expenditures paid with working capital by the Covenant Entities. (u) Section 7.22 of the Credit Agreement is hereby deleted without replacement. (v) Section 7.19 of the Credit Agreement is hereby deleted in its entirety and replaced as follows: PAYMENTS TO AFFILIATES. Neither Royal Grip nor Royal Headwear shall, without the express written consent of Lender, which consent may be granted or withheld in Lender's sole discretion, make any transfer, conveyance, loan or payment of any kind ("Payment") to Royal Grip (from Royal Headwear), Royal Headwear (from Royal Grip), to any Covenant Entity or to any other Affiliate which is not for fair and adequate consideration or which is in the aggregate in excess of $1,500,000.00 for any fiscal year. Notwithstanding the above, Royal Grip and Royal Headwear may make Payments to Guarantor on their behalf so long as such Payments are a reimbursement of expenses which are related solely to the costs associated with Royal Grip's and Royal Headwear's normal and customary day to day operations ("Expense Reimbursements"). (w) Section 7.17 of the Credit Agreement is hereby deleted in its entirety and replaced as follows: SALARIES. The Borrower will not pay excessive or unreasonable salaries, bonuses, commissions, consultant fees or other compensation; or increase the salary, bonus, commissions, consultant fees or other compensation of any director in a director capacity, officer or any member of their families, by more than 20% in any one year, either individually or for all such persons in the aggregate, or pay any such increase from any source other than profits earned in the year of payment. Notwithstanding the above, so long as there is not a then existing Event of Default or Default Period, Borrower may make payments to Borrower's executives in accordance with the terms of that certain Executive Bonus Plan dated September 14, 1999. The Executive Bonus Plan will not be amended without the consent of the Lender. 6 3. SATISFACTION OF CONDITIONS. Upon the terms and subject to the conditions set forth in this Amendment, the Lender hereby acknowledges that the conditions contained in the Lender's October 14, 1999 letter have been satisfied. 4. NO OTHER CHANGES. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance or letter of credit thereunder. 5. CONDITIONS PRECEDENT. This Amendment, and the waiver set forth in Paragraph 4 hereof, shall be effective when the Lender shall have received an executed original hereof, together with each of the following, each in substance and form acceptable to the Lender in its sole discretion: (a) The Acknowledgment and Agreement of Guarantor set forth at the end of this Amendment, duly executed by the Guarantor. (b) A Certificate of the Secretary of the Borrower certifying as to (i) the resolutions of the board of directors of the Borrower approving the execution and delivery of this Amendment, (ii) the fact that the articles of incorporation and bylaws of the Borrower, which were certified and delivered to the Lender pursuant to the Certificate of Authority of the Borrower's secretary or assistant secretary dated as of October 9, 1998 in connection with the execution and delivery of the Credit Agreement continue in full force and effect and have not been amended or otherwise modified except as set forth in the Certificate to be delivered, and (iii) certifying that the officers and agents of the Borrower who have been certified to the Lender, pursuant to the Certificate of Authority of the Borrower's secretary or assistant secretary dated as of October 9, 1998, as being authorized to sign and to act on behalf of the Borrower continue to be so authorized or setting forth the sample signatures of each of the officers and agents of the Borrower authorized to execute and deliver this Amendment and all other documents, agreements and certificates on behalf of the Borrower. (c) An opinion of the Borrower's counsel as to the matters set forth in paragraphs 6(a) and 6(b) hereof and as to such other matters as the Lender shall require. 6. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants to the Lender as follows: (a) The Borrower has all requisite corporate power and authority to execute this Amendment and to perform all of its obligations hereunder, and this Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Amendment has been duly authorized by all necessary corporate action and does not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or 7 (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 7. WAIVER OF INTEREST. That portion of accrued but unpaid interest (which accrued commencing on January 1, 1999 through the date hereof at a rate of 1% of the Revolving Advances and 1% of the Term Advances) which was, prior to the effectiveness of this Amendment, due and payable by Borrower upon the prepayment in whole of the Obligations is hereby forgiven by Lender. 8. REFERENCES. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 9. NO WAIVER. Except as set forth above with respect to Lender's October 14, 1999 letter, the execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default or Default Period under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment. 10. RELEASE. The Borrower, and Guarantor by signing the Acknowledgment and Agreement of Guarantor set forth below, each hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower or Guarantor has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 11. COSTS AND EXPENSES. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses. 8 12. Miscellaneous. This Amendment and the Acknowledgment and Agreement of Guarantor may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. WELLS FARGO BUSINESS CREDIT, INC. By /s/ Clifton Moschnik ------------------------------------- Its Business Banking Officer ROYAL GRIP, INC., a Nevada corporation By /s/ Thomas A. Schneider ------------------------------------- Its President ROYAL GRIP HEADWEAR COMPANY, a Nevada corporation By /s/ Thomas A. Schneider ------------------------------------- Its President 9 ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR The undersigned, a guarantor of the indebtedness of Royal Grip, Inc. and Royal Grip Headwear Company, formerly known as Roxxi, Inc., each a Nevada corporation (collectively, jointly and severally, the "Borrowers") to Wells Fargo Business Credit, Inc., formerly known as Norwest Business Credit, Inc. (the "Lender") pursuant to a Guaranty dated as of October 9, 1998 (the "Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii) consents to the terms (including without limitation the release set forth in paragraph 10 of the Amendment) and execution thereof; (iii) reaffirms its obligations to the Lender pursuant to the terms of its Guaranty; and (iv) acknowledges that the Lender may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of the Borrower, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under the Guaranty for all of the Borrowers' present and future indebtedness to the Lender. ROYAL PRECISION, INC., a Delaware corporation By /s/ Thomas A. Schneider ------------------------------------- Its President 10 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 6-MOS MAY-31-2000 JUN-01-1999 NOV-30-1999 1 62 0 3,894 381 5,533 10,292 6,687 1,284 24,453 4,423 0 0 0 6 13,805 24,453 12,936 12,936 8,665 3,367 0 0 298 716 358 358 0 0 0 358 0.06 0.06
-----END PRIVACY-ENHANCED MESSAGE-----