-----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, NFOwgBJ1W3Nk02qAf42Chsl5nAVlwhnDGBJofl0GGbxUgmZyK5ajFt5TXyhwqfDL cJzxNXEmDJ5gYzxwdmhBwQ== 0000950147-00-000545.txt : 20000412 0000950147-00-000545.hdr.sgml : 20000412 ACCESSION NUMBER: 0000950147-00-000545 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000411 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: 598324 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 2/29/00 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 February 29, 2000 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 April 7, 2000 ------------------- ---------------------------- Common Stock, par value $0.001 5,676,201 Shares PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ROYAL PRECISION, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands)
FEBRUARY 29, MAY 31, 2000 1999 -------- -------- ASSETS (UNAUDITED) CURRENT ASSETS: Cash $ 21 $ 184 Accounts receivable, net of allowance for doubtful accounts of $217 at February 29, 2000 and $433 at May 31, 1999, respectively 3,986 4,617 Inventories 6,041 4,514 Other current assets 103 783 Deferred income taxes 647 647 -------- -------- Total current assets 10,798 10,745 -------- -------- PROPERTY, PLANT AND EQUIPMENT: Land 123 123 Furniture, fixtures and office equipment 500 499 Buildings and improvements 840 670 Machinery and equipment 4,246 4,144 Equipment held for sale 500 -- Construction in progress 524 402 -------- -------- 6,733 5,838 Less - Accumulated depreciation (1,165) (929) -------- -------- 5,568 4,909 -------- -------- GOODWILL, net 8,493 8,857 -------- -------- DEFERRED INCOME TAXES 70 70 -------- -------- OTHER ASSETS 77 29 -------- -------- Total assets $ 25,006 $ 24,610 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations $ 906 $ 1,203 Accounts payable 1,792 1,839 Accrued salaries and benefits 957 595 Accrued pension liability 224 251 Other accrued expenses 1,013 1,079 -------- -------- Total current liabilities 4,892 4,967 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, net of current portion 6,260 6,191 -------- -------- Total liabilities 11,152 11,158 -------- --------
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COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $0.001 par value; 1,000,000 shares authorized (reduced from 5,000,000 shares on October 19, 1999); no shares issued -- -- Common stock, $0.001 par value; 10,000,000 shares authorized (reduced from 50,000,000 shares on October 19, 1999); 5,676,201 and 5,667,375 shares issued and outstanding at February 29, 2000 and May 31, 1999, respectively 6 6 Additional paid-in capital 13,906 13,897 Accumulated deficit (11) (404) Accumulated other comprehensive loss (47) (47) -------- -------- Total stockholders' equity 13,854 13,452 -------- -------- Total liabilities and stockholders' equity $ 25,006 $ 24,610 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. -3- ROYAL PRECISION, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (dollars in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- --------------------------- FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- NET SALES: Golf club shafts $ 6,066 $ 4,178 $ 16,938 $ 12,220 Golf club grips 949 940 3,013 2,787 ----------- ----------- ----------- ----------- 7,015 5,118 19,951 15,007 ----------- ----------- ----------- ----------- COST OF SALES: Golf club shafts 4,337 3,075 11,587 8,295 Golf club grips 691 589 2,106 1,566 ----------- ----------- ----------- ----------- 5,028 3,664 13,693 9,861 ----------- ----------- ----------- ----------- Gross profit 1,987 1,454 6,258 5,146 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,695 1,486 4,819 4,610 MERGER RELATED EXPENSES -- 503 -- 503 AMORTIZATION OF GOODWILL 121 129 364 387 ----------- ----------- ----------- ----------- Operating income (loss) 171 (664) 1,075 (354) INTEREST EXPENSE 159 206 457 595 OTHER INCOME 76 74 186 199 ----------- ----------- ----------- ----------- Income (loss) from continuing operations before provision for (benefit from) income taxes 88 (796) 804 (750) PROVISION FOR (BENEFIT FROM) INCOME TAXES 53 16 411 (39) ----------- ----------- ----------- ----------- Income (loss) from continuing operations 35 (812) 393 (711) DISCONTINUED OPERATIONS: Loss from operations of Roxxi, Inc. -- (127) -- (516) Loss on disposal of assets of Roxxi, Inc. -- (1,214) -- (1,214) ----------- ----------- ----------- ----------- Net income (loss) $ 35 $ (2,153) $ 393 $ (2,441) =========== =========== =========== =========== BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: Income (loss) from continuing operations $ 0.01 $ (0.14) $ 0.07 $ (0.13) Loss from discontinued operations -- (0.24) -- (0.30) ----------- ----------- ----------- ----------- Net income (loss) $ 0.01 $ (0.38) $ 0.07 $ (0.43) =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING USED IN COMPUTING DILUTED PER SHARE INFORMATION 5,843,157 5,667,375 5,807,007 5,643,818 =========== =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. -4- ROYAL PRECISION, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
NINE MONTHS ENDED -------------------------- FEBRUARY 29, FEBRUARY 28, 2000 1999 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 393 $(2,441) Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations-- Loss from discontinued operations -- 516 Loss on sale of discontinued operations -- 1,214 Depreciation and amortization 901 703 Loss on retirement and sale of fixed assets 18 -- Changes in operating assets and liabilities-- Accounts receivable, net 811 965 Inventories (1,027) (1,682) Other assets 132 (47) Accounts payable and accrued expenses 392 399 Other liabilities -- (44) ------- ------- Net cash provided by (used in) operating activities of continuing operations 1,620 (417) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment, net (1,564) (754) Payments from net investment in capital lease -- 198 Merger costs -- (162) ------- ------- Net cash used in investing activities of continuing operations (1,564) (718) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt -- 5,140 Proceeds from exercise of common stock options 9 17 Borrowings under lines-of-credit, net 749 515 Repayments of long-term debt and capital lease obligations (977) (4,245) ------- ------- Net cash (used in) provided by financing activities of continuing operations (219) 1,427 ------- ------- NET CASH USED IN DISCONTINUED OPERATIONS -- (299) ------- ------- DECREASE IN CASH (163) (7) CASH, beginning of period 184 28 ------- ------- CASH, end of period $ 21 $ 21 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for-- Interest $ 473 $ 649 ======= ======= Income taxes $ 41 $ 82 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. -5- 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 accounting principles generally accepted in the United States. These condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto for the fiscal 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. The Company manufactures and distributes steel golf club shafts and designs and distributes golf club grips and graphite golf club shafts for sale to original equipment manufacturers ("OEMs") and to distributors and retailers for use in the replacement market. 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 accounting principles generally accepted in the United States 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 nine months ended February 29, 2000 and February 28, 1999 were as follows (in thousands): -6- THREE MONTHS ENDED ---------------------------- FEBRUARY 29, FEBRUARY 28, 2000 1999 ------------ ------------ Basic: Average common shares outstanding 5,675 5,667 Diluted: Dilutive effect of stock options 168 -- ----- ----- Average common shares outstanding 5,843 5,667 ===== ===== NINE MONTHS ENDED ---------------------------- FEBRUARY 29, FEBRUARY 28, 2000 1999 ------------ ------------ Basic: Average common shares outstanding 5,671 5,644 Diluted: Dilutive effect of stock options 136 -- ----- ----- Average common shares outstanding 5,807 5,644 ===== ===== For the three and nine months ended February 28, 1999, basic average common shares outstanding for discontinued operations were 5,667,375 and 5,643,818, respectively. Basic and diluted earnings (loss) per share were the same for all periods presented. Loss per share for the three and nine months ended February 28, 1999 was not affected by stock options because their effect was anti-dilutive. 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 February 29, 2000 and May 31, 1999 consisted of the following (in thousands): FEBRUARY 29, 2000 MAY 31, 1999 ----------------- ------------ Raw materials $ 525 $ 471 Work-in-process 2,121 1,566 Finished goods 3,395 2,477 ------ ------ $6,041 $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 $2.9 million at February 29, 2000 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 -7- 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 February 29, 2000, FMP had $3.5 million outstanding under its revolving line-of-credit and $1.0 million 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 $0.5 million at February 29, 2000 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 February 29, 2000, RG had $0.4 million outstanding under its revolving line-of-credit and $0.3 million available for additional borrowings. The RG line-of-credit expires in September 2002. 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 (8.75% at February 29, 2000) 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 certain 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 February 29, 2000. On March 24, 2000, the FMP and RG credit facilities were amended and restated. The amount available for borrowings under the FMP facility was increased by $0.5 million. This additional borrowing capacity will be reduced by $0.1 million monthly beginning April 2000 and will expire on July 31, 2000. Also, an additional FMP term loan of up to $0.4 million was established to finance certain capital expenditures currently in process to increase the existing manufacturing capacity of pro grade steel golf club shafts. Funds under this loan can be advanced upon the completion of the capital project which is anticipated to be in the second quarter of fiscal year 2001. 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 (in thousands): THREE MONTHS ENDED FEBRUARY 29, 2000 ------------------------------------ GOLF CLUB GOLF CLUB SHAFTS GRIPS TOTAL ------ ----- ----- Net sales $ 6,066 $ 949 $ 7,015 Operating income (loss) 263 (92) 171 Depreciation and amortization 87 211 298 Total assets for reportable segments $13,390 $17,674 $31,064 Assets of discontinued operation 34 Elimination of investment in subsidiaries (6,092) ------- Consolidated total assets $25,006 ======= -8- THREE MONTHS ENDED FEBRUARY 28, 1999 ------------------------------------ GOLF CLUB GOLF CLUB SHAFTS GRIPS TOTAL ------ ----- ----- Net sales $ 4,178 $ 940 $ 5,118 Operating loss (521) (143) (664) Depreciation and amortization 76 162 238 Total assets for reportable segments $10,752 $21,054 $31,806 Assets of discontinued operation 630 Elimination of investment in subsidiaries (7,213) ------- Consolidated total assets $25,223 ======= NINE MONTHS ENDED FEBRUARY 29, 2000 ------------------------------------ GOLF CLUB GOLF CLUB SHAFTS GRIPS TOTAL ------ ----- ----- Net sales $16,938 $3,013 $19,951 Operating income (loss) 1,260 (185) 1,075 Depreciation and amortization 260 641 901 NINE MONTHS ENDED FEBRUARY 28, 1999 ------------------------------------ GOLF CLUB GOLF CLUB SHAFTS GRIPS TOTAL ------ ----- ----- Net sales $12,220 $2,787 $ 15,007 Operating loss (239) (115) (354) Depreciation and amortization 213 490 703 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 manufacturing equipment, finished goods 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 nine months ended February 29, 2000, royalties of $30,000 and $119,000 were recorded, respectively, and are reflected as other income in the accompanying condensed consolidated statements of operations. 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"). Since January 1997, RG has purchased the majority of its supply of non-cord, injected grips from Acushnet. The Company believes that its current inventory of grips together with purchases from other existing vendors will provide a sufficient supply of grips to satisfy customer demand through December 31, 2000. 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 from Acushnet. 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. -9- During the three months ended February 29, 2000, Acushnet completed the production requirements of the Termination Agreement. Finished goods totaling approximately $1.2 million were transported from Acushnet to RG's warehouses. RG utilized a $0.5 million purchase credit it received in conjunction with the Termination Agreement to acquire the grips from Acushnet. Additionally, the grip manufacturing equipment was removed from Acushnet's plant and transported to storage on RG's property. This equipment is no longer being used and is held for sale with a book value of $0.5 million. 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 $503,000 related to the RP-Coyote Merger during the three months ended February 28, 1999. 10. LITIGATION: 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. -10- 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 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 which carries on its business operations through its 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. The Company manufactures and distributes steel golf club shafts and designs and distributes golf club grips and graphite golf club shafts for sale to original equipment manufacturers ("OEMs") and to distributors and retailers for use in the replacement market. RP's products are sold throughout the United States as well as internationally, primarily in Japan, Australia, the United Kingdom and Canada. 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 FEBRUARY 29, 2000 COMPARED TO THE THREE MONTHS ENDED FEBRUARY 28, 1999 -- NET SALES. Net sales from continuing operations for the three months ended February 29, 2000 were $7.0 million, an increase of $1.9 million or 37% over net sales from continuing operations of $5.1 million during the corresponding period in 1999. Net sales of golf club shafts increased by $1.9 million or 45% and net sales of golf club grips were consistent at $0.9 million. 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 $1.7 million or 44%. Sales of the Company's lower priced, commercial grade golf club shafts increased by $0.2 million or 57%. COST OF SALES. Cost of goods sold from continuing operations for the three months ended February 29, 2000 was $5.0 million, an increase of $1.3 million or 37% over cost of goods sold from continuing operations of $3.7 million during the corresponding period in 1999. Golf club shafts cost of goods sold increased by $1.3 million or 41% as a result of higher total net sales. Golf club grips cost of goods sold increased by $0.1 million or 17% due to additional costs -11- associated with the opening of a new West Coast distribution center in December 1999. Acushnet Rubber Company ("Acushnet") had previously warehoused and distributed RG's grips under the manufacturing and supply agreement. RG has assumed responsibility for these functions following the termination of the Acushnet contracts. Approximately $50,000 in additional costs was incurred related to the new distribution facility during the three months ended February 29, 2000 compared to the corresponding period of 1999. Also, depreciation expense of $60,000 was recorded on the grip manufacturing equipment while in use by Acushnet during the three months ended February 29, 2000 whereas no depreciation expense was recorded during the corresponding period in 1999 when the Acushnet capital lease contract was in effect. GROSS PROFIT. Gross profit from continuing operations for the three months ended February 29, 2000 was $2.0 million, an increase of $0.5 million or 37% over gross profit from continuing operations of $1.5 million for the corresponding period in 1999. Gross profit from sales of golf club shafts increased by $0.6 million or 57% to $1.7 million due to higher total net sales. As a percentage of sales, the gross profit on sales of golf club shafts increased from 26% to 29%. Gross profit from sales of golf club grips decreased by $0.1 million or 27% to $0.3 million despite consistent net sales. As a percentage of sales, the gross profit on sales of golf club grips decreased from 37% to 27%. The decreased margin reflects additional costs incurred related to the new distribution facility and additional depreciation expense recorded during the three months ended February 29, 2000 compared to the corresponding period in 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the three months ended February 29, 2000 were $1.7 million, an increase of 14% over selling, general and administrative expenses of $1.5 million during the corresponding period in 1999. The $0.2 million increase reflects additional marketing and advertising costs associated with a television commercial campaign which was developed and first aired during the three months ended February 29, 2000. As a percentage of sales, selling, general and administrative expenses declined from 29% during the three months ended February 28, 1999 to 24% during the corresponding period in 2000. MERGER RELATED EXPENSES. The Company incurred professional fees of $503,000 related to the RP-Coyote Merger during the three months ended February 28, 1999. In June 1999, the 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. 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 $129,000 during the three months ended February 28, 1999 to $121,000 during the corresponding period ended February 29, 2000. INTEREST EXPENSE. Average outstanding borrowings were comparable during the three month periods ended February 29, 2000 and February 28, 1999 and, therefore, interest expense was consistent at $0.2 million. OTHER INCOME. Other income of $76,000 for the three months ended February 29, 2000 is principally comprised of royalties earned on sales of Roxxi headwear products. Other income of $74,000 for the three months ended February 28, 1999 is principally comprised of interest income on the Acushnet capital lease receivable. PROVISION FOR INCOME TAXES. Provisions of $53,000 and $16,000 were recorded for taxes on income from continuing operations during the three month periods ended February 29, 2000 and February 28, 1999, respectively. 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 and recorded a loss provision of $1.2 million during the three months ended February 28, 1999. Losses from the operations of Roxxi for the three months ended February 28, 1999 were $0.1 million. NINE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THE NINE MONTHS ENDED FEBRUARY 28, 1999 -- NET SALES. Net sales from continuing operations for the nine months ended February 29, 2000 were $20.0 million, an increase of $5.0 million or 33% over net sales from continuing operations of $15.0 million during the corresponding period in 1999. Net sales of golf club shafts increased by $4.8 million or 39% and net sales of golf club grips increased by $0.2 million or 8%. The increased -12- 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 $5.2 million or 53%. Sales of the Company's lower priced, commercial grade golf club shafts decreased by $0.5 million or 22%. Sales of these shafts were negatively impacted when 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 these shafts in future periods. These efforts resulted in increased sales of commercial grade shafts of $0.2 million during the three months ended February 29, 2000 compared to the corresponding period of 1999. The increased golf club grip sales reflect the success of a new buffed product introduced to the Japanese market in November 1998. Sales of this product for the nine months ended February 29, 2000 were $1.0 million compared to $0.2 million during the corresponding period in 1999. COST OF SALES. Cost of goods sold from continuing operations for the nine months ended February 29, 2000 was $13.7 million, an increase of $3.8 million or 39% over cost of goods sold from continuing operations of $9.9 million during the corresponding period in 1999. Golf club shafts cost of goods sold increased by $3.3 million or 40% and golf club grips cost of goods sold increased by $0.5 million or 35%, both as a result of higher total net sales. GROSS PROFIT. Gross profit from continuing operations for the nine months ended February 29, 2000 was $6.3 million, an increase of $1.1 million or 22% over gross profit from continuing operations of $5.2 million for the corresponding period in 1999. Gross profit from sales of golf club shafts increased by $1.4 million or 36% to $5.4 million due to higher total net sales. As a percentage of sales, the gross profit on sales of golf club shafts was unchanged at 32%. Gross profit from sales of golf club grips decreased by $0.3 million or 26% to $0.9 million despite an increase in net sales. As a percentage of sales, the gross profit on sales of golf club grips decreased from 44% to 30%. 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 34% of sales during the nine months ended February 29, 2000 compared to only 8% during the corresponding period in 1999. Additionally, depreciation expense of approximately $0.2 million was recorded on the grip manufacturing equipment while in use by Acushnet during the nine months ended February 29, 2000 whereas no depreciation expense was recorded during the corresponding period in 1999 when the Acushnet capital lease contract was in effect. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the nine months ended February 29, 2000 were $4.8 million, an increase of 5% over selling, general, and administrative expenses of $4.6 million during the corresponding period in 1999. The $0.2 million increase reflects additional marketing and advertising costs associated with a television commercial campaign which was developed and first aired during the three months ended February 29, 2000. As a percentage of sales, selling, general and administrative expenses declined from 31% during the nine months ended February 28, 1999 to 24% during the corresponding period in 2000. MERGER RELATED EXPENSES. The Company incurred professional fees of $503,000 related to the RP-Coyote Merger during the nine months ended February 28, 1999. In June 1999, the 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. 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 $387,000 during the nine months ended February 28, 1999 to $364,000 during the corresponding period in 2000. 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 $0.6 million interest expense during the nine months ended February 28, 1999. Interest expense during the corresponding period in 2000 was $0.5 million. OTHER INCOME. Other income of $186,000 for the nine months ended February 29, 2000 is principally comprised of royalties earned on sales of Roxxi headwear products. Other income of $199,000 for the nine months ended February 28, 1999 is principally comprised of interest income on the Acushnet capital lease receivable. PROVISION FOR (BENEFIT FROM) INCOME TAXES. A provision of $411,000 was recorded for taxes on income from continuing operations during the nine months ended -13- February 29, 2000 and a benefit of $39,000 was recorded on the loss from continuing operations during the corresponding period in 1999. 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 and recorded a loss provision of $1.2 million during the nine months ended February 28, 1999. Losses from the operations of Roxxi for the nine months ended February 28, 1999 were $0.5 million. LIQUIDITY AND CAPITAL RESOURCES -- At February 29, 2000, RP had working capital of $5.9 million and a current ratio of 2.2 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 $2.9 million at February 29, 2000 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 February 29, 2000, FMP had $3.5 million outstanding under its revolving line-of-credit and $1.0 million 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 $0.5 million at February 29, 2000 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 February 29, 2000, RG had $0.4 million outstanding under its revolving line-of-credit and $0.3 million available for additional borrowings. The RG line-of-credit expires in September 2002. 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 (8.75% at February 29, 2000) 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 certain 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 February 29, 2000. On March 24, 2000, the FMP and RG credit facilities were amended and restated. The amount available for borrowings under the FMP facility was increased by $0.5 million. This additional borrowing capacity will be reduced by $0.1 million monthly beginning April 2000 and will expire on July 31, 2000. Also, an additional FMP term loan of up to $0.4 million was established to finance certain capital expenditures currently in process to increase the existing manufacturing capacity of pro grade steel golf club shafts. Funds under this loan can be advanced upon the completion of the capital project which is anticipated to be in the second quarter of fiscal year 2001. 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 nine months ended February 29, 2000, net cash provided by operating activities was $1.6 million which primarily resulted from net income of $0.4 million, depreciation and amortization of $0.9 million, a decrease in accounts receivable of $0.8 million and an increase in accounts payable and accrued expenses of $0.4 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 nine months ended February 29, 2000 was $1.6 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 $2.2 million. The Company is assessing its steel golf club 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 to increase production capacity for pro grade steel golf club shafts. -14- Net cash used in financing activities for the nine months ended February 29, 2000, was $0.2 million resulting from repayments of long term debt and capital lease obligations of $1.0 million and net borrowings under lines-of-credit of $0.8 million. YEAR 2000 ASSESSMENT -- During the two year period ended December 31, 1999, 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 and approximately $20,000 to evaluate the Company's internal systems for Year 2000 problems. The Company did not experience any disruptions in its ability to conduct business due to Year 2000 problems. Also, no customers, suppliers, or financial institutions have informed the Company of any Year 2000 issues that would materially affect the Company. BUSINESS ENVIRONMENT AND FUTURE RESULTS -- RELIANCE ON THIRD PARTY SUPPLIERS. In May 1999, RG and Acushnet executed a mutual release agreement terminating their manufacturing and supply agreement and capital lease agreement (the "Termination Agreement"). Since January 1997, RG has purchased the majority of its supply of non-cord, injected grips from Acushnet. The Company believes that its current inventory of grips together with purchases from other existing vendors will provide a sufficient supply of grips to satisfy customer demand through December 31, 2000. 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 from Acushnet. 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. During the three months ended February 29, 2000, Acushnet completed the production requirements of the Termination Agreement. Finished goods totaling approximately $1.2 million were transported from Acushnet to RG's warehouses. RG utilized a $0.5 million purchase credit it received in conjunction with the Termination Agreement to acquire the grips from Acushnet. Additionally, the grip manufacturing equipment was removed from Acushnet's plant and transported to storage on RG's property. This equipment is no longer being used and is held for sale with a book value of $0.5 million. 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 manufacturing equipment, finished goods 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 nine months ended February 29, 2000, royalties of $30,000 and $119,000 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 February 29, 2000, 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 $18,000 and $51,000 on interest expense for the three and nine months ended February 29, 2000, respectively. The Company has entered into a contract of approximately $0.4 million to purchase certain manufacturing equipment. This contract is denominated in German Deutsche Marks. The Company expects to take delivery of this equipment and make final payment under the contract in October 2000. The Company has not hedged this transaction as of February 29, 2000 and, accordingly, will be impacted by any change in the exchange rate prior to the ultimate settlement date of the contract. -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. This matter was first reported in the registrant's Form 10-Q filing for the period ended November 30, 1999. There were no material developments in this matter during the quarter ended February 29, 2000. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. (3) Certificate of Incorporation and Bylaws Exhibit 3.1. Amended and Restated Certificate of Incorporation of Royal Precision, Inc. (restated to reflect amendment filed with the Secretary of State of Delaware on October 19, 1999) (incorporated by reference to Exhibit 3.1 of the Company's Form 10-Q for the period ended November 30, 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 Agreements. Exhibit 10.1. Third Amendment to Credit and Security Agreement between FM Precision Golf Manufacturing Corp., FM Precision Golf Sales Corp. and Wells Fargo Business Credit, Inc. dated March 24, 2000. Exhibit 10.2. Fourth Amendment to Amended and Restated Credit and Security Agreement between Royal Grip, Inc., Royal Grip Headwear Company and Wells Fargo Business Credit, Inc. dated March 24, 2000. -17- 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 February 29, 2000. 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 April 7, 2000 By /s/ Thomas Schneider ------------- ------------------------------------- Thomas Schneider, President and Chief Operating Officer By /s/ Kevin Neill ------------------------------------- Kevin Neill, Vice President - Finance and Chief Financial Officer (chief accounting officer) -18- EXHIBIT INDEX Page in Sequentially Numbered Exhibit Copy - ------- ---- 3.1 Amended and Restated Certificate of Incorporation of Royal Precision, Inc. (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 Third Amendment to Credit and Security Agreement between FM Precision Golf Manufacturing Corp., FM Precision Golf Sales Corp. and Wells Fargo Business Credit, Inc. dated March 24, 2000. 20 10.2 Fourth Amendment to Amended and Restated Credit and Security Agreement between Royal Grip, Inc., Royal Grip Headwear Company and Wells Fargo Business Credit, Inc. dated March 24, 2000. 35 27. Financial Data Schedule (submitted electronically for SEC information only). - ---------- * Incorporated by reference EX-10.1 2 3RD AMENDMENT TO CREDIT & SECURITY AGR. THIRD AMENDMENT TO CREDIT AND SECURITY AGREEMENT This Amendment, dated as of March 24, 2000, 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, as amended by that certain Second Amendment to Credit and Security Agreement dated November 10, 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 "Advance" contained in Section 1.1 of the Credit Agreement is hereby deleted and replaced as follows: "Advance" means a Revolving Advance, the Term Advance or the Capital Expenditures Advance. (b) 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: (A) the lesser of (x) 85% of Eligible Accounts, or (y) $5,000,000.00, plus 1 (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, plus (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, plus (D) an overadvance in the amount not to exceed $500,000.00 (the "Overadvance Limit), which Overadvance Limit shall be automatically reduced by $100,000.00 on each of April 1, 2000, May 1, 2000, June 1, 2000, July 1, 2000, and August 1, 2000. On or after August 1, 2000, the Overadvance Limit shall be equal to $0.00. (c) 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 to (ii) the sum of (A) Current Maturities of Long Term Debt (actually paid during the period) plus (B) Interest Expense. (d) The percentage "25%" contained in subsection (xiv) of the definition of "Eligible Accounts" contained in Section 1.1 of the Credit Agreement is hereby deleted and replaced with the percentage "50%". (e) The definition of "Note" contained in Section 1.1 of the Credit Agreement is hereby deleted and replaced as follows: "Note" means the Revolving Note, the Term Note or the Capital Expenditures Note, and "Notes" means the Revolving Note, the Term Note and the Capital Expenditures Note. (f) There is hereby added to Section 1.1 of the Credit Agreement a new definition for "Capital Expenditures Advance" which provides as follows: 2 "Capital Expenditures Advance" has the meaning specified in Section 2.6.2. (g) There is hereby added to Section 1.1 of the Credit Agreement a new definition for "Capital Expenditures Note" which provides as follows: "Capital Expenditures Note" means the Borrower's promissory note, payable to the order of the Lender in substantially the form of Exhibit B-2 hereto and any note or notes issued in substitution therefor, as the same may hereafter be amended, supplemented or restated from time to time. (h) Section 2.6 of the Credit Agreement is hereby renumbered as Section 2.6.1 and each reference to Section 2.6 contained in the Credit Agreement is hereby deleted and replaced with a reference to Section 2.6.1. (i) There is hereby added a new Section 2.6.2 to the Credit Agreement which provides as follows: Section 2.6.2 Capital Expenditures Advance. (a) The Lender agrees, on the terms and subject to the conditions herein set forth (including without limitation Section 4.2 and 4.3 below), to make a one time non-revolving advance to the Borrower in the amount equal to the lesser of (i) $400,000.00; or (ii) the Lendable Cost, as hereafter defined (the "Capital Expenditures Advance"). (b) The Borrower's obligation to pay the Capital Expenditures Advance shall be evidenced by the Capital Expenditures Note and shall be secured by the Collateral as provided in Article III. (c) The request for the disbursement of the Capital Expenditures Advance shall be by an individual authorized pursuant to Section 2.1(a). (d) Upon fulfillment of the applicable conditions set forth in Section 4.2 and 4.3, the Lender shall apply the proceeds of the Capital Expenditures Advance by crediting the same to the Borrower's demand deposit account specified in Section 2.1(b) unless the Lender and the Borrower shall agree in writing to another manner of disbursement. Upon the Lender's request, the Borrower shall promptly confirm the telephonic request for the 3 Capital Expenditures Advance by executing and delivering an appropriate confirmation certificate to the Lender. The Borrower shall be obligated to repay the Capital Expenditures Advance notwithstanding the Lender's failure to receive such confirmation and notwithstanding the fact that the person requesting the same was not in fact authorized to do so. The request for the Capital Expenditures Advance, whether written or telephonic, shall be deemed to be a representation by the Borrower that the conditions set forth in Section 4.2 and 4.3 have been satisfied as of the time of the request. (j) Section 2.7 of the Credit Agreement is hereby renumbered as Section 2.7.1 and each reference to Section 2.7 contained in the Credit Agreement is hereby deleted and replaced with a reference to Section 2.7.1. (k) There is hereby added a new Section 2.7.2 to the Credit Agreement which provides as follows: Section 2.7.2 Payment of Capital Expenditures Note. The outstanding principal balance of the Capital Expenditures Note shall be due and payable as follows: (a) Beginning on the first day of the first full month following the disbursement of the Capital Expenditures Advance and on the first day of each month thereafter in equal monthly installments in an amount sufficient to fully amortize the Capital Expenditures Advance over an assumed term of 60 months; (b) On the Termination Date, the entire unpaid principal balance of the Capital Expenditures Note, and all unpaid interest accrued thereon, shall in any event be due and payable. (l) Subsection (b) of Section 2.8 of the Credit Agreement is hereby deleted and replaced as follows: (b) TERM NOTE/CAPITAL EXPENDITURES NOTE. Except as set forth in Sections 2.8(d), 2.8(f) and 2.8(g), the outstanding principal balance of each of the Term Note and the Capital Expenditures Note shall bear interest at the Term Floating Rate. 4 (m) Section 2.12 of the Credit Agreement is hereby deleted and replaced as follows: Section 2.12 VOLUNTARY PREPAYMENT; REDUCTION OF THE MAXIMUM LINE; TERMINATION OF THE CREDIT FACILITY BY THE BORROWER. Except as otherwise provided herein, the Borrower may prepay the Revolving Advances in whole at any time or from time to time in part. The Borrower may prepay the Term Advance and the Capital Expenditures Advance (other than in accordance with Section 2.7.1(a) and 2.7.2(a)), and terminate the Credit Facility or reduce the Maximum Line at any time if it (i) gives the Lender at least 30 days' prior written notice and (ii) pays the Lender the prepayment, termination or line reduction fees in accordance with Section 2.13. Any prepayment of the Term Advance and the Capital Expenditure Advance (other than in accordance with Section 2.7.1(a) and 2.7.2(a)) or reduction in the Maximum Line must be in an amount not less than $250,000.00 or an integral multiple thereof. No reduction of the Maximum Line shall in any way affect the Minimum Interest Charges. If the Borrower reduces the Maximum Line to zero, all Obligations shall be immediately due and payable. Any partial prepayments of the Term Note and the Capital Expenditures Note (other than in accordance with Section 2.7.1(a) and 2.7.2(a)) shall be applied to principal payments due and owing in inverse order of their maturities. Upon termination of the Credit Facility and payment and performance of all Obligations, the Lender shall release or terminate the Security Interest and the Security Documents to which the Borrower is entitled by law. (n) Section 2.13(b) of the Credit Agreement is hereby deleted and replaced as follows: (b) PREPAYMENT FEES. If the Term Note or the Capital Expenditures Note are 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. 5 (o) Section 2.14 of the Credit Agreement is hereby deleted and replaced as follows: Section 2.14 Mandatory Prepayment. Without notice or demand, if the sum of the outstanding principal balance of the Revolving Advances plus the L/C Amount shall at any time exceed the Borrowing Base, the Borrower shall (i) first, immediately prepay the Revolving Advances to the extent necessary to eliminate such excess; and (ii) if prepayment in full of the Revolving Advances is insufficient to eliminate such excess, pay to the Lender in immediately available funds for deposit in the Special Account an amount equal to the remaining excess. Any payment received by the Lender under this Section 2.14 or under Section 2.12 may be applied to the Obligations, in such order and in such amounts as the Lender, in its discretion, may from time to time determine; provided that any prepayment under Section 2.12 which the Borrower designates as a partial prepayment of the Term Note or the Capital Expenditures Note shall be applied to principal installments of the Term Note or the Capital Expenditures Note, as applicable, in inverse order of maturity. For each day or portion thereof that the Revolving Advances shall exceed the Borrowing Base, the Borrower shall pay to the Lender an overadvance charge (which charge shall be in addition to and not in lieu of any other interest, fees or charges payable by Borrower hereunder) in the amount of $100.00; provided however, that if such day occurs during a Default Period, the overadvance charge for such day shall be $200.00. (p) There is hereby added a new Section 4.3 to the Credit Agreement which provides as follows: Section 4.3 CONDITIONS PRECEDENT TO DISBURSEMENT OF THE CAPITAL EXPENDITURES ADVANCE. The obligation of the Lender to make the disbursement of the Capital Expenditures Advance shall be subject to the further conditions precedent: 6 (a) The request for the disbursement of the Capital Expenditure Advance is made on or before the earlier of May 31, 2001 or the Termination Date; (b) Lender's prior review and approval of the documentation supporting the Borrower's Capital Expenditures, including but not limited to invoices and shipping documents, and Lender's determination (i) that such purchase is made by Borrower in an arms-length transaction with a reputable dealer, and (ii) that such purchase is for an item approved by the Lender in its sole discretion; (c) The amount of the disbursement is less than or equal to 80% of the invoice cost of Capital Expenditures, exclusive of cost of installation, set-up costs, taxes, shipping and other non-purchase price costs (the "Lendable Cost"); and (d) Lender shall have a first priority perfected security interest in all equipment purchased with disbursement of the Capital Expenditures Advance. (q) Section 6.1(c) of the Credit Agreement is hereby deleted and replaced as follows: (c) within 15 days after the end of the month, agings of the Borrower's accounts receivable and its accounts payable and an inventory certification report as at the end of such month, provided however, in the event that Advances are made under the Overadvance Limit, the Borrower shall submit inventory ineligible certifications and associated inventory reports on a weekly basis. The obligation to submit such weekly reports shall cease at such time as there have been no Advances outstanding under the Overadvance Limit for 30 consecutive days. The weekly reporting requirement shall be reinstated in the event that at some point in the future, Advances are made under the Overadvance Limit. (r) Section 6.12 of the Credit Agreement is hereby deleted 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 7 fiscal quarter, on and after February 29, 2000, maintain a consolidated average minimum debt service coverage ratio (based upon the period set forth below) as follows: Quarter Ending Debt Service Coverage Ratio .15 to 1 based upon the immediately February 29, 2000 preceding nine month period .50 to 1 based upon the immediately May 31, 2000 preceding twelve month period .75 to 1 based upon the immediately August 31, 2000 preceding three month period .50 to 1 based upon the immediately November 30, 2000 preceding six month period .50 to 1 based upon the immediately February 28, 2001 preceding nine month period 1.0 to 1 based upon the immediately May 31, 2001 preceding twelve month period August 31, 2001 and each 1.0 to 1 based upon the immediately August 31 thereafter preceding three month period November 30, 2001 and .75 to 1 based upon the immediately each November 30 preceding six month period thereafter February 28, 2002 and .75 to 1 based upon the immediately each February 28 preceding nine month period thereafter May 31, 2002 and each 1.05 to 1 based upon the immediately May 31 thereafter preceding twelve month period (s) Section 7.10 of the Credit Agreement is hereby deleted and replaced as follows: 8 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, 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 $1,900,000.00 during Borrower's 2000 fiscal year or $1,250,000.00 during any fiscal year thereafter. 3. 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. 4. FEES. The Borrower shall pay the Lender the following fees in consideration of the Lender's execution of this Amendment: (a) An origination fee equal in amount to 0.5% of the Capital Expenditures Advance, which fee shall be due and payable upon the disbursement of the Capital Expenditures Advance. (b) An accommodation fee in the amount of $2,500.00, which accommodation fee shall be due and payable upon the Lender's execution of this Amendment. (c) Additional accommodation fees shall be charged as follows: Overadvance Amount of Fee Threshold Date Due and Payable ------------- --------- -------------------- $250.00 $250,000.00 The date at which the Advances outstanding under the Overadvance Limit are in excess of the Overadvance Threshold. $250.00 $300,000.00 The date at which the Advances outstanding under the Overadvance Limit are in excess of the Overadvance Threshold. $250.00 $350,000.00 The date at which the Advances outstanding under the Overadvance Limit are in excess of the Overadvance Threshold. 9 Overadvance Amount of Fee Threshold Date Due and Payable ------------- --------- -------------------- $250.00 $400,000.00 The date at which the Advances outstanding under the Overadvance Limit are in excess of the Overadvance Threshold. $250.00 $450,000.00 The date at which the Advances outstanding under the Overadvance Limit are in excess of the Overadvance Threshold. The fees detailed in this Section 4(c) are onetime fees only. By way of example, in the event that the Advances outstanding under the Overadvance Limit are $251,000.00, a $250.00 fee would immediately be due and payable. If thereafter, the Advances under the Overadvance Limit are reduced below $250,000.00 and then again rise above $250,000.00, no fee would be owed. 5. CONDITIONS PRECEDENT. This Amendment 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 Capital Expenditures Note substantially in the form of Exhibit B-2 hereto, duly executed on behalf of the Borrower (the "Capital Expenditures 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 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 10 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 6(a) and 6(b) hereof and as to such other matters as the Lender shall require. (e) Payment of the fees as required in Paragraph 4. (f) Such other matters as the Lender may require. 6. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants to the Lender as follows: (a) The Borrower has all requisite power and authority to execute this Amendment and the Capital Expenditures Note and to perform all of its obligations hereunder, and this Amendment and the Capital Expenditures Note have been duly executed and delivered by the Borrower and constitute 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 Capital Expenditures 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. 7. 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. 8. NO WAIVER. The execution of this Amendment and acceptance of the Capital Expenditures Note and 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. 9. RELEASE. The Borrower, and each 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 11 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 such 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. 10. 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 fees required under Paragraph 4 hereof. 11. MISCELLANEOUS. This Amendment and the Acknowledgment and Agreement of Guarantors 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 Assistant Vice President FM PRECISION GOLF MANUFACTURING CORP., a Delaware corporation By /s/ Thomas Schneider ------------------------------------ Its President FM PRECISION GOLF SALES CORP., a Delaware corporation By /s/ Thomas Schneider ------------------------------------ Its President 12 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 9 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 Schneider ------------------------------------ Its President 13 EXHIBIT B-2 CAPITAL EXPENDITURES NOTE $400,000.00 Phoenix, Arizona ____________, 2000 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 FOUR HUNDRED THOUSAND DOLLARS ($400,000.00) or, if less, the aggregate unpaid principal amount of all Capital Expenditures 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 9, 1998, as amended from time to time (as the same may hereafter be further 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 Capital Expenditures 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. 14 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 -------------------------------- 15 EX-10.2 3 4TH AMEND. TO RESTATED CREDIT & SECURITY AGR FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT This Amendment, dated as of March 24, 2000, is made by and between ROYAL GRIP, INC., a Nevada corporation, and ROYAL GRIP HEADWEAR COMPANY, a Nevada 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 that certain Amended and Restated Credit and Security Agreement dated as of October 9, 1998, as amended by that certain Amendment to an Amended and Restated Credit and Security Agreement and Waiver of Defaults dated March 16, 1999, as amended by that certain Second Amendment to Amended and Restated Credit and Security Agreement and Waiver of Defaults dated April 14, 1999 as amended by that certain Third Amendment to Credit and Security Agreement dated November 10, 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 "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 to (ii) the sum of (A) Current Maturities of Long Term Debt (actually paid during the period) plus (B) Interest Expense. (b) Section 6.12 of the Credit Agreement is hereby deleted and replaced as follows: DEBT SERVICE COVERAGE RATIO. The Borrower covenants that Royal Grip and Royal Headwear and the Covenant Entities shall, as of 1 the last day of each fiscal quarter, on and after February 29, 2000, maintain a consolidated average minimum debt service coverage ratio (based upon the period set forth below) as follows: Quarter Ending Debt Service Coverage Ratio -------------- --------------------------- February 29, 2000 .15 to 1 based upon the immediately preceding nine month period May 31, 2000 .50 to 1 based upon the immediately preceding twelve month period August 31, 2000 .75 to 1 based upon the immediately preceding three month period November 30, 2000 .50 to 1 based upon the immediately preceding six month period February 28, 2001 .50 to 1 based upon the immediately preceding nine month period May 31, 2001 1.0 to 1 based upon the immediately preceding twelve month period August 31, 2001 and each 1.0 to 1 based upon the immediately August 31 thereafter preceding three month period November 30, 2001 and .75 to 1 based upon the immediately each November 30 preceding six month period thereafter February 28, 2002 and .75 to 1 based upon the immediately each February 28 preceding nine month period thereafter May 31, 2002 and each 1.05 to 1 based upon the immediately May 31 thereafter preceding twelve month period (c) Section 7.10 of the Credit Agreement is hereby deleted and replaced as follows: 2 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, 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 $1,900,000.00 during Borrower's 2000 fiscal year or $1,250,000.00 during any fiscal year thereafter. 3. 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. 4. Conditions Precedent. This Amendment 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 5(a) and 5(b) hereof and as to such other matters as the Lender shall require. (d) Such other matters as the Lender may require. 5. Representations and Warranties. The Borrower hereby represents and warrants to the Lender as follows: (a) The Borrower has all requisite 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. 3 (b) The execution, delivery and performance by the Borrower of this Amendment 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. 6. 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. 7. No Waiver. 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. 8. Release. The Borrower, and each 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 such 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. 9. 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. 4 10. Miscellaneous. This Amendment and the Acknowledgment and Agreement of Guarantors 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 Assistant Vice President ------------------------------------- ROYAL GRIP, INC., a Nevada corporation By /s/ Thomas Schneider ------------------------------------- Its President ------------------------------------- ROYAL GRIP HEADWEAR COMPANY, a Nevada corporation By /s/ Thomas Schneider ------------------------------------- Its President ------------------------------------- 5 ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR The undersigned, a guarantor of the indebtedness of Royal Grip, Inc., and Royal Grip Headwear, each Nevada 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 8 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 Schneider ------------------------------------- Its President ------------------------------------- 6 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 9-MOS MAY-31-2000 JUN-01-1999 FEB-29-2000 1 21 0 4,203 217 6,041 10,798 6,733 1,165 25,006 4,892 0 0 0 6 13,848 25,006 19,951 19,951 13,693 5,183 0 0 457 804 411 393 0 0 0 393 0.07 0.07
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