-----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, NdX2iKYHbJw68ayQ1NCIZYy9LLJVncJHnRTIN+LjR3gpcTn06s0cz9Ivg0UxsCfe 5T/BzY5Q5ylBV3aQIAKvvQ== /in/edgar/work/20000814/0000950147-00-001218/0000950147-00-001218.txt : 20000921 0000950147-00-001218.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950147-00-001218 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20000531 FILED AS OF DATE: 20000814 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-K405 SEC ACT: SEC FILE NUMBER: 000-22889 FILM NUMBER: 695918 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-K405 1 0001.txt ANNUAL REPORT FOR YEAR ENDING 5-31-2000 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K (Mark One) [X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: May 31, 2000 [ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to ________________ Commission file number: 0-22889 ROYAL PRECISION, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Delaware 06-1453896 - ------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 15170 North Hayden Road, Suite 1, Scottsdale, Arizona 85260 - ----------------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (480) 627-0200 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $0.001 per share ---------------------------------------- (Title of Class) 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 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of shares of Common Stock held by non-affiliates of the Registrant on August 7, 2000 was $5,782,000. The number of shares of Common Stock outstanding on August 7, 2000 was 5,678,956. Documents incorporated by reference: Portions of the Registrant's Proxy Statement relating to the 2000 Annual Meeting of Stockholders have been incorporated by reference into Part III, Items 10, 11, 12 and 13. PART I The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Management believes that this Form 10-K includes forward-looking statements which reflect the views of the Company 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 economic conditions, customer plans and commitments, the cost of raw materials, the competitive environment in which the Company operates, and changes in the financial markets relating to the Company's capital structure and cost of capital. Statements in this Form 10-K, including the Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations, describe factors, among others, that could contribute to or cause such differences. Additional factors that could cause actual results to differ materially from those expressed in such forward-looking statements are included in Exhibit 99.1. The words "believe," "expect," "anticipate," "project," and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. ITEM 1. DESCRIPTION OF BUSINESS. 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 (formerly known as Roxxi, Inc., "Roxxi"). RP (formerly FM Precision Golf Corp.), FMP and FMP Sales were incorporated in Delaware on May 3, 1996 by a group of investors who acquired, through such companies, substantially all of the assets of the golf club shaft manufacturing business of Brunswick Corporation. RP acquired RG, a Nevada corporation, on August 29, 1997 and RP simultaneously changed its name from FM Precision Golf Corp. to Royal Precision, Inc. As discussed in note 3 to the consolidated financial statements, the Company disposed of the operating assets of Royal Grip Headwear Company, a Nevada corporation, in March 1999. Results of operations for Roxxi in all periods through May 31, 1999 are reflected as discontinued operations. PRINCIPAL PRODUCTS; MARKETS The Company designs, manufactures and distributes steel golf club shafts, sales of which represented 85%, 82% and 85% of total revenues during the fiscal years ended May 31, 2000, 1999 and 1998, respectively. The Company developed and patented the "Rifle", the first modern stepless steel golf club shaft in the industry. Management believes that this shaft is the premier steel shaft available in the market today due to its patented internal and external design characteristics which result in superior performance, consistency and strength compared to other steel golf club shafts. The Company also pioneered, patented, and now licenses the technology of Frequency Coefficient Matching ("FCM") golf club shafts by means of an electronic analyzer. Management believes that FCM is more accurate than any other sorting method, in that it ensures identical shaft flex from club-to-club throughout a set, allowing the golfer to maintain a consistent, natural swing tempo regardless of the club chosen. The Company also designs and distributes golf club grips, sales of which represented 15%, 18% and 15% of total revenues during the fiscal years ended May 31, 2000, 1999 and 1998, respectively. In 1989, RG introduced a rubber wrap golf grip that gained widespread acceptance in the golf industry and enabled RG to achieve brand name recognition. The Company currently offers a wide variety of standard and custom models, all of which management believes feature durability and a distinctive feel and appearance. These grips are sold principally into the replacement market, which serves those golfers seeking to replace grips that have become worn and slick due to prolonged use. In February 2000, the Company introduced the "Rifle" Graphite shaft, a filament wound product which it co-designed and distributes. Management believes that this product has superior consistency properties based on the proprietary filament winding and finishing processes utilized in its manufacture that give the shaft uniform wall thickness and oscillation characteristics. Because the "Rifle" Graphite was not introduced until the end of fiscal 2000, sales of this product were immaterial to the Company's operations and financial condition, representing less than 1% of total revenues during the fiscal year ended May 31, 2000. Sales to original equipment manufacturers ("OEMs") accounted for the vast majority of the Company's sales in fiscal 2000, with the remainder of the sales being made to distributors, custom club assemblers, pro shops and repair shops. The Company's products are sold by OEMs as a component of the complete golf club through a variety of channels including sporting goods stores, discount stores, mail order catalogs, pro shops and mass merchandisers. Of the Company's top ten customers during the fiscal year ended May 31, 2000, two are international. The Company's exclusive Japanese distributor is its largest account (see "Principal Suppliers and Customers") and its Australian distributor is its eighth largest account. The Company also has a presence in Europe and Canada through other distributor relationships. BACKLOG As of May 31, 2000, the Company had open orders from customers totaling approximately $4.2 million for shipment during the fiscal year ending May 31, 2001. Open orders as of May 31, 1999 for shipment during fiscal 2000 were approximately $4.1 million. COMPETITION The golf equipment industry is highly competitive. There are numerous companies competing in various segments of the golf equipment markets including those which manufacture and sell the golf club component parts which are shafts, grips and heads. Some of the Company's competitors have greater name recognition, more extensive engineering, manufacturing and marketing capabilities, and greater financial, technological and personnel resources than those available to the Company. The Company competes primarily on the basis of product quality, product specifications and design, on-time deliveries, customer relationships and price. The Company competes primarily with three companies which manufacture and distribute steel golf club shafts to OEMs. FMP is the second largest producer of steel shafts, after True Temper Sports, Inc. Management believes that its market share in steel shafts is approximately 25% while True Temper's market share in steel shafts is believed to be approximately 60%. Other competitors which manufacture steel golf club shafts include Nippon Shaft Co., Ltd. and Far East Machinery Co., Ltd., both of which are located in Asia. The Company's principal competitors in the golf club grip market include Eaton/Golf Pride and Lamkin Corp. Management believes that its market share in golf club grips is approximately 3% while Eaton/Golf Pride's and Lamkin's market shares are believed to be approximately 55% and 15%, respectively. PRINCIPAL SUPPLIERS AND CUSTOMERS In December 1996, RG and Acushnet Rubber Company ("Acushnet") entered into a manufacturing and supply agreement whereby RG outsourced the manufacturing of its golf club grips to Acushnet. Additionally, the two parties entered into an agreement resulting in the transfer of RG's manufacturing equipment to Acushnet under a capital lease. Since January 1997, RG has purchased the majority of its supply of non-cord, injected grips from Acushnet. In May 1999, RG and Acushnet executed a mutual release agreement terminating their manufacturing and supply agreement and capital lease agreement (the "Termination Agreement"). Pursuant to the Termination Agreement, RG received $1.5 million in cash and $1.0 million in purchase credits from Acushnet in May 1999. Additionally, Acushnet's obligation to make additional payments to RG under the capital lease was terminated but Acushnet was required to continue producing grips through February 2000 at which time RG received the manufacturing equipment which was previously leased to Acushnet. The Company believes that its current inventory of grips is sufficient to satisfy customer demand through December 31, 2000. The Company is currently purchasing grips from various suppliers and believes it has an adequate source of supply to meet its current and anticipated future customer needs. However, there can be no assurance that the transition to new suppliers will not result in production delays or the loss of sales and key customers which would have a material adverse effect on the Company's financial condition and results of operations. FMP uses Worthington Industries, Inc. ("Worthington") as its primary supplier for strip steel but has no supply contract with Worthington. Should Worthington fail to deliver steel, there may be a disruption of operations at FMP until an alternate supplier is procured. Worthington provides steel from two separate plant locations. If one Worthington plant becomes unable to fill the necessary requirements, orders could be filled from the alternate location. Although FMP has elected to use Worthington as its primary supplier of strip steel, management believes that there are other acceptable supply sources at comparable prices and that the loss of Worthington as a supplier would not have a significant adverse impact on the Company. 2 The Company has a ten-year agreement with Precision FM Japan, Ltd. ("Precision FM") which grants exclusive distribution rights for sale of the Company's golf club grips in Japan and certain other Asian countries. The Company also has a five-year agreement with Marubeni Corporation ("Marubeni") and Precision Japan, Ltd. ("Precision") which grants exclusive distribution rights for sale of the Company's golf club shafts in Japan and certain other Asian countries. Precision FM and Precision are subsidiaries of Marubeni and are collectively referred to as "Precision Japan." The grip and shaft agreements with Precision Japan expire in July 2001 and July 2002, respectively. Precision Japan may renew the grip agreement for successive five-year terms. The grip agreement is terminable by either party for cause or if they fail to agree upon pricing terms, or by Precision Japan at any time upon six months prior notice to the Company. Precision Japan may renew the shaft agreement for successive two-year terms. The shaft agreement is terminable by either party for cause or by the Company if Precision Japan fails to meet certain minimum purchase requirements. While the Company currently enjoys a strong relationship with Precision Japan, the loss of Precision Japan as a distributor of the Company's products would have a significant adverse effect on the Company. The Company is significantly dependent on sales to Precision Japan and Taylor Made Golf which, in the aggregate, represented 46%, 40% and 35% of the Company's total net sales for the fiscal years ended May 31, 2000, 1999 and 1998, respectively. Precision Japan accounted for 19% of golf club shaft sales and 73% of golf club grip sales during fiscal 2000. Taylor Made Golf represented 22% of shaft sales and less than 1% of grip sales during fiscal 2000. The Company does not have a supply agreement with Taylor Made Golf. The loss of sales to either of these companies could have a significant adverse impact on the Company's business. Sales of golf equipment historically have been dependent on discretionary spending by consumers, which may be adversely affected by general economic conditions and the popularity of golf in general. A decrease in consumer spending on golf equipment could have an adverse effect on the Company's business and operating results. Sales in the golf equipment industry have historically been seasonal in nature with consumer demand for product being the strongest during the spring and summer months. PATENTS, TRADEMARKS The Company has obtained a trademark and a utility patent on the manufacture and design of its "Rifle" steel shaft products. Management believes that its "Rifle" products are superior to other steel golf club shafts in performance, consistency and strength which provides the Company a competitive advantage in the golf equipment industry. Management believes that some of the shaft patents material to its future success are its patent which enables a club maker to take frequency sorted steel shafts and calculate what new frequency shafts are needed to produce a Frequency Matched product, its patent which relates to the same frequency sorting, but for graphite shafts, and its patent which relates to the manipulation of flex distribution within a shaft or set of shafts. These patents expire on May 9, 2006, October 19, 2008, and January 12, 2016, respectively. Other patents held by the Company on frequency matching and the manufacture of steel golf shafts and clubs have expired. While there can be no assurance that competitors will not use the technology of the expired patents in the future, the Company's principal competitors have not adopted, nor does management believe that they have plans to copy, the expired patents. The Company also relies upon trademarks to establish and protect its proprietary rights in its grip products and technologies. The RG logo and the name "Royal Grip" have been registered as trademarks in the United States, Japan and in other foreign countries. In addition, the Company has filed trademark applications relating to the names and configurations of several of its grip products in the United States and in foreign countries, including Japan. The Company has also obtained design patents on some of its grips and applied for others that are pending. The Company protects its proprietary rubber compound and related technologies as trade secrets. Despite such safeguards, there can be no assurance that its proprietary rights are adequately protected or that competitors will not be able to produce golf club grips that successfully imitate the Company's designs and materials without infringing the Company's proprietary rights. REGULATIONS The design of new golf clubs is greatly influenced by rules and interpretations of the United States Golf Association ("USGA"). Although the golf equipment standards established by the USGA generally apply only to competitive events sanctioned by that organization, it has become critical for designers of new products to assure compliance with USGA standards. Although the Company believes that all of its golf club shafts and grips comply with current USGA standards, no assurance can be given that any new products will receive USGA approval or that existing USGA standards will not be altered in ways that adversely affect the sales of the Company's products. 3 RESEARCH AND DEVELOPMENT The Company's engineering, sales and other staff, together with independent consultants engaged by the Company, work to conceive new product opportunities by creating prototypes and masters and by working with suppliers and customers to design and produce finished products. New golf club shaft and grip products are tested through the Company's sales force with customers and various tour players. During the fiscal years ended May 31, 2000, 1999 and 1998, the Company spent approximately $0.7 million, $0.6 million and $0.5 million on research and development, respectively. ENVIRONMENTAL In May 1996, the Company acquired substantially all the assets of the golf club shaft manufacturing business of Brunswick Corporation (the "Brunswick Acquisition"). Included in the acquired assets were land, buildings and equipment at the Company's Torrington, Connecticut manufacturing facility (the "FMP plant"). In conjunction with the Brunswick Acquisition, Brunswick Corporation agreed to indemnify the Company from potential liability arising from certain environmental matters and to remediate certain environmental conditions which existed at the FMP plant on the date of acquisition. Brunswick Corporation has engaged an environmental consulting firm to perform testing at the FMP plant and is in the process of developing a plan of remediation. Failure of Brunswick Corporation to fulfill its obligations under the asset purchase contract could have a material adverse effect on the Company's financial condition and results of operations. The Company has retained legal counsel for representation on various environmental matters related to the Brunswick Acquisition. Total legal fees incurred related to these matters during the fiscal year ended May 31, 2000 were approximately $0.1 million. The Company received a notice of violation ("NOV") from the State of Connecticut Department of Environmental Protection ("DEP") alleging violation of certain provisions of a permit related to the discharge of treated wastewater at the FMP plant. This permit was issued to the Company in February 1997 based on an application prepared by Brunswick Corporation in April 1996. In April 2000, the Company reached a settlement agreement with DEP discharging the Company from any civil liability with respect to the allegations in the NOV, subject to completion and approval of certain remedial measures at the FMP plant. The Company incurred approximately $0.2 million in capital expense to complete these remedial measures during the fiscal year ended May 31, 2000 and, in June 2000, obtained a certification from DEP that the work was satisfactorily completed. The Company is seeking reimbursement from Brunswick Corporation for the cost of remediation and legal fees incurred in conjunction with this matter. In April 2000, the Company received a request for information from the U.S. Environmental Protection Agency ("EPA") related to disposal and treatment of waste materials from the FMP plant during a period from 1982 to 1997. The EPA is currently conducting an investigation regarding the former National Oil Services, Inc. Superfund site in West Haven, Connecticut. National Oil Services, Inc. was, prior to its bankruptcy, a contractor used by the Company and Brunswick Corporation to treat and dispose non-hazardous waste oils from the FMP plant. EPA has not issued any demands for reimbursement or performance of work from the Company relating to this matter and there is not sufficient information at this time to determine what, if any, action EPA may pursue and what, if any, effect it may have on the Company's financial condition and results of operations. During the fiscal year ended May 31, 2000, the Company incurred approximately $1.0 million in capital expense to upgrade the wastewater treatment facilities at the FMP plant to comply with new EPA mandates on water quality adopted by DEP. Upgrade of these systems is complete and was approved by DEP in February 2000. The Company does not anticipate significant additional cost related to the upgrade of these systems. During the fiscal year ended May 31, 2000, the Company expended approximately $74,000 on the treatment, storage and disposal of hazardous waste at the FMP plant. Regulatory fees for various environmental permits and costs during the year were approximately $11,000. EMPLOYEES As of May 31, 2000, the Company had 328 employees. Approximately 70% of the Company's work force is covered by a collective bargaining agreement which expires in November 2002. The Company believes its relationship with its employees is good. 4 ITEM 2. DESCRIPTION OF PROPERTY. The Company's golf club shaft manufacturing facility is located at 535 Migeon Avenue, Torrington, Connecticut and comprises approximately 230,000 square feet. The manufacturing facility is owned by the Company subject to an open-end mortgage granted to Wells Fargo Business Credit, Inc. See note 7 of Notes to Consolidated Financial Statements. The Company's principal executive and administrative offices are located in approximately 8,000 square feet of a leased facility at 15170 North Hayden Road, Suite 1, Scottsdale, Arizona. The monthly payment under the lease is approximately $16,000 and the term of the lease expires in May 2001. In November 1999, the Company entered into a lease of approximately 9,000 square feet of warehouse space located at 7861 East Gray Road, Suites 107-111, Scottsdale, Arizona. This facility serves as a distribution point from which product is shipped to the Company's West Coast customers. The monthly payment under the lease is approximately $7,600 and the term of the lease expires in November 2001. In the opinion of management, these facilities are suitable and adequate for the Company's intended use and are adequately covered by insurance. ITEM 3. LEGAL PROCEEDINGS. The Company is from time to time a party to various routine legal proceedings, incidental to the Company's business. Management believes that none of the current routine proceedings will have a material adverse effect on the Company's financial condition or future operating results. 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") alleged 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. On April 17, 2000, the court granted the Company's motion to dismiss this suit. However, the court has not yet signed a final judgment and it is uncertain whether or not Donnelley will appeal the dismissal. Management believes that the action is without merit and intends to defend any appeal vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 5 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock is traded on The Nasdaq National Market under the trading symbol "RIFL". The prices set forth below reflect the high and low sale prices for shares of Common Stock for each quarter during the past two fiscal years as reported by The Nasdaq National Market. HIGH LOW ---- --- FISCAL YEAR 1999 First Quarter $ 5.28 $3.88 Second Quarter 4.88 3.00 Third Quarter 3.50 1.28 Fourth Quarter 3.88 2.13 FISCAL YEAR 2000 First Quarter 4.00 1.75 Second Quarter 2.88 2.00 Third Quarter 3.50 2.31 Fourth Quarter 3.50 2.50 As of August 7, 2000, the Company had approximately 90 holders of Common Stock of record. The Company has not paid any dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future. The Company currently intends to retain any earnings to finance the growth of its business. Any determination as to the payment of dividends will depend upon the future results of operations, capital requirements and financial condition of the Company and such other facts as the Board of Directors of the Company may consider, including any contractual or statutory restrictions on the Company's ability to pay dividends. The Company's two credit facilities each limit the Company's ability to pay dividends on its Common Stock. ITEM 6. SELECTED FINANCIAL DATA. The selected consolidated financial data presented below for, and as of, each of the three years since the Company has been publicly traded is derived from the Company's consolidated financial statements as of May 31, 2000, 1999 and 1998. This data should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of this Form 10-K. ROYAL PRECISION, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA YEARS ENDED MAY 31, 2000, 1999 AND 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998 ------- ------- ------- Net sales $29,925 $23,219 $24,722 Income from continuing operations 870 276 268 Income from continuing operations per share 0.15 0.05 0.05 Total assets 24,942 24,610 25,886 Long-term debt and capital lease obligations 6,027 6,191 3,171 Total liabilities 10,530 11,158 11,559 6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 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 (formerly known as Roxxi, Inc., "Roxxi"). 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 3 to the consolidated financial statements, the Company disposed of the operating assets of Royal Grip Headwear Company in March 1999. Results of operations for Roxxi in all periods through May 31, 1999 are reflected as discontinued operations. The Company designs, 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. The Company'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. FISCAL YEAR ENDED MAY 31, 2000 COMPARED TO THE FISCAL YEAR ENDED MAY 31, 1999-- NET SALES. Net sales from continuing operations for the year ended May 31, 2000 were $29.9 million, an increase of $6.7 million or 29% over net sales from continuing operations of $23.2 million in 1999. Net sales of golf club shafts increased by $6.4 million or 33% and net sales of golf club grips increased by $0.3 million or 8%. 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 $6.7 million or 43%. Sales of the Company's lower priced, commercial grade golf club shafts decreased by $0.3 million or 10%. 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 year ended May 31, 2000 were $1.7 million compared to $0.6 million in 1999. COST OF SALES. Cost of goods sold from continuing operations for the year ended May 31, 2000 was $20.5 million, an increase of $5.5 million or 37% over cost of goods sold from continuing operations of $15.0 million in 1999. Golf club shafts cost of goods sold increased by $4.7 million or 37% as a result of higher total net sales. Golf club grips cost of goods sold increased by $0.8 million or 33% due to higher total net sales and additional costs 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 a manufacturing and supply agreement. RG assumed responsibility for these functions following the termination of the Acushnet contracts. (See note 5 to the consolidated financial statements.) Approximately $0.1 million in additional costs was incurred related to the new distribution facility during the year ended May 31, 2000. Also, depreciation expense of $0.2 million was recorded on the grip manufacturing equipment while in use by Acushnet during the year ended May 31, 2000 whereas no depreciation expense was recorded in 1999 when the Acushnet capital lease contract was in effect. GROSS PROFIT. Gross profit from continuing operations for the year ended May 31, 2000 was $9.4 million, an increase of $1.2 million or 15% over gross profit from continuing operations of $8.2 million in 1999. Gross profit from sales of golf club shafts increased by $1.6 million or 26% to $8.0 million due to higher total net sales. As a percentage of sales, the gross profit on sales of golf club shafts decreased from 33% to 31% due to several factors, principally the mix of products sold during the two periods. Sales of a particular pro grade shaft which is not subject to the Company's Frequency Coefficient Matching ("FCM") technology and is sold at a lower price and a lower profit margin than the Company's other pro grade products totaled approximately $4.3 million, or 17% of total shaft sales during fiscal 2000. Sales of this product during fiscal 1999 were approximately $1.8 million, or 9% of total shaft sales. Additionally, inventory write-downs of $0.3 million were recorded to reduce the book value of certain graphite shafts purchased for resale prior to the introduction of the "Rifle" Graphite, to estimated net realizable value. Overtime pay and workers' compensation insurance premiums also increased significantly during fiscal 2000 as production was increased to meet the higher sales demand. 7 Gross profit from sales of golf club grips decreased by $0.4 million or 23% to $1.4 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 31%. This decreased margin reflects the additional warehouse costs and depreciation discussed above as well as 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 38% of sales during the year ended May 31, 2000 compared to only 14% in 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the year ended May 31, 2000 were $7.1 million, an increase of 19% over selling, general and administrative expenses of $5.9 million during the corresponding period in 1999. The $1.1 million increase primarily consists of additional marketing and advertising costs including a television commercial campaign which first aired in January 2000 and management bonuses earned under an incentive compensation plan based on the profitability of the Company. As a percentage of sales, selling, general and administrative expenses declined from 26% during year ended May 31, 1999 to 24% during the corresponding period in 2000. AMORTIZATION OF GOODWILL. Goodwill was reduced in the fourth quarter of fiscal 1999 as a result of the utilization of net operating loss carryforwards established prior to the FMP-RG Merger ("Pre-Merger NOLs") and partial reversal of the valuation allowance on pre-merger deferred tax assets. Therefore, amortization expense was reduced from $521,000 during the year ended May 31, 1999, to $486,000 in 2000. GAIN ON TERMINATION OF MANUFACTURING SUPPLY CONTRACT. As discussed in note 5 to the consolidated financial statements, RG and Acushnet executed a mutual release agreement terminating the manufacturing and supply agreement and capital lease agreement in May 1999. RG recognized a one-time aggregate gain of $0.9 million during fiscal 1999 as a result of this Termination Agreement. See Reliance on Third Party Suppliers under Business Environment and Future Results below. 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 $0.8 million interest expense during the year ended May 31, 1999. Interest expense in 2000 was $0.6 million. TERMINATED MERGER EXPENSES. As discussed in note 6 to the consolidated financial statements, the Company incurred professional fees of $1.0 million during the year ended May 31, 1999 related to a terminated merger agreement with Coyote Sports, Inc. (the "RP-Coyote Merger"). These expenses represent costs incurred for due diligence, negotiation of agreements and preparation of a registration statement for the contemplated merger. OTHER INCOME. Other income of $267,000 for the year ended May 31, 2000 is principally comprised of royalties earned on sales of Roxxi headwear products as well as royalty fees from other contracts which license certain Company technology and products. Other income of $243,000 for the year ended May 31, 1999 primarily represents interest income on the Acushnet capital lease receivable. PROVISION FOR INCOME TAXES. Provisions of $616,000 and $804,000 for taxes on income from continuing operations were recorded during the years ended May 31, 2000 and 1999, respectively. During fiscal 2000, the Company utilized approximately $0.5 million of Pre-Merger NOLs and also determined that approximately $1.9 million of Pre-Merger NOLs were realizable. As such, the Company reduced the valuation allowance on its deferred income tax assets by approximately $0.7 million (see notes 2 and 10 to the consolidated financial statements). During fiscal 2000, the Company also reduced the valuation allowance on other deferred income tax assets, not related to the FMP-RG Merger, by approximately $162,000. During fiscal 1999, the Company utilized approximately $0.9 million of Pre-Merger NOLs and also determined that approximately $1.0 million of Pre-Merger NOLs were realizable and, therefore, reduced the valuation allowance on its deferred income tax assets by an aggregate of $0.7 million. 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 3 to the consolidated financial statements, the Company disposed of the operating assets of Roxxi in March 1999. A loss of $0.8 million was recorded on this sale, net of a tax benefit of $0.4 million, reflecting a write-down of the excess book value of assets sold over the cash received. Losses from the operations of Roxxi for the year ended May 31, 1999 were $0.4 million net of an income tax benefit of $0.2 million. 8 FISCAL YEAR ENDED MAY 31, 1999 COMPARED TO THE FISCAL YEAR ENDED MAY 31, 1998-- NET SALES. Net sales from continuing operations for the year ended May 31, 1999 were $23.2 million, a decrease of $1.5 million or 6% from net sales from continuing operations of $24.7 million in 1998. Net sales of golf club shafts decreased by $1.9 million or 9% primarily due to a reduction in sales of the Company's lower priced, commercial grade golf club shafts of $5.5 million or 61%. Sales of this product were significantly reduced following a price increase instituted by the Company in the first fiscal quarter of 1999. In response to these unfavorable results, the Company subsequently modified its pricing structure in an effort to increase sales of this product in future periods. Net sales of the Company's higher priced, pro grade golf club shafts increased by $3.5 million or 29%. This increase reflects the strong demand for the Company's proprietary "Rifle" shafts. Net sales of golf club grips increased by $0.4 million or 12% primarily due to the inclusion of RG golf club grip sales of $1.0 million during the first quarter of fiscal 1999 compared to $0 during the comparable period of 1998 which was prior to the effective date of the FMP-RG Merger. RG's business with two significant OEM customers has decreased significantly from sales of $440,000 during fiscal 1998 compared to $40,000 during fiscal 1999. COST OF SALES. Cost of goods sold from continuing operations for the year ended May 31, 1999 was $15.0 million, a decrease of 9% from cost of goods sold from continuing operations of $16.5 million in 1998. The decrease in cost of goods sold of $1.5 million is primarily attributable to the decline in sales of commercial grade golf club shafts discussed above. Total golf club shafts cost of goods sold decreased by $2.0 million. Golf club grips cost of goods sold increased by $0.5 million primarily due to the inclusion of RG golf club grips cost of goods sold of $0.5 million during the first quarter of fiscal 1999 compared to $0 during the comparable period of 1998 which was prior to the effective date of the FMP-RG Merger. GROSS PROFIT. Gross profit from continuing operations for both of the years ended May 31, 1999 and 1998 was $8.2 million. Gross profit from sales of golf club shafts was unchanged at $6.3 million despite the $1.9 million reduction in net sales due to a favorable change in the mix of product sales from lower margin, commercial grade shafts to higher margin, pro grade shafts. As a percentage of sales, the gross profit on shaft sales increased from 30% to 33%. Gross profit from sales of golf club grips was unchanged at $1.9 million despite an increase in net sales of $0.4 million. Fiscal 1998 gross profit reflects a $0.5 million credit received from Acushnet as compensation for production delays and shortfalls which was recorded as a one-time reduction in golf club grips cost of sales during the second quarter of fiscal 1998 (see note 5 to the consolidated financial statements). Gross profit on sales of golf club grips during the first quarter of fiscal 1999 was $0.5 million compared to $0 during the comparable period of 1998 which was prior to the effective date of the FMP-RG Merger. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the year ended May 31, 1999 were $5.9 million, a decrease of 5% from selling, general and administrative expenses of $6.3 million in 1998. This net reduction of $0.4 million was achieved despite the inclusion of selling, general and administrative expenses of $0.2 million from RG operations and goodwill amortization of $0.1 million during the first fiscal quarter of 1999 compared to $0 during the comparable period of 1998 which was prior to the effective date of the FMP-RG Merger. The Company began a cost cutting program following the FMP-RG Merger which resulted in reductions of corporate overhead costs. AMORTIZATION OF GOODWILL. Amortization expense of $0.5 million was recorded for the year ended May 31, 1999 compared to an expense of $0.4 million in 1998 which included only nine months of amortization following the effective date of the FMP-RG Merger. GAIN ON TERMINATION OF MANUFACTURING SUPPLY CONTRACT. As discussed in note 5 to the consolidated financial statements, RG and Acushnet executed a mutual release agreement terminating the manufacturing and supply agreement and capital lease agreement in May 1999. RG recognized a one-time aggregate gain of $0.9 million during fiscal 1999 as a result of this Termination Agreement. See Reliance on Third Party Suppliers under Business Environment and Future Results below. NONRECURRING MERGER RELATED EXPENSES. In conjunction with the FMP-RG Merger, expenses of $0.8 million were incurred during the year ended May 31, 1998. Significant components of this expense are costs related to terminate a computer software conversion, relocation of certain employees and severance pay. 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 $0.8 million interest expense during the year ended May 31, 1999. Interest expense in 1998 was $0.6 million. 9 TERMINATED MERGER EXPENSES. As discussed in note 6 to the consolidated financial statements, the Company incurred professional fees of $1.0 million during the year ended May 31, 1999 related to the RP-Coyote Merger. These expenses represent costs incurred for due diligence, negotiation of agreements and preparation of a registration statement for the contemplated merger. OTHER INCOME. Other income for the year ended May 31, 1999 was $243,000, compared to $168,000 in 1998. These amounts include interest income of $154,000 and $168,000 from the RG equipment capital lease with Acushnet during fiscal 1999 and 1998, respectively. The equipment capital lease with Acushnet was terminated in May 1999 and, therefore, RG will not recognize any related interest income in future periods. Additional income during fiscal 1999 primarily represents FMP royalty fees from new contracts which license certain technology and products. PROVISION FOR INCOME TAXES. Provisions of $804,000 and $28,000 for taxes on income from continuing operations were recorded during the years ended May 31, 1999 and 1998, respectively. During fiscal 1999, the Company utilized approximately $0.9 million of Pre-Merger NOLs and also determined that approximately $1.0 million of Pre-Merger NOLs were realizable. As such, the Company reduced the valuation allowance on its deferred income tax assets by an aggregate of $0.7 million (see notes 2 and 10 to the consolidated financial statements). 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 3 to the consolidated financial statements, the Company disposed of the operating assets of Roxxi in March 1999. A loss of $0.8 million was recorded on this sale, net of a tax benefit of $0.4 million, reflecting a write-down of the excess book value of assets sold over the cash received. Losses from the operations of Roxxi for the years ended May 31, 1999 and 1998 were $0.4 million and $0.5 million, respectively. Fiscal 1999 Roxxi operating losses are net of an income tax benefit of $0.2 million whereas no income tax benefit was provided for the fiscal 1998 operating losses due to the inability to utilize NOLs. LIQUIDITY AND CAPITAL RESOURCES-- At May 31, 2000, the Company had working capital of $6.0 million and a current ratio of 2.3 to 1 as compared to working capital of $5.8 million and a current ratio of 2.2 to 1 at May 31, 1999. FMP has a credit facility consisting of a term loan and a revolving line-of-credit. The FMP term loan of $2.7 million at May 31, 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 May 31, 2000, FMP had $3.7 million outstanding under its revolving line-of-credit and $1.1 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 $0.4 million at May 31, 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 May 31, 2000, RG had $0.1 million outstanding under its revolving line-of-credit and $0.8 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 (9.5% at May 31, 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 May 31, 2000. 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 year ended May 31, 2000, net cash provided by operating activities was $2.5 million which primarily resulted from net income of $0.9 million, depreciation and amortization of $1.2 million and deferred income taxes of $0.6 million. Net cash provided by operating activities was reduced by an increase in accounts receivable of $0.3 million. 10 Net cash used in investing activities for the year ended May 31, 2000 was $2.2 million for the purchase of property, plant and equipment. The Company estimates that capital expenditures for the fiscal year ending May 31, 2001 will be approximately $1.6 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. Net cash used in financing activities for the year ended May 31, 2000, was $0.5 million resulting from repayments of long term debt and capital lease obligations of $1.2 million and net borrowings under lines-of-credit of $0.7 million. The Company is investigating certain potential acquisitions. Any potential acquisitions may require the use of existing capital resources, assumption of debt or issuance of new debt instruments, any of which could impact the Company's liquidity and capital resources. 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 December 1996, RG and Acushnet entered into a manufacturing and supply agreement whereby RG outsourced the manufacturing of its golf club grips to Acushnet. Additionally, the two parties entered into an agreement resulting in the transfer of RG's manufacturing equipment to Acushnet under a capital lease. Since January 1997, RG has purchased the majority of its supply of non-cord, injected grips from Acushnet. In May 1999, RG and Acushnet executed a mutual release agreement terminating their manufacturing and supply agreement and capital lease agreement (the "Termination Agreement"). Pursuant to the Termination Agreement, RG received $1.5 million in cash and $1.0 million in purchase credits from Acushnet in May 1999. Additionally, Acushnet's obligation to make additional payments to RG under the capital lease was terminated but Acushnet was required to continue producing grips through February 2000 at which time RG received the manufacturing equipment which was previously leased to Acushnet. RG recognized an aggregate gain of $865,000 during the fiscal year ended May 31, 1999 as a result of the Termination Agreement. At May 31, 2000, the manufacturing equipment returned to RG is classified as equipment held for sale. The Company believes that its current inventory of grips is sufficient to satisfy customer demand through December 31, 2000. The Company is currently purchasing grips from various suppliers and believes it has an adequate source of supply to meet its current and anticipated future customer needs. However, there can be no assurance that the transition to new suppliers will not result in production delays or the loss of sales and key customers which would have a material adverse effect on the Company's financial condition and results of operations. 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 $0.3 million and a royalty of 2% of the buyer's net sales until the buyer has paid an additional $0.2 million. Subsequently, Roxxi's name was changed to Royal Grip Headwear Company. In fiscal 1999, the Company recorded a loss on disposal of assets of Roxxi of $0.8 million, net of a tax benefit of $0.4 million. This expense represents a $1.1 million write-down of the excess of the carrying value of inventory and fixed assets over the cash received and $0.1 million for estimated transaction costs and estimated operating expenses to be incurred during the phase-out period of this business segment. The Company is accounting for royalties as income is earned during the two year period beginning May 1, 1999. For the years ended May 31, 2000 and 1999, royalties of $151,000 and $20,000 were recorded, respectively, and are reflected as other income in the accompanying consolidated statements of operations. ENVIRONMENTAL MATTERS. In May 1996, the Company acquired substantially all the assets of the golf club shaft manufacturing business of Brunswick Corporation (the "Brunswick Acquisition"). Included in the acquired assets were land, buildings and equipment at the Company's Torrington, Connecticut manufacturing facility (the "FMP plant"). In conjunction with the Brunswick Acquisition, Brunswick Corporation agreed to indemnify the Company from 11 potential liability arising from certain environmental matters and to remediate certain environmental conditions which existed at the FMP plant on the date of acquisition. Brunswick Corporation has engaged an environmental consulting firm to perform testing at the FMP plant and is in the process of developing a plan of remediation. Failure of Brunswick Corporation to fulfill its obligations under the asset purchase contract could have a material adverse effect on the Company's financial condition and results of operations. The Company has retained legal counsel for representation on various environmental matters related to the Brunswick Acquisition. Total legal fees incurred related to these matters during the fiscal year ended May 31, 2000 were approximately $0.1 million. The Company received a notice of violation ("NOV") from the State of Connecticut Department of Environmental Protection ("DEP") alleging violation of certain provisions of a permit related to the discharge of treated wastewater at the FMP plant. This permit was issued to the Company in February 1997 based on an application prepared by Brunswick Corporation in April 1996. In April 2000, the Company reached a settlement agreement with DEP discharging the Company from any civil liability with respect to the allegations in the NOV, subject to completion and approval of certain remedial measures at the FMP plant. The Company incurred approximately $0.2 million in capital expense to complete these remedial measures during the fiscal year ended May 31, 2000 and, in June 2000, obtained a certification from DEP that the work was satisfactorily completed. The Company is seeking reimbursement from Brunswick Corporation for the cost of remediation and legal fees incurred in conjunction with this matter. In April 2000, the Company received a request for information from the U.S. Environmental Protection Agency ("EPA") related to disposal and treatment of waste materials from the FMP plant during a period from 1982 to 1997. The EPA is currently conducting an investigation regarding the former National Oil Services, Inc. Superfund site in West Haven, Connecticut. National Oil Services, Inc. was, prior to its bankruptcy, a contractor used by the Company and Brunswick Corporation to treat and dispose non-hazardous waste oils from the FMP plant. EPA has not issued any demands for reimbursement or performance of work from the Company relating to this matter and there is not sufficient information at this time to determine what, if any, action EPA may pursue and what, if any, effect it may have on the Company's financial condition or results of operations. During the fiscal year ended May 31, 2000, the Company incurred approximately $1.0 million in capital expense to upgrade the wastewater treatment facilities at the FMP plant to comply with new EPA mandates on water quality adopted by DEP. Upgrade of these systems is complete and was approved by DEP in February 2000. The Company does not anticipate significant additional cost related to the upgrade of these systems. During the fiscal year ended May 31, 2000, the Company expended approximately $74,000 on the treatment, storage and disposal of hazardous waste at the FMP plant. Regulatory fees for various environmental permits and costs during the year were approximately $11,000. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE COMMODITY INSTRUMENTS-- At May 31, 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 described in note 7 of the Notes to Consolidated Financial Statements. A one percent change in the prime lending rate would have an effect of $69,500 and $78,500 on interest expense for the years ended May 31, 2000 and 1999, 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 May 31, 2000 and, accordingly, will be impacted by any change in the exchange rate prior to the ultimate settlement date of the contract. 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Royal Precision, Inc.: We have audited the accompanying consolidated balance sheets of Royal Precision, Inc. (a Delaware corporation) and subsidiaries as of May 31, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity and cash flows for the three years in the period ended May 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Royal Precision, Inc. and subsidiaries as of May 31, 2000 and 1999, and the results of their operations and their cash flows for the three years in the period ended May 31, 2000 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Phoenix, Arizona July 21, 2000 13 ROYAL PRECISION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF MAY 31, 2000 AND 1999 (DOLLARS IN THOUSANDS)
2000 1999 -------- -------- ASSETS CURRENT ASSETS: Cash $ 36 $ 184 Accounts receivable, net of allowance for doubtful accounts of $274 and $433 at May 31, 2000 and 1999, respectively 5,100 4,617 Inventories 5,124 4,514 Other current assets 155 783 Deferred income taxes 106 647 -------- -------- Total current assets 10,521 10,745 -------- -------- PROPERTY, PLANT AND EQUIPMENT: Land 123 123 Furniture, fixtures and office equipment 455 499 Buildings and improvements 840 670 Machinery and equipment 4,278 4,144 Equipment held for sale 500 -- Construction in progress 1,081 402 -------- -------- 7,277 5,838 Less - Accumulated depreciation (1,264) (929) -------- -------- 6,013 4,909 -------- -------- GOODWILL, net 7,629 8,857 -------- -------- DEFERRED INCOME TAXES 701 70 -------- -------- OTHER ASSETS 78 29 -------- -------- Total assets $ 24,942 $ 24,610 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations $ 906 $ 1,203 Accounts payable 1,714 1,839 Accrued salaries and benefits 1,290 595 Accrued pension liability 176 251 Other accrued expenses 417 1,079 -------- -------- Total current liabilities 4,503 4,967 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, net of current portion 6,027 6,191 -------- -------- Total liabilities 10,530 11,158 -------- -------- 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); 5,678,956 and 5,667,375 shares issued and outstanding at May 31, 2000 and 1999, respectively 6 6 Additional paid-in capital 13,940 13,897 Retained earnings (accumulated deficit) 466 (404) Accumulated other comprehensive loss -- (47) -------- -------- Total stockholders' equity 14,412 13,452 -------- -------- Total liabilities and stockholders' equity $ 24,942 $ 24,610 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. 14 ROYAL PRECISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MAY 31, 2000, 1999 AND 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
2000 1999 1998 ----------- ----------- ----------- NET SALES: Golf club shafts $ 25,433 $ 19,075 $ 21,023 Golf club grips 4,492 4,144 3,699 ----------- ----------- ----------- 29,925 23,219 24,722 ----------- ----------- ----------- COST OF SALES: Golf club shafts 17,436 12,710 14,683 Golf club grips 3,089 2,318 1,805 ----------- ----------- ----------- 20,525 15,028 16,488 ----------- ----------- ----------- Gross profit 9,400 8,191 8,234 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,051 5,929 6,269 AMORTIZATION OF GOODWILL 486 521 390 GAIN ON TERMINATION OF MANUFACTURING SUPPLY CONTRACT -- (865) -- NONRECURRING MERGER RELATED EXPENSES -- -- 842 ----------- ----------- ----------- Operating income 1,863 2,606 733 INTEREST EXPENSE 644 794 605 TERMINATED MERGER EXPENSES -- 975 -- OTHER INCOME (267) (243) (168) ----------- ----------- ----------- Income from continuing operations before provision for income taxes 1,486 1,080 296 PROVISION FOR INCOME TAXES 616 804 28 ----------- ----------- ----------- Income from continuing operations 870 276 268 ----------- ----------- ----------- DISCONTINUED OPERATIONS: Loss from operations of Roxxi, Inc., net of tax benefit of $164 and $0 for the years ended May 31, 1999 and 1998, respectively -- 352 531 Loss on disposal of assets of Roxxi, Inc., net of tax benefit of $386 for the year ended May 31, 1999 -- 828 -- ----------- ----------- ----------- Loss from discontinued operations -- 1,180 531 ----------- ----------- ----------- Net income (loss) $ 870 $ (904) $ (263) =========== =========== =========== BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: Income from continuing operations $ 0.15 $ 0.05 $ 0.05 Loss from discontinued operations -- (0.21) (0.10) ----------- ----------- ----------- Net income (loss) $ 0.15 $ (0.16) $ (0.05) =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED TO COMPUTE PER SHARE INFORMATION: BASIC 5,672,580 5,649,756 5,246,857 =========== =========== =========== DILUTED 5,814,862 5,649,756 5,246,857 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 15 ROYAL PRECISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED MAY 31, 2000, 1999 AND 1998 (IN THOUSANDS)
RETAINED ACCUMULATED COMMON STOCK ADDITIONAL EARNINGS OTHER --------------- PAID-IN (ACCUMULATED COMPREHENSIVE COMPREHENSIVE SHARES AMOUNT CAPITAL DEFICIT) INCOME (LOSS) TOTAL INCOME (LOSS) ------ ------ ------- -------- ------------- -------- ------------- Balance, June 1, 1997 4,175 $ 4 $ 1,421 $ 763 $ -- $ 2,188 Issuance of common stock and stock options in connection with merger, net 1,371 2 12,385 -- -- 12,387 Exercise of common stock options and warrants 56 -- 15 -- -- 15 Net loss -- -- -- (263) -- (263) $(263) ----- Comprehensive loss -- -- -- -- -- -- (263) ----- --- ------- ----- ---- -------- ===== Balance, May 31, 1998 5,602 6 13,821 500 -- 14,327 Exercise of common stock options 65 -- 16 -- -- 16 Tax benefit from exercise of common stock options -- -- 45 -- -- 45 Stock based compensation -- -- 15 -- -- 15 Minimum pension liability adjustment, net of tax benefit of $31 -- -- -- -- (47) (47) (47) Net loss -- -- -- (904) -- (904) (904) ----- Comprehensive loss -- -- -- -- -- -- (951) ----- --- ------- ----- ---- -------- ===== Balance, May 31, 1999 5,667 6 13,897 (404) (47) 13,452 Exercise of common stock options 12 -- 4 -- -- 4 Tax benefit from exercise of common stock options -- -- 11 -- -- 11 Stock based compensation -- -- 28 -- -- 28 Minimum pension liability adjustment, net of tax expense of $31 -- -- -- -- 47 47 47 Net income -- -- -- 870 -- 870 870 ----- Comprehensive income -- -- -- -- -- -- $ 917 ----- --- ------- ----- ---- -------- ===== Balance, May 31, 2000 5,679 $ 6 $13,940 $ 466 $ -- $ 14,412 ===== === ======= ===== ==== ========
The accompanying notes are an integral part of these consolidated financial statements. 16 ROYAL PRECISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MAY 31, 2000, 1999 AND 1998 (IN THOUSANDS)
2000 1999 1998 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 870 $ (904) $ (263) Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations: Depreciation and amortization 1,158 939 749 Deferred income taxes 603 779 7 Loss on retirement and sale of fixed assets 14 -- 360 Stock based compensation 28 -- -- Changes in operating assets and liabilities - Accounts receivable, net (293) (575) 509 Inventories (110) (970) (130) Other assets 79 (19) 57 Accounts payable and accrued expenses 110 102 (650) Supply agreement credits -- -- (472) Loss from discontinued operations -- 352 531 Loss on sale of discontinued operations -- 828 -- Gain on termination of manufacturing supply contract -- (865) -- Terminated merger expenses -- 975 -- -------- -------- -------- Net cash provided by operating activities of continuing operations 2,459 642 698 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment, net (2,165) (940) (1,038) Merger costs -- (975) (1,031) Payments from net investment in capital lease -- 198 148 Payments from termination of manufacturing supply contract -- 1,500 -- Proceeds from sale of assets of discontinued operations -- 300 -- Proceeds from sale of fixed assets 15 -- 49 Cash acquired from Royal Grip, Inc. -- -- 18 -------- -------- -------- Net cash (used in) provided by investing activities of continuing operations (2,150) 83 (1,854) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of common stock options and warrants 4 16 15 Proceeds from issuance of long-term debt -- 5,140 1,600 Borrowings (repayments) under lines-of-credit, net 742 (359) 1,438 Repayments of long-term debt and capital lease obligations (1,203) (5,067) (1,607) -------- -------- -------- Net cash (used in) provided by financing activities of continuing operations (457) (270) 1,446 -------- -------- -------- NET CASH USED IN DISCONTINUED OPERATIONS -- (299) (290) -------- -------- -------- (DECREASE) INCREASE IN CASH (148) 156 -- CASH, beginning of year 184 28 28 -------- -------- -------- CASH, end of year $ 36 $ 184 $ 28 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 633 $ 870 $ 687 ======== ======== ======== Income taxes $ 48 $ 40 $ 61 ======== ======== ======== NON-CASH INVESTING AND FINANCING TRANSACTIONS: Reduction in goodwill due to utilization of pre-merger net operating loss carryforwards and reversal of valuation allowance on pre-merger deferred income tax assets $ 742 $ 650 $ -- ======== ======== ======== Issuance of common stock options and warrants in connection with FMP-RG Merger $ -- $ -- $ 12,995 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 17 ROYAL PRECISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS: ORGANIZATION - The accompanying consolidated financial statements include Royal Precision, Inc. (formerly FM Precision Golf Corp.) and its three wholly-owned subsidiaries (collectively, "RP" or the "Company") 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 (formerly known as Roxxi, Inc., "Roxxi"). As discussed in Note 3, the Company disposed of the operating assets of Roxxi in March 1999. Results of operations for RG are included in the Company's consolidated statements of operations since August 29, 1997, the effective date of the business combination described below. Results of operations for Roxxi are reflected as discontinued operations for all periods presented. BUSINESS - RP is a holding company which carries on its business operations through its subsidiaries. The Company designs, 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. The Company's products are sold throughout the United States as well as internationally, primarily in Japan, Australia, the United Kingdom and Canada (See Note 12). ACQUISITION - On May 14, 1997, RP entered into an Agreement and Plan of Merger with RG. Under the terms of the Merger agreement, effective August 29, 1997, 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. In the FMP-RG Merger, each outstanding share of RG common stock was converted into one-half share of RP common stock. As a result of the FMP-RG Merger, the pre-merger stockholders and option and warrant holders of RG owned or had the right to acquire an aggregate of 30% of RP's common stock on a fully diluted basis. The aggregate purchase price of $13,883,122 represents the sum of (i) the fair value of the 1,371,058 shares of RP common stock issued in exchange for 2,742,116 of the shares of RG common stock outstanding as of the merger date at $3.925 per share (the average closing bid price of RG common stock (pre-conversion) for the period from two days before until the two days after the announcement of the merger terms) of $10,763,000, (ii) cash of $122 paid to RG stockholders in lieu of 31 fractional shares, (iii) the fair value of the options and warrants to purchase 982,250 shares of RG common stock outstanding as of the merger date (which were converted into options and warrants to purchase 491,124 shares of RP common stock in connection with the merger) of $2,232,000, which amount was determined using the Black Scholes option pricing model, and (iv) RP Merger expenses of $888,000 (RG's merger costs of approximately $637,000 were expensed and RG's registration statement costs of approximately $143,000 were charged to stockholders' equity by RG prior to the acquisition). RP also incurred expenses of $608,000 associated with the registration statement which were charged to stockholders' equity. 18 The FMP-RG Merger was accounted for as a purchase, and the purchase price was allocated based on the fair value of the assets acquired and liabilities assumed as follows (in thousands): Cash $ 18 Accounts receivable 1,293 Inventories 710 Net investment in capital lease 2,981 Prepaid expenses and other current assets 68 Property and equipment 1,670 Goodwill 10,418 Accounts payable and accrued expenses (1,501) Supply agreement credits (472) Debt and capital lease obligations (1,166) Other, net (136) -------- $ 13,883 ======== In connection with the FMP-RG Merger, RG issued warrants to purchase 50,000 shares of RG common stock to an investment banker. Such warrants are included in the 982,250 RG options and warrants outstanding as of the Merger date referred to above. The warrants were exercisable at a price of $0.02 per share. Such warrants were exercised in September 1997 for $1,000. RP recorded a charge of $842,000 during the year ended May 31, 1998 for nonrecurring expenses related to the FMP-RG Merger. The components of this expense are $348,000 related to a computer software installation that was abandoned as a result of the FMP-RG Merger, $100,000 related to certain headwear related contracts, $150,000 of relocation expenses and $244,000 of severance as a result of organizational changes in connection with the FMP-RG Merger. DEPENDENCE ON "RIFLE" SHAFT SALES - Sales of the "Rifle" shaft were $18.7 million, $13.1 million and $9.8 million for the years ended May 31, 2000, 1999 and 1998, respectively. While management believes that demand for the "Rifle" shaft should remain high for the next several years, there can be no assurance that sales of the "Rifle" shaft will continue to grow or that the product will retain its profitability. If sales or profitability of the "Rifle" shaft decrease without the Company's introduction of new profitable products, the Company's overall financial performance would be materially adversely affected. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION - All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - 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. INVENTORIES - Inventories are valued at the lower of cost or market. Cost is determined on the first-in, first-out method. 19 PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are carried at acquired cost. Major additions and betterments are capitalized, while replacements, maintenance and repairs which do not extend the useful lives of the assets are charged to operations as incurred. Upon the disposition of property, plant and equipment, any resulting gain or loss is recognized in income. Depreciation of plant and equipment is provided for, commencing when such assets are placed in service, using the straight-line basis over the following estimated useful lives: USEFUL LIVES ------------ Buildings and improvements 27.5-40 years Machinery and equipment 3-12 years Furniture, fixtures and office equipment 3-12 years GOODWILL - Goodwill, prior to accumulated amortization, of $9,026,000, which is net of $1,392,000 of reductions related to utilization of pre-merger net operating loss ("NOL") carryforwards and reversal of related deferred tax assets, related to the FMP-RG Merger (see Note 1), is being amortized over 20 years. At May 31, 2000, accumulated amortization of goodwill was $1,397,000. LONG-LIVED ASSETS - The Company reviews long-lived assets and certain identifiable intangible assets to be held and used or disposed of for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment losses are recognized when the undiscounted future cash flows, excluding interest costs, exceed the carrying value of the related assets. The Company evaluates the goodwill asset for impairment by reviewing the estimated future cash flows of the acquired operations on a quarterly basis. As of May 31, 2000, the Company believes no impairment exists. INCOME TAXES - The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." This statement requires the Company to recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities and tax NOL carryforwards available for tax reporting purposes, using applicable tax rates for the years in which the differences are expected to reverse. A valuation allowance is recorded on deferred tax assets unless realization is more likely than not. STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation for employees under Accounting Principles Board Opinion No. 25 and has elected the disclosure-only alternative under SFAS No. 123, "Accounting for Stock Based Compensation." REVENUE RECOGNITION - Revenue is recorded upon the passage of title to the customers which generally occurs upon shipment. RESEARCH AND DEVELOPMENT - The Company expenses costs of research and development as incurred. Research and development expense was approximately $0.7 million, $0.6 million and $0.5 million for the years ended May 31, 2000, 1999 and 1998, respectively. ADVERTISING - The Company expenses production costs of advertising the first date the advertisements take place. Advertising and marketing costs were approximately $2.3 million, $1.6 million and $1.7 million for the years ended May 31, 2000, 1999 and 1998, respectively. As of May 31, 2000, deferred production and prepaid advertising costs totaling $115,000 are included in other current assets related to television commercials which had not yet aired. 20 NET 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 year. Diluted earnings (loss) per share assumes, in addition to the above, a dilutive effect of common share equivalents during the year. Common share equivalents represent dilutive stock options using the treasury stock method. For the years ended May 31, 2000, 1999 and 1998, options to purchase approximately 620,000, 147,000 and 437,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because the exercise prices of those options were greater than the average market price of the Company's common stock. Loss per share for the years ended May 31, 1999 and 1998 were not affected by stock options because their effect was anti-dilutive. COMPREHENSIVE INCOME - Under SFAS No. 130, "Reporting Comprehensive Income," the Company is required to report comprehensive income (loss) and its components in its consolidated financial statements in addition to net income (loss). Comprehensive loss is included in the accompanying consolidated statements of stockholders' equity. RECLASSIFICATIONS - Certain prior year balances have been reclassified to conform with the current year presentation. NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133 (as amended by SFAS No. 138), "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, as amended, during the fiscal year ending May 31, 2001. The Company does not anticipate any material impact resulting from the adoption of SFAS No. 133, as amended. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which was subsequently updated by SAB 101A. SAB 101 and SAB 101A summarize certain of the SEC's views in applying accounting principles generally accepted in the United States to revenue recognition in financial statements. The Company is required to adopt SAB 101 no later than the fourth quarter of its fiscal year ending May 31, 2001. The Company is currently evaluating the impact of the adoption of SAB 101 on its results of operations and financial position. 3. 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 $0.3 million and a royalty of 2% of the buyer's net sales until the buyer has paid an additional $0.2 million. Subsequently, Roxxi's name was changed to Royal Grip Headwear Company. In fiscal 1999, the Company recorded a loss on disposal of assets of Roxxi of $0.8 million, net of a tax benefit of $0.4 million. This expense represents a $1.1 million write-down of the excess of the carrying value of inventory and fixed assets over the cash received and $0.1 million for estimated transaction costs and estimated operating expenses to be incurred during the phase-out period of this business segment. The Company is accounting for royalties as income is earned during the two year period beginning May 1, 1999. For the years ended May 31, 2000 and 1999, royalties of $151,000 and $20,000 were recorded, respectively, and are reflected as other income in the accompanying consolidated statements of operations. 21 Selected financial data for the discontinued operations is as follows for the years ended May 31, 1999 and 1998 (in thousands): 1999 1998 ------- ------- Net sales $ 2,381 $ 2,899 ======= ======= Loss from operations before income taxes $ (516) $ (531) Income tax benefit 164 -- ------- ------- Loss from operations $ (352) $ (531) ======= ======= Cash flow $ (299) $ (290) ======= ======= 4. INVENTORIES: Inventories as of May 31, 2000 and 1999 consisted of the following (in thousands): 2000 1999 ------ ------ Raw materials $ 525 $ 471 Work-in-process 1,655 1,566 Finished goods 2,944 2,477 ------ ------ $5,124 $4,514 ====== ====== 5. MANUFACTURING SUPPLY CONTRACTS: In December 1996, RG and Acushnet Rubber Company ("Acushnet") entered into a manufacturing and supply agreement whereby RG outsourced the manufacturing of its golf club grips to Acushnet. Additionally, the two parties entered into an agreement resulting in the transfer of RG's manufacturing equipment to Acushnet under a capital lease. Since January 1997, RG has purchased the majority of its supply of non-cord, injected grips from Acushnet. During the first calendar quarter of 1997, Acushnet experienced startup delays in the production of grips and was unable to satisfy its obligation under the contracts. In light of these difficulties, RG and Acushnet renegotiated their manufacturing and supply agreement, and Acushnet provided RG with purchase credits totaling $472,000 to be applied against current and future amounts owed to Acushnet for the production of grips. RG recorded $472,000 during the year ended May 31, 1998 as a reduction in golf club grips cost of sales when these credits were not earned back by Acushnet under certain provisions of the amended contract. In May 1999, RG and Acushnet executed a mutual release agreement terminating their manufacturing and supply agreement and capital lease agreement (the "Termination Agreement"). Pursuant to the Termination Agreement, RG received $1.5 million in cash and $1.0 million in purchase credits from Acushnet. Additionally, Acushnet's obligation to make additional payments to RG under the capital lease was terminated but Acushnet was required to continue producing grips through February 2000 at which time RG received the manufacturing equipment which was previously leased to Acushnet. RG recognized an aggregate gain of $865,000 during the fiscal year ended May 31, 1999 as a result of the Termination Agreement. At May 31, 2000, the manufacturing equipment returned to RG is classified as equipment held for sale. The Company believes that its current inventory of grips is sufficient to satisfy customer demand through December 31, 2000. The Company is currently purchasing grips from various suppliers and believes it has an adequate source of supply to meet its current and anticipated future customer needs. However, there can be no assurance that the transition to new suppliers will not result in production delays or the loss of sales and key customers which would have a material adverse effect on the Company's financial condition and results of operations. FMP uses one vendor to supply primarily all of the strip steel utilized in the manufacture of steel golf club shafts, but has no supply contract with the vendor. Should the vendor fail to deliver steel, there may be a disruption of operations at FMP until an alternate supplier is procured. The vendor provides steel from two separate plant locations. If one plant becomes unable to fill the necessary requirements, orders could be filled from the alternate location. Although FMP has elected to use this vendor as its primary supplier of strip steel, management believes that there are other acceptable supply sources at comparable prices and that the loss of the supplier would not have a significant adverse impact on the Company. 22 6. 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 $1.0 million related to the RP-Coyote Merger which have been reflected as terminated merger expenses in the accompanying consolidated statement of operations for the year ended May 31, 1999. 7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: FMP has a credit facility consisting of a term loan and a revolving line-of-credit. The FMP term loan of $2.7 million at May 31, 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 May 31, 2000, FMP had $3.7 million outstanding under its revolving line-of-credit and $1.1 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 $0.4 million at May 31, 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 May 31, 2000, RG had $0.1 million outstanding under its revolving line-of-credit and $0.8 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 (9.5% at May 31, 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 May 31, 2000. Total indebtedness of the Company as of May 31, 2000 and 1999 consisted of the following (in thousands): 2000 1999 ------- ------- FMP: ---- Line-of-credit $ 3,740 $ 3,103 Term loan 2,657 3,607 RG: --- Line-of-credit 105 -- Term loan 431 644 Capital lease obligations -- 40 ------- ------- 6,933 7,394 Less - Current portion (906) (1,203) ------- ------- Total long-term debt and capital lease obligations $ 6,027 $ 6,191 ======= ======= 23 Scheduled maturities of the Company's indebtedness at May 31, 2000 are as follows (in thousands): YEARS ENDING MAY 31, ------- 2001 $ 906 2002 906 2003 5,121 ------ $6,933 ====== As of May 31, 2000 and 1999, the carrying value of the line-of-credit and term loans approximated their fair market value since the obligations bear interest at a variable rate of interest. 8. OPERATING LEASES: The Company leases its corporate offices, its West Coast distribution center and various office equipment under operating lease agreements. Minimum annual rental commitments under noncancellable leases are as follows (in thousands): YEARS ENDING MAY 31, ------- 2001 $ 294 2002 53 ------ $ 347 ====== Rental expense under operating leases totaled approximately $230,000, $256,000 and $204,000 for the years ended May 31, 2000, 1999 and 1998, respectively. 9. STOCK OPTION PLANS: In connection with the FMP-RG Merger, options to purchase 41 shares of FM Precision Golf Corp. common stock outstanding as of the FMP-RG Merger date were converted into options to purchase 169,761 shares of RP common stock. As of May 31, 2000, 90,308 shares of common stock are reserved for issuance upon the exercise of the remaining options outstanding. In connection with the FMP-RG Merger, options and warrants to purchase 982,250 shares of RG common stock outstanding as of the FMP-RG Merger date were converted into options and warrants to purchase 491,124 shares of RP common stock. As of May 31, 2000, 269,874 shares of common stock are reserved for issuance upon the exercise of the remaining options outstanding. In October 1997, the Company adopted the Royal Precision, Inc. Stock Option Plan (the "RP Plan"). The RP Plan is administered by the Board of Directors and provides for the granting of nonqualified or incentive stock options to purchase up to 750,000 shares of the Company's common stock to certain employees, consultants and directors. As of May 31, 2000, 695,173 shares of common stock are reserved for issuance upon the exercise of options outstanding under the RP Plan. As of May 31, 2000, an additional 54,266 shares of common stock are reserved for options not yet granted under the RP Plan. In December 1999, warrants to purchase 25,000 shares were granted to a firm which provides consulting services to the Company. These warrants were not issued under the RP plan, however, they are included in the detail below. None of the warrants had been exercised as of May 31, 2000. 24 Stock option and warrant activity for the years ended May 31, 1998, 1999 and 2000 is as follows:
FM PRECISION WEIGHTED- GOLF CORP. RG AVERAGE CONVERTED CONVERTED RP PLAN OTHER TOTAL EXERCISE SHARES SHARES SHARES SHARES SHARES PRICE ------ ------ ------ ------ ------ ----- Outstanding at June 1, 1997 69,761 -- -- -- 169,761 $ 0.24 Converted from RG options and warrants in connection with FMP-RG merger -- 491,124 -- -- 491,124 7.53 Granted -- -- 250,000 -- 250,000 6.75 Exercised (2,755) (52,500) -- -- (55,255) 0.28 Cancelled -- -- (250,000) -- (250,000) 6.75 Expired -- (1,875) -- -- (1,875) 13.00 ------- --------- -------- ------ --------- Outstanding at May 31, 1998 167,006 436,749 -- -- 603,755 6.13 Granted -- 178,083 104,980 -- 283,063 3.25 Exercised (65,678) -- -- -- (65,678) 0.24 Cancelled -- (323,833) (1,000) -- (324,833) 7.47 Expired -- (21,125) -- -- (21,125) 19.15 ------- --------- -------- ------ --------- Outstanding at May 31, 1999 101,328 269,874 103,980 -- 475,182 3.73 Granted -- -- 615,933 25,000 640,933 2.53 Exercised (11,020) -- (561) -- (11,581) 0.32 Cancelled -- -- (24,179) -- (24,179) 2.03 ------- --------- ------- ------ --------- Outstanding at May 31, 2000 90,308 269,874 695,173 25,000 1,080,355 3.10 ======= ========= ======== ====== =========
A summary of information about stock options outstanding at May 31, 2000 is as follows: OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------- ------------------------ WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE AT MAY 31, CONTRACTUAL EXERCISE AT MAY 31, EXERCISE PRICES 2000 LIFE PRICE 2000 PRICE - ------------- --------- --------- ------ ------- ------ $ 0.24 90,308 6.8 years $ 0.24 90,308 $ 0.24 1.81 42,740 8.6 years 1.81 14,104 1.81 1.88 25,000 4.2 years 1.88 25,000 1.88 2.06 148,600 9.1 years 2.06 -- 2.06 2.13 1,000 9.4 years 2.13 -- 2.13 2.38 27,500 7.0 years 2.38 25,000 2.38 2.63 125,000 7.7 years 2.63 20,000 2.63 2.75 - 6.75 587,707 8.0 years 3.41 258,457 3.88 8.00 - 24.50 32,500 1.3 years 15.09 32,500 15.09 --------- ------- 1,080,355 465,369 ========= ======= The Company has computed the pro forma disclosures required under SFAS No. 123 for all of the options it has using the Black Scholes option pricing model as prescribed by SFAS No. 123. The weighted average assumptions used are as follows for the years ended May 31, 2000 and 1999: 2000 1999 ---- ---- Risk free interest rate 6.6% 5.8% Expected dividend yield None None Expected life 10 years 7 years Expected volatility 55% 83% 25 The only options granted during the year ended May 31, 1998 were also cancelled. Since the Company accounts for cancellations on an actual basis for SFAS No. 123 disclosure purposes, the grant and cancellation had no effect on net loss for the year ended May 31, 1998. Had compensation cost for the Company's stock plan been determined consistent with SFAS No. 123, the Company's net income (loss) and basic and diluted net income (loss) per share would have been the following pro forma amounts for the years ended May 31, 2000 and 1999 (in thousands, except per share data): 2000 1999 ----- ------- Net income (loss): As reported $ 870 $ (904) Pro forma $ 555 $(1,384) Basic and diluted net income (loss) per share: As reported $0.15 $ (0.16) Pro forma $0.10 $ (0.24) The resulting pro forma compensation cost may not be representative of that to be expected in future years because the pro forma amounts do not consider options granted prior to fiscal 1997 or in future years. During March 2000, the FASB issued Interpretation 44, "Accounting for Certain Transactions Involving Stock Compensation--an Interpretation of APB Opinion No. 25" ("FIN 44"), which among other issues, addresses repricing and other modifications made to previously issued stock options. The Company will be required to adopt FIN 44 in the first quarter of its fiscal year ending May 31, 2001. As of May 31, 2000, there are outstanding options to purchase 170,583 shares at an exercise price of $3.19 per share which will be subject to variable plan accounting until they are exercised or expire in January 2004. 10. INCOME TAXES: The components of the provision for income taxes from continuing operations are as follows for the years ended May 31, 2000, 1999 and 1998 (in thousands): 2000 1999 1998 ---- ---- --- Current $ 13 $ 25 $21 Deferred 603 779 7 ---- ---- --- $616 $804 $28 ==== ==== === The Company's effective income tax rate, as a percent of pretax income from continuing operations, differs from the statutory federal rate as follows for the years ended May 31, 2000, 1999 and 1998: 2000 1999 1998 --- --- --- Statutory federal income tax rate 34% 34% 34% State taxes, net of federal benefit 6 -- 7 Nondeductible goodwill amortization 11 16 53 Change in valuation allowance (11) 28 (85) Other 1 (4) -- --- --- --- Effective income tax rate 41% 74% 9% === === === 26 The components of deferred income tax assets (liabilities) as of May 31, 2000 and 1999 are as follows (in thousands): 2000 1999 ------- ------- Current asset (liability) - Financial reserves and accruals not currently deductible $ 582 $ 1,518 Other (72) (210) Valuation allowance (404) (661) ------- ------- 106 647 ------- ------- Long-term asset (liability) - Tax effect of net operating loss carryforwards 2,230 1,900 Book basis in excess of tax for property, plant and equipment (441) (472) Compensation expense related to grant of stock options 94 262 Other 159 368 Valuation allowance (1,341) (1,988) ------- ------- 701 70 ------- ------- $ 807 $ 717 ======= ======= As of May 31, 2000, the Company has federal and state NOL carryforwards of approximately $5.6 million of which $4.9 million relate to RG for periods prior to the FMP-RG Merger ("Pre-Merger NOLs"). The use of such Pre-Merger NOLs is limited to $764,000 per annum under Section 382 of the Internal Revenue Code. As of May 31, 2000, approximately $1.1 million of Pre-Merger NOLs are available for usage under Section 382. The NOLs, if unused, expire in 2009 through 2019. As of May 31, 1998, a valuation allowance of $2,821,000 was recorded to fully offset NOL carryforwards and other net deferred tax assets as of such date, due to uncertainty of their realization. During fiscal 1999, the Company utilized approximately $942,000 of Pre-Merger NOLs and also determined that approximately $970,000 of Pre-Merger NOLs were realizable. As such, the Company reduced the valuation allowance by an aggregate of $650,000 (see Note 2). The effect of this benefit, as well as any future reductions in the valuation allowance related to the Pre-Merger NOLs, was recorded as a reduction of goodwill. During the year ended May 31, 1999, the Company also increased the valuation allowance on certain other deferred tax assets by approximately $478,000, resulting in a valuation allowance of $2,649,000 as of May 31, 1999. During fiscal 2000, the Company utilized approximately $437,000 of Pre-Merger NOLs and also determined that approximately $1.9 million of Pre-Merger NOLs were realizable. The Company accordingly reduced the valuation allowance by $742,000 and recorded a corresponding reduction of goodwill (see Note 2). Subsequent recognition of additional amounts of Pre-Merger NOLs would result in further reductions of goodwill of up to $1.4 million. During fiscal 2000, the Company also reduced the valuation allowance on other deferred income tax assets, not related to the FMP-RG Merger, by approximately $162,000. 11. RELATED PARTY TRANSACTIONS: In connection with the RP-Coyote Merger (see Note 6), fees of approximately $85,000 were paid to related parties during the year ended May 31, 1999 and in connection with the FMP-RG Merger (see Note 1), fees of approximately $607,000 were paid to related parties during the year ended May 31, 1998. Professional and advisory fees and expense reimbursements of approximately $291,000, $316,000 and $416,000 were paid to certain shareholders or their affiliates during the years ended May 31, 2000, 1999 and 1998, respectively. 12. FOREIGN SALES: The Company has export sales to customers located primarily throughout Japan, Australia, the United Kingdom and Canada. Foreign sales were approximately 33%, 29% and 20% of the Company's sales for the years ended May 31, 2000, 1999 and 1998, respectively. The following table summarizes the Company's sales by major worldwide regions for the years ended May 31, 2000, 1999 and 1998 (in thousands): 2000 1999 1998 ------- ------- ------- United States $20,160 $16,431 $19,777 Japan 8,210 5,797 3,950 Other 1,555 991 995 ------- ------- ------- Total $29,925 $23,219 $24,722 ======= ======= ======= 27 13. BENEFIT PLANS: 401(k) PLAN - The Company maintains a defined contribution benefit plan under Section 401(k) of the Internal Revenue Code. Each year, eligible participants may elect to make salary reduction contributions on their behalf up to a maximum of the lesser of 15% of compensation or the annual maximum contribution established by the Internal Revenue Service. Participants may also make voluntary after-tax contributions to the defined contribution benefit plan. Employer contributions are discretionary and, to date, the Company has not contributed to the defined contribution benefit plan. PENSION PLAN - Approximately 70% of the Company's work force is covered by a collective bargaining agreement. FMP maintains the FM Precision Golf Manufacturing Corp. Pension Plan for Represented Hourly Wage Employees (the "Union Plan") for the benefit of FMP's union employees. The Company contributes such amounts as are necessary on an actuarial basis to provide the Union Plan with assets sufficient to meet the benefits to be paid to participants. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. For the years ended May 31, 2000 and 1999, the reconciliation of the projected benefit obligation was (in thousands): 2000 1999 ----- ---- Beginning of year projected benefit obligation $ 382 $181 Service cost 98 88 Interest cost 22 13 Actuarial (gain) loss (61) 100 ----- ---- End of year projected benefit obligation $ 441 $382 ===== ==== The reconciliation of the funded status of the Union Plan as of May 31, 2000 and 1999 was (in thousands): 2000 1999 ---- ---- Projected benefit obligation $(441) $(382) Plan assets at fair value 265 131 ----- ----- Funded status (accrued benefit cost) (176) (251) Minimum pension liability adjustment -- 78 ----- ----- Net amount recognized $(176) $(173) ===== ===== The reconciliation of fair value of assets of the Union Plan as of May 31, 2000 and 1999 was (in thousands): 2000 1999 ---- ---- Beginning of year fair value of assets $131 $120 Employer contributions 119 -- Actual return on plan assets 15 11 ---- ---- End of year fair value of assets $265 $131 ==== ==== The components of net pension cost for the years ended May 31, 2000, 1999 and 1998 were (in thousands): 2000 1999 1998 ----- ---- ---- Service cost $ 98 $ 88 $ 85 Interest cost 22 13 7 Expected return on assets (4) (3) 10 ----- ---- ---- Net periodic pension cost $ 116 $ 98 $102 ===== ==== ==== 28 A summary of the Company's key actuarial as sumptions as of May 31, 2000, 1999 and 1998 were as follows: 2000 1999 1998 ---- ---- ---- Discount rate 7.75% 6.75% 7.50% Expected long-term rate of return on assets 9.00% 9.00% 9.00% 14. 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. 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): YEAR ENDED MAY 31, 2000 --------------------------------- GOLF CLUB GOLF CLUB SHAFTS GRIPS TOTAL ------ ----- ----- Net sales $ 25,433 $ 4,492 $ 29,925 Interest expense 575 69 644 Depreciation and amortization 384 774 1,158 Operating income (loss) 2,004 (141) 1,863 Assets 13,488 17,475 30,963 Capital expenditures 1,838 327 2,165 Total assets for reportable segments $ 30,963 Assets of discontinued operations 43 Elimination of investment in subsidiary (6,064) -------- Consolidated total assets $ 24,942 ======== YEAR ENDED MAY 31, 1999 --------------------------------- GOLF CLUB GOLF CLUB SHAFTS GRIPS TOTAL ------ ----- ----- Net sales $ 19,075 $ 4,144 $ 23,219 Interest expense 708 86 794 Depreciation and amortization 288 651 939 Operating income 1,494 1,112 2,606 Assets 11,815 18,927 30,742 Capital expenditures 789 151 940 Total assets for reportable segments $ 30,742 Assets of discontinued operations 162 Elimination of investment in subsidiary (6,294) -------- Consolidated total assets $ 24,610 ======== YEAR ENDED MAY 31, 1998 --------------------------------- GOLF CLUB GOLF CLUB SHAFTS GRIPS TOTAL ------ ----- ----- Net sales $ 21,023 $ 3,699 $ 24,722 Interest expense 573 32 605 Depreciation and amortization 215 534 749 Operating income 294 439 733 Assets 9,276 22,277 31,553 Capital expenditures 828 210 1,038 Total assets for reportable segments $ 31,553 Assets of discontinued operations 1,956 Elimination of investment in subsidiary (7,623) -------- Consolidated total assets $ 25,886 ======== 29 15. CONCENTRATION OF CREDIT RISK: The Company is subject to a concentration of credit risk as a result of sales to its significant customers including its exclusive Japanese distributor and an original equipment manufacturer. These two largest customers each accounted for more than 10% and in the aggregate accounted for 46%, 40% and 35% of the Company's net sales for the years ended May 31, 2000, 1999 and 1998, respectively. The Japanese distributor purchases both golf club shafts and golf club grips and accounted for 19%, 17% and 11% of shaft sales and 73%, 61% and 73% of grip sales during the years ended May 31, 2000, 1999 and 1998, respectively. The outstanding receivable balances for this customer were approximately $0.6 million and $0.7 million at May 31, 2000 and 1999, respectively. The OEM customer purchases only golf club shafts and accounted for 22%, 18% and 18% of shaft sales during the years ended May 31, 2000, 1999 and 1998, respectively. The outstanding receivable balances for this customer were approximately $0.8 million and $0.3 million at May 31, 2000 and 1999, respectively. To reduce its credit risk, the Company requires letter of credit agreements from its Japanese distributor. 16. COMMITMENTS AND CONTINGENCIES: The Company is from time to time a party to various routine legal proceedings which are incidental to the Company's business. Management consults with legal counsel on all such matters and believes that none of the current routing proceedings will have a material adverse effect on the Company's financial condition or future operating results. 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") alleged 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. On April 17, 2000, the court granted the Company's motion to dismiss this suit. However, the court has not yet signed a final judgment and it is uncertain whether or not Donnelley will appeal the dismissal. Management believes that the action is without merit and intends to defend any appeal vigorously. In May 1996, the Company acquired substantially all the assets of the golf club shaft manufacturing business of Brunswick Corporation (the "Brunswick Acquisition"). Included in the acquired assets were land, buildings and equipment at the Company's Torrington, Connecticut manufacturing facility (the "FMP plant"). In conjunction with the Brunswick Acquisition, Brunswick Corporation agreed to indemnify the Company from potential liability arising from certain environmental matters and to remediate certain environmental conditions which existed at the FMP plant on the date of acquisition. Brunswick Corporation has engaged an environmental consulting firm to perform testing at the FMP plant and is in the process of developing a plan of remediation. Failure of Brunswick Corporation to fulfill its obligations under the asset purchase contract could have a material adverse effect on the Company's financial condition and results of operations. The Company has retained legal counsel for representation on various environmental matters related to the Brunswick Acquisition. Total legal fees incurred related to these matters during the fiscal year ended May 31, 2000 were approximately $0.1 million. The Company received a notice of violation ("NOV") from the State of Connecticut Department of Environmental Protection ("DEP") alleging violation of certain provisions of a permit related to the discharge of treated wastewater at the FMP plant. This permit was issued to the Company in February 1997 based on an application prepared by Brunswick Corporation in April 1996. In April 2000, the Company reached a settlement agreement with DEP discharging the Company from any civil liability with respect to the allegations in the NOV, subject to completion and approval of certain remedial measures at the FMP plant. The Company incurred approximately $0.2 million in capital expense to complete these remedial measures during the fiscal year ended May 31, 2000 and, in June 2000, obtained a certification from DEP that the work was satisfactorily completed. The Company is seeking reimbursement from Brunswick Corporation for the cost of remediation and legal fees incurred in conjunction with this matter. 30 In April 2000, the Company received a request for information from the U.S. Environmental Protection Agency ("EPA") related to disposal and treatment of waste materials from the FMP plant during a period from 1982 to 1997. The EPA is currently conducting an investigation regarding the former National Oil Services, Inc. Superfund site in West Haven, Connecticut. National Oil Services, Inc. was, prior to its bankruptcy, a contractor used by the Company and Brunswick Corporation to treat and dispose non-hazardous waste oils from the FMP plant. EPA has not issued any demands for reimbursement or performance of work from the Company relating to this matter and there is not sufficient information at this time to determine what, if any, action EPA may pursue and what, if any, effect it may have on the Company's financial condition and results of operations. 17. QUARTERLY FINANCIAL DATA (UNAUDITED): Provided below is selected unaudited quarterly financial data for the fiscal years ended May 31, 2000, 1999 and 1998 (in thousands except per share data):
2000 -------------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL ----- ------ ----- ------ ----- Net sales $ 6,516 $ 6,420 $ 7,015 $ 9,974 $ 29,925 Net income $ 294 $ 64 $ 35 $ 477 $ 870 ======= ======= ======= ======= ======== Per share information: Basic and diluted - Net income $ 0.05 $ 0.01 $ 0.01 $ 0.08 $ 0.15 ======= ======= ======= ======= ======== 1999 -------------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL ----- ------ ----- ------ ----- Net sales $ 6,038 $ 3,851 $ 5,118 $ 8,212 $ 23,219 Income (loss) from continuing operations 213 (112) (812) 987 276 Income (loss) from discontinued operations (210) (179) (127) 164(a) (352) Loss on sale of discontinued operations -- -- (1,214) 386(a) (828) ------- ------- ------- ------- -------- Net income (loss) $ 3 $ (291) $(2,153) $ 1,537 $ (904) ======= ======= ======= ======= ======== Per share information: Basic and diluted - Income (loss) from continuing operations $ 0.04 $ (0.02) $ (0.14) $ 0.17 $ 0.05 ======= ======= ======= ======= ======== Net income (loss) $ 0.00 $ (0.05) $ (0.38) $ 0.27 $ (0.16) ======= ======= ======= ======= ========
(a) Represents tax benefits realized from discontinued operations which were not available prior to the fourth quarter of fiscal 1999. 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding the Company's directors and executive officers is set forth under the heading "ELECTION OF DIRECTORS" in the Company's Proxy Statement for its 2000 Annual Meeting of Stockholders (the "2000 Proxy Statement") which information is incorporated herein by reference. Information relating to compliance with Section 16(a) of the Exchange Act is set forth under the heading "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in the 2000 Proxy Statement which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information regarding executive compensation is set forth under the headings "COMPENSATION OF MANAGEMENT" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" in the 2000 Proxy Statement which information is incorporated herein by reference; provided, however, that the information set forth under the headings "STOCK PERFORMANCE GRAPH" and "REPORT OF PERSONNEL AND COMPENSATION COMMITTEE" contained in the 2000 Proxy Statement is not incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information regarding security ownership of beneficial owners and management is set forth under the heading "SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS, DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS" in the 2000 Proxy Statement which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information regarding certain transactions and relationships of management is set forth under the heading "CERTAIN TRANSACTIONS" in the 2000 Proxy Statement which information is incorporated herein by reference. 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements Report of Independent Public Accountants ........................... 13 Consolidated Balance Sheets ........................................ 14 Consolidated Statements of Operations .............................. 15 Consolidated Statements of Stockholders' Equity .................... 16 Consolidated Statements of Cash Flows .............................. 17 Notes to Consolidated Financial Statements ......................... 18 (b) Reports on Form 8-K. No current reports on Form 8-K were filed during the last quarter of the period covered by this report. (c) Exhibits. The Index to Exhibits and required Exhibits are included following the Financial Statement Schedule beginning on page 37 of this report. (d) Financial Statement Schedules. Report of Independent Public Accountants .......................... S-1 Schedule II -- Valuation and Qualifying Accounts and Reserves ..................................................... S-2 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 11, 2000 ROYAL PRECISION, INC. (the "Registrant") By /s/ Thomas A. Schneider ----------------------------------- Thomas A. Schneider, President and Chief Operating Officer Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 11th day of August, 2000. NAME TITLE (CAPACITY) ---- ---------------- /s/ Thomas A. Schneider President and Chief Operating Officer - ----------------------------- (principal executive officer) Thomas A. Schneider /s/ Kevin L. Neill* Vice President-Finance, Chief Financial - ----------------------------- Officer (principal financial and Kevin L. Neill accounting officer) /s/ Richard P. Johnston * Director - ----------------------------- Richard P. Johnston /s/ David E. Johnston * Director - ----------------------------- David E. Johnston /s/ Raymond J. Minella * Director - ----------------------------- Raymond J. Minella /s/ Charles S. Mechem, Jr. * Director - ----------------------------- Charles S. Mechem, Jr. /s/ Danny Edwards * Director - ----------------------------- Danny Edwards * Thomas A. Schneider, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a Power of Attorney duly executed by such persons. By: /s/ Thomas A. Schneider ------------------------------------- Thomas A. Schneider, Attorney in Fact 34 ITEM 14D. FINANCIAL STATEMENT SCHEDULES. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Royal Precision, Inc.: We have audited in accordance with auditing standards generally accepted in the United States, the financial statements included in Royal Precision, Inc. and subsidiaries' (the Company) Form 10-K, and have issued our report thereon dated July 21, 2000. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule shown on page S-2 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Phoenix, Arizona July 21, 2000 S-1 ROYAL PRECISION, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED MAY 31, 1998, 1999 AND 2000
Charged to Balance at (Deducted Balance at Beginning of from) Costs Other Other End of Period and Expenses Additions Deductions Period ------ ------------ --------- ---------- ------ (in thousands) Allowance for doubtful accounts: Year ended May 31, 1998 $ 541 $ 124 $ -- $ (63) $ 602 Year ended May 31, 1999 602 24 -- (193) 433 Year ended May 31, 2000 433 40 -- (199) 274 Charged to Balance at (Deducted Balance at Beginning of from) Costs Other Other End of Period and Expenses Additions Deductions Period ------ ------------ --------- ---------- ------ (in thousands) Deferred tax asset valuation allowance: Year ended May 31, 1998 $ -- $ -- $ 2,821(a) $ -- $2,821 Year ended May 31, 1999 2,821 478 -- (650)(b) 2,649 Year ended May 31, 2000 2,649 (162) -- (742)(b) 1,745
(a) Created as part of acquisition accounting related to the FMP-RG Merger. (b) Reduction in goodwill related to preacquisition net operating loss carryforwards. S-2 EXHIBIT INDEX
EXHIBIT - ------- (3) Certificate of Incorporation and Bylaws * 3.1 Amended and Restated Certificate of Incorporation of registrant (incorporated by reference to Exhibit 3.1 to the registrant's Form 10-QSB for the quarter ended November 30, 1999; the "November 1999 10-QSB"). * 3.2 Bylaws of Royal Precision, Inc. (incorporated by reference to Exhibit 3.2 to Form S-4, No. 333-28841; the "Form S-4"). * (4) Instruments defining the rights of holders * 4.1 See Articles FOUR, FIVE and SEVEN of the Amended and Restated Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the November 1999 10-QSB). * 4.2 See Article I, Sections 2.1 and 2.2 of Article II and Section 7.3 of Article VII of the Bylaws of Royal Precision, Inc. (incorporated by reference to Exhibit 3.2 to the Form S-4). * (10) Material Contracts * 10.1 Asset Purchase Agreement dated May 31, 1996 with Brunswick Corporation. (incorporated by reference to Exhibit 10.1.1 of the Form S-4). * 10.2 1997 Stock Option Plan dated March 13, 1997 (incorporated by reference to Exhibit 10.2.5 of the Form S-4).** * 10.2 Form of Option Agreement with those not parties to the Management Stockholders Agreement (incorporated by reference to Exhibit 10.2.6 of the Form S-4).** * 10.4 Form of Option Agreement with those who are parties to the Management Stockholders Agreement (incorporated by reference to Exhibit 10.2.7 of the Form S-4).** * 10.5 Credit and Security Agreement dated as of October 8, 1998 among FM Precision Golf Manufacturing Corp., FM Precision Golf Sales Corp. and Norwest Business Credit, Inc. (incorporated by reference to Exhibit 10.1 of the Form 10-QSB for the quarter ended August 31, 1998 (the "August 1998 10-QSB")). * 10.6 Amended and Restated Credit and Security Agreement dated as of October 8, 1998 among Royal Grip, Inc., Roxxi, Inc. and Norwest Business Credit, Inc. (incorporated by reference to Exhibit 10.2 of the August 1998 10-QSB). * 10.7 Agreement between Royal Grip, Inc. and Precision Japan Ltd. dated July 12, 1991 (incorporated by reference to Exhibit 10.7 to RG's 1996 Form 10-K). * 10.8 Manufacturers' Representative Agreement dated March 1, 1979 with Union Tubular Products, Brunswick Corporation and M.A. Clark (incorporated by reference to Exhibit 10.4.6 of the Form S-4). * 10.9 Distributor Agreement effective August 20, 1990 with Brunswick and Infiniti Golf (incorporated by reference to Exhibit 10.4.7 of the Form S-4). *
EXHIBIT - ------- 10.10 Royal Precision, Inc. Stock Option Plan dated October 5, 1997 (incorporated by reference to Exhibit 10.32 of the Form 10-KSB for the year ended May 31, 1998).** * 10.11 Amendment No. 1 to the Stockholder Agreement, dated as of May 12, 1997, among Danny Edwards, Drew M. Brown, DMB Property Ventures Limited Partnership, Mark N. Sklar, Bennett Dorrance, Trustee of the Bennett Dorrance Trust dated April 21, 1989, as amended, Christopher A. Johnston, Richard P. Johnston and Jayne A. Johnston Charitable Remainder Trust #3 (Richard P. Johnston Trustee), as successor to RPJ/JAJ Partners, Ltd., a Wyoming partnership, David E. Johnston, Berenson Minella & Company, L.P., Kenneth J. Warren and Royal Precision, Inc. (incorporated by reference to Exhibit 99.4 of Form 8-K dated February 3, 1999.) * 10.12 Asset Purchase Agreement dated February 26, 1999 between Roxxi, Inc. and Paramount Headwear, Inc. (incorporated by reference to Exhibit 2.1 of the Form 8-K dated March 22, 1999). * 10.13 Asset Purchase Agreement dated March 11, 1999 between Roxxi, Inc. and Big Play, Inc. (incorporated by reference to Exhibit 2.2 of the Form 8-K dated March 22, 1999). * 10.14 Guaranty by the Registrant dated March 11, 1999 (incorporated by reference to Exhibit 2.3 of the Form 8-K dated March 22, 1999). * 10.15 First Amendment to Amended and Restated Credit and Security Agreement and Waiver of Defaults between Royal Grip, Inc., Roxxi, Inc. and Norwest Business Credit, Inc. and Acknowledgment and Agreement of Guarantor dated March 16, 1999 (incorporated by reference to Exhibit 10.16 of the registrant's Form 10-KSB for the year ended May 31, 1999; the "1999 Form 10-KSB"). * 10.16 Second Amendment to Credit and Security Agreement and Waiver of Defaults between Royal Grip, Inc., Roxxi, Inc. and Wells Fargo Business Credit, Inc. (formerly known as Norwest Business Credit, Inc.) dated as of April 13, 1999 (incorporated by reference to Exhibit 10.17 of the 1999 Form 10-KSB). * 10.17 Amendment to Credit and Security Agreement and Waiver of Defaults between FM Precision Golf Manufacturing Corp., FM Precision Golf Sales Corp. and Wells Fargo Business Credit, Inc. (formerly known as Norwest Business Credit, Inc.) dated as of April 13, 1999 (incorporated by reference to Exhibit 10.18 of the 1999 Form 10-KSB). * 10.18 Personal Services Agreement entered into as of August 31, 1999 between Danny Edwards and Royal Precision, Inc. (incorporated by reference to Exhibit 10.1 of the registrant's Form 10-Q for the quarter ended August 31, 1999).** * 10.19 Royal Precision Stock Option Plan (restated to reflect amendments adopted by the Board of Directors on November 30, 1999) (incorporated by reference to Exhibit 10.1 of the November 1999 10-QSB).** * 10.20 Second Amendment to Credit and Security Agreement between FM Precision Golf Manufacturing Corp., FM Precision Golf Sales Corp and Wells Fargo Business Credit, Inc. dated November 10, 1999 (incorporated by reference to Exhibit 10.2 of the November 1999 10-QSB). * 10.21 Third Amendment to Amended and Restated Credit and Security Agreement between Royal Grip, Inc., Royal Grip Headwear Company and Wells Fargo Business Credit, Inc. dated November 10, 1999 (incorporated by reference to Exhibit 10.3 of the November 1999 10-QSB). *
EXHIBIT - ------- 10.22 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 (incorporated by reference to Exhibit 10.1 of registrant's Form 10-QSB for the quarter ended February 29, 2000; the "February 2000 10-QSB"). * 10.23 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 (incorporated by reference to Exhibit 10.3 of the February 2000 10-QSB). * 10.24 Fourth Amendment to Credit and Security Agreement between FM Precision Golf Manufacturing Corp., FM Precision Golf Sales Corp. and Wells Fargo Business Credit, Inc. dated August 3, 2000. 10.25 Fifth Amendment to Amended and Restated Credit and Security Agreement between Royal Grip, Inc., Royal Grip Headwear Company and Wells Fargo Business Credit, Inc. dated August 3, 2000. 21 Subsidiaries of the Registrant. (23) Consents 23.1 Consent of Arthur Andersen LLP. (24) Power of Attorney 24.1 Powers of Attorney 24.2 Certified resolution of the Registrant's Board of Directors authorizing officers and directors signing on behalf of the Company to sign pursuant to a power of attorney. 27 Financial Data Schedule (submitted for SEC purposes only) 99.1 Private Securities Litigation Reform Act of 1995 safe harbor compliance statement for forward-looking statements
* Incorporated by reference. ** Compensatory plan for executive officers and directors. The Registrant will furnish a copy of any exhibit to a beneficial owner of its securities or to any person from whom a proxy was solicited in connection with the Registrant's most recent Annual Meeting of Stockholders upon the payment of a fee of fifty cents ($0.50) per page. EX-10.24 2 0002.txt AMENDMENT TO CREDIT AND SECURITY AGRMT. FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT This Amendment, dated as of August 3, 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, as amended by that certain Third Amendment to Credit and Security Agreement dated March 24, 2000, (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) Section 7.10 of the Credit Agreement is hereby deleted and replaced as follows: CAPITAL EXPENDITURES. FMM, FMS and the Covenant Entities will not incur or contract to incur Capital Expenditures in the aggregate of more than (i) $2,200,000.00 during Borrower's 2000 fiscal year, and (ii) $2,000,000.00 during any fiscal year thereafter. 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 (i) $2,200,000.00 during Borrower's 2000 fiscal year, and (ii) $1,250,000.00 during any fiscal year thereafter. 1 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) 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. (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. 2 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. 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. 3 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/ Kevin L. Neill ------------------------------------- Its Chief Financial Officer ------------------------------------ FM PRECISION GOLF SALES CORP., a Delaware corporation By /s/ Kevin L. Neill ------------------------------------- Its Chief Financial Officer ------------------------------------ 4 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 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/ Kevin L. Neill ------------------------------------- Its Chief Financial Officer ------------------------------------ 5 EX-10.25 3 0003.txt AMENDMENT TO CREDIT AND SECURITY AGRMT. FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT This Amendment, dated as of August 3, 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 13, 1999 as amended by that certain Third Amendment to Credit and Security Agreement dated November 10, 1999, as amended by that certain Fourth Amendment to Amended and Restated Credit Agreement dated March 24, 2000, (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) Section 7.10 of the Credit Agreement is hereby deleted and replaced as follows: CAPITAL EXPENDITURES. Royal Grip, Royal Headwear and the Covenant Entities will not incur or contract to incur Capital Expenditures in the aggregate of more than (i) $2,200,000.00 during Borrower's 2000 fiscal year, and (ii) $2,000,000.00 during any fiscal year thereafter. 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 (i) $2,200,000.00 during Borrower's 2000 fiscal year, and (ii) $1,250,000.00 during any fiscal year thereafter. 1 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) 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. (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. 2 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. 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. 3 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/ Kevin L. Neill ------------------------------------- Its Chief Financial Officer ------------------------------------ ROYAL GRIP HEADWEAR COMPANY, a Nevada corporation By /s/ Kevin L. Neill ------------------------------------- Its Chief Financial Officer ------------------------------------ 4 ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR The undersigned, a guarantor of the indebtedness of Royal Grip, Inc., and Royal Grip Headwear Company, 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/ Kevin L. Neill ------------------------------------- Its Chief Financial Officer ------------------------------------ 5 EX-21 4 0004.txt SUBSIDIARIES OF REGISTRANT SUBSIDIARIES OF REGISTRANT The registrant has the following wholly-owned subsidiaries: FM Precision Golf Manufacturing Corp., a Delaware corporation FM Precision Golf Sales Corp., a Delaware corporation Royal Grip, Inc., a Nevada corporation Royal Grip Headwear Company (formerly known as Roxxi, Inc.), a Nevada corporation, is a wholly-owned subsidiary of Royal Grip, Inc. EX-23.1 5 0005.txt CONSENT OF ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 333-35605 and 333-66381. /s/ ARTHUR ANDERSEN LLP Phoenix, Arizona August 9, 2000 EX-24.1 6 0006.txt POWERS OF ATTORNEY POWER OF ATTORNEY The undersigned who is a director or officer of Royal Precision, Inc., a Delaware corporation (the "Company"); Does hereby constitute and appoint Richard P. Johnston and Thomas Schneider to be his agents and attorneys-in-fact; Each with the power to act fully hereunder without the other and with full power of substitution to act in the name and on behalf of the undersigned; To sign and file with the Securities and Exchange Commission the Annual Report of the Company on Form 10-K or other appropriate form and any amendments or supplements to such Annual Report; and To execute and deliver any instruments, certificates or other documents which they shall deem necessary or proper in connection with the filing of such Annual Report, and generally to act for and in the name of the undersigned with respect to such filings as fully as could the undersigned if then personally present and acting. Each agent named above is hereby empowered to determine in his discretion the times when, the purposes for, and the names in which, any power conferred upon him herein shall be exercised and the terms and conditions of any instrument, certificate or document which may be executed by him pursuant to this instrument. This Power of Attorney shall not be affected by the disability of the undersigned or the lapse of time. The validity, terms and enforcement of this Power of Attorney shall be governed by those laws of the State of Delaware that apply to instruments negotiated, executed, delivered and performed solely within the State of Delaware. This Power of Attorney may be executed in any number of counterparts, each of which shall have the same effect as if it were the original instrument and all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, I have executed this Power of Attorney this 8th day of August, 2000. /s/ Danny Edwards ----------------------------------- Danny Edwards POWER OF ATTORNEY The undersigned who is a director or officer of Royal Precision, Inc., a Delaware corporation (the "Company"); Does hereby constitute and appoint Richard P. Johnston and Thomas Schneider to be his agents and attorneys-in-fact; Each with the power to act fully hereunder without the other and with full power of substitution to act in the name and on behalf of the undersigned; To sign and file with the Securities and Exchange Commission the Annual Report of the Company on Form 10-K or other appropriate form and any amendments or supplements to such Annual Report; and To execute and deliver any instruments, certificates or other documents which they shall deem necessary or proper in connection with the filing of such Annual Report, and generally to act for and in the name of the undersigned with respect to such filings as fully as could the undersigned if then personally present and acting. Each agent named above is hereby empowered to determine in his discretion the times when, the purposes for, and the names in which, any power conferred upon him herein shall be exercised and the terms and conditions of any instrument, certificate or document which may be executed by him pursuant to this instrument. This Power of Attorney shall not be affected by the disability of the undersigned or the lapse of time. The validity, terms and enforcement of this Power of Attorney shall be governed by those laws of the State of Delaware that apply to instruments negotiated, executed, delivered and performed solely within the State of Delaware. This Power of Attorney may be executed in any number of counterparts, each of which shall have the same effect as if it were the original instrument and all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, I have executed this Power of Attorney this 5th day of June, 2000. /s/ David E. Johnston ----------------------------------- David E. Johnston POWER OF ATTORNEY The undersigned who is a director or officer of Royal Precision, Inc., a Delaware corporation (the "Company"); Does hereby constitute and appoint Richard P. Johnston and Thomas Schneider to be his agents and attorneys-in-fact; Each with the power to act fully hereunder without the other and with full power of substitution to act in the name and on behalf of the undersigned; To sign and file with the Securities and Exchange Commission the Annual Report of the Company on Form 10-K or other appropriate form and any amendments or supplements to such Annual Report; and To execute and deliver any instruments, certificates or other documents which they shall deem necessary or proper in connection with the filing of such Annual Report, and generally to act for and in the name of the undersigned with respect to such filings as fully as could the undersigned if then personally present and acting. Each agent named above is hereby empowered to determine in his discretion the times when, the purposes for, and the names in which, any power conferred upon him herein shall be exercised and the terms and conditions of any instrument, certificate or document which may be executed by him pursuant to this instrument. This Power of Attorney shall not be affected by the disability of the undersigned or the lapse of time. The validity, terms and enforcement of this Power of Attorney shall be governed by those laws of the State of Delaware that apply to instruments negotiated, executed, delivered and performed solely within the State of Delaware. This Power of Attorney may be executed in any number of counterparts, each of which shall have the same effect as if it were the original instrument and all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, I have executed this Power of Attorney this 28th day of June, 2000. /s/ Richard P. Johnston ----------------------------------- Richard P. Johnston POWER OF ATTORNEY The undersigned who is a director or officer of Royal Precision, Inc., a Delaware corporation (the "Company"); Does hereby constitute and appoint Richard P. Johnston and Thomas Schneider to be his agents and attorneys-in-fact; Each with the power to act fully hereunder without the other and with full power of substitution to act in the name and on behalf of the undersigned; To sign and file with the Securities and Exchange Commission the Annual Report of the Company on Form 10-K or other appropriate form and any amendments or supplements to such Annual Report for the fiscal year ended May 31, 1998; and To execute and deliver any instruments, certificates or other documents which they shall deem necessary or proper in connection with the filing of such Annual Report, and generally to act for and in the name of the undersigned with respect to such filings as fully as could the undersigned if then personally present and acting. Each agent named above is hereby empowered to determine in his discretion the times when, the purposes for, and the names in which, any power conferred upon him herein shall be exercised and the terms and conditions of any instrument, certificate or document which may be executed by him pursuant to this instrument. This Power of Attorney shall not be affected by the disability of the undersigned or the lapse of time. The validity, terms and enforcement of this Power of Attorney shall be governed by those laws of the State of Delaware that apply to instruments negotiated, executed, delivered and performed solely within the State of Delaware. This Power of Attorney may be executed in any number of counterparts, each of which shall have the same effect as if it were the original instrument and all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, I have executed this Power of Attorney this 8th day of August, 2000. /s/ Raymond J. Minella ----------------------------------- Raymond J. Minella POWER OF ATTORNEY The undersigned who is a director or officer of Royal Precision, Inc., a Delaware corporation (the "Company"); Does hereby constitute and appoint Richard P. Johnston and Thomas Schneider to be his agents and attorneys-in-fact; Each with the power to act fully hereunder without the other and with full power of substitution to act in the name and on behalf of the undersigned; To sign and file with the Securities and Exchange Commission the Annual Report of the Company on Form 10-K or other appropriate form and any amendments or supplements to such Annual Report; and To execute and deliver any instruments, certificates or other documents which they shall deem necessary or proper in connection with the filing of such Annual Report, and generally to act for and in the name of the undersigned with respect to such filings as fully as could the undersigned if then personally present and acting. Each agent named above is hereby empowered to determine in his discretion the times when, the purposes for, and the names in which, any power conferred upon him herein shall be exercised and the terms and conditions of any instrument, certificate or document which may be executed by him pursuant to this instrument. This Power of Attorney shall not be affected by the disability of the undersigned or the lapse of time. The validity, terms and enforcement of this Power of Attorney shall be governed by those laws of the State of Delaware that apply to instruments negotiated, executed, delivered and performed solely within the State of Delaware. This Power of Attorney may be executed in any number of counterparts, each of which shall have the same effect as if it were the original instrument and all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, I have executed this Power of Attorney this 5th day of June, 2000. /s/ Kevin L. Neill ----------------------------------- Kevin L. Neill POWER OF ATTORNEY The undersigned who is a director or officer of Royal Precision, Inc., a Delaware corporation (the "Company"); Does hereby constitute and appoint Richard P. Johnston and Thomas Schneider to be his agents and attorneys-in-fact; Each with the power to act fully hereunder without the other and with full power of substitution to act in the name and on behalf of the undersigned; To sign and file with the Securities and Exchange Commission the Annual Report of the Company on Form 10-K or other appropriate form and any amendments or supplements to such Annual Report; and To execute and deliver any instruments, certificates or other documents which they shall deem necessary or proper in connection with the filing of such Annual Report, and generally to act for and in the name of the undersigned with respect to such filings as fully as could the undersigned if then personally present and acting. Each agent named above is hereby empowered to determine in his discretion the times when, the purposes for, and the names in which, any power conferred upon him herein shall be exercised and the terms and conditions of any instrument, certificate or document which may be executed by him pursuant to this instrument. This Power of Attorney shall not be affected by the disability of the undersigned or the lapse of time. The validity, terms and enforcement of this Power of Attorney shall be governed by those laws of the State of Delaware that apply to instruments negotiated, executed, delivered and performed solely within the State of Delaware. This Power of Attorney may be executed in any number of counterparts, each of which shall have the same effect as if it were the original instrument and all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, I have executed this Power of Attorney this 5th day of June, 2000. /s/ Thomas A. Schneider ----------------------------------- Thomas A. Schneider POWER OF ATTORNEY The undersigned who is a director or officer of Royal Precision, Inc., a Delaware corporation (the "Company"); Does hereby constitute and appoint Richard P. Johnston and Thomas Schneider to be his agents and attorneys-in-fact; Each with the power to act fully hereunder without the other and with full power of substitution to act in the name and on behalf of the undersigned; To sign and file with the Securities and Exchange Commission the Annual Report of the Company on Form 10-K or other appropriate form and any amendments or supplements to such Annual Report; and To execute and deliver any instruments, certificates or other documents which they shall deem necessary or proper in connection with the filing of such Annual Report, and generally to act for and in the name of the undersigned with respect to such filings as fully as could the undersigned if then personally present and acting. Each agent named above is hereby empowered to determine in his discretion the times when, the purposes for, and the names in which, any power conferred upon him herein shall be exercised and the terms and conditions of any instrument, certificate or document which may be executed by him pursuant to this instrument. This Power of Attorney shall not be affected by the disability of the undersigned or the lapse of time. The validity, terms and enforcement of this Power of Attorney shall be governed by those laws of the State of Delaware that apply to instruments negotiated, executed, delivered and performed solely within the State of Delaware. This Power of Attorney may be executed in any number of counterparts, each of which shall have the same effect as if it were the original instrument and all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, I have executed this Power of Attorney this 6th day of June, 2000. /s/ Charles S. Mechem, Jr. ----------------------------------- Charles S. Mechem, Jr. EX-24.2 7 0007.txt CERTIFICATE FOR POWERS OF ATTORNEY CERTIFICATE I, KENNETH J. WARREN, hereby certify that I am the duly elected Secretary of Royal Precision, Inc., a Delaware corporation (the "Corporation"), and do further certify that the following resolutions were duly adopted by the Board of Directors of the Corporation at a meeting duly called and held on May 25, 2000, and that such resolutions have not been amended or rescinded, and are in full force and effect: RESOLVED, that each officer and director who may be required to execute an annual report on Form 10-K or any amendment or supplement thereto (whether on behalf of the Company or as an officer or director thereof or otherwise) be, and each of them hereby is, authorized to execute a power of attorney appointing Richard P. Johnston and Thomas Schneider and each of them severally, his true and lawful attorneys and agents to execute in his name, place and stead (in any such capacity) said Form 10-K and all instruments or reports necessary or in connection therewith, and to file the same with the Securities and Exchange Commission, each of said attorneys and agents to have the power to act with or without the other, to have full power and authority to do and to perform in the name and on behalf of each of said officers and directors, or both, as the case may be, every act which is necessary or advisable to be done as fully, and to all intents and purposes, as any such officer or director might or could do in person. Dated this 5th day of June, 2000. /s/ Kenneth J. Warren ----------------------------------- Kenneth J. Warren EX-27 8 0008.txt FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 12-MOS MAY-31-2000 JUN-01-1999 MAY-31-2000 1 36 0 5,374 274 5,124 10,521 7,277 1,264 24,942 4,503 0 0 0 6 14,406 24,942 29,925 29,925 20,525 7,537 0 0 644 1,486 616 870 0 0 0 870 0.15 0.15
EX-99.1 9 0009.txt SAFE HARBOR COMPLIANCE STATEMENT SAFE HARBOR COMPLIANCE STATEMENT PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Management believes that this Form 10-K includes forward-looking statements which reflect the views of the Company 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 economic conditions, customer plans and commitments, the cost of raw materials, the competitive environment in which the Company operates, and changes in the financial markets relating to the Company's capital structure and cost of capital. Statements in this Form 10-K, including the Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations, describe factors, among others, that could contribute to or cause such differences. Additional factors that could cause actual results to differ materially from those expressed in such forward-looking statements are detailed below. The words "believe," "expect," "anticipate," "project," and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. RISK FACTORS NO LONG-TERM SUPPLIER OF GOLF CLUB GRIPS. In December 1996, Royal Grip, Inc. ("RG") and Acushnet Rubber Company ("Acushnet") entered into a manufacturing and supply agreement whereby RG outsourced the manufacturing of its golf club grips to Acushnet. Additionally, the two parties entered into an agreement resulting in the transfer of RG's manufacturing equipment to Acushnet under a capital lease. Since January 1997, RG has purchased the majority of its supply of non-cord, injected grips from Acushnet. In May 1999, RG and Acushnet executed a mutual release agreement terminating their manufacturing and supply agreement and capital lease agreement (the "Termination Agreement"). The Company believes that its current inventory of grips is sufficient to satisfy customer demand through December 31, 2000. The Company is currently purchasing grips from various suppliers and believes it has an adequate source of supply to meet its current and anticipated future customer needs. However, there can be no assurance that the transition to new suppliers will not result in production delays or the loss of sales and key customers which would have a material adverse effect on the Company's financial condition and results of operations. DEPENDENCE ON "RIFLE" SHAFT SALES. The Company is substantially dependent on sales of "Rifle" golf club shafts which constituted 62%, 56% and 40% of the Company's total net sales during the fiscal years ended May 31, 2000, 1999 and 1998, respectively. While the Company's management believes that demand for the "Rifle" shaft should remain high for the next several years, there can be no assurance that sales of the "Rifle" shaft will not decline or that the Rifle shaft will maintain its profitability. Decreases in sales or profitability of the "Rifle" shaft could have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON DISCRETIONARY CONSUMER SPENDING. Sales of golf equipment historically have been dependent on discretionary spending by consumers, which may be adversely affected by general economic conditions, changing consumer golf trends and the popularity of golf in general. Any period of economic uncertainty or decline that impacts consumer spending, any decrease in consumer spending on golf equipment for whatever reason or changes in consumer preferences for golf products could have a material adverse effect on the Company's business, results of operations and financial condition. COMPETITION. The golf equipment industry is highly competitive and is characterized by numerous companies competing in various segments of the market. Many of the Company's competitors have greater name recognition, more extensive engineering, manufacturing and marketing capabilities, and greater financial, technological and personnel resources than the Company. Efforts to remain competitive with these rival sports equipment manufacturers may cause the Company to accept lower profit margins, which could adversely impact the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully in the future with existing or new competitors. DEPENDENCE ON OEMS, CUSTOMER CONCENTRATION. The Company's major customers are original equipment manufacturers ("OEMs") which sell finished golf products primarily to sporting goods stores and specialty retailers of golf equipment and recreational products. A decision by these OEM customers to manufacture their own grips and shafts or to acquire grips and shafts from sources other than the Company could have a material adverse effect on the Company's business, results of operations and financial condition as could changes in the purchasing patterns, inventory levels and advertising and marketing strategies of these OEM customers. The Company is significantly dependent on sales to Precision Japan and Taylor Made Golf which, in the aggregate, represented 46%, 40% and 35% of the Company's total net sales for the fiscal years ended May 31, 2000, 1999 and 1998, respectively. Precision Japan accounted for 19% of golf club shaft sales and 73% of golf club grip sales during fiscal 2000. Taylor Made Golf represented 22% of shaft sales and less than 1% of grip sales during fiscal 2000. The Company does not have a supply agreement with Taylor Made Golf. The loss of sales to either of these companies could have a significant adverse impact on the Company's business. Because of the historical volatility of consumer demand for specific golf clubs, as well as continued competition from alternative suppliers, sales to a given customer in a prior period may not necessarily be indicative of future sales. The loss of a significant customer or a substantial decrease in sales to a significant customer could adversely affect the Company's business, operating results and financial condition. SEASONALITY; FLUCTUATIONS IN OPERATING RESULTS. The Company is dependent on golf-related product sales and golf is generally a warm weather sport. Therefore, the Company's business is seasonal. The Company has historically enjoyed its strongest sales in the third and fourth fiscal quarters ending in February and May because the Company's customers build up inventory levels in anticipation of sales in the spring and summer, the principal selling seasons for golf-related products. In order to minimize the effect of this seasonality, the Company may build product inventories during the first and second fiscal quarters ending in August and November based on management's estimate of customer demand for the Company products in the third and fourth fiscal quarters. This strategy allows the Company to use its production resources more efficiently and have inventory on hand to meet its customers' demand but also exposes the Company to the risk of materially inaccurate estimates. If the Company underestimates the demand for its products, the Company may not be able to deliver products to its customers in a timely fashion. If the Company overestimates the demand for its products, the Company may have to sell excess inventory at severely discounted prices. Either event may have a material adverse effect on the Company's business, operating results and financial condition. ENVIRONMENTAL RISKS. The Company is subject to environmental laws and regulations that impose workplace standards and limitations on the discharge of pollutants into the environment and establish standards for the handling and disposal of waste products. The nature of the Company's Torrington, Connecticut golf club shaft manufacturing operations could expose the Company to the risk of claims with regard to environmental matters. In May 1996, the Company acquired substantially all the assets of the golf club shaft manufacturing business of Brunswick Corporation (the "Brunswick Acquisition"). Included in the acquired assets were land, buildings and equipment at the Company's Torrington, Connecticut manufacturing facility (the "FMP plant"). In conjunction with the Brunswick Acquisition, Brunswick Corporation agreed to indemnify the Company from potential liability arising from certain environmental matters and to remediate certain environmental conditions which existed at the FMP plant on the date of acquisition. Brunswick Corporation has engaged an environmental consulting firm to perform testing at the FMP plant and is in the process of developing a plan of remediation. Failure of Brunswick Corporation to fulfill its obligations under the asset purchase contract could have a material adverse effect on the Company's financial condition and results of operations. The Company has retained legal counsel for representation on various environmental matters related to the Brunswick Acquisition. Total legal fees incurred related to these matters during the fiscal year ended May 31, 2000 were approximately $0.1 million. The Company received a notice of violation ("NOV") from the State of Connecticut Department of Environmental Protection ("DEP") alleging violation of certain provisions of a permit related to the discharge of treated wastewater at the FMP plant. This permit was issued to the Company in February 1997 based on an application prepared by Brunswick Corporation in April 1996. In April 2000, the Company reached a settlement agreement with DEP discharging the Company from any civil liability with respect to the allegations in the NOV, subject to completion and approval of certain remedial measures at the FMP plant. The 2 Company incurred approximately $0.2 million in capital expense to complete these remedial measures during the fiscal year ended May 31, 2000 and, in June 2000, obtained a certification from DEP that the work was satisfactorily completed. The Company is seeking reimbursement from Brunswick Corporation for the cost of remediation and legal fees incurred in conjunction with this matter. In April 2000, the Company received a request for information from the U.S. Environmental Protection Agency ("EPA") related to disposal and treatment of waste materials from the FMP plant during a period from 1982 to 1997. The EPA is currently conducting an investigation regarding the former National Oil Services, Inc. Superfund site in West Haven, Connecticut. National Oil Services, Inc. was, prior to its bankruptcy, a contractor used by the Company and Brunswick Corporation to treat and dispose non-hazardous waste oils from the FMP plant. EPA has not issued any demands for reimbursement or performance of work from the Company relating to this matter and there is not sufficient information at this time to determine what, if any, action EPA may pursue and what, if any, effect it may have on the Company's financial condition and results of operations. During the fiscal year ended May 31, 2000, the Company incurred approximately $1.1 million in capital expense to upgrade FMP's wastewater treatment facilities to comply with new U.S. Environmental Protection Agency ("EPA") mandates on water quality adopted by the State of Connecticut. Upgrade of these systems is complete and approved by the Connecticut Department of Environmental Protection, and the Company does not anticipate significant additional cost related to the upgrade of these systems. There can be no assurance that additional material costs or liabilities will not be incurred in connection with environmental laws and regulations in the future or that governmental requirements will not change in a manner that imposes material costs or liabilities on the Company. FOREIGN SALES RISKS. The Company is significantly dependent on international sales which represented 33%, 29% and 20% of the Company's total net sales during the fiscal years ended May 31, 2000, 1999 and 1998, respectively. International sales expose the Company to additional risks inherent in doing business abroad. These risks include, but are not limited to delays in shipment; export controls, embargoes, tariffs and other trade barriers; foreign government regulation, political instability, and changes in economic conditions; and adverse fluctuations in foreign exchange rates and exchange controls. Any of these risks may result in the loss of international sales or a decline in the profitability of international sales which could have a material adverse effect on the Company's business, operating results or financial condition. Sales to Precision Japan, the Company's exclusive distributor for Japan, accounted for 84%, 85% and 80% of the Company's international sales during the fiscal years ended May 31, 2000, 1999 and 1998, respectively. The loss of sales to Precision Japan could have a material adverse effect on the Company's business, operating results and financial condition. TRADE UNION. Most employees of the Company at its Torrington, Connecticut plant are represented by a trade union for collective bargaining purposes. Although the Company currently believes its relations with employees are good, there is no assurance that work stoppages or slowdowns will not be experienced in the future. Any work stoppage or slowdown could have a material adverse effect on the Company's business, results of operations and financial condition. LIMITED HISTORY. The Company's golf club shaft manufacturing facility in Torrington, Connecticut dates back over a century and the facility's manufacture of shafts dates back to the 1920's. However, three different owners have operated the facility. Most recently, in 1996 a group of investors joined the then current management in acquiring substantially all of the assets and certain liabilities of the golf shaft manufacturing business from Brunswick Corporation. In August 1997, RP acquired RG. Consequently, the Company has a limited operating history. There can be no assurance that the results of such a limited history or of the predecessor operations will be indicative of future performance. NEW PRODUCT INTRODUCTIONS. The Company believes that the introduction of new, innovative golf club shafts and golf club grips will be crucial to its future success. New models and basic design changes are frequently introduced into the golf industry but are often met with consumer rejection. Although the Company has achieved certain successes in the introduction of previous products, no assurances can be given that it will be able to continue to design and manufacture products that meet with market acceptance. In addition, prior successful designs may be rendered obsolete within a relatively short period of time as new products are introduced into the market. The design of new golf equipment is also greatly influenced by rules and interpretations of the USGA. Although the golf equipment standards established by the USGA generally apply only to competitive events sanctioned by that organization, it has become critical for designers of new products to assure compliance with USGA standards. Although the Company believes that all of its grips and shafts comply with current USGA standards, no assurance can be given that any new products will receive USGA approval or that existing USGA standards will not be altered in ways that adversely affect the sales of products. 3 PRODUCT PROTECTION AND INTELLECTUAL PROPERTY. The Company currently relies upon a combination of patents, copyrights, trademarks and trade secret laws to establish and protect certain of its proprietary rights in its products. There can be no assurance that the steps taken by the Company in this regard will be adequate to prevent misappropriation of proprietary property rights or that competitors will not independently develop proprietary property that is substantially equivalent or superior. 4 -----END PRIVACY-ENHANCED MESSAGE-----