-----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, GLDyirVBuXj5YRVo42TsZ1fXy+woPPhFwOKBWCkENs49THsUJ0Nv4OCjYNHVxB0t VKzVPx+W6nx2tjafdwIaSQ== /in/edgar/work/0000950147-00-001541/0000950147-00-001541.txt : 20001011 0000950147-00-001541.hdr.sgml : 20001011 ACCESSION NUMBER: 0000950147-00-001541 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000831 FILED AS OF DATE: 20001010 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYAL PRECISION INC CENTRAL INDEX KEY: 0001016395 STANDARD INDUSTRIAL CLASSIFICATION: [3949 ] IRS NUMBER: 061453896 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22889 FILM NUMBER: 736531 BUSINESS ADDRESS: STREET 1: 15170 NORTH HAYDEN ROAD STREET 2: SUITE 1 CITY: SCOTTSDALE STATE: AZ ZIP: 85260 BUSINESS PHONE: 6026270200 MAIL ADDRESS: STREET 1: 15170 NORTH HAYDEN ROAD STREET 2: SUITE 1 CITY: SCOTTSDALE STATE: AZ ZIP: 85260 FORMER COMPANY: FORMER CONFORMED NAME: FM PRECISION GOLF CORP DATE OF NAME CHANGE: 19970521 10-Q 1 0001.txt QUARTERLY REPORT FOR THE QTR ENDED 8/31/00 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended August 31, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to _________. Commission File Number: 0-22889 ROYAL PRECISION, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 06-1453896 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 15170 North Hayden Road, Suite 1, Scottsdale, AZ 85260 (Address of Principal Executive Offices) (Zip code) (480) 627-0200 (Registrant's Telephone Number, Including Area Code) (Former Name, Former Address and Former Fiscal Year if Changed Since Last Report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Title of each class Outstanding at October 6, 2000 ------------------- ------------------------------- Common Stock, par value $0.001 5,678,956 Shares PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ROYAL PRECISION, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (dollars in thousands)
AUGUST 31, MAY 31, 2000 2000 -------- -------- ASSETS CURRENT ASSETS: Cash $ 470 $ 36 Accounts receivable, net of allowance for doubtful accounts of $313 at August 31, 2000 and $274 at May 31, 2000, respectively 3,031 5,100 Inventories 5,688 5,124 Other current assets 96 155 Deferred income taxes 104 106 -------- -------- Total current assets 9,389 10,521 -------- -------- PROPERTY, PLANT AND EQUIPMENT: Land 123 123 Furniture, fixtures and office equipment 546 455 Buildings and improvements 920 840 Machinery and equipment 4,414 4,278 Equipment held for sale 500 500 Construction in progress 1,102 1,081 -------- -------- 7,605 7,277 Less - Accumulated depreciation (1,388) (1,264) -------- -------- 6,217 6,013 -------- -------- GOODWILL, net 7,519 7,629 -------- -------- DEFERRED INCOME TAXES 701 701 -------- -------- OTHER ASSETS 73 78 -------- -------- Total assets $ 23,899 $ 24,942 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations $ 906 $ 906 Accounts payable 1,248 1,714 Accrued salaries and benefits 704 1,290 Accrued pension liability 206 176 Other accrued expenses 715 417 -------- -------- Total current liabilities 3,779 4,503 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, net of current portion 5,575 6,027 -------- -------- Total liabilities 9,354 10,530 -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $0.001 par value; 1,000,000 shares authorized; no shares issued -- -- Common stock, $0.001 par value; 10,000,000 shares authorized; 5,678,956 shares issued and outstanding at August 31, 2000 and May 31, 2000 6 6 Additional paid-in capital 13,968 13,940 Retained earnings 571 466 -------- -------- Total stockholders' equity 14,545 14,412 -------- -------- Total liabilities and stockholders' equity $ 23,899 $ 24,942 ======== ========
The accompanying notes are an integral part of these condensed consolidated balance sheets. -2- ROYAL PRECISION, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (dollars in thousands, except per share amounts) THREE MONTHS ENDED ------------------------- AUGUST 31, AUGUST 31, 2000 1999 ---------- ---------- NET SALES: Golf club shafts $ 5,807 $ 5,313 Golf club grips 1,171 1,246 ---------- ---------- 6,978 6,559 ---------- ---------- COST OF SALES: Golf club shafts 3,749 3,246 Golf club grips 822 866 ---------- ---------- 4,571 4,112 ---------- ---------- Gross profit 2,407 2,447 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,997 1,640 AMORTIZATION OF GOODWILL 110 121 ---------- ---------- Operating income 300 686 INTEREST EXPENSE 178 151 OTHER INCOME 87 55 ---------- ---------- Income before provision for income taxes 209 590 PROVISION FOR INCOME TAXES 104 296 ---------- ---------- Net income $ 105 $ 294 ========== ========== BASIC AND DILUTED EARNINGS PER SHARE $ 0.02 $ 0.05 ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED TO COMPUTE PER SHARE INFORMATION: BASIC 5,678,956 5,667,555 ========== ========== DILUTED 5,861,306 5,805,795 ========== ========== The accompanying notes are an integral part of these condensed consolidated financial statements. -3- ROYAL PRECISION, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (dollars in thousands)
THREE MONTHS ENDED ---------------------------- AUGUST 31, AUGUST 31, 2000 1999 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 105 $ 294 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 250 304 (Gain) loss on retirement or sale of fixed assets (3) 7 Stock based compensation 28 -- Changes in operating assets and liabilities: Accounts receivable, net 2,069 2,340 Inventories (564) (711) Other assets 66 207 Accounts payable and accrued expenses (724) (596) ------- ------- Net cash provided by operating activities 1,227 1,845 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of machinery and equipment (371) (546) Proceeds from sale of fixed assets 30 -- ------- ------- Net cash used in investing activities (341) (546) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments under lines-of-credit, net (225) (1,036) Repayments of long-term debt and capital lease obligations (227) (399) ------- ------- Net cash used in financing activities (452) (1,435) ------- ------- INCREASE (DECREASE) IN CASH 434 (136) CASH, beginning of period 36 184 ------- ------- CASH, end of period $ 470 $ 48 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for-- Interest $ 177 $ 204 ======= ======= Income taxes $ 1 $ 31 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. -4- ROYAL PRECISION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION -- The condensed consolidated financial statements of Royal Precision, Inc. and subsidiaries (collectively, "RP" or the "Company") presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States. These condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto for the fiscal year ended May 31, 2000 included in the Company's Form 10-K. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company. Quarterly operating results are not necessarily indicative of the results that would be expected for the full year. ORGANIZATION -- The accompanying condensed consolidated financial statements include Royal Precision, Inc. and its three wholly-owned subsidiaries, FM Precision Golf Manufacturing Corp. ("FMP"), FM Precision Golf Sales Corp. ("FMP Sales") and Royal Grip, Inc. ("RG") which has a wholly-owned subsidiary, Royal Grip Headwear Company. All significant intercompany balances and transactions have been eliminated in consolidation. 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. USE OF ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements such as the estimate for impairment of long-lived assets and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. EARNINGS PER SHARE: The Company accounts for earnings per share in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share are based on the average number of common shares outstanding during the period. Diluted earnings per share assumes, in addition to the above, a dilutive effect of common share equivalents during the period. Common share equivalents represent dilutive stock options using the treasury stock method. The number of shares used in computing earnings per share for the three months ended August 31, 2000 and August 31, 1999 were as follows (in thousands): -5- THREE MONTHS ENDED ---------------------- AUGUST 31, AUGUST 31, 2000 1999 ----- ----- Basic: Average common shares outstanding 5,679 5,668 Diluted: Dilutive effect of stock options 182 138 ----- ----- Average common shares outstanding 5,861 5,806 ===== ===== 3. NEW ACCOUNTING PRONOUNCEMENTS: During March 2000, the Financial Accounting Standards Board ("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 adopted FIN 44 during the quarter ended August 31, 2000. As of August 31, 2000, there were outstanding options to purchase 170,583 shares at an exercise price of $3.19 per share which are subject to variable plan accounting until they are exercised or expire in January 2004. No compensation costs were recognized during the quarter ended August 31, 2000 related to these options. 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 101B. SAB 101 summarizes 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. In July 2000, the Emerging Issues Task Force ("EITF") reached a final consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF No. 00-10"). When adopted, EITF No. 00-10 requires that all amounts billed to customers in sale transactions related to shipping and handling be classified as revenue. In addition, EITF No. 00-10 requires that shipping and handling fees and costs in financial statements for prior periods presented for comparative purposes be reclassified. EITF No. 00-10 must be adopted prior to, or concurrent with, the adoption of SAB 101. The Company has elected to early adopt EITF No. 00-10 during its quarter ended August 31, 2000. As such, the condensed consolidated statement of operations for the three months ended August 31, 1999 has been restated to reflect the adoption of EITF No. 00-10. In June 1998, the FASB issued Statement of Financial Accounting Standards ("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 during the fiscal year ending May 31, 2002. The Company does not anticipate any material impact resulting from the adoption of SFAS No. 133. 4. INVENTORIES: Inventories are valued at the lower of cost or market. Cost is determined on the first-in, first-out method. Inventories as of August 31, 2000 and May 31, 2000 consisted of the following (in thousands): AUGUST 31, 2000 MAY 31, 2000 --------------- ------------ Raw materials $ 495 $ 525 Work-in-process 2,255 1,655 Finished goods 2,938 2,944 ------ ------ $5,688 $5,124 ====== ====== -6- 5. BORROWING ARRANGEMENTS: FMP has a credit facility consisting of a term loan and a revolving line-of-credit. The FMP term loan of $2.5 million at August 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 $4.5 million. As of August 31, 2000, FMP had $3.3 million outstanding under its revolving line-of-credit and $0.6 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 August 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 August 31, 2000, RG had $0.3 million outstanding under its revolving line-of-credit and $0.5 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 August 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 and minimum quarterly debt service coverage ratios, as defined. The Company was in compliance with all financial loan covenants at August 31, 2000. 6. INFORMATION ON SEGMENTS: The Company has two reportable segments: golf club shafts and golf club grips. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Form 10-K for the fiscal year ended May 31, 2000. The Company evaluates the performance of these segments based on segment operating income or loss and cash flows. The Company allocates certain administrative expenses to segments. The amounts in this illustration are the amounts in reports used by the chief operating officer (in thousands):
THREE MONTHS ENDED AUGUST 31, 2000 ------------------------------------- GOLF CLUB GOLF CLUB SHAFTS GRIPS TOTAL -------- -------- -------- Net sales $ 5,807 $ 1,171 $ 6,978 Operating income 239 61 300 Depreciation and amortization 128 122 250 Total assets for reportable segments $ 12,925 $ 16,990 $ 29,915 Elimination of investment in subsidiaries (6,016) -------- Consolidated total assets $ 23,899 ========
-7-
THREE MONTHS ENDED AUGUST 31, 1999 ------------------------------------- GOLF CLUB GOLF CLUB SHAFTS GRIPS TOTAL -------- -------- -------- Net sales $ 5,313 $ 1,246 $ 6,559 Operating income 603 83 686 Depreciation and amortization 87 217 304 Total assets for reportable segments $ 10,922 $ 18,144 $ 29,066 Elimination of investment in subsidiaries (6,193) -------- Consolidated total assets $ 22,873 ========
7. 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 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 expenditure 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 of 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. 8. ACQUISITION LETTER OF INTENT: On September 18, 2000, the Company signed a letter of intent to acquire PH Group Inc. ("PHG"), a manufacturer of hydraulic presses and injection molding machines. Under the terms of the transaction, PHG shareholders would receive $1.00 worth of Royal Precision, Inc. common stock for each share of PHG common stock they own. The proposed acquisition is subject to a number of conditions including the execution and delivery of definitive agreements acceptable to both parties, approval of the boards of the Company and PHG, and the approval of PHG shareholders. In connection with the execution of the letter of intent, PHG granted the Company an option to acquire 500,000 shares of PHG common stock at an exercise price of $0.50 per share. -8- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS -- The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. The Company has made forward-looking statements within the meaning of the Litigation Reform Act in this Form 10-Q which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors include, but are not limited to, uncertainties relating to international, national, and local economic conditions, the Company's dependence on discretionary consumer spending, customer concentration and their plans and commitments, the Company's cost and available supply of raw materials, the competitive environment in which the Company operates, the timeliness and market acceptance of the Company's new product introductions, the Company's limited operating history, the Company's ability to protect its intellectual property rights, seasonality of sales, fluctuations in operating results, and changes in the financial markets relating to the Company's capital structure and cost of capital. Statements in this Form 10-Q, including the Notes to the Condensed Consolidated Financial Statements ("Financial Statements") and Management's Discussion and Analysis of Financial Condition and Results of Operations describe factors, among others, that could contribute to or cause such differences. Additional factors that could cause actual results to differ materially from those expressed in such forward-looking statements are detailed in the Company's Form 10-K for the fiscal year ended May 31, 2000 (refer to Exhibit 99.1 therein). The words "believe," "expect," "anticipate," "project," and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. OVERVIEW -- Royal Precision, Inc. ("RP" or the "Company") is a holding company which carries on its business operations through its three wholly-owned subsidiaries which are FM Precision Golf Manufacturing Corp. ("FMP"), FM Precision Golf Sales Corp. ("FMP Sales"), and Royal Grip, Inc. ("RG") which has a wholly-owned subsidiary, Royal Grip Headwear Company. 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. THREE MONTHS ENDED AUGUST 31, 2000 COMPARED TO THE THREE MONTHS ENDED AUGUST 31, 1999-- NET SALES. Net sales for the three months ended August 31, 2000 were $7.0 million, an increase of $0.4 million or 6% over net sales of $6.6 million during the corresponding period in 1999. Net sales of golf club shafts increased by $0.5 million or 9% and net sales of golf club grips were consistent at $1.2 million. COST OF SALES. Cost of goods sold for the three months ended August 31, 2000 was $4.6 million, an increase of $0.5 million or 11% over cost of goods sold of $4.1 million during the corresponding period in 1999. The cost of golf club shafts sold increased by $0.5 million or 16% as a result of higher total net sales and a change in the mix of products sold during the two periods. The cost of golf club grips sold was consistent at $822,000 and $866,000 during the three-month periods ended August 31, 2000 and 1999, respectively. -9- GROSS PROFIT. Gross profit for the three months ended August 31, 2000 and 1999 was consistent at $2.4 million. Gross profit from sales of golf club shafts was consistent at $2.1 million. As a percentage of sales, the gross profit on sales of golf club shafts decreased from 39% to 35% due principally to the mix of products sold during the two periods. Sales of a 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 $1.0 million, or 18% of total shaft sales during the three months ended August 31, 2000. Sales of this product during the corresponding period in 1999 were approximately $0.4 million, or 7% of total shaft sales. Gross profit from sales of golf club grips was consistent at $349,000 and $380,000 during the three-month periods ended August 31, 2000 and 1999, respectively. As a percentage of sales, the gross profit on sales of golf club grips was consistent at 30%. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the three months ended August 31, 2000 were $2.0 million, an increase of 22% over selling, general and administrative expenses of $1.6 million during the corresponding period in 1999. The $357,000 increase is primarily due to costs associated with a television commercial advertising campaign which commenced in January 2000. Costs of purchased airtime and development of commercials totaled approximately $219,000 during the three months ended August 31, 2000 compared to $0 during the corresponding period in 1999. AMORTIZATION OF GOODWILL. Amortization of goodwill was consistent at $0.1 million during the three-month periods ended August 31, 2000 and 1999. INTEREST EXPENSE. Interest expense increased from $151,000 during the three months ended August 31, 1999 to $178,000 during the three months ended August 31, 2000 primarily due to a 1.25% increase in the prime lending rate. OTHER INCOME. Other income of $87,000 and $55,000 for the three months ended August 31, 2000 and 1999, respectively, is principally comprised of royalties earned on sales of headwear products as well as royalty fees from other contracts which license certain Company technology and products. PROVISION FOR INCOME TAXES. Provisions of $0.1 million and $0.3 million were recorded for income taxes during the three-month periods ended August 31, 2000 and 1999, respectively. Taxes are provided based on the estimated effective tax rate for the year which considers the effect of nondeductible goodwill amortization. LIQUIDITY AND CAPITAL RESOURCES-- At August 31, 2000, RP had working capital of $5.6 million and a current ratio of 2.5 to 1 as compared to working capital of $6.0 million and a current ratio of 2.3 to 1 at May 31, 2000. FMP has a credit facility consisting of a term loan and a revolving line-of-credit. The FMP term loan of $2.5 million at August 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 $4.5 million. As of August 31, 2000, FMP had $3.3 million outstanding under its revolving line-of-credit and $0.6 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 August 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 August 31, 2000, RG had $0.3 million outstanding under its revolving line-of-credit and $0.5 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 August 31, 2000) plus 0.75% and 0.25%, respectively, and are secured by substantially all of the Company's assets. -10- 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 and minimum quarterly debt service coverage ratios, as defined. The Company was in compliance with all financial loan covenants at August 31, 2000. The Company believes that its existing capital resources and credit lines available are sufficient to fund its operations and capital requirements of current business segments as presently planned over the next twelve months. During the three months ended August 31, 2000, net cash provided by operating activities was $1.2 million which primarily resulted from net income of $0.1 million, depreciation and amortization of $0.3 million and a net collection of accounts receivable of $2.1 million. Cash provided by operating activities was reduced by an increase in inventories of $0.6 million and a decrease in accounts payable and accrued expenses of $0.7 million. Net cash used in investing activities for the three months ended August 31, 2000 was $0.3 million primarily for the purchase of machinery 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 three months ended August 31, 2000, was $0.5 million resulting from repayments of long term debt and capital lease obligations of $0.2 million and net repayments under lines-of-credit of $0.2 million. The Company is investigating certain potential acquisitions including the acquisition of PH Group Inc. (see Note 8). 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. 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 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 expenditure 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 -11- Brunswick Corporation to treat and dispose of 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. ACQUISITION LETTER OF INTENT -- On September 18, 2000, the Company signed a letter of intent to acquire PH Group Inc. ("PHG"), a manufacturer of hydraulic presses and injection molding machines. Under the terms of the transaction, PHG shareholders would receive $1.00 worth of Royal Precision common stock for each share of PHG common stock they own. The proposed acquisition is subject to a number of conditions including the execution and delivery of definitive agreements acceptable to both parties, approval of the boards of the Company and PHG, and the approval of PHG shareholders. In connection with the execution of the letter of intent, PHG granted the Company an option to acquire 500,000 shares of PHG common stock at an exercise price of $0.50 per share. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE COMMODITY INSTRUMENTS. At August 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 that are described in note 5 to the condensed consolidated financial statements. A one- percent change in the prime lending rate would have an effect of approximately $17,000 on interest expense for the three months ended August 31, 2000. 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 November 2000. The Company has not hedged this transaction as of August 31, 2000 and, accordingly, will be impacted by any change in the exchange rate prior to the ultimate settlement date of the contract. -12- PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On November 2, 1999, R. R. Donnelley & Sons Company, Plaintiff, vs. Royal Precision, Inc., Defendant, was filed in Superior Court, Maricopa County, Arizona. In the matter, R. R. Donnelley & Sons Company ("Donnelley") 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. On August 14, 2000, a court judgment was signed which provided for the Company to receive reimbursement from Donnelley for its legal fees related to the suit. In September 2000, the Company received payment of approximately $24,000 from Donnelley and on September 14, 2000, the appeal period expired, bringing a close to this matter. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) The annual meeting of stockholders was held on September 26, 2000. (b) Raymond J. Minella and Danny Edwards were elected as directors, each to serve a term of three years and Richard P. Johnston was elected as a director to serve for a term of one year. Other directors whose terms of office continued after the annual meeting are Charles S. Mechem, Jr., David E. Johnston, and Thomas A. Schneider. (c) The only matters voted on at the annual meeting were the election of directors and approval of an amendment to the Royal Precision Stock Option Plan to increase the aggregate number of shares in respect to which options may be granted under the Plan from 750,000 to 1,500,000. Results of the voting were as follows: Total number of shares entitled to vote present or represented at the annual meeting: 3,408,956 Election of Directors: For Authority Withheld --- ------------------ Raymond J. Minella 3,342,426 66,530 Danny Edwards 3,342,426 66,530 Richard P. Johnston 3,342,426 66,530 Approval of amendment to Royal Precision, Inc. Stock Option Plan: For Against Abstain Not Voted --- ------- ------- --------- 2,630,206 85,652 767 692,331 ITEM 5. OTHER INFORMATION. None. -13- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. (3) Certificate of Incorporation and Bylaws Exhibit 3.1. Amended and Restated Certificate of Incorporation of Royal Precision, Inc. (restated to reflect amendment filed with the Secretary of State of Delaware on October 19, 1999) (incorporated by reference to Exhibit 3.1 of the Company's Form 10-Q for the period ended November 30, 1999). Exhibit 3.2. Bylaws of Royal Precision, Inc. (incorporated by reference to Annex IV to the Company's Form S-4; No. 333-28841 (the "Form S-4")). (4) Instruments Defining the Rights of Security Holders Exhibit 4. 1. See Articles FOUR, FIVE and SEVEN of the Amended and Restated Certificate of Incorporation at Exhibit 3.1. Exhibit 4.2. See Article I, Sections 2.1 and 2.2 of Article II and Section 7.3 of Article VII of the Bylaws of Royal Precision, Inc. (incorporated by reference to Exhibit 3.2 to the Form S-4). (10) Material Contracts Exhibit 10.1. Royal Precision, Inc. Stock Option Plan (restated to reflect amendment adopted by the stockholders on September 26, 2000). Exhibit 27. Financial Data Schedule (submitted electronically for SEC information only) (b) Reports on Form 8-K. There were no reports on Form 8-K filed by the Registrant during the quarter ended August 31, 2000. -14- SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROYAL PRECISION, INC. Date October 6, 2000 By /s/ Thomas A. Schneider ------------------------------------- Thomas A. Schneider, President (duly authorized officer) By /s/ Kevin L. Neill ------------------------------------- Kevin L. Neill, Vice President - Finance (chief financial officer) -15- EXHIBIT INDEX PAGE IN SEQUENTIALLY NUMBERED EXHIBIT COPY - ------- ---- 3.1 Amended and Restated Certificate of Incorporation of Royal Precision, Inc. (restated to reflect amendment filed with the Secretary of State of Delaware on October 19, 1999) (incorporated by reference to Exhibit 3.1 of the Company's Form 10-Q for the quarter ended November 30, 1999). * 3.2 Bylaws of Royal Precision, Inc. (incorporated by reference to Annex IV to the Company's Form S-4; No. 333-28841 (the "Form S-4)). * 4.1 See Articles FOUR, FIVE and SEVEN of the Amended and Restated Certificate of Incorporation of the registrant at Exhibit 3.1. * 4.2 See Article I, Sections 2.1 and 2.2 of Article II and Section 7.3 of Article VII of the Bylaws of Royal Precision, Inc. (incorporated by reference to Exhibit 3.2 to the Form S-4). * 10.1 Royal Precision, Inc. Stock Option Plan (restated to reflect amendment adopted by the stockholders on September 26, 2000). 17 27. Financial Data Schedule (submitted electronically for SEC information only). 38 - -------- * Incorporated by reference -16- EX-10.1 2 0002.txt AMENDED STOCK OPTION PLAN ROYAL PRECISION, INC. STOCK OPTION PLAN ---------- OCTOBER 5, 1997 (RESTATED TO REFLECT AMENDMENTS ADOPTED NOVEMBER 30, 1999 AND SEPTEMBER 26, 2000) ---------- PREAMBLE: 1. Royal Precision, Inc. a Delaware corporation (the "COMPANY"), by means of this Stock Option Plan (the "PLAN"), desires to attract and retain capable employees, officers, directors and consultants and to provide them with long term incentives to continue their services to the Company, to maximize the value of the Company to its stockholders and to acquire a continuing ownership interest in the Company. 2. The Company has determined that the foregoing objectives will be promoted by granting Options (as hereinafter defined) under this Plan to certain employees, officers, directors and consultants of the Company and of its Parent and Subsidiaries, if any, pursuant to this Plan. TERMS: ARTICLE 1. DEFINITIONS. Section 1.1. GENERAL. Certain words and phrases used in this Plan shall have the meanings given to them below in this section: "BOARD OF DIRECTORS" means the board of directors of the Company. "CODE" means the Internal Revenue Code of 1986 and the regulations thereunder, as now in effect or hereafter amended. "COMMITTEE" means the Board of Directors or a committee of the Board of Directors that administers the Plan under Section 2.1 below. "COMMON STOCK" means the common stock with a par value of one mil ($0.001) per share, of the Company. "CONSULTANT" means any person who provides services to any Employer (other than as an Employee or a Director or in connection with the offer or sale of securities of the Employer in a capital raising transaction) and who is a consultant or an adviser to the Employer within the meaning of General Instruction A.1. to Form S-8 promulgated by the SEC under the Securities Act of 1933. "DATE OF GRANT" means the date an Option is first granted. "DIRECTOR" means a member of the Board of Directors. "EFFECTIVE DATE" means the date this Plan is first adopted by the Board of Directors. "EMPLOYEE" means any common law employee of an Employer. "EMPLOYER" means the Company or any Parent or Subsidiary of the Company which employs a given Employee or has engaged a given Consultant. "EXCHANGE ACT" means the Securities Exchange Act of 1934 and the regulations thereunder, as now in effect or hereafter amended. "EXERCISE PRICE" means, with respect to an Option, the amount of consideration that must be delivered to the Company in order to purchase a single Share thereunder. "FAIR MARKET VALUE OF A SHARE" means the amount determined to be the fair market value of a single Share by the Committee based upon the trading price of the Shares, their offering price in public and private offerings by the Company and such other factors as it deems relevant. In the absence of such a determination, the Fair Market Value of a Share shall be deemed to be (a) if the Shares are listed or admitted to trading on a national securities exchange or the NASDAQ - National Market System, the per Share closing price regular way on the principal national securities exchange or the NASDAQ - National Market System on which the Shares are listed or admitted to trading on the day prior to the date of determination or, if no closing price can be determined for the date of determination, the most recent date for which such price can reasonably be ascertained, or (b) if the Shares are not listed or admitted to trading on a national securities exchange or the NASDAQ - National Market System, the mean between the representative bid and asked per Share prices in the over-the-counter market at the closing of the day prior to the date of determination or the most recent such bid and asked prices then available, as reported by NASDAQ or if the Shares are not then quoted by NASDAQ as furnished by any market maker selected from time to time by the Company for that purpose. "GRANTEE" means any Participant to whom an Option has been granted. "HOLDER" means any Grantee who holds a valid Option and any heir or legal representative to whom such Grantee's Option has been transferred by will or the laws of descent and distribution. "INCENTIVE STOCK OPTION" or "ISO" means a Stock Option intended to comply with the terms and conditions set forth in Section 422 of the Code. "MEETING DATE" means the date of each annual meeting of the stockholders of the Company at which Directors are elected. "NONQUALIFIED OPTION" means a Stock Option other than an Incentive Stock Option. "OFFICER" means an officer of the Company as defined in 17 C.F.R.ss. 240.16a-1(f) as now in effect or hereafter amended. "OPTION" or "STOCK OPTION" means a right granted under Article 5, 6 or 7 of the Plan to a Grantee to purchase a stated number of Shares at a stated Exercise Price. "OPTION AGREEMENT" means an agreement evidencing an Option substantially in the form of Exhibit A, Exhibit B or Exhibit C attached hereto. "PARENT" means a parent of a given corporation as such term is defined in Section 424(e) of the Code. "PARTICIPANT" means a person who is eligible to receive an Option under the Plan. "PLAN" means this Plan as it may be amended or restated from time to time. "RULE 16b-3" means Rule 16b-3 (17 C.F.R. ss. 240.16b-3) promulgated under Section 16(b) of the Exchange Act as now in effect or hereafter amended. "SEC" means the Securities and Exchange Commission. "SHARES" means shares of Common Stock. "SUBSIDIARY" means a subsidiary of a given corporation as such term is defined in Section 424(f) of the Code. "TAX OFFSET PAYMENT" means a payment in cash which may be authorized by the Committee to be paid to a Grantee of a Nonqualified Option in an amount determined by the following formula: 1-[A + (1-A) + B] ----------------- - C = D C where "A" is the maximum federal marginal income tax rate imposed on individuals, "B" is the maximum marginal income tax rate imposed on individuals by the State in which the Grantee is domiciled, "C" is the difference between the Exercise Price and the Fair Market Value of a Share at the time of exercise, times the number of Shares subject to such exercise, and "D" is the amount of -2- the Tax Offset Payment. If at the time of exercise of a Nonqualified Option with respect to which a Tax Offset Payment has been authorized, in the reasonable opinion of the chief financial officer of the Company, (a) the Company may offset from income an amount equal to the full amount of the Tax Offset Payment, the Tax Offset Payment shall be paid at such time by first paying any withholding taxes due with respect to the exercise and grant of the Tax Offset Payment, and then by paying to the Grantee the balance, or (b) the Company may not offset from income an amount equal to the full amount of the Tax Offset Payment, only that portion of the Tax Offset Payment, if any, equal to the amount of the tax benefit available to the Company or its stockholders (the "Partial Tax Offset Payment") shall be paid at such time by first paying any withholding taxes due with respect to the exercise and grant of the Tax Offset Payment, and then by paying to the Grantee the balance, if any, of the Partial Tax Offset Payment. The balance of the Tax Offset Payment shall be paid to such Grantee as and when the Company may utilize the tax benefit resulting therefrom. "TEN PERCENT STOCKHOLDER" means a person who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company. Ownership shall, for the purposes of the previous sentence, be determined under the rules set forth in Section 424 of the Code. "TERMINATION WITHOUT CAUSE" means a termination by an Employer of the employment or consulting relationship of a Grantee with the Employer that is not for cause and is not occasioned by the resignation, death or disability of the Grantee. Section 1.2. ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles. Section 1.3. EFFECT OF DEFINITIONS. The definitions set forth in Section 1.1 above shall apply equally to the singular, plural, adjectival, adverbial and other forms of any of the words and phrases defined regardless of whether they are capitalized. ARTICLE 2. ADMINISTRATION. Section 2.1. COMMITTEE. The Plan shall be administered by a committee of the Board of Directors consisting of two or more Directors, each of whom is a "Non-Employee Director" as described in paragraph (b)(3) of Rule 16b-3 and is an "outside director" as described in Code Section 162(m) and the regulations thereunder. Unless the Board of Directors designates another of its committees to administer the Plan, the Plan shall be administered by (a) a committee consisting of those members of the Compensation Committee of the Board of Directors who are disinterested persons and are outside directors, but, if the Compensation Committee is abolished or its membership does not contain two persons who comply with the requirements of the first sentence of this Section 2.1, the Board of Directors shall either reconstitute the Compensation Committee in compliance with, or create another Committee that complies with, the requirements of the first sentence of this Section 2.1 to administer the Plan or (b) the Board of Directors. Section 2.2. AUTHORITY. Subject to the express provisions of the Plan and in addition to the powers granted by other sections of the Plan, the Committee has the authority, in its discretion, to (a) determine the Participants, grant Options, determine whether Tax Offset Payments should be authorized and, if authorized, the percentage of such Tax Offset Payment, and determine the timing, pricing and amount of the Options; (b) define, prescribe, amend and rescind rules, regulations, procedures, terms and conditions relating to the Plan; (c) make all other determinations necessary or advisable for administering the Plan including, but not limited to, interpreting the Plan, correcting defects, reconciling inconsistencies and resolving ambiguities; and (d) review and resolve all claims of Employees, Consultants, Directors, Grantees, Holders and Participants. The actions and determinations of the Committee on matters related to the Plan shall be conclusive and binding upon the Company and all Employees, Consultants, Directors, Grantees, Holders and Participants. ARTICLE 3. SHARES. Section 3.1. NUMBER. The aggregate number of Shares in respect of which Options may be granted under the Plan shall not exceed 1,500,000, which number ---------- -3- of Shares is hereby reserved for issuance under the Plan out of the authorized but unissued Shares. Section 3.2. CANCELLATIONS. If any portion of an Option is canceled, terminates or expires for any reason without having been exercised, the Shares related to such unexercised portion, shall be available again for the purposes of the Plan. Section 3.3. ANTI-DILUTION. (a) If the Shares are split or if a dividend of Shares is paid on the Shares, the number of Shares on which each then outstanding Option is based and the number of Shares as to which Options may be granted under this Plan shall be increased automatically by the ratio between the number of Shares outstanding immediately after such event and the number of Shares outstanding immediately before such event (ignoring for this purpose any provision for the repurchase or cash payment of fractional shares) and the Exercise Price thereof shall be decreased automatically by the same ratio. If the Shares are combined into a lesser number of Shares, the number of Shares for which each then outstanding Option is based and the number of Shares as to which Options may be granted under the Plan shall be decreased automatically by such ratio and the Exercise Price thereof shall be increased automatically by such ratio. (b) If any other change occurs in the Shares, through recapitalization, merger, consolidation or exchange of shares or otherwise, there shall automatically be substituted for each Share subject to an unexercised Option and each Share available for additional grants of Options, the number and kind of shares or other securities or property into which each outstanding Share was changed, and the Exercise Price shall be increased or decreased proportionally so that the aggregate Exercise Price for the securities subject to each Option shall remain the same as immediately before such event. In addition, the Committee may make such further equitable adjustments in the Plan and the then outstanding Options as are deemed necessary and appropriate by the Committee including, but not limited to, changing the number of Shares reserved under the Plan or covered by outstanding Options, the Exercise Price of outstanding Options and the vesting conditions of outstanding Options. Section 3.4. SOURCE. Except as otherwise determined by the Board of Directors, the Shares issued under the Plan shall be drawn from the Company's authorized but unissued Shares. However, Shares which are to be delivered under the Plan may be obtained by the Company from its treasury, by purchases on the open market or from private sources, as well as by issuing authorized but unissued Shares. The proceeds of the exercise of any Option shall be general corporate funds of the Company. No Shares may be sold under any Option Agreement for less than the par value thereof. No fractional Shares shall be issued or sold under the Plan nor will any cash payment be made in lieu of fractional Shares. Section 3.5. RIGHTS OF A STOCKHOLDER. No Holder nor any person claiming under or through any Holder shall have any right, title or interest in or to any Shares allocated or reserved under the Plan or subject to any Option except as to such Shares, if any, for which certificates representing such Shares have been issued to such Holder upon the due exercise of an Option. Section 3.6. SECURITIES LAWS. No Option shall be exercised nor shall any Shares or other securities be issued or transferred pursuant to an Option unless and until all applicable requirements imposed by federal and state securities laws and by any stock exchanges upon which the Shares may be listed, have been fully complied with. As a condition precedent to the exercise of an Option or the issuance of Shares pursuant to the grant or exercise of an Option, the Company may require the Holder to take any reasonable action to meet such requirements including providing undertakings as to the investment intent of the Holder, accepting transfer restrictions on the Shares issuable thereunder and providing opinions of counsel, in form and substance acceptable to the Company, as to the availability of exemptions from such requirements. ARTICLE 4. ELIGIBILITY. Section 4.1. ARTICLE 5. Only Employees shall be eligible to receive Options under Article 5 below. Section 4.2. ARTICLE 6. Only Consultants shall be eligible to receive Options under Article 6 below. -4- Section 4.3. ARTICLE 7. Only Directors shall be eligible to receive Options under Article 7 below. ARTICLE 5. EMPLOYEES' STOCK OPTIONS. Section 5.1. DETERMINATIONS. The Committee shall determine which Participants shall be granted Options, which Participants will be granted Tax Offset Payments and the percentage of Tax Offset Payments, the manner of payment, the number of Shares for which the Options may be exercised, the times when they shall receive them and the terms and conditions of individual Option grants (which need not be identical). Section 5.2. EXERCISE PRICE. The Committee shall determine the Exercise Price of each Option at the time that it is granted, but in no event shall the Exercise Price of an Option be less than the Fair Market Value of a Share on the Date of Grant. If no express determination of the Exercise Price of an Option is made by the Committee, the Exercise Price thereof is equal to the Fair Market Value of a Share on the Date of Grant. Section 5.3. TERM. Subject to the rule set forth in the next sentence, the Committee shall determine the times when an Option vests and the term during which an Option is exercisable at the time that it is granted. No Option shall be exercisable after the expiration of ten years from the Date of Grant. If no express determination of the times when Options are exercisable is made by the Committee: (a) each Option shall vest and first become exercisable (subject to the rule set forth in Section 5.4(c) below) as to 25% of the Shares subject to such Option on each of the first four anniversaries of the Date of Grant provided the Grantee has been an Employee continuously during the time beginning on the Date of Grant and ending on the date when such portion vests and first becomes exercisable and further provided that no portion of an Option shall vest and become exercisable after the employment of the Grantee by his Employer has terminated, regardless of the reason for such termination. (b) any portion of an Option that has vested and become exercisable shall lapse and cease to be exercisable upon the earliest of: (i) the expiration of ten years from the Date of Grant, (ii) subject to the rule set forth in Section 5.4(d) below, nine months after the Grantee ceases to be an Employee because of death or disability, (iii) three months after the termination without cause of the Grantee's employment with all Employers, or (iv) immediately upon termination of the Grantee's employment with all Employers by the applicable Employers for cause or by the Grantee's resignation. Where both an Incentive Stock Option and a Nonqualified Option are granted, the number of Shares which become exercisable under clause (a) of the previous sentence at any time shall be calculated on the basis of the total of the Shares subject to both Options and the Options shall become exercisable as to that number of Shares first under the Incentive Stock Option and then under the Nonqualified Option, unless the rule set forth in Section 5.4(c) below would defer the exercisability of such Incentive Stock Option, in which case such Nonqualified Options shall become exercisable first. Section 5.4. INCENTIVE STOCK OPTIONS. (a) The Committee shall determine whether any Option is an Incentive Stock Option or a Nonqualified Option at the time that it is granted and, if no express determination is made by the Committee, all Options shall be Nonqualified Options. (b) If the Committee grants Incentive Stock Options, they shall be on such terms and conditions as may be necessary to render them "incentive stock options" pursuant to Section 422 of the Code. (c) The aggregate Fair Market Value of the Shares, determined as of the time the Option is granted, which first become exercisable under all Incentive Stock Options granted to any one Grantee under this Plan or any other plan of the Company or any Parent or Subsidiary of the Company, shall not exceed $100,000 during any calendar year and, if the foregoing limit would be exceeded -5- in any given calendar year by the terms of any Incentive Stock Option granted hereunder, the exercisability of such portion of such Option as would exceed such limit shall be deferred to the first day of the next calendar year and, if such excess involves more than one Option, the exercisability of the most recently granted Option shall be deferred first. (d) If the employment of a Grantee, who holds an ISO, with any Employer is terminated because of a "disability" (within the meaning of Section 22(e)(3) of the Code), the unexercised portion of the ISO may be exercised only within six months after the date on which employment was terminated, and only to the extent that such Grantee could have otherwise exercised such ISO as of the date of termination. If a Grantee, who holds an ISO, dies while employed by an Employer (or within six months after termination of employment by reason of a disability or within 30 days after termination of employment without cause), the unexercised portion of the ISO at the time of death may be exercised only within six months after the date of death, and only to the extent that the Grantee could have otherwise exercised such ISO at the time of death. In such event, such ISO may be exercised by the executor or administrator of the Grantee's estate or by any Holder. (e) No Ten Percent Stockholder shall be granted an Incentive Stock Option unless, at the time such Incentive Stock Option is granted, the Exercise Price thereof is at least 110% of the Fair Market Value of a Share on the Date of Grant and the Incentive Stock Option, by its terms, is not exercisable after the expiration of five years from the Date of Grant. (f) If a Holder exercises an Incentive Stock Option and disposes of any of the Shares received by such Holder as a result of such exercise within two years from the Date of Grant or within one year after the issuance of such Shares to such Holder upon such exercise, such Holder shall notify the Company of such disposition and the consideration received as a result thereof and pay or provide for the withholding taxes on such disposition as required by Section 8.3 below. (g) An Option that is designated as a Nonqualified Option under this Plan shall not be treated as an "incentive stock option" as such term is defined in Section 422(b) of the Code. Section 5.5. EXERCISE. (a) An Option shall be exercised by the delivery of the Option Agreement therefor, with the notice of exercise attached thereto properly completed and duly executed by the Holder, to the Treasurer of the Company, together with the aggregate Exercise Price for the number of Shares as to which the Option is being exercised, after the Option has vested and become exercisable and before it has lapsed and ceased to be exercisable. (b) An Option may be exercised as to less than all of the Shares purchasable thereunder, but not for a fractional share. No Option may be exercised as to less than 100 Shares unless it is exercised as to all of the Shares then available thereunder. If an Option is exercised as to less than all of the Shares purchasable thereunder, a new duly executed Option Agreement reflecting the decreased number of Shares exercisable under such Option, but otherwise of the same tenor, shall be returned to the Holder. (c) The Committee may, in its sole discretion and upon such terms and conditions as it shall determine at or after the Date of Grant, permit the Exercise Price to be paid in cash, by the tender to the Company of Shares owned by the Holder, or by a combination thereof. If the Committee does not make such determination, the Exercise Price shall be paid in cash. (d) If any portion of the Exercise Price of an Option is payable in cash, it may be paid by (i) delivery of a certified or cashier's check payable to the order of the Company in such amount, (ii) wire transfer of immediately available funds to a bank account designated by the Company or (iii) reduction of a debt of the Company to the Holder. (e) If any portion of the Exercise Price of an Option is payable in Shares, it may be paid by delivery of certificates representing a number of Shares having a total fair market value on the date of exercise equal to or greater than the required amount, duly endorsed for transfer with all signatures -6- guaranteed by a medallion signature guarantee. If more Shares than are necessary to pay such Exercise Price based on their fair market value on the date of exercise are delivered to the Company, it shall return to the Holder a certificate for the balance of the whole number of Shares and a check payable to the order of the Holder for any fraction of a Share. Shares may not be delivered to the Company as payment for the exercise of an Option if such Shares have been owned by the Holder (together with his decedent or testator) for less than six months or if the disposition of such Shares would require the giving of a notice under Section 5.4(f) above. (f) Promptly after an Option is properly exercised, the Company shall issue to the Holder a certificate representing the Shares purchased thereunder. Section 5.6. OPTION AGREEMENT. Promptly after the Date of Grant, the Company shall duly execute and deliver to the Grantee an Option Agreement setting forth the terms of the Option. Option Agreements are not negotiable instruments or securities (as such term is defined in Article 8 of the Uniform Commercial Code). Lost and destroyed Option Agreements may be replaced without bond. Section 5.7. NEW HIRES. A person to whom the Company is offering employment may be granted a Nonqualified Option under this Article 5, but any such grant shall lapse if the person does not subsequently become an Employee pursuant to such offer. ARTICLE 6. CONSULTANTS' STOCK OPTIONS. Section 6.1. DETERMINATIONS. The Committee shall determine which Participants shall be granted Options, the number of Shares for which the Options may be exercised, the times when they shall receive them and the terms and conditions of individual Option grants (which need not be identical). Section 6.2. EXERCISE PRICE. The Committee shall determine the Exercise Price of each Option at the time that it is granted, but in no event shall the Exercise Price of an Option be less than the Fair Market Value of a Share on the Date of Grant. If no express determination of the Exercise Price of an Option is made by the Committee, the Exercise Price thereof is equal to the Fair Market Value of a Share on the Date of Grant. Section 6.3. TERM. Subject to the rule set forth in the next sentence, the Committee shall determine the times when an Option vests and the term during which an Option is exercisable at the time that it is granted. No Option shall be exercisable after the expiration of ten years from the Date of Grant. If no express determination of the times when Options are exercisable is made by the Committee: (a) each Option shall vest and first become exercisable as to 25% of the Shares subject to such Option on each of the first four anniversaries of the Date of Grant provided the Grantee has been a Consultant continuously during the time beginning on the Date of Grant and ending on the date when such portion vests and first becomes exercisable and further provided that no portion of an Option shall vest and become exercisable after the termination of the Grantee's consulting relation with his Employer, regardless of the reason for such termination. (b) any portion of an Option that has vested and become exercisable shall lapse and cease to be exercisable upon the earliest of: (i) the expiration of ten years from the Date of Grant, (ii) nine months after the Grantee ceases to be a Consultant because of death or disability, or (iii) three months after the termination without cause of the Grantee's consulting relation with the Employer, or (iv) immediately upon termination of the Grantee's consulting relation with the Employer for cause or by the Grantee's resignation. Section 6.4. NOT INCENTIVE STOCK OPTIONS. An Option under this Article 6 shall not be treated as an Incentive Stock Option. Section 6.5. EXERCISE. (a) An Option shall be exercised by the delivery of the Option Agreement therefor, with the notice of exercise attached thereto properly -7- completed and duly executed by the Holder, to the Treasurer of the Company, together with the aggregate Exercise Price for the number of Shares as to which the Option is being exercised, after the Option has vested and become exercisable and before it has lapsed and ceased to be exercisable. (b) An Option may be exercised as to less than all of the Shares purchasable thereunder, but not for a fractional share. No Option may be exercised as to less than 100 Shares unless it is exercised as to all of the Shares then available thereunder. If an Option is exercised as to less than all of the Shares purchasable thereunder, a new duly executed Option Agreement reflecting the decreased number of Shares exercisable under such Option, but otherwise of the same tenor, shall be returned to the Holder. (c) The Committee may, in its sole discretion and upon such terms and conditions as it shall determine at or after the Date of Grant, permit the Exercise Price to be paid in cash, by the tender to the Company of Shares owned by the Holder, or by a combination thereof. If the Committee does not make such determination, the Exercise Price shall be paid in cash. (d) If any portion of the Exercise Price of an Option is payable in cash, it may be paid by (i) delivery of a certified or cashier's check payable to the order of the Company in such amount, (ii) wire transfer of immediately available funds to a bank account designated by the Company or (iii) reduction of a debt of the Company to the Holder. (e) If any portion of the Exercise Price of an Option is payable in Shares, it may be paid by delivery of certificates representing a number of Shares having a total fair market value on the date of exercise equal to or greater than the required amount, duly endorsed for transfer with all signatures guaranteed by a medallion signature guarantee. If more Shares than are necessary to pay such Exercise Price based on their fair market value on the date of exercise are delivered to the Company, it shall return to the Holder a certificate for the balance of the whole number of Shares and a check payable to the order of the Holder for any fraction of a Share. Shares may not be delivered to the Company as payment for the exercise of an Option if such Shares have been owned by the Holder (together with his decedent or testator) for less than six months or if the disposition of such Shares would require the giving of a notice under Section 5.4(f) above. (f) Promptly after an Option is properly exercised, the Company shall issue to the Holder a certificate representing the Shares purchased thereunder. Section 6.6. OPTION AGREEMENT. Promptly after the Date of Grant, the Company shall duly execute and deliver to the Grantee an Option Agreement setting forth the terms of the Option. Option Agreements are neither negotiable instruments nor securities (as such term is defined in Article 8 of the Uniform Commercial Code). Lost and destroyed Option Agreements may be replaced without bond. ARTICLE 7. DIRECTORS' OPTIONS. Section 7.1. GRANT. On each Meeting Date, an Option shall be automatically granted to each Director who is eligible to receive Options under Section 4.3 above and who attended at least seventy five per cent (75%) of the total number of meetings of the Board of Directors (and committees thereof of which he is a member) during the most recently ended fiscal year of the Company. The number of Shares subject to each Option granted under this Section 7.1 shall be determined by a resolution adopted by the [{Committee}{Board of Directors}] on or before a Meeting Date, uniformly applying to all eligible Directors, which establishes, increases or decreases the number of Shares subject to such Option Any such resolution shall continue in force for the next Meeting Date, unless it is amended or repealed, the Meeting Date is more than ten years after the Effective Date or there are not a sufficient number of Shares remaining available under Section 3.1 above. This Section 7.1 shall not be operative until such time as such a resolution is adopted. Section 7.2. EXERCISE PRICE. The Exercise Price of an Option shall be equal to the Fair Market Value of a Share on the Date of Grant. Section 7.3. TERM. (a) Each Option shall vest and first become exercisable as to 25% of the Shares originally subject to the Option on each Meeting Date which is held -8- more than six months after the Date of Grant if the Grantee is a Director at the time of the adjournment of the meeting of stockholders held on such Meeting Date and further provided that no portion of an Option shall vest and become exercisable after the Grantee has ceased to be a Director, regardless of the reason for such cessation. (b) any portion of an Option that has vested and become exercisable shall lapse and cease to be exercisable upon the earliest of: (i) the expiration of ten years from the Date of Grant, (ii) nine months after the Grantee ceases to be a Director because of his death or disability, (iii) immediately upon resignation by the Grantee as a Director, or (iv) three months after the Grantee ceases to be a Director for any reason other than his death, disability or resignation. Section 7.4. NOT INCENTIVE STOCK OPTIONS. An Option under this Article 7 shall not be treated as an Incentive Stock Option. Section 7.5. EXERCISE. (a) An Option shall be exercised by the delivery of the Option Agreement therefor, with the notice of exercise attached thereto properly completed and duly executed by the Holder, to the Treasurer of the Company, together with the aggregate Exercise Price for the number of Shares as to which the Option is being exercised, after the Option has vested and become exercisable and before it has lapsed and ceased to be exercisable. (b) An Option may be exercised as to less than all of the Shares purchasable thereunder but not for a fractional Share. No Option may be exercised as to less than 100 Shares unless it is exercised as to all of the Shares then available thereunder. If an Option is exercised as to less than all of the Shares purchasable thereunder, a new duly executed Option Agreement reflecting the decreased number of Shares exercisable under such Option, but otherwise of the same tenor, shall be returned to the Holder. (c) The Committee may, in its sole discretion and upon such terms and conditions as it shall determine at or after the Date of Grant, permit the Exercise Price to be paid in cash, by the tender to the Company of Shares owned by the Holder, or by a combination thereof. If the Committee does not make such determination, the Exercise Price shall be paid in cash. (d) If any portion of the Exercise Price of an Option is payable in cash, it may be paid by (i) delivery of a certified or cashier's check payable to the order of the Company in such amount, (ii) wire transfer of immediately available funds to a bank account designated by the Company or (iii) reduction of a debt of the Company to the Holder. (e) If any portion of the Exercise Price of an Option is payable in Shares, it may be paid by delivery of certificates representing a number of Shares having a total fair market value on the date of exercise equal to or greater than the required amount, duly endorsed for transfer with all signatures guaranteed by a medallion signature guarantee. If more Shares than are necessary to pay such Exercise Price based on their fair market value on the date of exercise are delivered to the Company, it shall return to the Holder a certificate for the balance of the whole number of Shares and a check payable to the order of the Holder for any fraction of a Share. Shares may not be delivered to the Company as payment for the exercise of an Option if such Shares have been owned by the Holder (together with his decedent or testator) for less than six months or if the disposition of such Shares would require the giving of a notice under Section 5.4(f) above. (f) Promptly after an Option is properly exercised, the Company shall issue to the Holder a certificate representing the Shares purchased thereunder. Section 7.6. OPTION AGREEMENT. Promptly after the Date of Grant, the Company shall duly execute and deliver to the Grantee an Option Agreement setting forth the terms of the Option. Option Agreements are neither negotiable instruments nor securities (as such term is defined in Article 8 of the Uniform Commercial Code). Lost and destroyed Option Agreements may be replaced without bond. -9- ARTICLE 8. PROVISIONS APPLICABLE TO ALL TYPES OF OPTIONS. Section 8.1. MAXIMUM SHARES. Notwithstanding any other provision of this Plan, the maximum number of Shares with respect to which Options may be granted during any fiscal year of the Company to any Employee shall be 250,000 Shares. Section 8.2. CORPORATE MERGERS AND ACQUISITIONS. The Committee may grant Options having terms and conditions which vary from those specified in the Plan if such Options are granted in substitution for, or in connection with the assumption of, existing options granted by another business entity and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a merger or consolidation of or acquisition of substantially all of the assets or stock of another business entity that is not a Subsidiary of the Company prior to such acquisition, with or by the Company or its Subsidiaries. Section 8.3. WITHHOLDING. The Company shall have the right to withhold from any payments due under any Option or due to any Holder from the Company as compensation or otherwise the amounts of any federal, state or local withholding taxes not paid by the Holder at the time of the exercise or vesting of any Option or upon a disposition of Shares received upon the exercise of an Incentive Stock Option. If cash payments sufficient to allow for withholding of taxes are not made at the time of exercise or vesting of an Option, the Holder exercising such Option shall pay to the Company an amount equal to the withholding required to be made less the withholding otherwise made in cash or, if allowed by the Committee in its discretion and pursuant to rules adopted by the Committee consistent with Section 5.5 above, Shares previously owned by the Holder. The Company may make such other provisions as it deems appropriate to withhold any taxes the Company determines are required to be withheld in connection with the exercise of any Option or upon a disqualifying disposition of Shares received upon the exercise of an Incentive Stock Option, including, but not limited to, the withholding of Shares from an Option upon such terms and conditions as the Committee may provide. The Company may require the Holder to satisfy any relevant withholding requirements before issuing Shares or delivering any Option to the Holder. Section 8.4. DISABILITY. If a Grantee who is an Employee or a Consultant is absent from work because of a physical or mental disability, for purposes of the Plan such Grantee will not be considered to have ended his employment or consulting relationship with the Company while such Grantee has that disability, unless he resigns or terminates such relationship or the Committee decides otherwise. If a Grantee who is a Director is absent from meetings of the Board of Directors because of a physical or mental disability, for purposes of the Plan such Grantee will not be considered to have ended his service with the Board of Directors while such Grantee has that disability, unless he resigns or is not re-elected by the stockholders. Section 8.5. MERGER OF THE COMPANY. If the Company merges or consolidates with or sells substantially all of its assets to a person that was not one of its affiliates before such transaction, or any such unaffiliated person or corporation has publicly announced a tender offer to purchase more than 20% of the outstanding voting securities of the Company, all Options shall immediately vest and may thereafter, but not beyond the ten year period referred to in Sections 5.3, 6.3, and 7.3 above and the five year period referred to in Section 5.4(e) above, be exercised in whole or in part If such transaction is not timely completed, any exercise or vesting of any Option shall be unwound. Section 8.6. SURRENDER AND EXCHANGE. The Committee may permit the voluntary surrender of all or a portion of any Option to be conditioned upon the granting to the Holder of a new Option for the same or a different number of Shares as the Option surrendered, or may require such voluntary surrender as a condition precedent to a grant of a new Option to such Holder. Subject to the provisions of the Plan, such new Option shall be exercisable at the price, during the period and on such other terms and conditions as are specified by the Committee at the time the new Option is granted. Upon surrender, the Option surrendered shall be canceled and the Shares previously subject to it shall be available for the grant of other Options. -10- Section 8.7. ACCELERATION. Notwithstanding anything else in the Plan, the Committee may, in its sole discretion, at any time or from time to time, accelerate the time at which any Options mature or vest or waive any provisions of the Plan relating to the manner of payment or procedures for the exercise or maturity of any Option. Any such acceleration may be made effective (a) with respect to one or more or all Holders, (b) with respect to some or all of the Shares subject to or forming the basis for any Option to any Holder or (c) for a period of time ending at or before the expiration date of any Option. Section 8.8. ACTIONS BY COMMITTEE AFTER GRANT. The Committee shall have, subject to the written consent of the Holder where the action impairs or adversely alters the rights of the Holder, the right, at any time and from time to time after the Date of Grant of any Option, to modify the terms of any Option. ARTICLE 9. GENERAL PROVISIONS. Section 9.1. NO RIGHT TO EMPLOYMENT. Nothing in the Plan or any Option or any instrument executed pursuant to the Plan will confer upon any Grantee any right to continue to be employed by or provide services to the Company or affect the right of the Company to terminate the employment of any Grantee or its other relationship with any Grantee. Nothing in the Plan or any Option or any instrument executed pursuant to the Plan will confer upon any Grantee any right to continue to be a Director of the Company or affect the right of the stockholders to terminate the directorship of any Grantee. Section 9.2. LIMITED LIABILITY. The liability of the Company under this Plan or in connection with any exercise of any Option is limited to the obligations expressly set forth in the Plan and in the grant of any Option, and no term or provision of this Plan nor of any Option shall be construed to impose any duty, obligation or liability on the Company not expressly set forth in the Plan or any grant of any Option. Section 9.3. ASSUMPTION OF OPTIONS. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more other entities as a result of which the Company is not the surviving entity, or upon a sale of substantially all the assets of the Company to another entity, any Options outstanding theretofore granted or sold hereunder must be assumed by the surviving or purchasing entity, with appropriate adjustments as to the number and kind of shares and price. Section 9.4. NO TRANSFER. No Option or other benefit under the Plan may be sold, pledged or otherwise transferred other than by will or the laws of descent and distribution; and no Option may be exercised during the life of the Grantee to whom it was granted except by such Grantee. Section 9.5. EXPENSES. All costs and expenses incurred in connection with the administration of the Plan including any excise tax imposed upon the transfer of Shares pursuant to the exercise of an Option shall be borne by the Company. Section 9.6. NOTICES. Notices and other communications required or permitted to be made under the Plan shall be in writing and shall be deemed to have been duly given only if personally delivered or if sent by first class mail addressed (a) if to a Holder, at his residence address set forth in the records of the Company or (b) if to the Company, to its President at its principal executive office. Section 9.7. THIRD PARTIES. Nothing herein expressed or implied is intended or shall be construed to give any person other than the Holders any rights or remedies under this Plan. -11- Section 9.8. SATURDAYS, SUNDAYS AND HOLIDAYS. Where this Plan authorizes or requires a payment or performance on a Saturday, Sunday or public holiday, such payment or performance shall be deemed to be timely if made on the next succeeding business day; PROVIDED, HOWEVER, that this Section 9.8 shall not be construed to extend the ten year period referred to in Sections 5.3, 6.3, and 7.3 above or the five year period referred to in Section 5.4(e) above. Section 9.9. RULES OF CONSTRUCTION. The captions and section numbers appearing in this Plan are inserted only as a matter of convenience. They do not define, limit or describe the scope or intent of the provisions of this Plan. In this Plan words in the singular number include the plural, and in the plural include the singular; and words of the masculine gender include the feminine and the neuter and, when the sense so indicates, words of the neuter gender may refer to any gender. Section 9.10. GOVERNING LAW. The validity, terms, performance and enforcement of this Plan shall be governed by laws of the State of Delaware that are applicable to agreements negotiated, executed, delivered and performed solely in the State of Delaware. Section 9.11. EFFECTIVE DATE OF THE PLAN. The Plan shall become effective upon its approval by the affirmative vote of the holders of a majority of the outstanding Shares present or represented and entitled to vote at a meeting of the stockholders of the Company. Options may be granted by the Committee before such approval, but all Options so granted shall be conditioned on such approval and shall be void if such approval is not given within 12 months after the Effective Date. Section 9.12. AMENDMENT AND TERMINATION. No Option shall be granted under the Plan more than ten years after the Effective Date. The Board of Directors may at any time terminate the Plan or make such amendment of the Plan as it may deem advisable; PROVIDED, HOWEVER, that no amendment shall be effective without the approval of the stockholders of the Company by the affirmative vote of the holders of a majority of the outstanding Shares present or represented and entitled to vote at a meeting of stockholders duly held, if it were to: (a) authorize the grant of Options that may be exercised more than ten years after the Date of Grant or that have an Exercise Price which is less than the Fair Market Value of a Share on the Date of Grant; or (b) materially increase the number of Shares which may be issued under the Plan; and, FURTHER, PROVIDED, HOWEVER, that no amendment or termination of the Plan shall be effective to materially impair the rights of a Holder under any Option granted before the adoption of such amendment or termination by the Board of Directors, without the written consent of such Holder. No termination or amendment of this Plan or any Option nor waiver of any right or requirement under this Plan or any Option shall be binding on the Company unless it is in a writing duly entered into its records and executed by a duly authorized Officer. -12- EXHIBIT A EMPLOYEES' OPTION AGREEMENT ROYAL PRECISION, INC. 15170 N. HAYDEN ROAD, SUITE 1 SCOTTSDALE, AZ 85260 (Date of Grant) (Name of Grantee) (Street) (City, State, Zip) Congratulations. You have been granted a Stock Option under the Company's Stock Option Plan dated October 5, 1997 (the "PLAN") on the following terms: 1. NUMBER OF SHARES. The number of Shares of Common Stock of the Company that you may purchase under this Option is: (Number) 2. EXERCISE PRICE. The Exercise Price to purchase Shares under this Option is: $(Price) per Share. 3. VESTING. [25%] of the Shares originally subject to this Option will vest and become exercisable on the first [four] anniversaries of the date of this Agreement if you have been an Employee of the Company continuously from the date of this Agreement through the date when such portion of the Option vests[ subject to the special rule referred to in paragraph 5 below]. No portion of this Option shall vest and become exercisable after your employment with your Employer has terminated, regardless of the reason for such termination. 4. LAPSE. This Option will lapse and cease to be exercisable upon the earliest of: (i) the expiration of 10 years from the date of this Agreement, (ii) nine [six] months after you cease to be an Employee because of your death or disability, (iii) three months after a termination without cause of your employment with your Employer, or (iv) immediately upon termination of your employment with your Employer by such Employer for cause or by your resignation. 5. TAXATION. This Option is [an Incentive Stock Option][a Nonqualified Option]. [Because this Option is an Incentive Stock Option vesting of a portion of this Option or of other Incentive Stock Options held by you may be deferred under a special rule set forth in Section 5.4 (c) of the Plan. If you exercise this Option and dispose of any of the Shares received by you as a result of such exercise within two years from the date above or within one year after the issuance of such Shares to you upon such exercise, you must notify the Company of such disposition and the amount received as a result thereof and pay or provide for the withholding taxes on such disposition.] [You will have taxable income upon the exercise of this Option. At that time, you must pay to the Company an amount equal to the required federal, state, and local tax withholding less any withholding otherwise made from your salary or bonus. You must satisfy any relevant withholding requirements before the Company issues Shares to you.] 6. EXERCISE. This Option may be exercised by the delivery of this Agreement, with the notice of exercise attached hereto properly completed and signed by you, to the Treasurer of the Company, together with the aggregate Exercise Price for the number of Shares as to which the Option is being exercised, after the Option has become exercisable and before it has ceased to be exercisable. The Exercise Price must be paid in cash by (a) delivery of a certified or cashier's check payable to the order of the Company in such amount, (b) wire transfer of immediately available funds to a bank account designated by the Company, or (c) reduction of a debt of the Company to you. This Option may be exercised as to less than all of the Shares purchasable hereunder, but not for a fractional share, nor may it be exercised as to less than 100 Shares unless it is exercised as to all of the Shares then available hereunder. [You have been granted a ____% Tax Offset Payment.] 7. NO TRANSFER. This Option may not be sold, pledged nor otherwise transferred other than by will or the laws of descent and distribution; and it may be exercised during your lifetime only by you. This Agreement is neither a negotiable instrument nor a security (as such term is defined in Article 8 of the Uniform Commercial Code). 8. NOT AN EMPLOYMENT AGREEMENT. This Agreement is not an employment agreement and nothing contained herein gives you any right to continue to be employed by or provide services to the Company or affects the right of the Company to terminate your employment or other relationship with you. 9. PLAN CONTROLS. This Agreement is an Option Agreement (as such term is defined in the Plan) under Article 5 of the Plan. The terms of this Agreement are subject to, and controlled by, the terms of the Plan, as it is now in effect or may be amended from time to time hereafter, which are incorporated herein as if they were set forth in full. Any words or phrases defined in the Plan have the same meanings in this Agreement. The Company will provide you with a copy of the Plan promptly upon your written or oral request made to its Treasurer. 10. MISCELLANEOUS. This Agreement sets forth the entire agreement of the parties with respect to the subject matter hereof and it supersedes and discharges all prior agreements (written or oral) and negotiations and all contemporaneous oral agreements concerning such subject matter. This Agreement may not be amended or terminated except by a writing signed by the party against whom any such amendment or termination is sought. If any one or more provisions of this Agreement shall be found to be illegal or unenforceable in any respect, the validity and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. This Agreement shall be governed by the laws of the State of Delaware. Please acknowledge your acceptance of this Agreement by signing the enclosed copy in the space provided below and returning it promptly to the Company. ROYAL PRECISION, INC. By: _________________________________________ (Name of Officer), (Title) Accepted and Agreed to as of the date first set forth above: - -------------------------------------------- (Name of Grantee) -2- OPTION EXERCISE FORM The undersigned hereby exercises the right to purchase ________________ shares of Common Stock of the Company pursuant to the Option Agreement dated (Date of Grant) under the Company's Stock Option Plan dated October 5, 1997. The undersigned hereby represents and warrants to the Company that he is not exercising such rights or planning to transfer such shares while in the possession of material inside information relating to the Company. Date: _____________________ ________________________________________ (Name of Holder) ______________________________________________________________ Sign and complete this Option Exercise Form and deliver it to: ROYAL PRECISION, INC. Attn.: Treasurer 15170 N. Hayden Road, Suite 1 Scottsdale, AZ 85260 together with the Exercise Price in cash by (a) delivery of a certified or cashier's check payable to the order of the Company in such amount, (b) wire transfer of immediately available funds to a bank account designated by the Company, or (c) reduction of a debt of the Company to you. -3- EXHIBIT B CONSULTANTS' OPTION AGREEMENT ROYAL PRECISION, INC. 15170 N. HAYDEN ROAD, SUITE 1 SCOTTSDALE, AZ 85260 (Date of Grant) (Name of Grantee) (Street) (City, State, Zip) Congratulations. You have been granted a Stock Option under the Company's Stock Option Plan dated October 5, 1997 (the "PLAN") on the following terms: 1. NUMBER OF SHARES. The number of Shares of Common Stock of the Company that you may purchase under this Option is: (Number) 2. EXERCISE PRICE. The exercise price to purchase Shares under this Option is: $(Price) per Share. 3. VESTING. [25%] of the Shares originally subject to this Option will vest and become exercisable on the first [four] anniversaries of the date of this Agreement if you have been a Consultant to the Company continuously from the date of this Agreement through the date when such portion of the Option vests. No portion of this Option shall vest and become exercisable after the termination of the your consulting relation with your Employer, regardless of the reason for such termination. 4. LAPSE. This Option will lapse and cease to be exercisable upon the earliest of: (i) the expiration of 10 years from the date of this Agreement, (ii) nine months after you cease to be a Consultant because of your death or disability, (iii) three months after a termination without cause of your consulting relationship with your Employer; or (iv) immediately upon termination of your consulting relationship with your Employer for cause or by your resignation. 5. TAXATION. This Option is a Nonqualified Option. You will have taxable income upon the exercise of this Option. At that time, you must pay to the Company an amount equal to the required federal, state, and local tax withholding less any withholding otherwise made from compensation payable to you. You must satisfy any relevant withholding requirements before the Company issues Shares to you. 6. EXERCISE. This Option may be exercised by the delivery of this Agreement, with the notice of exercise attached hereto properly completed and signed by you, to the Treasurer of the Company, together with the aggregate Exercise Price for the number of Shares as to which the Option is being exercised, after the Option has become exercisable and before it has ceased to be exercisable. The Exercise Price must be paid in cash by (a) delivery of a certified or cashier's check payable to the order of the Company in such amount, (b) wire transfer of immediately available funds to a bank account designated by the Company, or (c) reduction of a debt of the Company to you. This Option may be exercised as to less than all of the Shares purchasable hereunder, but not for a fractional share, nor may it be exercised as to less than 100 Shares unless it is exercised as to all of the Shares then available hereunder. 7. NO TRANSFER. This Option may not be sold, pledged nor otherwise transferred other than by will or the laws of descent and distribution; and it may be exercised during your lifetime only by you. This Agreement is neither a negotiable instrument nor a security (as such term is defined in Article 8 of the Uniform Commercial Code). 8. NOT A CONSULTING AGREEMENT. This Agreement is not a consulting agreement and nothing contained herein gives you any right to continue to provide services to the Company or affect the right of the Company to terminate the consulting relationship with you. 9. PLAN CONTROLS. This Agreement is an Option Agreement (as such term is defined in the Plan) under Article 6 of the Plan. The terms of this Agreement are subject to, and controlled by, the terms of the Plan, as it is now in effect or may be amended from time to time hereafter, which are incorporated herein as if they were set forth in full. Any words or phrases defined in the Plan have the same meanings in this Agreement. The Company will provide you with a copy of the Plan promptly upon your written or oral request made to its Treasurer. 10. MISCELLANEOUS. This Agreement sets forth the entire agreement of the parties with respect to the subject matter hereof and it supersedes and discharges all prior agreements (written or oral) and negotiations and all contemporaneous oral agreements concerning such subject matter. This Agreement may not be amended or terminated except by a writing signed by the party against whom any such amendment or termination is sought. If any one or more provisions of this Agreement shall be found to be illegal or unenforceable in any respect, the validity and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. This Agreement shall be governed by the laws of the State of Delaware. Please acknowledge your acceptance of this Agreement by signing the enclosed copy in the space provided below and returning it promptly to the Company. ROYAL PRECISION, INC. By: ______________________________________ (Name of Officer), (Title) Accepted and Agreed to as of the date first set forth above: - - ------------------------------------------------------------ (Name of Grantee) -2- OPTION EXERCISE FORM The undersigned hereby exercises the right to purchase ________________ shares of Common Stock of the Company pursuant to the Option Agreement dated (Date of Grant) under the Company's Stock Option Plan dated October 5, 1997. Date: __________________________ ________________________________________ (Name of Holder) - -------------------------------------------------------------- Sign and complete this Option Exercise Form and deliver it to: ROYAL PRECISION, INC. Attn.: Treasurer 15170 N. Hayden Road, Suite 1 Scottsdale, AZ 85260 together with the Exercise Price in cash by (a) delivery of a certified or cashier's check payable to the order of the Company in such amount, (b) wire transfer of immediately available funds to a bank account designated by the Company, or (c) reduction of a debt of the Company to you. -3- EXHIBIT C DIRECTORS' OPTION AGREEMENT ROYAL PRECISION, INC. 15170 N. HAYDEN ROAD, SUITE 1 SCOTTSDALE, AZ 85260 (Date of Grant) (Name of Grantee) (Street) (City, State, Zip) Congratulations. You have been granted a Stock Option under the Company's Stock Option Plan dated October 5, 1997 (the "PLAN") on the following terms: 1. NUMBER OF SHARES. The number of Shares of Common Stock of the Company that you may purchase under this Option is:(Number) 2. EXERCISE PRICE. The exercise price to purchase Shares under this Option is: $(Price) per Share. 3. VESTING. [25%] of the Shares originally subject to this Option will vest and become exercisable on each Meeting Date which occurs more than six months after the date of this Agreement if you are a Director at the time of the adjournment of the meeting of stockholders held on such Meeting Date. 4. LAPSE. This Option will lapse and cease to be exercisable upon the earliest of: (i) the expiration of 10 years from the date of this Agreement, (ii) nine months after you cease to be a Director because of your death or Disability, (iii) immediately upon your resignation as a Director, or (iv) three months after you cease to be a Director for any reason other than your death, disability or resignation. 5. TAXATION. This Option is a Nonqualified Option. You will have taxable income upon the exercise of this Option. 6. EXERCISE. This Option may be exercised by the delivery of this Agreement, with the notice of exercise attached hereto properly completed and signed by you, to the Treasurer of the Company, together with the aggregate Exercise Price for the number of Shares as to which the Option is being exercised, after the Option has become exercisable and before it has ceased to be exercisable. The Exercise Price must be paid in cash by (a) delivery of a certified or cashier's check payable to the order of the Company in such amount, (b) wire transfer of immediately available funds to a bank account designated by the Company, or (c) reduction of a debt of the Company to you. This Option may be exercised as to less than all of the Shares purchasable hereunder, but not for a fractional share, nor may it be exercised as to less than 100 Shares unless it is exercised as to all of the Shares then available hereunder. 7. NO TRANSFER. This Option may not be sold, pledged nor otherwise transferred other than by will or the laws of descent and distribution; and it may be exercised during your lifetime only by you. This Agreement is neither a negotiable instrument nor a security (as such term is defined in Article 8 of the Uniform Commercial Code). 8. NOT AN EMPLOYMENT AGREEMENT. This Agreement is not an employment agreement and nothing contained herein gives you any right to continue to be a Director of the Company or affect the right of the stockholders to terminate your directorship. 9. PLAN CONTROLS. This Agreement is an Option Agreement (as such term is defined in the Plan) under Article 7 of the Plan. The terms of this Agreement are subject to, and controlled by, the terms of the Plan, as it is now in effect or may be amended from time to time hereafter, which are incorporated herein as if they were set forth in full. Any words or phrases defined in the Plan have the same meanings in this Agreement. The Company will provide you with a copy of the Plan promptly upon your written or oral request made to its Treasurer. 10. MISCELLANEOUS. This Agreement sets forth the entire agreement of the parties with respect to the subject matter hereof and it supersedes and discharges all prior agreements (written or oral) and negotiations and all contemporaneous oral agreements concerning such subject matter. This Agreement may not be amended or terminated except by a writing signed by the party against whom any such amendment or termination is sought. If any one or more provisions of this Agreement shall be found to be illegal or unenforceable in any respect, the validity and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. This Agreement shall be governed by the laws of the State of Delaware. Please acknowledge your acceptance of this Agreement by signing the enclosed copy in the space provided below and returning it promptly to the Company. ROYAL PRECISION, INC. By: ______________________________________ (Name of Officer), (Title) Accepted and Agreed to as of the date first set forth above: - ------------------------------------------- (Name of Grantee) OPTION EXERCISE FORM The undersigned hereby exercises the right to purchase ________________ shares of Common Stock of the Company pursuant to the Option Agreement dated (Date of Grant) under the Company's Stock Option Plan, dated October 5, 1997. Date: _____________________ ________________________________________ (Name of Holder) - -------------------------------------------------------------- Sign and complete this Option Exercise Form and deliver it to: ROYAL PRECISION, INC. Attn.: Treasurer 15170 N. Hayden Road, Suite 1 Scottsdale, AZ 85260 together with the Exercise Price in cash by (a) delivery of a certified or cashier's check payable to the order of the Company in such amount, (b) wire transfer of immediately available funds to a bank account designated by the Company, or (c) reduction of a debt of the Company to you. EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 3-MOS MAY-31-2001 JUN-01-2000 AUG-31-2000 1 470 0 3,344 313 5,688 9,389 7,605 1,388 23,899 3,779 0 0 0 6 14,539 23,899 6,978 6,978 4,571 2,107 0 0 178 209 104 105 0 0 0 105 0.02 0.02
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