-----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, UkpaZc/1BIAYxTmfwc0NCWqKiaj1rl/ITyhZ/3ehDldO9ipkeYrVtXYSUxcugD5q 4LBAD1RWh834yKPjR46HuQ== 0000950147-01-500721.txt : 20010416 0000950147-01-500721.hdr.sgml : 20010416 ACCESSION NUMBER: 0000950147-01-500721 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010228 FILED AS OF DATE: 20010412 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: 1600789 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 e-6621.txt QUARTERLY REPORT FOR THE QTR ENDED 2/28/01 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended February 28, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to _________. Commission File Number: 0-22889 ROYAL PRECISION, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 06-1453896 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 15170 North Hayden Road, Suite 1, Scottsdale, AZ 85260 (Address of Principal Executive Offices) (Zip code) (480) 627-0200 (Registrant's Telephone Number, Including Area Code) (Former Name, Former Address and Former Fiscal Year if Changed Since Last Report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Title of each class Outstanding at April 11, 2001 ------------------- ----------------------------- 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, except share data)
FEBRUARY 28, MAY 31, 2001 2000 -------- -------- ASSETS CURRENT ASSETS: Cash $ 479 $ 36 Accounts receivable, net of allowance for doubtful accounts of $279 and $274 at February 28, 2001 and May 31, 2000, respectively 4,164 5,100 Inventories 6,590 5,124 Other current assets 76 155 Deferred income taxes 683 106 -------- -------- Total current assets 11,992 10,521 -------- -------- PROPERTY, PLANT AND EQUIPMENT: Land 123 123 Furniture, fixtures and office equipment 635 455 Buildings and improvements 941 840 Machinery and equipment 5,003 4,278 Equipment held for sale 120 500 Construction in progress 792 1,081 -------- -------- 7,614 7,277 Less - Accumulated depreciation (1,713) (1,264) -------- -------- 5,901 6,013 -------- -------- GOODWILL, net 7,297 7,629 -------- -------- DEFERRED INCOME TAXES 701 701 -------- -------- OTHER ASSETS 77 78 -------- -------- Total assets $ 25,968 $ 24,942 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 768 $ 906 Subordinated debt 1,000 -- Accounts payable 1,878 1,714 Accrued salaries and benefits 671 1,290 Accrued pension liability 162 176 Other accrued expenses 598 417 -------- -------- Total current liabilities 5,077 4,503 LONG-TERM DEBT, net of current portion 7,390 6,027 -------- -------- Total liabilities 12,467 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 February 28, 2001 and May 31, 2000 6 6 Additional paid-in capital 13,975 13,940 Retained earnings (accumulated deficit) (480) 466 -------- -------- Total stockholders' equity 13,501 14,412 -------- -------- Total liabilities and stockholders' equity $ 25,968 $ 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 NINE MONTHS ENDED --------------------------- ----------------------------- FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- NET SALES: Golf club shafts $ 6,804 $ 6,083 $ 17,368 $ 16,997 Golf club grips 911 958 2,817 3,046 ----------- ----------- ----------- ----------- 7,715 7,041 20,185 20,043 ----------- ----------- ----------- ----------- COST OF SALES: Golf club shafts 4,928 4,354 12,880 11,646 Golf club grips 730 700 2,201 2,139 ----------- ----------- ----------- ----------- 5,658 5,054 15,081 13,785 ----------- ----------- ----------- ----------- Gross profit 2,057 1,987 5,104 6,258 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,528 1,640 5,114 4,754 AMORTIZATION OF GOODWILL 111 121 332 364 NONRECURRING EXPENSES 10 55 642 65 ----------- ----------- ----------- ----------- Operating income (loss) 408 171 (984) 1,075 INTEREST EXPENSE 275 159 638 457 OTHER EXPENSE -- -- 79 -- OTHER INCOME 73 76 238 186 ----------- ----------- ----------- ----------- Income (loss) before provision for (benefit from) income taxes 206 88 (1,463) 804 PROVISION FOR (BENEFIT FROM) INCOME TAXES 55 53 (517) 411 ----------- ----------- ----------- ----------- Net income (loss) $ 151 $ 35 $ (946) $ 393 =========== =========== =========== =========== BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: BASIC $ 0.03 $ 0.01 $ (0.17) $ 0.07 =========== =========== =========== =========== DILUTED $ 0.03 $ 0.01 $ (0.17) $ 0.07 =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED TO COMPUTE PER SHARE INFORMATION: BASIC 5,678,956 5,674,780 5,678,956 5,670,900 =========== =========== =========== =========== DILUTED 5,789,378 5,843,157 5,678,956 5,807,007 =========== =========== =========== ===========
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)
NINE MONTHS ENDED ------------------------------ FEBRUARY 28, FEBRUARY 29, 2001 2000 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (946) $ 393 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 797 901 Deferred income taxes (577) -- (Gain) loss on retirement or sale of fixed assets (3) 18 Stock based compensation 35 -- Write-down of equipment and inventories 954 -- Increase (decrease) in cash resulting from a change in operating assets and liabilities: Accounts receivable, net 936 811 Inventories (1,943) (1,027) Other assets 80 132 Accounts payable and accrued expenses (288) 392 ------- ------- Net cash provided by (used in) operating activities (955) 1,620 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of machinery and equipment (877) (1,564) Proceeds from sale of fixed assets 50 -- ------- ------- Net cash used in investing activities (827) (1,564) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of subordinated debt 1,000 -- Proceeds from issuance of long-term debt 282 -- Proceeds from exercise of common stock options -- 9 Borrowings under lines-of-credit, net 1,660 749 Repayments of long-term debt (717) (977) ------- ------- Net cash provided by (used in) financing activities 2,225 (219) ------- ------- INCREASE (DECREASE) IN CASH 443 (163) CASH, beginning of period 36 184 ------- ------- CASH, end of period $ 479 $ 21 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 577 $ 473 ======= ======= Income taxes $ 5 $ 41 ======= =======
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 (LOSS) PER SHARE: The Company accounts for earnings (loss) per share in accordance with the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic earnings (loss) per share are based on the average number of common shares outstanding during the period. Diluted earnings (loss) per share assumes, in addition to the above, a dilutive effect of common share equivalents during the period. Common share equivalents represent dilutive stock options using the treasury stock method. Loss per share for the nine-month period ended February 28, 2001 was not affected by 1.3 million shares subject to outstanding stock options because their effect was anti-dilutive. The number of shares used in computing earnings (loss) per share for the three and nine-month periods ended February 28, 2001 and February 29, 2000 were as follows: -5-
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ---------------------------- FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, 2001 2000 2001 2000 --------- --------- --------- --------- Basic: Average common shares outstanding 5,678,956 5,674,780 5,678,956 5,670,900 Diluted: Dilutive effect of stock options 110,422 168,377 -- 136,107 --------- --------- --------- --------- Average common shares outstanding 5,789,378 5,843,157 5,678,956 5,807,007 ========= ========= ========= =========
3. NEW ACCOUNTING PRONOUNCEMENTS: In March 2000, the FASB issued FASB Interpretation No. 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 February 28, 2001, 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 three and nine-month periods ended February 28, 2001 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 does not anticipate any material impact on its results of operations and financial position resulting from the adoption of SAB 101. 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 elected to early adopt EITF No. 00-10 during its quarter ended August 31, 2000. As such, the condensed consolidated statements of operations for the three and nine-month periods ended February 29, 2000 have been reclassified to reflect the adoption of EITF No. 00-10. In June 1998, the FASB issued SFAS No. 133 (as amended by SFAS No. 138), "Accounting for Derivative Instruments and Hedging Activities," which requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137 which deferred the effective date of SFAS No. 133. The Company will be required to adopt SFAS No. 133 on June 1, 2001. The Company does not anticipate any material impact on its results of operations and financial position resulting from the adoption of SFAS No. 133. 4. INVENTORIES: Inventories are valued at the lower of cost or market. Cost is determined on the first-in, first-out method. Inventories as of February 28, 2001 and May 31, 2000 consisted of the following (in thousands): FEBRUARY 28, 2001 MAY 31, 2000 ----------------- ------------ Raw materials $ 563 $ 525 Work-in-process 1,578 1,655 Finished goods 4,449 2,944 --------- --------- $ 6,590 $ 5,124 ========= ========= -6- During the three months ended November 30, 2000, the Company recorded write-downs totaling $477,000 to reduce the carrying value of golf club shafts and grips finished goods inventories to estimated net realizable value. These write-downs are reflected as a component of cost of sales in the statement of operations for the nine-month period ended February 28, 2001. 5. EQUIPMENT WRITE-DOWN: During the three months ended November 30, 2000, the Company recorded an impairment write-down of $360,000 on equipment held for sale which represents the rubber injection presses previously used to manufacture golf club grips. This write-down is reflected as a component of nonrecurring expenses in the statement of operations for the nine-month period ended February 28, 2001. During the three months ended November 30, 2000, the Company recorded an expense of $117,000 to write-off the accumulated cost of various projects under development to design and construct tooling for the manufacture of golf club grips. This item is included as a component of nonrecurring expenses in the statement of operations for the nine-month period ended February 28, 2001. 6. BORROWING ARRANGEMENTS: In March 2001, the Company amended its bank credit facilities with its lender. In conjunction with this amendment, the Company received waivers of all violations of financial loan covenants which had existed since November 2000. An additional borrowing of $0.8 million was funded under an existing term loan and the maximum borrowing under the lines-of-credit was increased from $6.5 million to $8.0 million. The maturity date of all credit facilities was extended to September 30, 2004. The annual interest rate on all borrowings was increased by 1% retroactive to November 2000. An additional 1% annual interest charge was assessed on all borrowings retroactive to November 2000 but will be payable only in the event that the Company's consolidated net loss for the fiscal year ending May 31, 2001 exceeds $0.2 million. The Company is accruing this additional interest on a monthly basis until such time as it becomes evident that the minimum income requirement for fiscal 2001 is assured. FMP's bank credit facility consists of two term loans and a revolving line-of-credit. The outstanding principal balance of one FMP term loan ("FMP Term 1") was $2.1 million at February 28, 2001 and was increased by $0.8 million on March 9, 2001. This term loan is due in monthly principal installments of $46,850 until its maturity in September 2004. The outstanding principal balance of the second FMP term loan ("FMP Term 2") was $0.3 million at February 28, 2001. This balance represents the partial funding on December 1, 2000 of a term loan facility which can be increased to a maximum of $0.4 million upon the completion of certain capital projects currently under development. It is anticipated that an additional funding of $0.1 million will occur prior to May 31, 2001. This term loan is due in monthly principal installments beginning June 2001 in an amount calculated using a 60-month amortization until its maturity in September 2004. The amount available for borrowings under the FMP revolving line-of-credit is based upon the levels of eligible FMP accounts receivable and inventories, as defined, subject to a maximum borrowing which was increased from $5.0 million to $6.5 million on March 9, 2001. As of February 28, 2001, FMP had $4.8 million outstanding under its revolving line-of-credit and $0.1 million available for additional borrowings. Following the amendment to the credit facility on March 9, 2001, the amount available for borrowings under the FMP revolving line-of-credit was increased by $1.3 million. The FMP line-of-credit expires in September 2004. RG's bank credit facility consists of a term loan and a revolving line-of-credit. The RG term loan of $0.3 million at February 28, 2001 is due in monthly principal installments of $10,500 until its maturity in September 2004. The amount available for borrowings under the RG revolving line-of-credit is based upon the levels of eligible RG accounts receivable and inventories, as defined, subject to a maximum borrowing of $1.5 million. As of February 28, 2001, RG had $0.7 million outstanding under its revolving line-of-credit and $0.1 million available for additional borrowings. The RG line-of-credit expires in September 2004. The effective annual interest rate on the FMP and RG bank credit facilities was increased by 1% on March 9, 2001, retroactive to November 1, 2000. Borrowings under both lines-of-credit and FMP Term 2 bear interest at a rate per annum equal to the prime rate (8.5% at February 28, 2001) plus 1.25%. Borrowings under the RG term loan and FMP Term 1 bear interest at a -7- rate per annum equal to the prime rate plus 1.75%. An additional 1% annual interest charge accrues on all borrowings effective November 1, 2000 but will be payable only in the event that the Company's consolidated net loss for the fiscal year ending May 31, 2001 exceeds $0.2 million. The Company is accruing this additional interest on a monthly basis until such time as it becomes evident that the minimum income requirement for fiscal 2001 is assured. As of February 28, 2001, $26,000 of additional interest was accrued. Borrowings under the FMP and RG bank credit facilities are secured by substantially all of the Company's assets and contain certain financial and other covenants which, among other things, limit annual capital expenditures and dividends, limit the repayment of subordinated indebtedness, and require the maintenance of minimum monthly and quarterly earnings and minimum quarterly debt service coverage ratios, as defined. The Company believes it is in compliance with all financial loan covenants as amended on March 9, 2001. On December 7, 2000, the Company entered into a revolving subordinated promissory note ("Subordinated Note") with the Johnston Family Charitable Remainder Unitrust #3 ("Johnston Trust"), of which Richard P. Johnston, a director and Chairman of the Board of the Company, is a Trustee. In December 2000, RP borrowed $1.0 million under the Subordinated Note which represents the maximum available funding amount. The Subordinated Note bears interest at a fixed annual rate of 13% and is subordinate to both the FMP and RG bank credit facilities. The Johnston Trust has an option to convert the indebtedness into RP common stock at an exchange ratio of $1.00 per share with respect to any outstanding principal and accrued interest that is not repaid in full on or before May 31, 2001. On March 16, 2001, the Company and the Johnston Trust amended the Subordinated Note to increase the annual interest rate to 17% on any unpaid principal outstanding after May 31, 2001 and to restrict the Johnston Trust conversion rights prior to stockholder approval. Until stockholder approval, the Johnston Trust may only exercise the conversion option for an amount not to exceed $25,000. A meeting of the stockholders to vote on approval of the conversion right must occur on or prior to September 30, 2001. Subsequent to February 28, 2001, the Company repaid $0.3 million of the Subordinated Note and the Company anticipates that the remaining $0.7 million outstanding balance will be repaid on or before May 31, 2001. 7. 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 NINE MONTHS ENDED FEBRUARY 28, 2001 FEBRUARY 28, 2001 -------------------------------- -------------------------------- GOLF CLUB GOLF CLUB GOLF CLUB GOLF CLUB SHAFTS GRIPS TOTAL SHAFTS GRIPS TOTAL -------- -------- -------- -------- -------- -------- Net sales $ 6,804 $ 911 $ 7,715 $ 17,368 $ 2,817 $ 20,185 Operating income (loss) 560 (152) 408 (85) (899) (984) Nonrecurring expenses 10 -- 10 165 477 642 Depreciation and amortization 141 143 284 406 391 797 Total assets for reportable segments $ 15,452 $ 16,475 $ 31,927 Elimination of investment in subsidiaries (5,959) -------- Consolidated total assets $ 25,968 ======== THREE MONTHS ENDED NINE MONTHS ENDED FEBRUARY 29, 2000 FEBRUARY 29, 2000 -------------------------------- -------------------------------- GOLF CLUB GOLF CLUB GOLF CLUB GOLF CLUB SHAFTS GRIPS TOTAL SHAFTS GRIPS TOTAL -------- -------- -------- -------- -------- -------- Net sales $ 6,083 $ 958 $ 7,041 $ 16,997 $ 3,046 $ 20,043 Operating income (loss) 263 (92) 171 1,260 (185) 1,075 Nonrecurring expenses 55 -- 55 65 -- 65 Depreciation and amortization 87 211 298 260 641 901 Total assets for reportable segments $ 13,390 $ 17,708 $ 31,098 Elimination of investment in subsidiaries (6,092) -------- Consolidated total assets $ 25,006 ========
-8- 8. ENVIRONMENTAL MATTERS: In May 1996, the Company acquired substantially all the assets of the golf club shaft manufacturing business of Brunswick Corporation (NYSE: BC) (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 ("Brunswick") 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 has engaged an environmental consulting firm to perform testing at the FMP plant and is in the process of developing a plan of remediation. The Company has engaged an environmental consulting firm to assist in the development of the plan of remediation. Failure of Brunswick 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. Prior to the Brunswick Acquisition, the FMP plant was listed on the U.S. Environmental Protection Agency's ("EPA") Comprehensive Environmental Response, Compensation and Liability Information System ("CERCLIS"). A contractor for the EPA performed a preliminary assessment of the FMP plant in January 1992 and, in June 1992, the site was deferred from the CERCLIS inventory to the EPA's Resource Conservation and Recovery Act ("RCRA") program. During calendar 2000, the EPA reviewed the status of the property, concluded that the FMP plant is not subject to corrective action under RCRA and returned the site to its active CERCLIS inventory. In November 2000, a contractor for the EPA performed another assessment of the FMP plant. The Company has been informed that the contractor will return to perform sampling of the property in April 2001. The Company anticipates that a report from the EPA will be received approximately one year following the completion of the sampling. The Company believes that, pursuant to the Brunswick Acquisition agreement, Brunswick has an obligation under the Connecticut Transfer Act (the "Act") to remediate any environmental issues that fall within the scope of the Act. The Company expects that, if any environmental issues are identified by the EPA, they would be ones that fall within the scope of the Act. There is not sufficient information at this time to determine what action, if any, the EPA may pursue and what effect, if any, it may have on the Company's financial condition and results of operations. In April 2000, the Company received a request for information from the EPA related to disposal and treatment of waste materials from the FMP plant during the period from 1982 to 1997. The EPA is 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 Brunswick, and to a limited degree by the Company, to treat and dispose of non-hazardous waste oils from the FMP plant. The EPA has not issued any demands for reimbursement from the Company relating to this matter and there is not sufficient information at this time to determine what action, if any, the EPA may pursue. Based on discussions with legal counsel, the Company does not believe that this matter will have a material adverse effect on the Company's financial condition or results of operations. In October 2000, the Company received a notice of violation ("NOV") from the State of Connecticut Department of Environmental Protection ("DEP") alleging that various effluent discharge samples during the period from January 2000 to September 2000 were in violation of authorized limits under an existing permit for the discharge of treated wastewater at the FMP plant. In December 2000, the Company submitted its response to the NOV. There is not sufficient information at this time to determine what action, if any, the DEP may pursue and what effect, if any, it may have on the Company's financial condition and results of operations. In February 2001, the Company received a reimbursement from Brunswick totaling $180,000 for costs incurred to resolve a prior NOV from the DEP which the Company settled in June 2000. Of the funds received, $75,000 was recorded as a reimbursement of environmental related expenses and is reflected as a reduction of nonrecurring expenses in the statements of operations for the three and nine-month periods ended February 28, 2001. -9- The remaining balance received was recorded as a partial reimbursement of the capital expenditures incurred at the FMP plant to complete the remedial measures specified in the NOV settlement. Expenses related to the various environmental matters discussed above totaled $10,000, net, and $165,000, net, during the three and nine-month periods ended February 28, 2001, respectively. These expenses are reflected as a component of nonrecurring expenses in the statements of operations. 9. TERMINATION OF 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. The Company terminated the letter of intent and ceased negotiations to acquire PHG effective November 27, 2000. Legal and other professional fees associated with the due diligence efforts of the proposed acquisition totaled $79,000 and are reflected as other expense in the statement of operations for the nine-month period ended February 28, 2001. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS -- This Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often characterized by the terms "may," "believes," "projects," "expects," or "anticipates," and do not reflect historical facts. Such statements include, but are not limited to, statements concerning the Company's future results from operations; the adequacy of existing capital resources and credit lines; anticipated future customer orders; anticipated future capital expenditures; anticipated costs of environmental matters at our manufacturing facilities and expectations regarding future environmental reports; and our ability to generate sufficient cash flow from operations to repay indebtedness and fund operations. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Forward-looking statements are based on the current beliefs and expectations of the Company's management and are subject to significant risks, uncertainties and other factors, which may cause actual results, performance, or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements. Factors that could affect the Company's results and cause them to be materially different from those contained in the forward-looking statements include: uncertainties relating to general economic conditions; the Company's dependence on discretionary consumer spending; the Company's dependence on demand from original equipment manufacturers; the Company's dependence on international sales; the cost and availability of raw materials; the timeliness and market acceptance of the Company's new product introductions; the competitive environment in which the Company operates; seasonality of sales, which results in fluctuations in operating results; the Company's ability to protect its intellectual property rights; the Company's reliance on third party suppliers; changes in the financial markets relating to the Company's capital structure and cost of capital; increased costs related to environmental regulations and/or the failure of third parties to fulfill their indemnification and remediation obligations to us; work stoppages or slowdowns; the Company's limited operating history; the Company's ability to successfully launch new products; and other factors that management is currently unable to identify or quantify, but may arise or become known in the future. A discussion of these and other factors that could cause the Company's results to differ materially from those described in the forward-looking statements can be found in Exhibit 99.1 of Royal Precision's Annual Report on Form 10-K for the period ended May 31, 2000. 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 -10- 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 FEBRUARY 28, 2001 COMPARED TO THE THREE MONTHS ENDED FEBRUARY 29, 2000-- NET SALES. Net sales for the three months ended February 28, 2001 were $7.7 million, an increase of $0.7 million or 10% over net sales of $7.0 million during the corresponding period in 2000. Net sales of golf club shafts increased by $0.7 million or 12% and net sales of golf club grips were consistent at $0.9 million. Net sales of the Company's higher priced, pro-grade golf club shafts increased by $0.6 million reflecting continued strong demand for the Company's proprietary "Rifle" shafts. COST OF SALES. Cost of goods sold for the three months ended February 28, 2001 was $5.7 million, an increase of $0.6 million or 12% over cost of goods sold of $5.1 million during the corresponding period in 2000. The cost of golf club shaft sales increased by $0.6 million or 13% as a result of higher total net sales. The cost of golf club grip sales was consistent at $0.7 million. GROSS PROFIT. Gross profit for the three months ended February 28, 2001 was $2.1 million, an increase of $0.1 million or 4% over gross profit of $2.0 million during the corresponding period in 2000. Gross profit from sales of golf club shafts increased by $0.1 million or 9% to $1.9 million due to higher total sales. As a percentage of sales, the gross profit on sales of golf club shafts was consistent at 28%. Gross profit from sales of golf club grips was consistent at $0.2 million. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the three months ended February 28, 2001 were $1.5 million, a decrease of 7% from selling, general and administrative expenses of $1.6 million during the corresponding period in 2000. The decrease is primarily attributable to reduced spending on advertising in the current year. AMORTIZATION OF GOODWILL. Amortization of goodwill was consistent at $0.1 million during both of the three-month periods ended February 28, 2001 and February 29, 2000. NONRECURRING EXPENSES. As discussed in Note 8, net expenses of $10,000 were incurred during the three months ended February 28, 2001 related to various environmental issues. These expenses are net of a $75,000 reimbursement received from Brunswick. Similar environmental related expenses incurred during the corresponding period in 2000 were $55,000. INTEREST EXPENSE. Interest expense increased from $0.2 million during the three months ended February 29, 2000 to $0.3 million during the three months ended February 28, 2001. As discussed in Note 6, this is primarily the result of a 1% increase in the Company's annual interest rate on its bank credit facilities effective November 1, 2000 and an additional 1% interest charge accruing on all bank borrowings subsequent to November 1, 2000. During the three months ended February 28, 2001, additional interest of $26,000 was accrued. Additionally, interest recorded on the Johnston Trust Subordinated Note during the three months ended February 28, 2001 was $28,000. OTHER INCOME. Other income of $0.1 million for both of the three-month periods ended February 28, 2001 and February 29, 2000 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. Tax provisions of $0.1 million were recorded on income during both of the three-month periods ended February 28, 2001 and February 29, 2000. Taxes are provided based on the estimated effective tax rate for the year which considers the effect of nondeductible goodwill amortization. NINE MONTHS ENDED FEBRUARY 28, 2001 COMPARED TO THE NINE MONTHS ENDED FEBRUARY 29, 2000-- NET SALES. Net sales for the nine months ended February 28, 2001 were $20.2 million, an increase of $0.2 million or 1% over net sales of $20.0 million during the corresponding period in 2000. Net sales of golf club shafts increased -11- by $0.4 million or 2% and net sales of golf club grips decreased by $0.2 million or 8%. The decrease in grip sales is primarily attributable to declines in orders from the Company's exclusive Japanese distributor due to slow general economic conditions in Asia. COST OF SALES. Cost of goods sold for the nine months ended February 28, 2001 was $15.1 million, an increase of $1.3 million or 9% over cost of goods sold of $13.8 million during the corresponding period in 2000. As discussed in Note 4, the Company recorded write-downs totaling $477,000 to reduce the carrying value of golf club shafts and grips finished goods inventories to estimated net realizable value during the nine months ended February 28, 2001. Excluding the inventory write-down of $410,000, the cost of golf club shaft sales increased by $0.8 million or 7% as a result of higher net sales. Excluding the inventory write-down of $67,000 during the nine-month period ended February 28, 2001, the cost of golf club grip sales was consistent at $2.1 million. GROSS PROFIT. Gross profit for the nine months ended February 28, 2001 was $5.1 million, a decrease of $1.2 million or 18% from gross profit of $6.3 million during the corresponding period in 2000. Gross profit from sales of golf club shafts decreased by $0.9 million or 16% and gross profit from sales of golf club grips decreased by $0.3 million or 32%. Excluding the inventory write-down of $410,000, gross profit from sales of golf club shafts decreased by $0.5 million to 28% of sales from 32% of sales last year. This decline in margin is partially attributable to a $0.3 million increase in the cost of natural gas fuel at the Company's FMP plant due to increased usage and significantly higher rates charged by our utility provider. Additionally, production rates during the fiscal quarter ended November 30, 2000 were negatively impacted by start-up costs incurred on the initial manufacture of several new pro-grade product lines for which manufacturing efficiencies had not yet been achieved. Excluding the inventory write-down of $67,000, gross profit from sales of golf club grips decreased by $0.2 million to 24% of sales from 30% of sales last year. This decline in margin is attributable to fixed costs being spread over lower unit sales volume and operating costs of the Company's West Coast distribution center which opened in December 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the nine months ended February 28, 2001 were $5.1 million, an increase of 8% over selling, general and administrative expenses of $4.8 million during the corresponding period in 2000. The $0.3 million increase is primarily due to costs associated with a television commercial advertising campaign which commenced in January 2000 and continued through December 2000. Costs of purchased airtime and development of commercials totaled approximately $0.3 million during the nine months ended February 28, 2001 compared to $0.1 million during the corresponding period in 2000. AMORTIZATION OF GOODWILL. Amortization of goodwill was consistent at $0.3 million during both of the nine-month periods ended February 28, 2001 and February 29, 2000. NONRECURRING EXPENSES. As discussed in Note 5, an impairment write-down of $360,000 was recorded during the nine months ended February 28, 2001 to reduce the carrying value of equipment held for sale to estimated net realizable value. As discussed in Note 5, an expense of $117,000 was recorded during the nine months ended February 28, 2001 to write-off the accumulated costs related to various projects under development to design and construct tooling for the manufacture of golf club grips. As discussed in Note 8, net expenses of $165,000 were incurred during the nine months ended February 28, 2001 related to various environmental issues. These expenses are net of a $75,000 reimbursement received from Brunswick. Similar environmental related expenses incurred during the corresponding period in 2000 were $65,000. INTEREST EXPENSE. Interest expense increased from $0.5 million during the nine months ended February 29, 2000 to $0.6 million during the nine months ended February 28, 2001. As discussed in Note 6, this is primarily the result of a 1% increase in the Company's annual interest rate on its bank credit facilities effective November 1, 2000 and an additional 1% interest charge accruing on all bank borrowings subsequent to November 1, 2000. During the nine months ended February 28, 2001, additional interest of $26,000 was accrued. Additionally, interest recorded on the Johnston Trust Subordinated Note during the nine months ended February 28, 2001 was $28,000. OTHER EXPENSE. As discussed in Note 9, legal and professional fees associated with the proposed PH Group Inc. ("PHG") acquisition totaled $79,000 during the nine months ended February 28, 2001. OTHER INCOME. Other income of $0.2 million for both of the nine-month periods ended February 28, 2001 and February 29, 2000 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. -12- PROVISION FOR (BENEFIT FROM) INCOME TAXES. A tax benefit of $0.5 million was recorded on the loss during the nine months ended February 28, 2001 and a tax provision of $0.4 million was recorded on the income during the nine months ended February 29, 2000. Taxes are provided based on the estimated effective tax rate for the year which considers the effect of nondeductible goodwill amortization. A benefit has not been recorded on the nonrecurring inventory and equipment write-downs discussed in Notes 4 and 5 in accordance with the provisions of SFAS No. 109. LIQUIDITY AND CAPITAL RESOURCES-- At February 28, 2001, the Company had working capital of $6.9 million and a current ratio of 2.4 to 1 as compared to working capital of $6.0 million and a current ratio of 2.3 to 1 at May 31, 2000. In March 2001, the Company amended its bank credit facilities with its lender. In conjunction with this amendment, the Company received waivers of all violations of financial loan covenants which had existed since November 2000. An additional borrowing of $0.8 million was funded under an existing term loan and the maximum borrowing under the lines-of-credit was increased from $6.5 million to $8.0 million. The maturity date of all credit facilities was extended to September 30, 2004. The annual interest rate on all borrowings was increased by 1% retroactive to November 2000. An additional 1% annual interest charge was assessed on all borrowings retroactive to November 2000 but will be payable only in the event that the Company's consolidated net loss for the fiscal year ending May 31, 2001 exceeds $0.2 million. The Company is accruing this additional interest on a monthly basis until such time as it becomes evident that the minimum income requirement for fiscal 2001 is assured. FMP's bank credit facility consists of two term loans and a revolving line-of-credit. The outstanding principal balance of one FMP term loan ("FMP Term 1") was $2.1 million at February 28, 2001 and was increased by $0.8 million on March 9, 2001. This term loan is due in monthly principal installments of $46,850 until its maturity in September 2004. The outstanding principal balance of the second FMP term loan ("FMP Term 2") was $0.3 million at February 28, 2001. This balance represents the partial funding on December 1, 2000 of a term loan facility which can be increased to a maximum of $0.4 million upon the completion of certain capital projects currently under development. It is anticipated that an additional funding of $0.1 million will occur prior to May 31, 2001. This term loan is due in monthly principal installments beginning June 2001 in an amount calculated using a 60-month amortization until its maturity in September 2004. The amount available for borrowings under the FMP revolving line-of-credit is based upon the levels of eligible FMP accounts receivable and inventories, as defined, subject to a maximum borrowing which was increased from $5.0 million to $6.5 million on March 9, 2001. As of February 28, 2001, FMP had $4.8 million outstanding under its revolving line-of-credit and $0.1 million available for additional borrowings. Following the amendment to the credit facility on March 9, 2001, the amount available for borrowings under the FMP revolving line-of-credit was increased by $1.3 million. The FMP line-of-credit expires in September 2004. RG's bank credit facility consists of a term loan and a revolving line-of-credit. The RG term loan of $0.3 million at February 28, 2001 is due in monthly principal installments of $10,500 until its maturity in September 2004. The amount available for borrowings under the RG revolving line-of-credit is based upon the levels of eligible RG accounts receivable and inventories, as defined, subject to a maximum borrowing of $1.5 million. As of February 28, 2001, RG had $0.7 million outstanding under its revolving line-of-credit and $0.1 million available for additional borrowings. The RG line-of-credit expires in September 2004. The effective annual interest rate on the FMP and RG bank credit facilities was increased by 1% on March 9, 2001, retroactive to November 1, 2000. Borrowings under both lines-of-credit and FMP Term 2 bear interest at a rate per annum equal to the prime rate (8.5% at February 28, 2001) plus 1.25%. Borrowings under the RG term loan and FMP Term 1 bear interest at a rate per annum equal to the prime rate plus 1.75%. An additional 1% annual interest charge accrues on all borrowings effective November 1, 2000 but will be payable only in the event that the Company's consolidated net loss for the fiscal year ending May 31, 2001 exceeds $0.2 million. The Company is accruing this additional interest on a monthly basis until such time as it becomes evident that the minimum income requirement for fiscal 2001 is assured. As of February 28, 2001, $26,000 of additional interest was accrued. Borrowings under the FMP and RG bank credit facilities are secured by substantially all of the Company's assets and contain certain financial and other covenants which, among other things, limit annual capital expenditures and -13- dividends, limit the repayment of subordinated indebtedness, and require the maintenance of minimum monthly and quarterly earnings and minimum quarterly debt service coverage ratios, as defined. The Company believes it is in compliance with all financial loan covenants as amended on March 9, 2001. On December 7, 2000, the Company entered into a revolving subordinated promissory note ("Subordinated Note") with the Johnston Family Charitable Remainder Unitrust #3 ("Johnston Trust"), of which Richard P. Johnston, a director and Chairman of the Board of the Company, is a Trustee. In December 2000, RP borrowed $1.0 million under the Subordinated Note which represents the maximum available funding amount. The Subordinated Note bears interest at a fixed annual rate of 13% and is subordinate to both the FMP and RG bank credit facilities. The Johnston Trust has an option to convert the indebtedness into RP common stock at an exchange ratio of $1.00 per share with respect to any outstanding principal and accrued interest that is not repaid in full on or before May 31, 2001. On March 16, 2001, the Company and the Johnston Trust amended the Subordinated Note to increase the annual interest rate to 17% on any unpaid principal outstanding after May 31, 2001 and to restrict the Johnston Trust conversion rights prior to stockholder approval. Until stockholder approval, the Johnston Trust may only exercise the conversion option for an amount not to exceed $25,000. A meeting of the stockholders to vote on approval of the conversion right must occur on or prior to September 30, 2001. Subsequent to February 28, 2001, the Company repaid $0.3 million of the Subordinated Note and the Company anticipates that the remaining $0.7 million outstanding balance will be repaid on or before May 31, 2001. 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 nine months ended February 28, 2001, net cash used in operating activities was $1.0 million which primarily resulted from a net loss of $0.9 million, an increase in inventories of $1.9 million, an increase in deferred taxes of $0.6 million, and a decrease in accounts payable and accrued expenses of $0.3 million. Non-cash expenses during the period include depreciation and amortization of $0.8 million and $1.0 million for inventory and equipment write-downs as described in Notes 4 and 5. Net cash used in operating activities was partially offset by a net collection of accounts receivable of $0.9 million. Net cash used in investing activities for the nine months ended February 28, 2001 was $0.8 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 $1.3 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, the Company believes that 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 provided by financing activities for the nine months ended February 28, 2001, was $2.2 million resulting from net borrowings under lines-of-credit of $1.7 million, proceeds from issuance of subordinated debt and long-term debt of $1.0 million and $0.3 million, respectively, partially offset by repayments of long-term debt of $0.7 million. The Company is investigating certain potential acquisitions. Any potential acquisitions may require the use of existing capital resources, assumption of debt or issuance of new debt instruments, any of which could impact the Company's liquidity and capital resources. ENVIRONMENTAL MATTERS -- In May 1996, the Company acquired substantially all the assets of the golf club shaft manufacturing business of Brunswick Corporation (NYSE: BC) (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 ("Brunswick") 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 has engaged an environmental consulting firm to perform testing at the FMP plant and is in the process of developing a plan of remediation. The Company has engaged an environmental consulting firm to assist in the development of the plan of remediation. Failure of Brunswick 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. -14- Prior to the Brunswick Acquisition, the FMP plant was listed on the U.S. Environmental Protection Agency's ("EPA") Comprehensive Environmental Response, Compensation and Liability Information System ("CERCLIS"). A contractor for the EPA performed a preliminary assessment of the FMP plant in January 1992 and, in June 1992, the site was deferred from the CERCLIS inventory to the EPA's Resource Conservation and Recovery Act ("RCRA") program. During calendar 2000, the EPA reviewed the status of the property, concluded that the FMP plant is not subject to corrective action under RCRA and returned the site to its active CERCLIS inventory. In November 2000, a contractor for the EPA performed another assessment of the FMP plant. The Company has been informed that the contractor will return to perform sampling of the property in April 2001. The Company anticipates that a report from the EPA will be received approximately one year following the completion of the sampling. The Company believes that, pursuant to the Brunswick Acquisition agreement, Brunswick has an obligation under the Connecticut Transfer Act (the "Act") to remediate any environmental issues that fall within the scope of the Act. The Company expects that, if any environmental issues are identified by the EPA, they would be ones that fall within the scope of the Act. There is not sufficient information at this time to determine what action, if any, the EPA may pursue and what effect, if any, it may have on the Company's financial condition and results of operations. In April 2000, the Company received a request for information from the EPA related to disposal and treatment of waste materials from the FMP plant during the period from 1982 to 1997. The EPA is 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 Brunswick, and to a limited degree by the Company, to treat and dispose of non-hazardous waste oils from the FMP plant. The EPA has not issued any demands for reimbursement from the Company relating to this matter and there is not sufficient information at this time to determine what action, if any, the EPA may pursue. Based on discussions with legal counsel, the Company does not believe that this matter will have a material adverse effect on the Company's financial condition or results of operations. In October 2000, the Company received a notice of violation ("NOV") from the State of Connecticut Department of Environmental Protection ("DEP") alleging that various effluent discharge samples during the period from January 2000 to September 2000 were in violation of authorized limits under an existing permit for the discharge of treated wastewater at the FMP plant. In December 2000, the Company submitted its response to the NOV. There is not sufficient information at this time to determine what action, if any, the DEP may pursue and what effect, if any, it may have on the Company's financial condition and results of operations. -15- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK QUANTITATIVE INFORMATION REGARDING MARKET RISK. At February 28, 2001, 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. QUALITATIVE INFORMATION REGARDING MARKET RISK. The Company's primary market risk exposure relates to its variable rate debt obligations that are described in Note 6 to the condensed consolidated financial statements. A one percent change in the prime lending rate would have an effect of approximately $23,000 and $57,000 on interest expense for the three and nine-month periods ended February 28, 2001, respectively. -16- PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On December 7, 2000, the Company entered into a revolving subordinated promissory note ("Subordinated Note") with the Johnston Family Charitable Remainder Unitrust #3 ("Johnston Trust"), of which Richard P. Johnston, a director and Chairman of the Board of the Company, is a Trustee. In December 2000, RP borrowed $1.0 million under the Subordinated Note and utilized the funds for working capital to support the ongoing operations of the Company. The Subordinated Note bears interest at a fixed annual rate of 13% and is subordinate to the Company's bank credit facilities. The Johnston Trust has an option to convert the indebtedness into RP common stock at an exchange ratio of $1.00 per share with respect to any outstanding principal and accrued interest that is not repaid in full on or before May 31, 2001. On March 16, 2001, the Company and the Johnston Trust amended the Subordinated Note to increase the annual interest rate to 17% on any unpaid principal outstanding after May 31, 2001 and to restrict the Johnston Trust conversion rights prior to stockholder approval. Until stockholder approval, the Johnston Trust may only exercise the conversion option for an amount not to exceed $25,000. A meeting of the stockholders must occur on or prior to September 30, 2001 to vote on approval of the conversion right. On March 9, 2001, the Company obtained additional bank financing which the Company anticipates will be utilized to retire the indebtedness to the Johnston Trust on or before May 31, 2001. The transaction is exempt under Section 4(2) of the Securities Exchange Act of 1933. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Due to the substantial loss incurred during the three months ended November 30, 2000, the Company was not in compliance with several financial loan covenants of its bank credit facilities. These covenant violations impact all of the Company's outstanding term loans and lines-of-credit which, in the aggregate, totaled $8.2 million at February 28, 2001. On March 9, 2001, the Company and its lender modified the credit facilities and an additional term loan was funded in the amount of $0.8 million. Additionally, the Company obtained waivers of all existing financial loan covenant violations from its lender. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. (3) Certificate of Incorporation and Bylaws Exhibit 3.1. Amended and Restated Certificate of Incorporation of Royal Precision, Inc. (restated to reflect amendment filed with the Secretary of State of Delaware on October 19, 1999) (incorporated by reference to Exhibit 3.1 of the Company's Form 10-Q for the period ended November 30, 1999). Exhibit 3.2. Bylaws of Royal Precision, Inc. (incorporated by reference to Exhibit 3.2 to the Company's Form S-4; No. 333-28841 (the "Form S-4")). (4) Instruments Defining the Rights of Security Holders -17- 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. Sixth Amendment to Credit and Security Agreement between FM Precision Golf Manufacturing Corp., FM Precision Golf Sales Corp. and Wells Fargo Business Credit, Inc. dated March 9, 2001. Exhibit 10.2. Seventh Amendment to Amended and Restated Credit and Security Agreement between Royal Grip, Inc., Royal Grip Headwear Company and Wells Fargo Business Credit, Inc. dated March 9, 2001. Exhibit 10.3. Amendment No. 1 to Revolving Subordinated Promissory Note from Royal Precision, Inc. to the Johnston Family Charitable Remainder Unitrust #3 dated March 16, 2001. (b) Reports on Form 8-K. The Company did not file any current reports on Form 8-K during the quarter ended February 28, 2001. -18- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROYAL PRECISION, INC. Date: April 11, 2001 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) -19- 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 period ended November 30, 1999). * 3.2 Bylaws of Royal Precision, Inc. (incorporated by reference to Exhibit 3.2 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 Sixth Amendment to Credit and Security Agreement between FM Precision Golf Manufacturing Corp., FM Precision Golf Sales Corp. and Wells Fargo Business Credit, Inc. dated March 9, 2001. 21 10.2 Seventh Amendment to Amended and Restated Credit and Security Agreement between Royal Grip, Inc., Royal Grip Headwear Company and Wells Fargo Business Credit, Inc. dated March 9, 2001. 40 10.3 Amendment No. 1 to Revolving Subordinated Promissory Note from Royal Precision, Inc. to the Johnston Family Charitable Remainder Unitrust #3 dated March 16, 2001. 53 - -------- * Incorporated by reference EX-10.1 2 ex10-1.txt SIXTH AMENDMENT TO CREDIT & SECURITY AGREEMENT Exhibit 10.1 SIXTH AMENDMENT TO CREDIT AND SECURITY AGREEMENT This Amendment, dated as of March 9, 2001, is made by and between FM PRECISION GOLF MANUFACTURING CORP., a Delaware corporation, and FM PRECISION GOLF SALES CORP., a Delaware corporation (collectively, jointly and severally, the "Borrower"), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"). Recitals The Borrower and the Lender have entered into a Credit and Security Agreement dated as of October 9, 1998, as amended by that certain Amendment to Credit and Security Agreement and Waiver of Defaults dated April 13, 1999, as amended by that certain Second Amendment to Credit and Security Agreement dated November 10, 1999, as amended by that certain Third Amendment to Credit and Security Agreement dated March 24, 2000, as amended by that certain Fourth Amendment to Credit and Security Agreement dated August 3, 2000 and, as amended by that certain Fifth Amendment to Credit and Security Agreement dated November 8, 2000 (collectively, the "Credit Agreement"). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified. The Borrower has requested that certain amendments be made to the Credit Agreement, which the Lender is willing to make pursuant to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. DEFINED TERMS. Capitalized terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. 2. AMENDMENTS. The Credit Agreement is hereby amended as follows: (a) The definition of "Borrowing Base" contained in Section 1.1 of the Credit Agreement is hereby deleted in its entirety and replaced as follows: "Borrowing Base" means, at any time the lesser of: (a) the Maximum Line; or (b) subject to change from time to time in the Lender's sole discretion, the sum of: (A) the lesser of (x) 85% of Eligible Accounts, or (y) $6,500,000.00, plus (B) the lesser of (x) 60% of Eligible Inventory (exclusive of Eligible Raw Materials Inventory), or (y) $2,500,000.00 from March 1 through September 30 of each year and $3,500,000.00 from 1 October 1 of each year through February 28 of each subsequent year, provided however, during the year 2001 only, the $3,500,000.00 figure shall be effective through and until April 1, 2001 at which point it shall be automatically reduced to $2,500,000.00, plus (C) the lesser of (x) 50% of Eligible Raw Materials Inventory, or (y) $2,500,000.00 from March 1 through September 30 of each year and $3,500,000.00 from October 1 of each year through February 28 of each subsequent year, provided however, during the year 2001 only the $3,500,000.00 figure shall be effective through and until April 1, 2001 at which point it shall be automatically reduced to $2,500,000.00, plus (D) If but only if Lender, in its sole and absolute discretion, elects to make Revolving Advances under the Overadvance Limit, as hereafter defined, in Borrower's 2001 fiscal year, an overadvance in the amount not to exceed $500,000.00 (the "Overadvance Limit), which Overadvance Limit shall be automatically reduced to $400,000.00 on April 1, 2001, to $200,000.00 on May 1, 2001 and to $0.00 on June 1, 2001. No Overadvance Limit shall exist at any time from June 1, 2001 through October 31, 2001. In addition, if but only if Lender, in its sole and absolute discretion, elects to make Revolving Advances under the Overadvance Limit, in any given year subsequent to Borrower's 2001 fiscal year, commencing on November 1 of each year, an overadvance in the amount not to exceed $500,000.00 (the "Overadvance Limit), which Overadvance Limit shall be automatically reduced to $400,000.00 on March 1 of the immediately following year, to $300,000.00 on April 1 of the immediately following year, to $200,000.00 on May 1 of the immediately following year and to $0.00 on June 1 of the immediately following year. No Overadvance Limit shall exist at any time from June 1 through October 31 in any year. (b) Effective March 1, 2001, the definition of "Capital Expenditures Floating Rate" contained in Section 1.1 of the Credit Agreement was hereby deleted and replaced as follows: "Capital Expenditures Floating Rate" means an annual rate equal to the sum of the Prime Rate plus one and one-quarter of one 2 percent (1.25%). The Capital Expenditures Floating Rate shall automatically be reduced to an annual rate equal to the sum of the Prime Rate plus one-quarter of one percent (0.25%) on the first day of the first full month following Lender's receipt of Borrower's 2001 fiscal year audited financial statements complying with Section 6.1(a) below, if but only if (i) said financial statements indicate that the Borrower and the Covenant Entities have achieved a Net Income for the Borrower's 2001 fiscal year of not less than $250,000.00, (ii) said financial statements indicate that the Borrower and the Covenant Entities increased their aggregate Net Worth during Borrower's 2001 fiscal year by not less than $250,000.00, and (iii) there is not a then existing Event of Default or Default Period. If but only if said reduction is not achieved as provided above, the Capital Expenditures Floating Rate shall automatically be adjusted on the first day of the first full month following Lender's receipt of Borrower's audited financial statements complying with Section 6.1(a) below in any year subsequent to Borrower's 2001 fiscal year, to an annual rate equal to the sum of the Prime Rate plus one-quarter of one percent (0.25%) in the event that (i) said financial statements indicate that the Borrower and the Covenant Entities have achieved a Net Income for any such fiscal year of not less than $600,000.00, (ii) said financial statements indicate that the Borrower and the Covenant Entities increased their aggregate Net Worth during any such fiscal year by not less than $600,000.00, and (iii) there is not a then existing Event of Default or Default Period. The Capital Expenditures Floating Rate shall change when and as the Prime Rate changes. (c) The definition of "Default Rate" contained in Section 1.1 of the Credit Agreement is deleted and replaced as follows: "Default Rate" means an annual rate equal to two percent (2%) over the Revolving Floating Rate, the Term Floating Rate, the Capital Expenditures Floating Rate and the Overadvance Floating Rate, which rate shall change when and as the Term Floating Rate changes. (d) The definition of "Maturity Date" contained in Section 1.1 of the Credit Agreement is hereby deleted and replaced as follows: "Maturity Date" means September 30, 2004. (e) The figure "$5,000,000.00" contained in the definition of "Maximum Line" contained in Section 1.1 of the Credit Agreement is hereby deleted and replaced with the figure "$6,500,000.00". (f) There is hereby added a new definition for "Overadvance Floating Rate" to Section 1.1 of the Credit Agreement which provides as follows: 3 "Overadvance Floating Rate" means an annual rate equal to the sum of the Prime Rate plus three and one-quarter percent (3.25%). The Overadvance Floating Rate shall automatically be reduced to an annual rate equal to the sum of the Prime Rate plus two and one-quarter percent (2.25%) on the first day of the first full month following Lender's receipt of Borrower's 2001 fiscal year audited financial statements complying with Section 6.1(a) below, if but only if (i) said financial statements indicate that the Borrower and the Covenant Entities have achieved a Net Income for the Borrower's 2001 fiscal year of not less than $250,000.00, (ii) said financial statements indicate that the Borrower and the Covenant Entities increased their aggregate Net Worth during Borrower's 2001 fiscal year by not less than $250,000.00, and (iii) there is not a then existing Event of Default or Default Period. If but only if said reduction is not achieved as provided above, the Overadvance Floating Rate shall automatically be adjusted on the first day of the first full month following Lender's receipt of Borrower's audited financial statements complying with Section 6.1(a) below in any year subsequent to Borrower's 2001 fiscal year, to an annual rate equal to the sum of the Prime Rate plus two and one-quarter percent (2.25%) in the event that (i) said financial statements indicate that the Borrower and the Covenant Entities have achieved a Net Income for any such fiscal year of not less than $600,000.00, (ii) said financial statements indicate that the Borrower and the Covenant Entities increased their aggregate Net Worth during any such fiscal year by not less than $600,000.00, and (iii) there is not a then existing Event of Default or Default Period. The Overadvance Floating Rate shall change when and as the Prime Rate changes. (g) Effective March 1, 2001, the definition of "Revolving Floating Rate" contained in Section 1.1 of the Credit Agreement was hereby deleted and replaced as follows: "Revolving Floating Rate" means an annual rate equal to the sum of the Prime Rate plus one and one-quarter of one percent (1.25%). The Revolving Floating Rate shall automatically be reduced to an annual rate equal to the sum of the Prime Rate plus one-quarter of one percent (0.25%) on the first day of the first full month following Lender's receipt of Borrower's 2001 fiscal year audited financial statements complying with Section 6.1(a) below, if but only if (i) said financial statements indicate that the Borrower and the Covenant Entities have achieved a Net Income for the Borrower's 2001 fiscal year of not less than $250,000.00, (ii) said financial statements indicate that the Borrower and the Covenant Entities increased their aggregate Net Worth during Borrower's 2001 fiscal year by not less than $250,000.00, and (iii) there is not a then existing Event of Default or Default Period. If but only if said reduction is not achieved as provided 4 above, the Revolving Floating Rate shall automatically be adjusted on the first day of the first full month following Lender's receipt of Borrower's audited financial statements complying with Section 6.1(a) below in any year subsequent to Borrower's 2001 fiscal year, to an annual rate equal to the sum of the Prime Rate plus one-quarter of one percent (0.25%) in the event that (i) said financial statements indicate that the Borrower and the Covenant Entities have achieved a Net Income for any such fiscal year of not less than $600,000.00, (ii) said financial statements indicate that the Borrower and the Covenant Entities increased their aggregate Net Worth during any such fiscal year by not less than $600,000.00, and (iii) there is not a then existing Event of Default or Default Period. The Revolving Floating Rate shall change when and as the Prime Rate changes. (h) Effective March 1, 2001, the definition of "Term Floating Rate" contained in Section 1.1 of the Credit Agreement was hereby deleted and replaced as follows: "Term Floating Rate" means an annual rate equal to the sum of the Prime Rate plus one and three-quarters of one percent (1.75%). The Term Floating Rate shall automatically be reduced to an annual rate equal to the sum of the Prime Rate plus three-quarters of one percent (0.75%) on the first day of the first full month following Lender's receipt of Borrower's 2001 fiscal year audited financial statements complying with Section 6.1(a) below, if but only if (i) said financial statements indicate that the Borrower and the Covenant Entities have achieved a Net Income for the Borrower's 2001 fiscal year of not less than $250,000.00, (ii) said financial statements indicate that the Borrower and the Covenant Entities increased their aggregate Net Worth during Borrower's 2001 fiscal year by not less than $250,000.00, and (iii) there is not a then existing Event of Default or Default Period. If but only if said reduction is not achieved as provided above, the Term Floating Rate shall automatically be adjusted on the first day of the first full month following Lender's receipt of Borrower's audited financial statements complying with Section 6.1(a) below in any year subsequent to Borrower's 2001 fiscal year, to an annual rate equal to the sum of the Prime Rate plus three-quarters of one percent (0.75%) in the event that (i) said financial statements indicate that the Borrower and the Covenant Entities have achieved a Net Income for any such fiscal year of not less than $600,000.00, (ii) said financial statements indicate that the Borrower and the Covenant Entities increased their aggregate Net Worth during any such fiscal year by not less than $600,000.00, and (iii) there is not a then existing Event of Default or Default Period. The Term Floating Rate shall change when and as the Prime Rate changes. 5 (i) Section 2.6(a) of the Credit Agreement is hereby deleted and replaced as follows: (a) The Lender agrees, on the terms and subject to the conditions herein set forth, to make a non-revolving advance to the Borrower in the amount of $2,811,000.00 (the "Term Advance"). Borrower hereby acknowledges that as of March 1, 2001, $2,007,000.00 of the Term Advance was currently outstanding. (j) Section 2.7.1(a) of the Credit Agreement is hereby deleted and replaced as follows: (a) Beginning on April 1, 2001 and on the first day of each month thereafter, in equal monthly installments of $46,850.00. (k) Section 2.8(a) of the Credit Agreement is hereby deleted and replaced as follows: (a) REVOLVING NOTE. Except as set forth in Sections 2.8(d), 2.8(f) and 2.8(g), the outstanding principal balance (exclusive of that portion of the Revolving Advances which constitutes the Overadvance Limit) of the Revolving Note shall bear interest at the Revolving Floating Rate. Except as set forth in Sections 2.8(d), 2.8(f) and 2.8(g), the outstanding principal balance of that portion of the Revolving Advances which constitutes the Overadvance Limit shall bear interest at the Overadvance Floating Rate. (l) Section 2.9(a) of the Credit Agreement is hereby deleted and replaced as follows: (a) UNUSED LINE FEE. For the purposes of this Section 2.9(a),"Unused Amount" means the Maximum Line reduced by (1) outstanding Revolving Advances and (2) the L/C Amount. The Borrower agrees to pay to the Lender an unused line fee at the rate of one-half of one percent (0.5%) per annum on the average daily Unused Amount from the date of this Agreement to and including the Termination Date, due and payable monthly in arrears on the first day of the month and on the Termination Date. (m) Subsection (d) of Section 2.9 of the Credit Agreement is hereby deleted and replaced as follows: (d) AUDIT FEES. The Borrower hereby agrees to pay the Lender, on demand, audit fees of $75.00 per hour (or Lender's then applicable rate) per auditor in connection with any audits or inspections by the Lender of any collateral or the operations or business of the Borrower, together with all actual out-of-pocket costs and expenses 6 incurred in conducting any such audit or inspection (collectively, "Out-of-Pockets"). So long as there is not any then existing Event of Default or Default Period, such audit fees shall not exceed $5,000.00 per audit plus all applicable Out-of-Pockets and audits shall be performed not more frequently than four times per annum. Lender shall send to Borrower an invoice applicable to such audit fees, out-of-pocket costs and expenses, provided, however, any failure of Lender to send such invoices shall not relieve Borrower of its obligations under this Section 2.9(d). (n) Sections 2.13(a) and 2.13(b) of the Credit Agreement are hereby deleted and replaced as follows: (a) TERMINATION AND LINE REDUCTION FEES. If the Credit Facility is terminated for any reason as of a date other than the Maturity Date, or the Borrower reduces the Maximum Line, the Borrower shall pay the Lender a fee in an amount equal to a percentage of the Maximum Line (or the reduction, as the case may be) as follows: (i) three percent (3%) if the termination or reduction occurs on or before September 30, 2001, (ii) two percent (2%) if the termination or reduction occurs after September 30, 2001 but on or before September 1, 2002, and (iii) one percent (1%) if the termination or reduction occurs after September 30, 2002. (b) PREPAYMENT FEES. If the Term Note or the Capital Expenditures Note are prepaid as of a date other than the Maturity Date for any reason except in accordance with Section 2.7, the Borrower shall pay to the Lender a fee in an amount equal to a percentage of the amount prepaid as follows: (i) three percent (3%) if prepayment occurs on or before September 30, 2001; (ii) two percent (2%) if prepayment occurs after September 30, 2001 but on or before September 30, 2002; and (iii) one percent (1%) if prepayment occurs after September 30, 2002. (o) Section 6.12 of the Credit Agreement is hereby deleted and replaced as follows: DEBT SERVICE COVERAGE RATIO. The Borrower covenants that FMM and FMS and the Covenant Entities shall, as of the last day of each fiscal quarter, on and after May 31, 2001, maintain a consolidated average minimum debt service coverage ratio (based upon the period set forth below) as follows: 7 Quarter Ending Debt Service Coverage Ratio -------------- --------------------------- May 31, 2001 1.0 to 1 based upon the immediately preceding three month period, and excluding all payments made on or Subordinated Indebtedness owed to the Johnston Family Charitable Remainder Unitrust No. 3 August 31, 2001 and 1.0 to 1 based upon the immediately preceding each August 31 three month period thereafter November 30, 2001 and .75 to 1 based upon the immediately preceding six each November 30 month period thereafter February 28, 2002 and .75 to 1 based upon the immediately preceding nine each February 28 month period thereafter May 31, 2002 and each 1.05 to 1 based upon the immediately preceding May 31 thereafter twelve month period (p) Section 6.13 of the Credit Agreement is hereby deleted and replaced as follows: Section 6.13 NET WORTH. The Borrower covenants that as of May 31, 2000, the aggregate consolidated Net Worth of FMM, FMS and the Covenant Entities was $14,411,226.36. The Borrower covenants that said aggregate consolidated Net Worth as of the end of each future fiscal quarter end shall increase by not less than (or in the event a decrease is allowed, decrease by not more than) the amounts set forth below as measured from the immediately preceding fiscal year ending aggregate consolidated Net Worth. Quarter Ending Net Worth Increase (Decrease) -------------- ----------------------------- February 28, 2001 ($1,200,000.00) May 31, 2001 ($200,000.00) August 31, 2001 and each August 31 thereafter $0.00 8 November 30, 2001 and each November 30 thereafter ($300,000.00) February 28, 2002 and each February 28 thereafter ($100,000.00) May 31, 2002 and each May 31 thereafter $600,000.00 (q) Section 6.14 of the Credit Agreement is hereby deleted in its entirety and replaced as follows: Section 6.14 NET INCOME. The Borrower covenants that FMM, FMS and the Covenant Entities shall achieve an aggregate consolidated Net Income of at least (or, in the event a Net Loss is allowed for such fiscal quarter, a Net Loss of not more than) the amount set forth below for each fiscal quarter as measured from the immediately preceding fiscal year end. Quarter Ending Net Income (Loss) -------------- ----------------- February 28, 2001 ($1,200,000.00) May 31, 2001 ($200,000.00) August 31, 2001 and each August 31 thereafter $0.00 November 30, 2001 and each November 30 thereafter ($300,000.00) February 28, 2002 and each February 28 thereafter ($100,000.00) May 31, 2002 and each May 31 thereafter $600,000.00 (r) Section 6.15 of the Credit Agreement is hereby deleted in its entirety and replaced as follows: Section 6.15 MONTHLY NET INCOME/NET LOSS. The Borrower covenants that beginning with January 1, 2001, and continuing for each month thereafter, FMM, FMS and the Covenant Entities shall achieve an aggregate consolidated Net Income of not less than (or in the event a Net Loss is allowed for such month, a Net Loss of not more than) the amounts set forth below for each month as measured from the last day of the immediately preceding month. 9 Month Net Income/(Net Loss) ----- --------------------- January, 2001 $0.00 February, 2001 $50,000.00 March, 2001 $100,000.00 April, 2001 $150,000.00 May, 2001 $150,000.00 June of each year $0.00 July of each year $0.00 August of each year ($300,000.00) September of each year ($150,000.00) October of each year ($200,000.00) November of each year ($100,000.00) December of each year ($350,000.00) January, 2002 and each January thereafter ($50,000.00) February, 2002 and each February thereafter $0.00 March, 2002 and each March thereafter $0.00 April, 2002 and each April thereafter $0.00 May, 2002 and each May thereafter $0.00 (s) Section 7.10 of the Credit Agreement is hereby deleted and replaced as follows: CAPITAL EXPENDITURES. FMM, FMS and the Covenant Entities will not incur or contract to incur Capital Expenditures in the aggregate of more than (i) $1,250,000.00 during Borrower's 2001 fiscal year, and (ii) $1,500,000.00 during any fiscal year thereafter. In addition, FMM, FMS and the Covenant Entities will not incur or contract to incur Capital Expenditures paid with working capital in the aggregate of more than (i) $800,000.00 during Borrower's 2001 fiscal year, and (ii) $900,000.00 during any fiscal year thereafter. In addition, FMM, FMS and the Covenant Entities will not incur or contract to incur Capital Expenditures in excess of $500,000.00 in any one transaction without the prior approval of Lender which approval can be granted or withheld in Lender's sole discretion. 10 3. NO OTHER CHANGES. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance or letter of credit thereunder. 4. THE DEFAULTS. The Borrower is in default of the following provisions of the Credit Agreement (collectively, the "Current Defaults"): (a) The Borrower has failed to achieve the required Debt Service Coverage Ratio for the quarter ending November 30, 2000 as required by Section 6.12 of the Credit Agreement. (b) The Borrower and the Covenant Entities have failed to achieve the Net Worth for the quarter ending November 30, 2000 as required by Section 6.13 of the Credit Agreement. (c) The Borrower and the Covenant Entities have failed to achieve the Net Income for the quarter ending November 30, 2000 as required by Section 6.14 of the Credit Agreement. (d) The Borrower and the Covenant Entities have exceeded the maximum allowable Net Loss for the month of November, 2000 as set forth in Section 6.15 of the Credit Agreement. The Borrower acknowledges that as a result of the Current Defaults, a Default Period exists and the Default Rate was implemented on November 1, 2000. The Borrower further acknowledges as of the date hereof, the amounts owed as a result of the implementation of the Default Rate have not been paid (the "Default Interest"). Upon the terms and subject to the conditions set forth in this Amendment, the Lender hereby waives the Current Defaults. This waiver shall be effective only in this specific instance and for the specific purpose for which it is given, and this waiver shall not entitle the Borrower to any other or further waiver in any similar or other circumstances. The Borrower further agrees that notwithstanding the above waiver, the Obligations shall continue to bear interest at the Default Rate. The Borrower shall pay one-half of the past due Default Interest (which equals $22,826.38) upon the execution of this Amendment. The Borrower shall pay one-half of the Default Interest going forward monthly as required by the Credit Agreement. The second one-half of the past due Default Interest and one-half of the Default Interest going forward (collectively the "Accrued Default Interest") shall continue to accrue and shall be due and payable on the earlier of (i) the first day of the first full month after Lender's receipt of Borrower's audited financial statements for Borrower's 2001 fiscal year complying with the terms of Section 6.1(a) of the Credit Agreement (the "2001 Financials") which indicate that there is an event of default existing under the Credit Agreement, or (ii) the date after the date hereof upon which any Event of Default occurs under the Credit Agreement. In the event the Accrued Default Interest becomes due and payable, the Current Defaults and the Default Period associated therewith, shall automatically be reinstated retroactively to November 1, 2000. Notwithstanding the above, if but only if the Accrued Default Interest has not previously become due and payable and the 2001 Financial Statements indicate that the Borrower is in compliance with all of the provisions of the Credit Agreement, the Lender shall waive the payment of the Accrued Default Interest and the Obligations shall cease to bear interest at the Default Rate. 11 5. ORIGINATION FEE. The Borrower shall pay the Lender as of the date hereof a fully earned, non-refundable origination fee in the amount of $11,195.00 in consideration of the Lender's execution of this Amendment. 6. CONDITIONS PRECEDENT. This Amendment shall be effective when the Lender shall have received an executed original hereof, together with each of the following, each in substance and form acceptable to the Lender in its sole discretion: (a) The replacement revolving note substantially in the form of Exhibit A hereto, duly executed on behalf of the Borrower (the "Replacement Note"). (b) The Acknowledgment and Agreement of Guarantor set forth at the end of this Amendment, duly executed by the Guarantor. (c) A Certificate of the Secretary of the Borrower certifying as to (i) the resolutions of the board of directors of the Borrower approving the execution and delivery of this Amendment, (ii) the fact that the articles of incorporation and bylaws of the Borrower, which were certified and delivered to the Lender pursuant to the Certificate of Authority of the Borrower's secretary or assistant secretary dated as of October 9, 1998 in connection with the execution and delivery of the Credit Agreement continue in full force and effect and have not been amended or otherwise modified except as set forth in the Certificate to be delivered, and (iii) certifying that the officers and agents of the Borrower who have been certified to the Lender, pursuant to the Certificate of Authority of the Borrower's secretary or assistant secretary dated as of October 9, 1998, as being authorized to sign and to act on behalf of the Borrower continue to be so authorized or setting forth the sample signatures of each of the officers and agents of the Borrower authorized to execute and deliver this Amendment, the Replacement Note and all other documents, agreements and certificates on behalf of the Borrower. (d) An opinion of the Borrower's counsel as to the matters set forth in paragraphs 7(a) and 7(b) hereof and as to such other matters as the Lender shall require. (e) Payment of the fee described in Paragraph 5. (f) Payment of the Default Interest as described in Paragraph 4(d). (g) Such other matters as the Lender may require. 7. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants to the Lender as follows: (a) The Borrower has all requisite power and authority to execute this Amendment and the Replacement Note and to perform all of its obligations hereunder, and this Amendment and the Replacement Note have been duly executed and delivered by the Borrower and constituteS the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. 12 (b) The execution, delivery and performance by the Borrower of this Amendment and the Replacement Note have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or bylaws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 8. REFERENCES. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. Upon the satisfaction of each of the conditions set forth in paragraph 6 hereof, the definition of "Revolving Note" and all references thereto in the Credit Agreement shall be deemed amended to describe the Replacement Note, which Replacement Note shall be issued by the Borrower to the Lender in replacement, renewal and amendment, but not in repayment, of the Revolving Note. 9. NO OTHER WAIVER. Except as specifically set forth in Section 4 above, the execution of this Amendment and acceptance of the Replacement Note and any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default or Default Period under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment. 10. RELEASE. The Borrower, and the Guarantor by signing the Acknowledgment and Agreement of Guarantor set forth below, each hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower or such Guarantor has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 11. PAYMENTS ON THE SUBORDINATED DEBT. Notwithstanding anything in that certain Subordination Agreement dated December 7, 2000 (the "Subordination Agreement") to the contrary, the Borrower agrees that it shall only make payments on the Subordinated Indebtedness in strict accordance with the following: 13 (a) Payments may only be made on the following dates (or, in the event any such date falls on a weekend or holiday, the next business day) in amounts not to exceed the following amounts: (i) On the date hereof, $100,000.00; (ii) On March 31, 2001, $200,000.00; (iii) On April 30, 2001, $200,000.00; and (iv) On May 31, 2001, the balance of the Subordinated Indebtedness. (b) The amount of any payment may not exceed the amount equal to the aggregate Availability under the Credit Agreement and the RG Credit Agreement minus Accounts more than 30 days past respective due date minus $500,000.00. (c) With respect to the May 31, 2001 payment only, the average aggregate excess Availability under the Credit Agreement and the RG Credit Agreement for the 60 days immediately preceding said payment was not less than $1,000,000.00, and (d) no Event of Default or Default Period has occurred and is continuing or will occur as a result of or immediately following any such payment. Any payments received by the Subordinated Creditor which are not permitted hereby shall be handled in strict accordance with Section 5 of the Subordination Agreement. Nothing contained herein shall limit the Borrower from issuing its shares of Common Stock to the Subordinated Creditor in accordance with the terms of the Subordinated Indebtedness. 12. COSTS AND EXPENSES. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses and the fee required under paragraph 5 hereof. 13. MISCELLANEOUS. This Amendment and the Acknowledgment and Agreement of Guarantor may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. 14 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. WELLS FARGO BUSINESS CREDIT, INC. By /s/ Clifton Moschnik -------------------------------------- Its Assistant Vice President FM PRECISION GOLF MANUFACTURING CORP., a Delaware corporation By /s/ Kevin Neill -------------------------------------- Its Chief Financial Officer FM PRECISION GOLF SALES CORP., a Delaware corporation By /s/ Kevin Neill -------------------------------------- Its Chief Financial Officer 15 ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR The undersigned, a guarantor of the indebtedness of FM Precision Golf Manufacturing Corp., and FM Precision Golf Sales Corp., each Delaware corporations (collectively, jointly and severally, the "Borrowers") to Wells Fargo Business Credit, Inc., (the "Lender") pursuant to a Guaranty dated as of October 9, 1998 (the "Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii) consents to the terms (including without limitation the release set forth in paragraph 10 of the Amendment) and execution thereof; (iii) reaffirms its obligations to the Lender pursuant to the terms of its Guaranty; and (iv) acknowledges that the Lender may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of the Borrower, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under the Guaranty for all of the Borrowers' present and future indebtedness to the Lender. ROYAL PRECISION, INC., a Delaware corporation By /s/ Kevin Neill ------------------------------------- Its Chief Financial Officer 16 ACKNOWLEDGMENT OF SUBORDINATED CREDITOR The undersigned has executed and delivered to Wells Fargo Business Credit, Inc., a Minnesota corporation ("Lender"), a Subordination Agreement applicable to amounts owed to the undersigned by the Borrower, Royal Grip, Inc., a Nevada corporation, and Royal Grip Headwear Company, a Nevada corporation. The Borrower has requested that the Lender enter into this Sixth Amendment to Credit and Security Agreement. The Lender has agreed to do so if, but only if, the undersigned delivered to the Lender this acknowledgment. Accordingly, as an inducement to the Lender to entering into this Sixth Amendment, the undersigned acknowledges that its Debt Subordination Agreement remains in full force and effect. The undersigned specifically consent to the provisions of Section 11 of the Amendment. The Debt Subordination Agreement is in all respects ratified, confirmed and approved. Dated March 9, 2001. THE JOHNSTON FAMILY CHARITABLE REMAINDER UNITRUST NO. 3 Witness: /s/ Thomas A. Schneider By /s/ Richard P. Johnston, as Trustee ----------------------- ----------------------------------- 17 EXHIBIT A SECOND REPLACEMENT REVOLVING NOTE $6,500,000.00 Phoenix, Arizona ____________, 2001 For value received, the undersigned, FM PRECISION GOLF MANUFACTURING CORP., a Delaware corporation, and FM PRECISION GOLF SALES CORP., a Delaware corporation (collectively, jointly and severally, "Borrower"), hereby jointly and severally promise to pay on the Termination Date under the Credit Agreement (defined below), to the order of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its main office in Phoenix, Arizona, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of SIX MILLION FIVE HUNDRED THOUSAND and N0/100 Dollars ($6,500,000.00) or, if less, the aggregate unpaid principal amount of all Revolving Advances made by the Lender to the Borrower under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Credit and Security Agreement dated October 8, 1998, as amended from time to time (as the same may hereafter be amended, supplemented or restated from time to time, the "Credit Agreement") by and between the Lender and the Borrower. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Revolving Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. Both entities constituting the Borrower hereby jointly and severally agree to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. This Note, upon its execution, is a replacement of, issued in substitution and not in satisfaction of a promissory note, and a portion of the indebtedness hereunder is the same indebtedness evidenced by that certain Replacement Revolving Note in the amount of $5,000,000.00, made by the undersigned, which Replacement Revolving Note was executed pursuant to the Credit Agreement. The indebtedness evidenced by said Replacement Revolving Note is not extinguished hereby. 18 Presentment or other demand for payment, notice of dishonor and protest are expressly waived. FM PRECISION GOLF MANUFACTURING CORP., a Delaware corporation By ----------------------------------- Its ---------------------------------- FM PRECISION GOLF SALES CORP., a Delaware corporation By ----------------------------------- Its ---------------------------------- 20 EX-10.2 3 ex10-2.txt SEVENTH AMENDMENT TO CREDIT & SECURITY AGREEMENT Exhibit 10.2 SEVENTH AMENDMENT TO AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT This Amendment, dated as of March 9, 2001, is made by and between ROYAL GRIP, INC., a Nevada corporation, and ROYAL GRIP HEADWEAR COMPANY, a Nevada corporation (collectively, jointly and severally, the "Borrower"), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"). Recitals The Borrower and the Lender have entered into that certain Amended and Restated Credit and Security Agreement dated as of October 9, 1998, as amended by that certain Amendment to an Amended and Restated Credit and Security Agreement and Waiver of Defaults dated March 16, 1999, as amended by that certain Second Amendment to Amended and Restated Credit and Security Agreement and Waiver of Defaults dated April 13, 1999 as amended by that certain Third Amendment to Credit and Security Agreement dated November 10, 1999, as amended by that certain Fourth Amendment to Amended and Restated Credit Agreement dated March 24, 2000, and as amended by that certain Fifth Amendment to Credit and Security Agreement dated August 3, 2000, as amended by that certain Sixth Amendment to Amended and Restated Credit and Security Agreement dated November 8, 2000 (collectively, the "Credit Agreement"). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified. The Borrower has requested that certain amendments be made to the Credit Agreement, which the Lender is willing to make pursuant to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. DEFINED TERMS. Capitalized terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. 2. AMENDMENTS. The Credit Agreement is hereby amended as follows: (a) The definition of "Maturity Date" contained in Section 1.1 of the Credit Agreement is hereby deleted and replaced as follows: "Maturity Date" means September 30, 2004. (b) Effective March 1, 2001, the definition of "Revolving Floating Rate" contained in Section 1.1 of the Credit Agreement was hereby deleted and replaced as follows: "Revolving Floating Rate" means an annual rate equal to the sum of the Prime Rate plus one and one-quarter of one percent (1.25%). The Revolving Floating Rate shall automatically be reduced to an annual rate equal to the sum of the Prime Rate plus one-quarter of one percent (0.25%) on the first day of the first full month following Lender's receipt of Borrower's 2001 1 fiscal year audited financial statements complying with Section 6.1(a) below, if but only if (i) said financial statements indicate that the Borrower and the Covenant Entities have achieved a Net Income for the Borrower's 2001 fiscal year of not less than $250,000.00, (ii) said financial statements indicate that the Borrower and the Covenant Entities increased their aggregate Net Worth during Borrower's 2001 fiscal year by not less than $250,000.00, and (iii) there is not a then existing Event of Default or Default Period. If but only if said reduction is not achieved as provided above, the Revolving Floating Rate shall automatically be adjusted on the first day of the first full month following Lender's receipt of Borrower's audited financial statements complying with Section 6.1(a) below in any year subsequent to Borrower's 2001 fiscal year, to an annual rate equal to the sum of the Prime Rate plus one-quarter of one percent (0.25%) in the event that (i) said financial statements indicate that the Borrower and the Covenant Entities have achieved a Net Income for any such fiscal year of not less than $600,000.00, (ii) said financial statements indicate that the Borrower and the Covenant Entities increased their aggregate Net Worth during any such fiscal year by not less than $600,000.00, and (iii) there is not a then existing Event of Default or Default Period. The Revolving Floating Rate shall change when and as the Prime Rate changes. (c) Effective March 1, 2001, the definition of "Term Floating Rate" contained in Section 1.1 of the Credit Agreement was hereby deleted and replaced as follows: "Term Floating Rate" means an annual rate equal to the sum of the Prime Rate plus one and three-quarters of one percent (1.75%). The Term Floating Rate shall automatically be reduced to an annual rate equal to the sum of the Prime Rate plus three-quarters of one percent (0.75%) on the first day of the first full month following Lender's receipt of Borrower's 2001 fiscal year audited financial statements complying with Section 6.1(a) below, if but only if (i) said financial statements indicate that the Borrower and the Covenant Entities have achieved a Net Income for the Borrower's 2001 fiscal year of not less than $250,000.00, (ii) said financial statements indicate that the Borrower and the Covenant Entities increased their aggregate Net Worth during Borrower's 2001 fiscal year by not less than $250,000.00, and (iii) there is not a then existing Event of Default or Default Period. If but only if said reduction is not achieved as provided above, the Term Floating Rate shall automatically be adjusted on the first day of the first full month following Lender's receipt of Borrower's audited financial statements complying with Section 6.1(a) below in any year subsequent to Borrower's 2001 fiscal year, to an annual rate equal to the sum of the Prime Rate plus three-quarters of one percent (0.75%) in the event that (i) said financial statements indicate that the Borrower and the Covenant Entities have achieved a Net Income for any such 2 fiscal year of not less than $600,000.00, (ii) said financial statements indicate that the Borrower and the Covenant Entities increased their aggregate Net Worth during any such fiscal year by not less than $600,000.00, and (iii) there is not a then existing Event of Default or Default Period. The Term Floating Rate shall change when and as the Prime Rate changes. (d) Subsection (d) of Section 2.9 of the Credit Agreement is hereby deleted and replaced as follows: (d) AUDIT FEES. The Borrower hereby agrees to pay the Lender, on demand, audit fees of $75.00 per hour (or Lender's then applicable rate) per auditor in connection with any audits or inspections by the Lender of any collateral or the operations or business of the Borrower, together with all actual out-of-pocket costs and expenses incurred in conducting any such audit or inspection (collectively, "Out-of-Pockets"). So long as there is not any then existing Event of Default or Default Period, such audit fees shall not exceed $2,500.00 per audit plus all applicable Out-of-Pockets and audits shall be performed not more frequently than four times per annum. Lender shall send to Borrower an invoice applicable to such audit fees, out-of-pocket costs and expenses, provided, however, any failure of Lender to send such invoices shall not relieve Borrower of its obligations under this Section 2.9(d). (e) Sections 2.13(a) and 2.13(b) of the Credit Agreement are hereby deleted and replaced as follows: (a) TERMINATION AND LINE REDUCTION FEES. If the Credit Facility is terminated for any reason as of a date other than the Maturity Date, or the Borrower reduces the Maximum Line, the Borrower shall pay the Lender a fee in an amount equal to a percentage of the Maximum Line (or the reduction, as the case may be) as follows: (i) three percent (3%) if the termination or reduction occurs on or before September 30, 2001, (ii) two percent (2%) if the termination or reduction occurs after September 30, 2001 but on or before September 1, 2002, and (iii) one percent (1%) if the termination or reduction occurs after September 30, 2002. (b) PREPAYMENT FEES. If the Term Note is prepaid as of a date other than the Maturity Date for any reason except in accordance with Section 2.7, the Borrower shall pay to the Lender a fee in an amount equal to a percentage of the amount prepaid as follows: (i) three percent (3%) if prepayment occurs on or before September 30, 2001; (ii) two percent (2%) if prepayment occurs after September 30, 2001 but on or before September 30, 2002; and (iii) one percent (1%) if prepayment occurs after September 30, 2002. 3 (f) Section 6.12 of the Credit Agreement is hereby deleted and replaced as follows: DEBT SERVICE COVERAGE RATIO. The Borrower covenants that Royal Grip and Royal Headwear and the Covenant Entities shall, as of the last day of each fiscal quarter, on and after May 31, 2001, maintain a consolidated average minimum debt service coverage ratio (based upon the period set forth below) as follows: Quarter Ending Debt Service Coverage Ratio -------------- --------------------------- May 31, 2001 1.0 to 1 based upon the immediately preceding three month period, and excluding all payments made on or Subordinated Indebtedness owed to the Johnston Family Charitable Remainder Unitrust No. 3 August 31, 2001 and each 1.0 to 1 based upon the immediately August 31 thereafter preceding three month period November 30, 2001 and each .75 to 1 based upon the immediately November 30 thereafter preceding six month period February 28, 2002 and each .75 to 1 based upon the immediately February 28 thereafter preceding nine month period May 31, 2002 and each 1.05 to 1 based upon the immediately May 31 thereafter preceding twelve month period (g) Section 6.13 of the Credit Agreement is hereby deleted and replaced as follows: Section 6.13 NET WORTH. The Borrower covenants that as of May 31, 2000, the aggregate consolidated Net Worth of Royal Grip, Royal Headwear and the Covenant Entities was $14,411,226.36. The Borrower covenants that said aggregate consolidated Net Worth as of the end of each future fiscal quarter end shall increase by not less than (or in the event a decrease is allowed, decrease by not more than) the amounts set forth below as measured from the immediately preceding fiscal year ending aggregate consolidated Net Worth. 4 Quarter Ending Net Worth Increase (Decrease) -------------- ----------------------------- February 28, 2001 ($1,200,000.00) May 31, 2001 ($200,000.00) August 31, 2001 and each August 31 thereafter $0.00 November 30, 2001 and each November 30 thereafter ($300,000.00) February 28, 2002 and each February 28 thereafter ($100,000.00) May 31, 2002 and each May 31 thereafter $600,000.00 (h) Section 6.14 of the Credit Agreement is hereby deleted in its entirety and replaced as follows: Section 6.14 NET INCOME. The Borrower covenants that Royal Grip, Royal Headwear and the Covenant Entities shall achieve an aggregate consolidated Net Income of at least (or, in the event a Net Loss is allowed for such fiscal quarter, a Net Loss of not more than) the amount set forth below for each fiscal quarter as measured from the immediately preceding fiscal year end. Quarter Ending Net Income (Loss) -------------- ----------------- February 28, 2001 ($1,200,000.00) May 31, 2001 ($200,000.00) August 31, 2001 and each August 31 thereafter $0.00 November 30, 2001 and each November 30 thereafter ($300,000.00) February 28, 2002 and each February 28 thereafter ($100,000.00) May 31, 2002 and each May 31 thereafter $600,000.00 (i) Section 6.15 of the Credit Agreement is hereby deleted in its entirety and replaced as follows: Section 6.15 MONTHLY NET INCOME/NET LOSS. The Borrower covenants that beginning with January 1, 2001, and continuing for each month thereafter, Royal Grip, Royal Headwear and the Covenant Entities shall achieve an 5 aggregate consolidated Net Income of not less than (or in the event a Net Loss is allowed for such month, a Net Loss of not more than) the amounts set forth below for each month as measured from the last day of the immediately preceding month. Month Net Income/(Net Loss) ----- --------------------- January, 2001 $0.00 February, 2001 $50,000.00 March, 2001 $100,000.00 April, 2001 $150,000.00 May, 2001 $150,000.00 June of each year $0.00 July of each year $0.00 August of each year ($300,000.00) September of each year ($150,000.00) October of each year ($200,000.00) November of each year ($100,000.00) December of each year ($350,000.00) January, 2002 and each January thereafter ($50,000.00) February, 2002 and each February thereafter $0.00 March, 2002 and each March thereafter $0.00 April, 2002 and each April thereafter $0.00 May, 2002 and each May thereafter $0.00 (j) Section 7.10 of the Credit Agreement is hereby deleted and replaced as follows: CAPITAL EXPENDITURES. Royal Grip, Royal Headwear and the Covenant Entities will not incur or contract to incur Capital Expenditures in the aggregate of more than (i) $1,250,000.00 during Borrower's 2001 fiscal year, and (ii) 6 $1,500,000.00 during any fiscal year thereafter. In addition, Royal Grip, Royal Headwear and the Covenant Entities will not incur or contract to incur Capital Expenditures paid with working capital in the aggregate of more than (i) $800,000.00 during Borrower's 2001 fiscal year, and (ii) $900,000.00 during any fiscal year thereafter. In addition, Royal Grip, Royal Headwear and the Covenant Entities will not incur or contract to incur Capital Expenditures in excess of $500,000.00 in any one transaction without the prior approval of Lender which approval can be granted or withheld in Lender's sole discretion. 3. NO OTHER CHANGES. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance or letter of credit thereunder. 4. THE DEFAULTS. The Borrower is in default of the following provisions of the Credit Agreement (collectively, the "Current Defaults"): (a) The Borrower has failed to achieve the required Debt Service Coverage Ratio for the quarter ending November 30, 2000 as required by Section 6.12 of the Credit Agreement. (b) The Borrower and the Covenant Entities have failed to achieve the Net Worth for the quarter ending November 30, 2000 as required by Section 6.13 of the Credit Agreement. (c) The Borrower and the Covenant Entities have failed to achieve the Net Income for the quarter ending November 30, 2000 as required by Section 6.14 of the Credit Agreement. (d) The Borrower and the Covenant Entities have exceeded the maximum allowable Net Loss for the month of November, 2000 as set forth in Section 6.15 of the Credit Agreement. The Borrower acknowledges that as a result of the Current Defaults, a Default Period exists and the Default Rate was implemented on November 1, 2000. The Borrower further acknowledges as of the date hereof, the amounts owed as a result of the implementation of the Default Rate have not been paid (the "Default Interest"). Upon the terms and subject to the conditions set forth in this Amendment, the Lender hereby waives the Current Defaults. This waiver shall be effective only in this specific instance and for the specific purpose for which it is given, and this waiver shall not entitle the Borrower to any other or further waiver in any similar or other circumstances. The Borrower further agrees that notwithstanding the above waiver, the Obligations shall continue to bear interest at the Default Rate. The Borrower shall pay one-half of the past due Default Interest (which equals $3,242.22) upon the execution of this Amendment. The Borrower shall pay one-half of the Default Interest going forward monthly as required by the Credit Agreement. The second one-half of the past due Default Interest and one-half of the Default Interest going forward (collectively the "Accrued Default Interest") shall continue to accrue and shall be due and payable on the earlier of (i) the first day of the first full month 7 after Lender's receipt of Borrower's audited financial statements for Borrowers 2001 fiscal year complying with the terms of Section 6.1(a) of the Credit Agreement (the "2001 Financials") which indicate that there is an event of default existing under the Credit Agreement, or (ii) the date after the date hereof upon which any Event of Default occurs under the Credit Agreement. In the event the Accrued Default Interest becomes due and payable, the Current Defaults and the Default Period associated therewith, shall automatically be reinstated retroactively to November 1, 2000. Notwithstanding the above, if but only if the Accrued Default Interest has not previously become due and payable and the 2001 Financial Statements indicate that the Borrower is in compliance with all of the provisions of the Credit Agreement, the Lender shall waive the payment of the Accrued Default Interest and the Obligations shall cease to bear interest at the Default Rate. 5. CONDITIONS PRECEDENT. This Amendment shall be effective when the Lender shall have received an executed original hereof, together with each of the following, each in substance and form acceptable to the Lender in its sole discretion: (a) The Acknowledgment and Agreement of Guarantor set forth at the end of this Amendment, duly executed by the Guarantor. (b) A Certificate of the Secretary of the Borrower certifying as to (i) the resolutions of the board of directors of the Borrower approving the execution and delivery of this Amendment, (ii) the fact that the certificate of incorporation and bylaws of the Borrower, which were certified and delivered to the Lender pursuant to the Certificate of Authority of the Borrower's secretary or assistant secretary dated as of October 9, 1998 in connection with the execution and delivery of the Credit Agreement continue in full force and effect and have not been amended or otherwise modified except as set forth in the Certificate to be delivered, and (iii) certifying that the officers and agents of the Borrower who have been certified to the Lender, pursuant to the Certificate of Authority of the Borrower's secretary or assistant secretary dated as of October 9, 1998, as being authorized to sign and to act on behalf of the Borrower continue to be so authorized or setting forth the sample signatures of each of the officers and agents of the Borrower authorized to execute and deliver this Amendment and all other documents, agreements and certificates on behalf of the Borrower. (c) Payment of the Default Interest as described in Paragraph 4(d). (d) An opinion of the Borrower's counsel as to the matters set forth in paragraph 6(a) and 6 (b) hereof and to such other matters as Lender shall require. (e) Such other matters as the Lender may require. 6. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants to the Lender as follows: (a) The Borrower has all requisite power and authority to execute this Amendment and to perform all of its obligations hereunder, and this Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental 8 department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the certificate of incorporation or by-laws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 7. REFERENCES. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 8. NO OTHER WAIVER. Except as specifically set forth in Section 4 above, the execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default or Default Period under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment. 9. RELEASE. The Borrower, and each Guarantor by signing the Acknowledgment and Agreement of Guarantor set forth below, each hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower or such Guarantor has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 10. COSTS AND EXPENSES. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses. 9 11. PAYMENTS ON THE SUBORDINATED DEBT. Notwithstanding anything in that certain Subordination Agreement dated December 7, 2000 (the "Subordination Agreement") to the contrary, the Borrower agrees that it shall only make payments on the Subordinated Indebtedness in strict accordance with the following: (a) Payments may only be made on the following dates (or, in the event any such date falls on a weekend or holiday, the next business day) in amounts not to exceed the following amounts: (i) On the date hereof, $100,000.00; (ii) On March 31, 2001, $200,000.00; (iii) On April 30, 2001, $200,000.00; and (iv) On May 31, 2001, the balance of the Subordinated Indebtedness. (b) The amount of any payment may not exceed the amount equal to the aggregate Availability under the Credit Agreement and the FM Credit Agreement minus Accounts more than 30 days past respective due date minus $500,000.00. (c) With respect to the May 31, 2001 payment only, the average aggregate excess Availability under the Credit Agreement and the FM Agreement for the 60 days immediately preceding said payment was not less than $1,000,000.00, and (d) No Event of Default or Default Period has occurred and is continuing or will occur as a result of or immediately following any such payment. Any payments received by the Subordinated Creditor which are not permitted hereby shall be handled in strict accordance with Section 5 of the Subordination Agreement. Nothing contained herein shall limit the Borrower from issuing its shares of Common Stock to the Subordinated Creditor in accordance with the terms of the Subordinated Indebtedness. 12. MISCELLANEOUS. This Amendment and the Acknowledgment and Agreement of Guarantor may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. 10 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. WELLS FARGO BUSINESS CREDIT, INC. By /s/ Clifton Moschnik ----------------------------------- Its Assistant Vice President ROYAL GRIP, INC., a Nevada corporation By /s/ Kevin Neill ----------------------------------- Its Chief Financial Officer ROYAL GRIP HEADWEAR COMPANY, a Nevada corporation By /s/ Kevin Neill ----------------------------------- Its Chief Financial Officer 11 ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR The undersigned, a guarantor of the indebtedness of Royal Grip, Inc., and Royal Grip Headwear Company, each Nevada corporations (collectively, jointly and severally, the "Borrowers") to Wells Fargo Business Credit, Inc. (the "Lender") pursuant to a Guaranty dated as of October 9, 1998 (the "Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii) consents to the terms (including without limitation the release set forth in paragraph 9 of the Amendment) and execution thereof; (iii) reaffirms its obligations to the Lender pursuant to the terms of its Guaranty; and (iv) acknowledges that the Lender may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of the Borrower, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under the Guaranty for all of the Borrowers' present and future indebtedness to the Lender. ROYAL PRECISION, INC., a Delaware corporation By /s/ Kevin Neill ----------------------------------- Its Chief Financial Officer 12 ACKNOWLEDGMENT OF SUBORDINATED CREDITOR The undersigned has executed and delivered to Wells Fargo Business Credit, Inc., a Minnesota corporation, ("Lender"), a Subordination Agreement applicable to amounts owed to the undersigned by the Borrower, FM Precision Golf Manufacturing Corp., a Delaware corporation and FM Precision Golf Sales Corp., a Delaware corporation. The Borrower has requested that the Lender enter into this Seventh Amendment to Credit and Security Agreement. The Lender has agreed to do so if, but only if, the undersigned delivered to the Lender this acknowledgment. Accordingly, as an inducement to the Lender to entering into this Seventh Amendment, the undersigned acknowledges that its Debt Subordination Agreement remains in full force and effect. The undersigned specifically consent to the provisions of Section 11 of the Amendment. The Debt Subordination Agreement is in all respects ratified, confirmed and approved. Dated March 9, 2001. THE JOHNSTON FAMILY CHARITABLE REMAINDER UNITRUST NO. 3 Witness: /s/ Thomas A. Schneider By /s/ Richard P. Johnston, as Trustee -------------------------- ----------------------------------- 13 EX-10.3 4 ex10-3.txt AMENDMENT NO. 1 TO REVOLVING PROMISSORY NOTE Exhibit 10.3 THIS INSTRUMENT IS SUBJECT TO THE TERMS OF A SUBORDINATION AGREEMENT BY JOHNSTON FAMILY CHARITABLE REMAINDER UNITRUST #3 IN FAVOR OF WELLS FARGO BUSINESS CREDIT, INC. DATED AS OF December 7, 2000. AMENDMENT NO. 1 THIS AMENDMENT NO. 1 (the "Amendment") is made and entered into as of March 16, 2001, by and between JOHNSTON FAMILY CHARITABLE REMAINDER UNITRUST #3, a trust created under a trust agreement dated October 15, 1998 (the "Lender"), and ROYAL PRECISION, INC. (the "Borrower") to that certain REVOLVING SUBORDINATED PROMISSORY NOTE, dated December 7, 2000 (the "Note"). RECITALS WHEREAS, the parties have determined to modify the Note in the manner hereinafter set forth. NOW THEREFORE, the parties hereby agree as follows: Section 1. AMENDMENTS. 1.1. Section 1.2 is hereby amended in its entirety to read as follows: 1.2. INTEREST. The Borrower shall pay interest on the unpaid principal balance of all Loans at a rate per annum equal to 13%. All interest payable under this Note or otherwise payable hereunder shall be computed on the basis of the actual number of days elapsed over a year of 365 days. Interest on the unpaid principal balance of each Loan shall be payable on January 30, 2001, monthly thereafter at the end of each calendar month and at the repayment of the unpaid principal balance of such Loan. Notwithstanding the provisions of the first sentence, if the unpaid principal balance has not been repaid in full by May 31, 2001, all unpaid principal shall bear interest at a rate per annum equal to 17% from February 1, 2001 until paid in full. 1.2. Section 6.1 is hereby amended to read as follows: 6.1. ACCELERATION. If an Event of Default exists, the outstanding unpaid principal balance of this Note, together with all interest accrued thereon and any unpaid fees, expenses or other amounts due to the Lender under this Note, is immediately due and payable at the Lender's election, without presentment, demand, protest or notice of any kind, all of which are hereby waived. Until the Lender makes such election, interest shall continue to accrue until the earlier of (a) the Lender's demand for payment, in which event the principal and interest shall be due and payable, or (b) three days after approval of this Agreement by the stockholders of the Borrower as outlined in Section 10.10 hereof ("Stockholder Approval"), in which event the Lender has to either elect to convert or demand payment. 1.3. Section 6.3 is hereby amended to read as follows: 6.3. OPTION. If all Loans are not paid in full, including all interest due thereon, by the End of the Credit, or earlier if there is an Event of Default, then the Lender shall have the option (the "Option") to convert all or any part of the unpaid Loans and interest thereon into shares of Common Stock of the Borrower (the "Shares") at the rate of one Share for each $1.00 of unpaid principal and interest thereon as of the End of the Credit (the "Exercise Price"). Until Stockholder Approval, the Lender shall only be able to exercise the Option for an amount not to exceed $25,000. After Stockholder Approval, there shall be no restrictions on the exercise of the Option. Exercise of the Option shall be considered payment by the Borrower and thus reduce any outstanding balance owed by the Borrower by the amount of Shares received by the Lender. 1.4. Section 10.10 is hereby inserted to read as follows: 10.10. STOCKHOLDER APPROVAL. Unless this Note has been fully paid pursuant to its terms prior thereto, the Borrower agrees to solicit stockholder approval for this Note at the Borrower's annual meeting, or at such earlier time as the Lender may request, but in all events a meeting of stockholders of the Borrower must occur on or prior to September 30, 2001 for the purpose of voting on approving this Note. In the event the Lender requests a stockholder meeting prior to the Borrower's annual meeting, the Lender shall provide notice of such request to the Borrower and the Borrower shall, at its sole cost and expense, take such action as may be necessary to cause a special meeting of the stockholders of the Borrower to be held within 45 days of receipt of such request, or as soon as practical thereafter, to vote on approving this Note. Section 2. CONTINUING VALIDITY. Except as amended herein, the provisions of the Note shall remain unchanged and in full force and effect. All references to the Note hereafter shall be deemed to mean and refer to the Note, as amended by this Amendment. -2- IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. ROYAL PRECISION, INC. By: /s/ Kevin L. Neill ------------------------------------- Name: Kevin L. Neill Title: Chief Financial Officer JOHNSTON FAMILY CHARITABLE REMAINDER UNITRUST #3 By: /s/ Richard P. Johnston ------------------------------------- Name: Richard P. Johnston Title: Trustee -3- -----END PRIVACY-ENHANCED MESSAGE-----