0000950147-01-501757.txt : 20011026 0000950147-01-501757.hdr.sgml : 20011026 ACCESSION NUMBER: 0000950147-01-501757 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010831 FILED AS OF DATE: 20011019 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: 1934 Act SEC FILE NUMBER: 000-22889 FILM NUMBER: 1762485 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-7600.txt QUARTERLY REPORT FOR THE QTR ENDED 08/31/2001 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended August 31, 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, Arizona 85260 (Address of Principal Executive Offices) (Zip code) (480) 627-0200 (Registrant's Telephone Number, Including Area Code) (Former Name, Former Address and Former Fiscal Year if Changed Since Last Report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Title of each class Outstanding at October 19, 2001 ------------------- ------------------------------- Common Stock, par value $0.001 5,681,711 Shares PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. ROYAL PRECISION, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data) AUGUST 31, MAY 31, 2001 2001 -------- -------- ASSETS CURRENT ASSETS: Cash $ 60 $ 33 Accounts receivable, net of allowance for doubtful accounts of $170 and $187 at August 31, 2001 and May 31, 2001, respectively 1,902 4,988 Inventories 5,811 5,920 Other current assets 135 215 Deferred income taxes -- 224 -------- -------- Total current assets 7,908 11,380 -------- -------- PROPERTY, PLANT AND EQUIPMENT: Land 123 123 Furniture, fixtures and office equipment 615 614 Buildings and improvements 955 955 Machinery and equipment 5,802 5,733 Equipment held for sale 106 120 Construction in progress 477 371 -------- -------- 8,078 7,916 Less - Accumulated depreciation (2,125) (1,912) -------- -------- 5,953 6,004 -------- -------- GOODWILL, net 1,250 7,187 -------- -------- DEFERRED INCOME TAXES -- 582 -------- -------- OTHER ASSETS 52 54 -------- -------- Total assets $ 15,163 $ 25,207 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 5,755 $ 768 Accounts payable 1,752 1,534 Accrued salaries and benefits 270 529 Accrued pension liability 229 198 Accrued environmental costs 248 272 Other accrued expenses 363 360 -------- -------- Total current liabilities 8,617 3,661 LONG-TERM DEBT, net of current portion -- 7,705 -------- -------- Total liabilities 8,617 11,366 -------- -------- 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 (increased to 15,000,000 on September 25, 2001); 5,681,711 shares issued and outstanding at August 31, 2001 and May 31, 2001 6 6 Additional paid-in capital 13,977 13,977 Accumulated deficit (7,413) (118) Accumulated other comprehensive loss (24) (24) -------- -------- Total stockholders' equity 6,546 13,841 -------- -------- Total liabilities and stockholders' equity $ 15,163 $ 25,207 ======== ======== The accompanying notes are an integral part of these condensed consolidated balance sheets. 2 ROYAL PRECISION, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share amounts) THREE MONTHS ENDED ---------------------- AUGUST 31, AUGUST 31, 2001 2000 --------- --------- NET SALES: Golf club shafts $ 5,858 $ 5,807 Golf club grips 807 1,171 ------- ------- 6,665 6,978 ------- ------- COST OF SALES: Golf club shafts 4,622 3,749 Golf club grips 684 822 ------- ------- 5,306 4,571 ------- ------- Gross profit 1,359 2,407 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,755 1,982 AMORTIZATION OF GOODWILL -- 110 ENVIRONMENTAL COSTS 30 15 ------- ------- Operating income (loss) (426) 300 INTEREST EXPENSE 170 178 OTHER INCOME 44 87 ------- ------- Income (loss) before provision for income taxes (552) 209 PROVISION FOR INCOME TAXES 806 104 ------- ------- Income (loss) before cumulative effect of change in accounting principle (1,358) 105 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 5,937 -- ------- ------- Net income (loss) $(7,295) $ 105 ======= ======= BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: Income (loss) before cumulative effect of change in accounting principle $ (0.24) $ 0.02 Cumulative effect of change in accounting principle (1.04) -- ------- ------- Net income (loss) $ (1.28) $ 0.02 ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED TO COMPUTE PER SHARE INFORMATION (IN THOUSANDS): BASIC 5,682 5,679 ======= ======= DILUTED 5,682 5,861 ======= ======= The accompanying notes are an integral part of these condensed consolidated financial statements. 3 ROYAL PRECISION, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) THREE MONTHS ENDED --------------------- AUGUST 31, AUGUST 31, 2001 2000 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(7,295) $ 105 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 213 250 Increase in valuation allowance on deferred tax assets 806 -- Impairment of goodwill 5,937 -- (Gain) loss on retirement or sale of fixed assets 13 (3) Stock based compensation -- 28 Increase (decrease) in cash resulting from a change in operating assets and liabilities -- Accounts receivable, net 3,086 2,069 Inventories 109 (564) Other assets 82 66 Accounts payable and accrued expenses (31) (724) ------- ------- Net cash provided by operating activities 2,920 1,227 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of machinery and equipment (188) (371) Proceeds from sale of fixed assets 13 30 ------- ------- Net cash used in investing activities (175) (341) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of lines-of-credit, net (2,480) (225) Repayments of long-term debt (238) (227) ------- ------- Net cash used in financing activities (2,718) (452) ------- ------- INCREASE IN CASH 27 434 CASH, beginning of period 33 36 ------- ------- CASH, end of period $ 60 $ 470 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for -- Interest $ 167 $ 177 ======= ======= Income taxes $ 2 $ 1 ======= ======= 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 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, 2001 included in the Company's Annual Report on 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. ("RP") and its three wholly-owned subsidiaries (collectively the "Company"), which are FM Precision Golf Manufacturing Corp. ("FMP"), FM Precision Golf Sales Corp. ("FMP Sales") and Royal Grip, Inc. ("RG"). RP acquired RG on August 29, 1997 ("the RG Acquisition"). BUSINESS -- RP is a holding company that conducts 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, Europe 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. 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 weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share considers, in addition to the above, the dilutive effect of common share equivalents during the period. Common share equivalents represent dilutive stock options and warrants using the treasury stock method. Loss per share for the three months ended August 31, 2001 was not affected by outstanding options to acquire 1,502,000 shares of common stock because their effect was anti-dilutive. For the three months ended August 31, 2000, options to acquire 621,000 shares of common stock were excluded from the computation of diluted earnings per share because the exercise prices of those options were greater than the average market price of the Company's common stock. The number of shares used in computing earnings (loss) per share for the three-month periods ended August 31, 2001 and 2000 were as follows (in thousands): 5 THREE MONTHS ENDED ---------------------- AUGUST 31, AUGUST 31, 2001 2000 ------ ------ Basic: Average common shares outstanding 5,682 5,679 Diluted: Dilutive effect of stock options -- 182 ------ ------ Average common shares outstanding 5,682 5,861 ====== ====== 3. NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, the FASB issued SFAS No. 133 (as amended by SFAS Nos. 137 and 138), "Accounting for Derivative Instruments and Hedging Activities," which requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. The Company adopted SFAS No. 133 on June 1, 2001. The adoption of SFAS No. 133 did not have a material impact on the Company's results of operations or its financial position. In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires companies to apply the purchase method of accounting for all business combinations initiated after June 30, 2001 and prohibits the use of the pooling-of-interest method. SFAS No. 142 changes the method by which companies may recognize intangible assets in purchase business combinations and generally requires identifiable intangible assets to be recognized separately from goodwill. In addition, it eliminates the amortization of all existing and newly acquired goodwill on a prospective basis and requires companies to assess goodwill for impairment, at least annually, based on the fair value of the reporting unit associated with the goodwill. The Company elected to early adopt SFAS Nos. 141 and 142 on June 1, 2001. Note 9 provides additional discussion regarding the impact to the Company's financial statements as a result of adopting these statements. 4. INVENTORIES: Inventories are valued at the lower of cost or market. Cost is determined on the first-in, first-out method. Inventories as of August 31, 2001 and May 31, 2001 consisted of the following (in thousands): AUGUST 31, 2001 MAY 31, 2001 --------------- ------------ Raw materials $ 833 $ 814 Work-in-process 1,542 1,215 Finished goods 3,436 3,891 ------ ------ $5,811 $5,920 ====== ====== 5. BORROWING ARRANGEMENTS: The Company's primary borrowing arrangement consists of two bank credit facilities. 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 and require the maintenance of minimum monthly and quarterly earnings and quarterly debt service coverage ratios, as defined. Due to the loss incurred during the three months ended August 31, 2001, the Company is not in compliance with several financial loan covenants and is in default of its credit facilities. Therefore, all amounts borrowed at August 31, 2001 are classified as current liabilities in the condensed consolidated balance sheet as of that date. The Company is currently negotiating with its lender to modify the FMP and RG credit facilities and to obtain waivers of the covenant violations. The Company believes that this financing agreement will be completed during the fiscal quarter ending November 30, 2001. Upon completion of the financing agreement and waiver of the covenant violations by the lender, the Company anticipates that $4,987,000 of the outstanding bank debt will be reclassified from a current obligation to long-term debt. Failure by the Company to obtain the necessary waivers of financial loan covenant defaults could have a material adverse effect on the Company's financial condition and results of operations. 6 FMP's bank credit facility consists of two term loans and a revolving line-of-credit. The outstanding principal balance of the first FMP term loan ("FMP Term 1") of $2,577,000 at August 31, 2001 is due in monthly principal installments of $46,850 plus interest until its maturity in September 2004. The outstanding principal balance of the second FMP term loan ("FMP Term 2") of $380,000 at August 31, 2001 is due in monthly principal installments of $6,667 plus interest 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 base of $6,500,000. Beginning on November 1 of each year, a seasonal over-advance of $500,000 is available until May 31 of the following year. As of August 31, 2001, FMP had $2,550,000 outstanding under its revolving line-of-credit and $424,000 available for additional borrowings. 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 $190,000 at August 31, 2001 is due in monthly principal installments of $10,500 plus interest until it is paid off in July 2003. 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 $1,500,000. As of August 31, 2001, RG had $58,000 outstanding under its revolving line-of-credit and $475,000 available for additional borrowings. The RG line-of-credit expires in September 2004. Borrowings under both lines-of-credit and FMP Term 2 bear interest at a rate per annum equal to the prime rate (6.5% at August 31, 2001) plus 2.25%. Borrowings under the RG term loan and FMP Term 1 bear interest at a rate per annum equal to the prime rate plus 2.75%. Borrowings under the FMP seasonal over-advance bear interest at a rate per annum equal to the prime rate plus 4.25%. In October 2001, the Company secured a commitment of additional financing from the Johnston Family Charitable Foundation ("Johnston Foundation") with agreement on terms of a subordinated promissory note ("Subordinated Note") in the amount of $1,250,000. The Company anticipates that execution of the Subordinated Note and funding of $1,000,000 will occur during the fiscal quarter ending November 30, 2001 upon approval of the transaction by the Company's bank lender. The Company anticipates that an additional funding of the Subordinated Note in the amount of $250,000 will be received prior to December 31, 2001. The Subordinated Note bears interest at a fixed annual rate of 13%, is due 12 months after funding and is subordinate to both the FMP and RG bank credit facilities. Upon funding, the Johnston Foundation will receive warrants to purchase 300,000 shares of RP common stock at a price of $0.25 per share. Additionally, the Johnston Foundation will have an option to convert the indebtedness into RP common stock at an exchange ratio of $0.25 per share with respect to any outstanding principal and accrued interest that is not repaid in full on or before the maturity date. Until stockholder approval, the Johnston Foundation may only exercise its warrants and the conversion option up to an aggregate of 25,000 shares. The Company anticipates presenting this transaction to stockholders for approval no later than the next annual meeting of stockholders scheduled for September 2002. The Company intends to use the proceeds from this financing agreement for working capital to support the ongoing operations of the Company and to fund the cost of the corporate restructuring discussed in Note 10. Richard P. Johnston, a director and the CEO and Chairman of the Board of the Company, and Kenneth J. Warren, a director and secretary and general counsel of the Company, are members of the Board of Trustees of the Johnston Foundation, and David E. Johnston, a director of the Company, is President of the Johnston Foundation. 6. INFORMATION ON SEGMENTS: The Company has two reportable segments: golf club shafts and golf club grips. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Annual Report on Form 10-K for the fiscal year ended May 31, 2001. 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): 7 THREE MONTHS ENDED AUGUST 31, 2001 ----------------------------- GOLF CLUB GOLF CLUB SHAFTS GRIPS TOTAL ------- ------- ------- Net sales $ 5,858 $ 807 $ 6,665 Operating loss (217) (209) (426) Depreciation 157 56 213 Interest expense 155 15 170 Total assets for reportable segments $11,721 $ 9,347 $21,068 Elimination of investment in subsidiaries (5,905) ------- Consolidated total assets $15,163 ======= THREE MONTHS ENDED AUGUST 31, 2000 ----------------------------- GOLF CLUB GOLF CLUB SHAFTS GRIPS TOTAL ------- ------- ------- Net sales $ 5,807 $ 1,171 $ 6,978 Operating income 239 61 300 Depreciation and amortization 128 122 250 Interest expense 164 14 178 Total assets for reportable segments $12,925 $16,990 $29,915 Elimination of investment in subsidiaries (6,016) ------- Consolidated total assets $23,899 ======= 7. 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 in the U.S. Environmental Protection Agency's ("EPA") Comprehensive Environmental Response, Compensation and Liability Information System ("CERCLIS"). A contractor for the EPA has performed site assessments and taken samples from the property of the FMP plant. The Company anticipates that a report from the EPA with the results of this work will be received prior to April 2002. 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 the EPA identifies any environmental issues, they would be issues 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 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 from the FMP plant. The Company submitted its response to the NOV in December 2000 and, in April 2001, the Company received a draft consent order from the DEP related to this matter. The Company is currently negotiating with the DEP prior to entering into a final consent order. The Company does not anticipate, however, that the conditions of the draft consent order will be significantly modified. Terms of the draft consent order include, among other things, that the Company pay a civil penalty of $206,000, submit to various compliance audits, and complete a feasibility study to determine if the discharge of treated wastewater from the FMP plant can be reduced, 8 diverted to another source or eliminated entirely. Management believes it is possible that the proposed civil penalty will be slightly reduced when the final consent order is executed. A provision for the proposed civil penalty was recorded in the amount of $150,000 during the fiscal year ended May 31, 2001. Management believes that significant future capital expenditures in excess of $300,000 may be made at the FMP plant during the fiscal year ending May 31, 2002 to comply with the terms of the consent order. Environmental costs related to the various matters discussed above totaled $30,000 and $15,000 during the three-month periods ended August 31, 2001 and 2000, respectively. 8. VALUATION ALLOWANCE ON DEFERRED TAX ASSETS: As of May 31, 2001, the Company had recorded deferred tax assets of $806,000 net of a valuation allowance of $1,745,000. Due to the loss incurred during the three months ended August 31, 2001 and the additional costs anticipated for a corporate restructuring (see Note 10), it is unlikely that the Company will generate positive taxable income during the fiscal year ending May 31, 2002. Therefore, the valuation allowance has been increased to fully offset the recorded deferred tax assets based on the more likely than not criteria for realizability of deferred tax assets established in SFAS 109. This increase in the valuation allowance on deferred tax assets is reflected as a provision for income taxes of $806,000 during the three months ended August 31, 2001 in the accompanying condensed consolidated statement of operations. 9. ACCOUNTING FOR GOODWILL: In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" which changes the method by which companies may recognize intangible assets in purchase business combinations and generally requires identifiable intangible assets to be recognized separately from goodwill. In addition, it eliminates the amortization of all existing and newly acquired goodwill on a prospective basis and requires companies to assess goodwill for impairment, at least annually, based on the fair value of the reporting unit associated with the goodwill. The Company elected to early adopt SFAS No. 142 during its quarter ended August 31, 2001. Therefore, amortization of goodwill was suspended effective June 1, 2001. The following table presents the pro-forma financial results for the three months ended August 31, 2000 on a basis consistent with the new accounting principle (dollars in thousands except per share amounts): Reported net income $ 105 Add back amortization of goodwill 110 ------- Adjusted net income $ 215 ======= Reported basic and diluted net income per share $ 0.02 Add back goodwill amortization per share 0.02 ------- Adjusted basic and diluted net income per share $ 0.04 ======= In accordance with the transitional guidance of SFAS No. 142, the Company's previously recognized goodwill was tested for impairment as of June 1, 2001. Goodwill of $10,418,000 had been recorded in conjunction with the RG Acquisition. This balance was subsequently reduced by $1,392,000 due to utilization of pre-acquisition net operating loss carryforwards and by amortization expense totaling $1,839,000. Goodwill was assigned to the Company's golf club grip business segment. A fair value measurement of the grip segment was computed by applying a market multiple to the projected segment cash flows. Professionals in the investment banking industry were consulted to validate the assumptions used in the fair value estimate. Based on this analysis, a fair value of $1,250,000 was calculated for the segment which was lower than recorded goodwill of $7,187,000. Therefore, an impairment of goodwill was recorded in the amount of $5,937,000 which is reflected as the cumulative effect of change in accounting principle in the accompanying condensed consolidated statement of operations for the three months ended August 31, 2001. The income tax effect of this change in accounting principle was $0. The recorded impairment loss is the result of a change in the evaluation criteria for goodwill from an undiscounted cash flow approach which was previously utilized under the guidance in Accounting Principles Board Opinion No. 17 to the fair value approach which is stipulated in SFAS No. 142. The following table provides a reconciliation of the recorded goodwill during the period from May 31, 2001 to August 31, 2001 (in thousands): 9 Balance as of May 31, 2001 $ 7,187 Impairment loss recorded (5,937) ------- Balance as of August 31, 2001 $ 1,250 ======= 10. CORPORATE RESTRUCTURING: In September 2001, the Company's board of directors approved a restructuring plan designed to streamline operations and reduce expenses. The restructuring plan includes staff reductions and anticipates a decrease in operating expenses resulting from the consolidation of the existing corporate headquarters leased in Scottsdale, Arizona to the manufacturing facility which the Company owns in Torrington, Connecticut. The Company expects to incur expenses of approximately $1,100,000 related to the restructuring during the current fiscal year. The Company estimates that costs totaling $800,000 will be expensed during the fiscal quarter ending November 30, 2001, for severance and retention bonuses payable to terminated employees, lease termination costs, employee hiring, travel and training, and modification of stock options held by terminated employees. An estimated $300,000 additional expense is anticipated to be recorded during the fiscal quarter ending February 28, 2002 for employee relocation, hiring, training, and travel. Approximately 25 individuals who perform administrative, sales, marketing, customer service and accounting functions are currently employed at the Company's corporate headquarters. The affected employees are entitled to receive severance benefits pursuant to established severance policies or by governmentally mandated labor regulations. The Company estimates that the restructuring will provide annualized savings in excess of $1,000,000 subsequent to the completion of all phases of the plan. 11. AUTHORIZED SHARES OF COMMON STOCK: The Company's annual meeting of stockholders was held on September 25, 2001. At the meeting, stockholders approved an amendment to the Amended and Restated Certificate of Incorporation to increase the aggregate authorized number of shares of common stock from 10,000,000 to 15,000,000. 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; the ability to modify the terms of existing credit facilities and to obtain additional financing; anticipated future customer orders; anticipated future capital expenditures; anticipated costs of environmental matters at our manufacturing facilities and expectations regarding future environmental reports; our ability to generate sufficient cash flow from operations to repay indebtedness and fund operations; and expectations regarding the costs and benefits of our restructuring plan. 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 ("OEMs"); 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; 10 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 the Company; work stoppages or slowdowns; the Company's limited operating history; the Company's ability to successfully launch new products; the willingness of our lender to modify the terms of existing credit facilities; the willingness of certain terminated employees to continue with the Company through the restructuring; the continued listing of the Company's stock on the Nasdaq National Market 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 the Company's Annual Report on Form 10-K for the period ended May 31, 2001. OVERVIEW -- Royal Precision, Inc. ("RP") is a holding company which carries on its business operations through its three wholly-owned subsidiaries (collectively the "Company"), which are FM Precision Golf Manufacturing Corp. ("FMP"), FM Precision Golf Sales Corp. ("FMP Sales"), and Royal Grip, Inc. ("RG"). 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 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, Europe and Canada. The Company principally operates in the golf equipment industry which has historically been seasonal in nature with consumer demand for product being the strongest during the spring and summer months. THREE MONTHS ENDED AUGUST 31, 2001 COMPARED TO THE THREE MONTHS ENDED AUGUST 31, 2000 -- NET SALES. Net sales for the three months ended August 31, 2001 were $6,665,000, a decrease of $313,000 or 4% from net sales of $6,978,000 during the corresponding period in 2000. Net sales of golf club shafts increased by $51,000 or 1% and net sales of golf club grips decreased by $364,000 or 31%. Sales of grips to the Company's exclusive Japanese distributor declined $314,000 or 34%. The Japanese distributor has experienced a decline in business which it attributes to the slow general economic conditions in Asia and reduced orders from certain of its Japanese OEM customers. COST OF SALES. Cost of goods sold for the three months ended August 31, 2001 was $5,306,000, an increase of $735,000 or 16% over cost of goods sold of $4,571,000 during the corresponding period in 2000. The cost of golf club shaft sales increased by $873,000 or 23%. This increase primarily reflects reduced production at the Company's manufacturing facility in reaction to declining demand from several significant customers. Production during the three months ended August 31, 2001 was reduced approximately 25% compared to the same period last year. The lower production resulted in fixed manufacturing costs being spread over a decreased number of units and a higher unit cost basis for the shafts manufactured. The cost of golf club grip sales decreased by $138,000 or 17% primarily as a result of lower total net sales. GROSS PROFIT. Gross profit for the three months ended August 31, 2001 was $1,359,000, a decrease of $1,048,000 or 44% from gross profit of $2,407,000 during the corresponding period in 2000. Gross profit from sales of golf club shafts decreased by $822,000 or 40% to $1,236,000 primarily due to a higher cost of units produced resulting from lower absorption of fixed manufacturing costs. Additionally, the mix of products sold during the three months ended August 31, 2001 was weighted more heavily toward lower priced, commercial grade shafts than the comparable period of the prior year. Average shaft selling prices declined approximately 5% as a result in this change in mix. Expressed as a percentage of sales, the gross profit on sales of golf club shafts decreased from 35% to 21%. Gross profit from sales of golf club grips decreased by $226,000 or 65% to $123,000 due primarily to the decline in total net sales. Expressed as a percentage of sales, the gross profit on sales of golf club grips decreased from 30% to 15%. This decline in margin is also attributable to fixed overhead costs being spread over lower unit sales volume. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the three months ended August 31, 2001 were $1,755,000, a decrease of $227,000 or 11% from selling, general and administrative expenses of $1,982,000 during the corresponding period in 2000. The decrease is primarily attributable to reduced spending on television and 11 print advertising. Expressed as a percentage of sales, selling, general and administrative expenses declined from 28% during the three months ended August 31, 2000 to 26% in 2001. AMORTIZATION OF GOODWILL. As discussed in Note 9 to the condensed consolidated financial statements, the Company adopted SFAS No. 142 effective June 1, 2001 and eliminated amortization expense as of that date. Amortization expense during the three months ended August 31, 2000 was $110,000. ENVIRONMENTAL COSTS. Costs related to various environmental matters were $30,000 and $15,000 for the three-month periods August 31, 2001, and 2000, respectively (see Note 7 to the condensed consolidated financial statements). INTEREST EXPENSE. Interest expense was consistent at $170,000 and $178,000 during the three-month periods ended August 31, 2001 and 2000, respectively. OTHER INCOME. Other income of $44,000 and $87,000 for the three-month periods ended August 31, 2001 and 2000, respectively, is principally comprised of royalties earned on sales of headwear products as well as royalty fees from other contracts which license certain Company technologies and products. The royalty stream on one headwear contract expired in May 2001 which resulted in a decrease in reported income during the three months ended August 31, 2001. PROVISION FOR INCOME TAXES. A tax provision of $104,000 was recorded on income during the three months ended August 31, 2000. Taxes were provided based on the estimated effective tax rate for the year which considered the effect of nondeductible goodwill amortization. As discussed in Note 8 to the condensed consolidated financial statements, the valuation allowance on deferred tax assets was increased to fully reserve the recorded tax assets during the three months ended August 31, 2001 based on the more likely than not criteria for realizability of deferred tax assets established in SFAS 109. This increase in the valuation allowance resulted in a provision for income taxes of $806,000 during the three months ended August 31, 2001. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. As discussed in Note 9 to the condensed consolidated financial statements, the Company adopted SFAS No. 142 effective June 1, 2001. In accordance with the transitional guidance of SFAS No. 142, the Company's previously recognized goodwill was tested for impairment under the newly established guidelines. A charge in the amount of $5,937,000 was recorded for the calculated impairment which is reflected as the cumulative effect of change in accounting principle in the accompanying condensed consolidated statement of operations for the three months ended August 31, 2001. LIQUIDITY AND CAPITAL RESOURCES -- At August 31, 2001, the Company had a negative working capital of $709,000 and a current ratio of 0.9 to 1 as compared to working capital of $7,719,000 and a current ratio of 3.1 to 1 at May 31, 2001. This decline in working capital is primarily the result of a reclassification of $4,987,000 in long-term debt to current liabilities due to various loan covenant violations discussed below. The Company's primary borrowing arrangement consists of two bank credit facilities. 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 and require the maintenance of minimum monthly and quarterly earnings and quarterly debt service coverage ratios, as defined. Due to the loss incurred during the three months ended August 31, 2001, the Company is not in compliance with several financial loan covenants and is in default of its credit facilities. Therefore, all amounts borrowed at August 31, 2001 are classified as current liabilities in the condensed consolidated balance sheet as of that date. The Company is currently negotiating with its lender to modify the FMP and RG credit facilities and to obtain waivers of the covenant violations. The Company believes that this financing agreement will be completed during the fiscal quarter ending November 30, 2001. Upon completion of the financing agreement and waiver of the covenant violations by the lender, the Company anticipates that $4,987,000 of the outstanding bank debt will be reclassified from a current obligation to long-term debt. Failure by the Company to obtain the necessary waivers of financial loan covenant defaults could have a material adverse effect on the Company's financial condition and results of operations. FMP's bank credit facility consists of two term loans and a revolving line-of-credit. The outstanding principal balance of the first FMP term loan ("FMP Term 1") of $2,577,000 at August 31, 2001 is due in monthly principal installments of $46,850 plus interest until its maturity in September 2004. The outstanding principal balance of the second FMP term loan ("FMP Term 2") of 12 $380,000 at August 31, 2001 is due in monthly principal installments of $6,667 plus interest 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 base of $6,500,000. Beginning on November 1 of each year, a seasonal over-advance of $500,000 is available until May 31 of the following year. As of August 31, 2001, FMP had $2,550,000 outstanding under its revolving line-of-credit and $424,000 available for additional borrowings. 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 $190,000 at August 31, 2001 is due in monthly principal installments of $10,500 plus interest until it is paid off in July 2003. 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 $1,500,000. As of August 31, 2001, RG had $58,000 outstanding under its revolving line-of-credit and $475,000 available for additional borrowings. The RG line-of-credit expires in September 2004. Borrowings under both lines-of-credit and FMP Term 2 bear interest at a rate per annum equal to the prime rate (6.5% at August 31, 2001) plus 2.25%. Borrowings under the RG term loan and FMP Term 1 bear interest at a rate per annum equal to the prime rate plus 2.75%. Borrowings under the FMP seasonal over-advance bear interest at a rate per annum equal to the prime rate plus 4.25%. In October 2001, the Company secured a commitment of additional financing from the Johnston Family Charitable Foundation ("Johnston Foundation") with agreement on terms of a subordinated promissory note ("Subordinated Note") in the amount of $1,250,000. The Company anticipates that execution of the Subordinated Note and funding of $1,000,000 will occur during the fiscal quarter ending November 30, 2001 upon approval of the transaction by the Company's bank lender. The Company anticipates that an additional funding of the Subordinated Note in the amount of $250,000 will be received prior to December 31, 2001. The Subordinated Note bears interest at a fixed annual rate of 13%, is due 12 months after funding and is subordinate to both the FMP and RG bank credit facilities. Upon funding, the Johnston Foundation will receive warrants to purchase 300,000 shares of RP common stock at a price of $0.25 per share. Additionally, the Johnston Foundation will have an option to convert the indebtedness into RP common stock at an exchange ratio of $0.25 per share with respect to any outstanding principal and accrued interest that is not repaid in full on or before the maturity date. Until stockholder approval, the Johnston Foundation may only exercise its warrants and the conversion option up to an aggregate of 25,000 shares. The Company anticipates presenting this transaction to stockholders for approval no later than the next annual meeting of stockholders scheduled for September 2002. The Company intends to use the proceeds from this financing agreement for working capital to support the ongoing operations of the Company and to fund the cost of the corporate restructuring discussed in Note 10. Richard P. Johnston, a director and the CEO and Chairman of the Board of the Company, and Kenneth J. Warren, a director and secretary and general counsel of the Company, are members of the Board of Trustees of the Johnston Foundation, and David E. Johnston, a director of the Company, is President of the Johnston Foundation. The Company believes that its existing capital resources and credit lines available, together with the anticipated funding of additional subordinated debt of $1,250,000, are sufficient to fund its operations and capital requirements of current business segments as presently planned over the next twelve months. In September 2001, the Company received notification from the Nasdaq Stock Market ("Nasdaq") that the Company's common stock had failed to maintain a minimum market value of public float of $5,000,000 over the preceding 30 consecutive trading days. The Company was given 90 days to regain compliance with this continued listing requirement of the Nasdaq National Market. In October 2001, the Company was advised that the Nasdaq had implemented a moratorium on the market value of public float requirement until January 2, 2002. There is not sufficient information at this time to determine what action, if any, the Nasdaq will pursue subsequent to January 2, 2002 and what effect, if any, it may have on the Company's financial condition and results of operations. Should the Company's common stock continue to fall below the minimum market value of public float requirement for continued listing on the Nasdaq National Market, the Company will consider all available options which may include applying for listing on the Nasdaq SmallCap Market. 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 13 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 in the U.S. Environmental Protection Agency's ("EPA") Comprehensive Environmental Response, Compensation and Liability Information System ("CERCLIS"). In November 2000 and April 2001, a contractor for the EPA performed site assessments and took samples from the property of the FMP plant. The Company anticipates that a report from the EPA with the results of this work will be received prior to April 2002. 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 the EPA identifies any environmental issues, they would be issues 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 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 from the FMP plant. The Company submitted its response to the NOV in December 2000 and, in April 2001, the Company received a draft consent order from the DEP related to this matter. The Company is currently negotiating with the DEP prior to entering into a final consent order. The Company does not anticipate, however, that the conditions of the draft consent order will be significantly modified. Terms of the draft consent order include, among other things, that the Company pay a civil penalty of $206,000, submit to various compliance audits, and complete a feasibility study to determine if the discharge of treated wastewater from the FMP plant can be reduced, diverted to another source or eliminated entirely. Management believes it is possible that the proposed civil penalty will be slightly reduced when the final consent order is executed. A provision for the proposed civil penalty was recorded in the amount of $150,000 during the fiscal year ended May 31, 2001. Management believes that significant future capital expenditures in excess of $300,000 may be made at the FMP plant during the fiscal year ending May 31, 2002 to comply with the terms of the consent order. Environmental costs related to the various matters discussed above totaled $30,000 and $15,000 during the three-month periods ended August 31, 2001 and 2000, respectively. 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. QUANTITATIVE INFORMATION REGARDING MARKET RISK. At August 31, 2001, the Company did not participate in any market risk sensitive 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 5 to the condensed consolidated financial statements. A one percent change in the prime lending rate would have an effect of approximately $18,000 on interest expense for the three months ended August 31, 2001. 15 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Due to the loss incurred during the three months ended August 31, 2001, the Company is not in compliance with several financial loan covenants and is in default of its bank credit facilities. These covenant violations include covenants requiring the maintenance of minimum monthly and quarterly earnings and minimum quarterly debt service coverage ratios, as defined. These covenant violations impact all of the Company's outstanding term loans and lines-of-credit which, in the aggregate, totaled $5,755,000 at August 31, 2001. Therefore, all amounts borrowed at August 31, 2001 are classified as current liabilities in the consolidated balance sheet as of that date. The Company is currently negotiating with its lender to modify the credit facilities and to obtain waivers of the covenant violations. The Company believes that this financing agreement will be completed during the fiscal quarter ending November 30, 2001. Upon completion of the financing agreement and waiver of the covenant violations by the lender, the Company anticipates that $4,987,000 of the outstanding bank debt will be reclassified from a current obligation to long-term debt. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) The annual meeting of stockholders was held on September 25, 2001. (b) Richard P. Johnston, Charles S. Mechem, Jr. and Christopher A. Johnston were elected as directors, each to serve a term of three years. Other directors whose terms of office continued after the annual meeting are David E. Johnston, Kenneth J. Warren, Raymond J. Minella and Thomas A. Schneider. Mr. Schneider subsequently resigned as a director and officer of the Company and John C. Lauchnor was elected by the board as a director and officer. (c) The only matters voted on at the annual meeting were the election of directors and approval of an amendment to the Amended and Restated Certificate of Incorporation to increase the aggregate authorized number of shares of common stock from 10,000,000 to 15,000,000. Results of the voting were as follows: Total number of shares entitled to vote present or represented at the annual meeting: 5,356,968 Election of Directors: For Authority Withheld --------- ------------------ Richard P. Johnston 5,354,901 2,067 Charles S. Mechem, Jr. 5,354,901 2,067 Christopher A. Johnston 5,354,901 2,067 Approval of amendment to Amended and Restated Certificate of Incorporation: For Against Abstain --------- ------- ------- 5,354,776 1,475 717 (d) Not applicable. 16 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 September 28, 2001). 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 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. Agreement to Terminate Employment with Thomas A. Schneider dated as of October 1, 2001. Exhibit 10.2. Executive Employment Agreement with John Lauchnor dated as of September 1, 2001. (b) Reports on Form 8-K. There were no reports on Form 8-K filed by the Registrant during the quarter ended August 31, 2001. 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 October 19, 2001 By /s/ John C. Lauchnor ---------------- ---------------------------------------- John C. Lauchnor, President (duly authorized officer) By /s/ Kevin L. Neill ---------------------------------------- Kevin L. Neill, Vice President - Finance (chief financial officer) 17 EXHIBIT INDEX PAGE IN SEQUENTIALLY NUMBERED EXHIBIT COPY ------- ---- 3.1 Amended and Restated Certificate of Incorporation of 19 Royal Precision, Inc. (restated to reflect amendment filed with the Secretary of State of Delaware on September 28, 2001). 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 Agreement to Terminate Employment with Thomas A. 25 Schneider dated as of October 1, 2001. 10.2 Executive Employment Agreement with John Lauchnor dated 28 as of September 1, 2001. * Incorporated by reference EX-3.1 3 ex3-1.txt AMENDED CERTIFICATE OF INCORPORATION Exhibit 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF ROYAL PRECISION, INC. (Restated to reflect Amendments of October 19, 1999 and September 28, 2001) FIRST: The name of the Corporation is Royal Precision, Inc. SECOND: The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle. The name of its registered agent at that address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: Section 1. AUTHORIZED SHARES. The total number of shares of stock which the Corporation shall have the authority to issue is 16,000,000 of which 1,000,000 are shares of Preferred Stock with a par value of one mil ($0.001) per share ("Preferred Stock"), and 15,000,000 are shares of Common Stock with a par value of one mil ($0.001) per share ("Common Stock"). Section 2. PREFERRED STOCK. The Board of Directors is expressly authorized to adopt, from time to time, a resolution or resolutions providing for the issuance of Preferred Stock in one or more series, to fix the number of shares in each such series and to fix the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions thereof, of each such series. Section 3. COMMON STOCK. Holders of the issued and outstanding shares of Common Stock shall be entitled to receive ratably, in proportion to the number of shares of Common Stock held by them, (a) such dividends as may be declared by the Board of Directors, from time to time, out of the assets or funds of the Corporation legally available for the payment of dividends, and (b) upon the liquidation, dissolution or winding up of the Corporation, the assets of the Corporation remaining after the payment of creditors and the holders of shares of any class or series of Preferred Stock to the extent that the then existing terms of such class or series grant them priority over the holders of shares of Common Stock. Neither the merger or consolidation of the Corporation into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Corporation, nor the sale, lease, exchange or other disposition (for cash, shares of stock, securities or other consideration) of all or substantially all of the assets of the Corporation, shall be deemed to be a dissolution, liquidation, or winding up, voluntary or involuntary, of the Corporation. Each share of Common Stock entitles the holder thereof to one vote on all matters submitted to a vote of the holders of Common Stock. FIFTH: Section 1. CLASSIFIED DIRECTORS. (a) The Board of Directors shall be divided into three classes; the term of office of those of the first class to expire at the annual meeting next ensuing; of the second class one year thereafter; of the third class two years thereafter; and at each annual election held after the initial classification of the Board of Directors and election of directors to such classes, directors shall be chosen for a full term of three years, as the case may be, to succeed those whose terms expire. The total number of directors constituting the full Board of Directors and the number of directors in each class shall be fixed by, or in the manner provided in the by-laws, but the total number of directors shall not exceed seventeen (17) nor shall the number of directors in any class exceed six (6). Subject to the foregoing, the classes of directors need not have the same number of members. No reduction in the total number of directors or in the number of directors in any class shall be effective to remove any director or to reduce the term of any director. If the Board of Directors increases the number of directors in a class, it may fill the vacancy created thereby for the full remaining term of a director in that class even though such term may extend beyond the next annual election. The Board of Directors may fill any vacancy occurring for any other reason for the full remaining term of the director whose death, resignation or removal caused the vacancy, even though such term may extend beyond the next annual election. (b) Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the express terms of such class or series, and such directors so elected shall not be divided into classes pursuant to this Article FIFTH unless expressly provided by such terms. (c) Any director or the entire Board of Directors may be removed by the holders of a majority of the shares then entitled to vote at an election of directors only for cause. A director shall hold office until the annual meeting for the year in which his term expires and until his successor is elected and qualified, or until his earlier resignation or removal from office for cause. Section 2. BALLOTS. Elections of directors at a special or annual meeting of stockholders need not be by written ballot unless the by-laws of the Corporation shall provide otherwise. SIXTH: The Board of Directors shall have the power to adopt, amend or repeal the by-laws. SEVENTH: Action shall be taken by the stockholders of the Corporation only at an annual or special meeting of stockholders, and stockholders may not act by written consent. Special meetings of the Corporation may be called only as provided in the by-laws. EIGHTH: A director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of any fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which the director derives an improper personal benefit. If the General Corporation Law of the State of Delaware is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. The foregoing limitation on liability shall not apply to acts or omissions occurring prior to the effective date of this Article. NINTH: Section 1. INDEMNIFICATION. The Corporation shall indemnify any director or officer who was or is a party or is threatened to be made a party to: (a) DIRECT ACTIONS. Any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful; the termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful; or (b) DERIVATIVE ACTIONS. Any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. The Corporation may indemnify any of its other employees or agents to the same extent and subject to the same procedures and limitations as are set forth in this Section 1 and Section 3 below as it is required to indemnify its directors and officers by this Section 1. Section 2. SUCCESSFUL DEFENSE. To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1 of this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 3. STANDARD OF CONDUCT. Any indemnification under Section 1 of this Article (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in said Section 1 of this Article. Such determination shall be made (1) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. Section 4. PAYMENT OF EXPENSES. Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article NINTH. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. Section 5. NOT EXCLUSIVE. The indemnification and advancement of expenses provided by, or granted pursuant to, the provisions of this Article NINTH shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the certificate of incorporation, or any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Section 6. INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this section. Section 7. DEFINITIONS. (a) THE CORPORATION. For purposes of this Article NINTH, references to "the Corporation" shall include, in addition to the Corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this NINTH with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (b) OTHER ENTERPRISES. For purposes of this Article NINTH, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article NINTH. Section 8. CONTRACTUAL NATURE. This Article NINTH shall be deemed to be a contract between the Corporation and each director and officer who serves as such at any time while this Article NINTH is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon such state of facts. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article NINTH shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. TENTH: Effective upon the filing of this Amended and Restated Certificate of Incorporation, each share of the Common Stock, par value $.01 per share, of the Corporation theretofore issued and outstanding ("Old Common Stock") shall be split into 10 shares of the Common Stock described in Section 3 of Article FOURTH above ("New Common Stock") and each holder of a certificate representing Old Common Stock (an "Old Certificate") shall be entitled to receive a certificate representing the number of shares of New Common Stock into which the shares of Old Common Stock represented by the Older Certificate were split upon surrender of such Old Certificate to the Corporation. EX-10.1 4 ex10-1.txt AGREEMENT TO TERMINATE EMPLOYMENT - SCHNEIDER Exhibit 10.1 AGREEMENT TO TERMINATE EMPLOYMENT This Agreement to Terminate Employment is made as of October 1, 2001, by and between ROYAL PRECISION, INC., a Delaware corporation ("Corporation"), and THOMAS A. SCHNEIDER ("Employee"). WHEREAS, Corporation and Employee have maintained an employer-employee relationship for a period of time and they now desire to terminate that relationship. It is also the desire of Corporation and Employee that they enter into a written agreement in order to establish their respective rights, duties, and obligations, resolve all claims and differences that may currently exist, or that in the future may arise and generally release each other from any claims or other matters that may not be specifically set forth hereinafter. NOW, THEREFORE, for and in consideration of the promises and the consideration more fully set forth hereinafter, and intending to be legally bound hereby, Corporation and Employee mutually agree as follows: 1. TERMINATION OF EMPLOYMENT RELATIONSHIP. The employment relationship shall terminate and cease October 2, 2001 at 5:00 p.m. Phoenix time ("Termination Date"), and the payment to Employee of any sums, pursuant to this Agreement, after such termination, shall be considered wages. Corporation shall, however, withhold the ordinary and customary federal and state taxes to such extent as required by law. Corporation shall not be obligated to pay any other sums to Employee or to provide any other benefits, after the date of this Agreement, except as required by applicable law or regulation or as set forth hereinafter. 2. CONSIDERATION. Corporation shall pay to Employee, or to his heirs, or executors, the sum of $170,000, without interest, which shall be payable according to existing bi-weekly payment cycle from October 3, 2001 to October 2, 2002 (the "Severance Period"). No payments shall be made, however, until this Agreement has been executed by each party. Corporation shall pay normal payroll through October 2, 2001 and will then start the severance period on October 3, 2001 through October 3, 2002. 3. EMPLOYMENT BENEFITS. Corporation shall be obligated to continue and/or provide for, or pay, Employee's existing health and dental insurance for the Severance Period, but shall not be obligated to continue and/or provide for, or pay for any life insurance or any other benefits from or after the Termination Date. Employee may have the right to invoke the Consolidated Omnibus Budget Reconciliation Act "COBRA" of 1985, to continue certain benefits. The COBRA period shall start on October 3, 2002 and will extend for 18 months thereafter. If Employee desires to exercise such rights, he shall immediately notify the Employee Benefits Coordinator and/or the Personnel Department of Corporation. A failure to do so may result in a loss of benefits. This Agreement shall not alter Employee's statutory rights. Corporation shall continue to reimburse Employee for expenses incurred in the ordinary course of the business of Corporation pursuant to the customary and normal rules for the reimbursement of expenses. 4. RETIREMENT BENEFITS. No further contributions shall be made to the benefit plans of Corporation on behalf of Employee; however, he shall be entitled to receive any and all benefits that have vested in him solely as determined by the terms and conditions of such plans. A statement of Employee's account in any such plan in which Employee has an account will be supplied to Employee upon request. 5. OPTIONS. Regardless of terms contained in any option agreement between Employee and Corporation which might be in conflict with the foregoing, all options with respect to Employee purchasing shares of Corporation currently held by Employee shall be immediately vested and exercisable with all vesting provisions eliminated, and Employee shall be entitled to exercise all such options during the option term and any time prior to the expiration date of such options. 6. RESIGNATION OF OFFICES. Employee hereby tenders, and Corporation accepts, Employee's resignation from any and all offices that Employee may currently hold with Corporation or any subsidiary of Corporation, including Employee's position as a member of the Board of Directors of Corporation and its subsidiaries, any executive offices, and any and all other such positions. 7. SECURITIES AND EXCHANGE ("SEC") FILINGS. Corporation agrees to pay for all required SEC filings to be completed on behalf of Employee. Corporation also agrees that it will instruct its corporate attorney to make Employee aware, on a timely basis, of any filings that are required to be made as a result of Employee's relationship with Corporation or as a result of the sale of stock or exercise of options when such counsel is notified of such sale or exercise. 8. CHOICE OF LAW. This Agreement is executed in and shall be governed by and construed in accordance with the laws of the State of Arizona applicable to contracts to be performed solely in the State of Arizona. 9. NOTICES. Materials required to be delivered to either party hereunder shall be delivered as indicated below. Any notice, or other communication under this Agreement shall be in writing and shall be considered given: (a) upon personal delivery or delivery by telecopier (with confirmation of completed delivery by sender), (b) two business days after being deposited with an "overnight" courier or "express mail" service, or (c) seven business days after being mailed by registered or certified first class mail, return receipt requested, in each case addressed to the notified party at its address set forth below (or at such other address as such party may specify by notice to the other delivered in accordance with this section): If to Corporation: If to Employee: Royal Precision, Inc. Thomas A. Schneider 535 Migeon Avenue 4111 E. Becker Lane Torrington, Connecticut 06790 Phoenix, Arizona 85028 Attn.: Chairman of the Board Telecopier: (860) 489-5454 10. WAIVER OF CLAIMS UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT. Employee hereby acknowledges that he has been referred to the Age Discrimination in Employment Act (ADEA 29 USCS ss.ss. 621 et seq.) and the regulations promulgated and set forth at 29 CFR Part 1625 and the Equal Employment Opportunity Commission Complaint Procedures, 32 CFR Part 588. Employee is also advised he has various rights, and may have, after reviewing the said legislation and regulations, certain claims arising under the ADEA. Employee hereby knowingly and voluntarily waives and releases any private rights that he may have under the ADEA. Employee acknowledges that he has sufficiently deliberated the waiver of his rights, has been encouraged to consult with his lawyer prior to signing this Agreement and, thus, knowingly waives and releases any private rights that he may have. This waiver of rights is acknowledged for payment of monies or other benefits noted herein. EMPLOYEE IS SPECIFICALLY ADVISED THAT HE HAS 21 DAYS TO CONSIDER THE TERMS OF THIS WAIVER BEFORE SIGNING IT AND IS ENCOURAGED TO AVAIL HIMSELF OF THIS PERIOD OF TIME. EMPLOYEE IS ALSO ADVISED THAT HE MAY REVOKE THIS WAIVER WITHIN SEVEN DAYS FOLLOWING THE DATE OF HIS SIGNING THE WAIVER. 11. MUTUAL UNDERSTANDINGS. This Agreement has been freely and fairly negotiated by the parties hereto and each party has been provided the opportunity to have the Agreement reviewed by legal counsel of his choice and to modify the terms hereof and, therefore, this Agreement shall be construed and interpreted without any presumption, or other rule, requiring construction or interpretation against the interest of the party causing this Agreement to be drafted. This Agreement embodies the entire understanding between the parties and supersedes and cancels all prior understandings and agreements, whether oral or written. There are no other representations, agreements, arrangements, or understandings, oral or written, between or among the parties hereto relating to the subject matter of this Agreement that are not fully expressed in this Agreement. All modifications to the Agreement must be in writing and signed by the party against whom enforcement of such modification is sought. 12. MISCELLANEOUS. a. The waiver of any breach of any provision of this Agreement will not operate or be construed as a waiver of any subsequent breach of the same or other provision of this Agreement. b. The section headings of this Agreement are intended for reference and may not by themselves determine the construction or interpretation of this Agreement. c. If any portion of this Agreement is determined to be invalid or unenforceable, that portion of this Agreement will be adjusted, rather than voided, to achieve the intent of the parties under this Agreement. d. EMPLOYEE ACKNOWLEDGES THAT HE HAS READ AND UNDERSTANDS THE FOREGOING PROVISIONS AND THAT SUCH PROVISIONS ARE REASONABLE AND ENFORCEABLE. EMPLOYEE ACKNOWLEDGES THAT HE HAS SIGNED THIS AGREEMENT AS HIS OWN FREE AND VOLUNTARY ACT, THAT HE ACKNOWLEDGES THAT THIS IS AN IMPORTANT AND BINDING LEGAL CONTRACT WHICH SHOULD BE REVIEWED BY EMPLOYEE'S ATTORNEY. IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties hereto have set their hands and seals the day and year first above written. ROYAL PRECISION, INC. By: /s/Richard P. Johnston /s/ Thomas A. Schneider ------------------------------- ---------------------------------------- Richard P. Johnston Thomas A. Schneider Chairman of the Board EX-10.2 5 ex10-2.txt EXECUTIVE EMPLOYMENT AGREEMENT - LAUCHNOR Exhibit 10.2 EXECUTIVE EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into as of September 1, 2001, by and between Royal Precision, Inc, a Delaware corporation (the "Company"), and John Lauchnor, an individual residing at 2251 Moorwood Drive, Holt, Michigan 48842 (the "Executive"). RECITALS WHEREAS, prior to the date of this Agreement, Executive has held positions in plant management, general management and is now a general manager of a global operation and a division head of Precision Cast Parts; and WHEREAS, the Company desires to employ Executive from September 24, 2001 (the "Effective Date") until expiration of the term of this Agreement, and Executive is willing to be employed by the Company during that period, on the terms and subject to the conditions set forth in this Agreement. NOW THEREFORE, in consideration of the mutual covenants and promises of the parties, the Company and Executive covenant and agree as follows: 1. DUTIES. During the term of this Agreement, Executive will be employed by the Company to initially serve as President and Chief Operating Officer of the Company. Executive will devote such full amount of business time to the conduct of the business of the Company as may be reasonably required to effectively discharge Executive's duties under this Agreement and, subject to the supervision and direction of the Company's Chairman of the Board and Board of Directors (the "Board"), will faithfully, industriously, and to the best of his ability, experience and talent, perform those duties and have such authority and powers as are contained in the Company's job description for the offices of a President and Chief Operating Officer. The Executive shall observe and abide by all reasonable corporate policies and decisions of the Company in all business matters. 2. TERM OF EMPLOYMENT 2.1. DEFINITIONS. For purposes of this Agreement the following terms have the following meanings: (a) "Termination for Cause" means termination by the Company of Executive's employment (i) by reason of Executive's willful dishonesty towards, fraud upon, or deliberate injury or attempted injury to, the Company, (ii) by reason of Executive's breach of this Agreement or failure to discharge the outlined duties or (iii) by reason of Executive's negligence or intentional misconduct with respect to the performance of Executive's duties under this Agreement. (b) "Termination Other than For Cause" means termination by the Company of Executive's employment by the Company for reasons other than the Disability (as defined in Section 2.5) or the death of Executive or those which constitute Termination for Cause. (c) "Voluntary Termination" means termination by Executive of Executive's employment with the Company, excluding termination by reason of Executive's Disability or death as described in Sections 2.5 and 2.6. 2.2. BASIC TERM. The term of employment of Executive by the Company (the "Term") will commence on the Effective Date and will extend through the period ending on the third anniversary of the Effective Date (the "Termination Date"). The Company and Executive may extend the Term by mutual written agreement, and such additional period shall be included in the definition of "Term." If Executive, upon the request of the Company, continues to render services in the Company's employ after the Term in the absence of any written extension, it is understood that such continued employment will be "at will," terminable at any time by either party. 2.3. TERMINATION FOR CAUSE. Termination for Cause may be effected by the Company at any time during the Term by written notification to Executive. Upon Termination for Cause, Executive is to be immediately paid all accrued salary, incentive compensation to the extent earned, vested deferred compensation (other than pension plan or profit sharing plan benefits, which will be paid in accordance with the applicable plan), and accrued vacation pay, all to the date of termination, but Executive will not be paid any severance compensation. 2.4. TERMINATION OTHER THAN FOR CAUSE. Notwithstanding anything else in this Agreement, the Company may effect a Termination Other Than for Cause at any time upon giving notice to Executive of such Termination Other Than for Cause. Upon any Termination Other Than for Cause, Executive will immediately be paid all accrued salary, all incentive compensation to the extent earned, severance compensation as provided in Section 4, vested deferred compensation (other than pension plan or profit sharing plan benefits, which will be paid in accordance with the applicable plan), and accrued vacation pay, all to the date of termination. 2.5. TERMINATION DUE TO DISABILITY. In the event that, during the Term, Executive should, in the reasonable judgment of the Board, fail to perform Executive's duties under this Agreement because of illness or physical or mental incapacity ("Disability"), and such Disability continues for a period of more than three consecutive months or for a period of 26 weeks out of any 52 weeks, the Company will have the right to terminate Executive's employment under this Agreement by written notification to Executive and payment to Executive of all accrued salary and incentive compensation to the extent earned, severance compensation as provided in Section 4, vested deferred compensation (other than pension plan or profit sharing plan benefits, which will be paid in accordance with the applicable plan), and all accrued vacation pay, all to the date of termination. Any determination by the Board with respect to Executive's Disability must be based on a determination of competent medical authority or authorities, a copy of which determination shall be delivered to Executive at the time it is delivered to the Board. 2 2.6. DEATH. In the event of Executive's death during the term of this Agreement, Executive's employment is to be deemed to have terminated as of the last day of the month during which Executive's death occurred, and the Company will pay to Executive's estate accrued salary, incentive compensation to the extent earned, vested deferred compensation (other than pension plan or profit sharing plan benefits, which will be paid in accordance with the applicable plan), and accrued vacation pay, all to the date of termination. In addition, the Company shall pay Executive's Base Salary to Executive's surviving spouse for the period commencing on the first month following Executive's death and ending on the shorter of (a) the death of Executive's surviving spouse, or (b) six months. 2.7. VOLUNTARY TERMINATION. In the event of a Voluntary Termination, the Company will immediately pay to Executive all accrued salary, all incentive compensation to the extent earned, vested deferred compensation (other than pension plan or profit sharing plan benefits, which will be paid in accordance with the applicable plan), and accrued vacation pay, all to the date of termination, but Executive will not be paid any severance compensation. 3. SALARY, BENEFITS AND OTHER COMPENSATION. 3.1. BASE SALARY. As payment for the services to be rendered by Executive as provided in Section 1 and subject to the terms and conditions of Section 2, the Company agrees to pay to Executive a "Base Salary," payable in accordance with the customary pay practices of the Company. The Base Salary payable to Executive under this Section will initially be $185,000. Executive will be entitled to regular annual salary reviews and raises during the term of this Agreement in the same general manner as other officers of the Company. 3.2. BONUS. In addition to amounts paid to Executive pursuant to other sections of this Agreement, Executive shall be entitled to a bonus that will equal up to 50% of his Base Salary if key objectives are accomplished. Initially, for fiscal year 2002, 75% of this bonus will be based upon net income before tax of the Company for the period September 1, 2001 and May 31, 2002; and, 25% of the bonus will be based upon cash flow of the Company from operations for the same period. The Personnel and Compensation Committee of the Board shall establish a plan outlining how such bonus shall be earned for fiscal year 2002 and the years thereafter. 3.3. BENEFIT PLANS. During the term of Executive's employment under this Agreement, Executive is to be eligible to participate in all employee benefit plans to the extent maintained by the Company, including (without limitation) any life, disability, health, accident and other insurance programs, paid vacations, and similar plans or programs, subject in each case to the generally applicable terms and conditions of the plan or program in question and to the determinations of any committee administering such plan or program. The Company, in lieu of other life insurance benefits, shall use reasonable efforts in good faith to secure a $500,000 term life insurance policy ( or such other policy as the Company may determine is reasonable having a death benefit of at least $500,000) on the life of Executive which shall be owned by the Company. So long as Executive is an employee of the Company, Executive shall select the beneficiary of such policy. 3 3.4. WITHHOLDING OF TAXES. Executive understands that the services to be rendered by Executive under this Agreement will cause Executive to recognize taxable income, which is considered under the Internal Revenue Code of 1986, as amended, and applicable regulations thereunder as compensation income subject to the withholding of income tax (and Social Security or other employment taxes). Executive hereby consents to the withholding of such taxes as are required by the Company. 3.5. EXPENSES. During the term of this Agreement, the Company will reimburse Executive for Executive's reasonable out-of-pocket expenses incurred in connection with the Company's business, including travel expenses, food, and lodging while away from home, subject to such policies as the Company may from time to time reasonably establish for its employees. 3.6. SIGNING BONUS. The Company shall pay Executive a signing bonus in the amount of $30,000. Such bonus shall be payable as follows: DATE AMOUNT ---- ------ November 15, 2001 $15,000 December 15, 2001 $15,000 3.7. REIMBURSEMENT OF FEES. After execution of this Agreement, the Company shall reimburse Executive for normal moving expenses, closing costs and realtor fees on both the sale and purchase of his old and new homes upon presentation of appropriate documentation. The Company will increase the payment for reimbursement of these fees to cover the amount of any taxes that may be due by Executive as a result of receipt of such reimbursement. 3.8. DEFERRAL PROGRAM. The Company shall use reasonable efforts in good faith to cause to be established an appropriate salary deferral program for the benefit of Executive, which may be made available to others, pursuant to which Executive may contribute, on a tax deferred basis, up to 25% of his compensation with no match by the Company. 3.9. DIRECTORSHIP. The Company shall cause Executive to be a director of the Company and shall cause Executive to be re-nominated and elected as a director of the Company for so long as Executive continues to be the President of the Company. 3.10. STOCK OPTIONS. The Company shall cause to be granted to Executive a nonqualified stock option to purchase up to 250,000 shares of Common Stock of the Company under the Company's Stock Option Plan, at an exercise price equal to the closing price of a share of common stock of the Company on September 21, 2001. The options shall vest at the rate of 25% per year starting on the first anniversary of date of the Effective Date. 3.11. COUNTRY CLUB. On and after June 1, 2002, the Company will reimburse Executive for the initiation fee for one country club up to $25,000. 4. SEVERANCE COMPENSATION. 4.1. TERMINATION OTHER THAN FOR CAUSE; PAYMENT IN LIEU OF NOTICE. In the event Executive's employment is terminated in a Termination Other Than for Cause, Executive will be paid as severance pay Executive's Base Salary for the period commencing on the date that Executive's employment is terminated and ending 12 months from the date of such termination, on the dates specified in Section 3.1 for payment of Executive's Base Salary. 4 4.2. TERMINATION FOR DISABILITY. In the event Executive's employment is terminated because of Executive's Disability pursuant to Section 2.5, Executive will be entitled to the benefits available under the Company's disability policies, if any, and such salary continuation as may be determined by the Personal and Compensation Committee. 4.3. OTHER TERMINATION. In the event of a Voluntary Termination, Termination for Cause or Death, Executive or Executive's estate will not be entitled to any severance pay except salary continuation as may be determined by the Personal and Compensation Committee. 5. NO CONFLICT. Executive hereby represents and warrants to the Company that he is not under any contractual, fiduciary or other obligation that would conflict in any manner whatsoever with his obligations and duties under this Agreement, and that the execution and performance of this Agreement by Executive will not breach any agreement (oral or written), fiduciary duty or other obligation to which Executive presently is a party or by which Executive is bound. Executive shall indemnify, defend and hold harmless the Company and its officers, directors, shareholders, employees and agents from and against any and all costs and expenses (including, without limitation, reasonable attorney's fees) incurred by the Company as a result of or in connection with any claim successfully made by any other person or entity that Executive's employment with the Company has caused or will cause (a) any harm to such person or entity, or (b) the breach of any contractual, fiduciary or other obligation owed to such person or entity. 6. PROPRIETARY INFORMATION; NON-COMPETE, ETC. 6.1. POSITION OF LOYALTY. In the course of Executive's employment with the Company, and because of the nature of Executive's responsibilities, Executive may acquire and have access to valuable trade secrets, proprietary data and other confidential information (collectively, "Confidential Information") with respect to the Company's customers, suppliers, competitors and business. Such Confidential Information includes but is not limited to the following: the Company's existing and contemplated services, products, business and financial methods and practices, plans, pricing, selling techniques, business systems, product technologies and formulae, and special methods and processes involved in providing services, lists of the Company's existing and prospective suppliers, subcontractors and/or customers, methods of obtaining suppliers and customers, credit and financial data of the Company's present and prospective suppliers and/or customers, particular business requirements of the Company's present and prospective customers as well as similar information related to any subsidiaries the Company may have. In addition, Executive, on behalf of the Company, may in the future enhance or develop personal acquaintances and relationships with the Company's present and prospective suppliers, subcontractors and customers, which acquaintances and relationships may constitute the Company's only contact with such persons or entities. As a consequence thereof, the parties agree that Executive occupies or will occupy a position of trust and confidence with respect to the Company's affairs and its products and services. In view of the foregoing and in consideration of the remuneration to be paid to Executive hereunder, Executive acknowledges and agrees that it is reasonable and necessary for the protection of the goodwill and business of the Company that Executive make the covenants contained in Sections 6.2 through 6.6 below regarding the conduct of Executive during and subsequent to employment with the Company, and that the Company will suffer irreparable injury if Executive engages in conduct prohibited thereby. Executive represents that observance of the aforementioned covenants will not cause Executive any undue hardship nor will it unreasonably interfere with Executive's ability to earn a livelihood, so long as the remuneration to be paid to Executive hereunder is timely paid without offset or counterclaim. 6.2. NON-DISCLOSURE. Executive, while in the employ of the Company or at any time thereafter, will not, without the express written consent of the Company, directly or indirectly communicate or divulge to, or use for his own benefit or for the benefit of any other person, firm, association or corporation, any of the Company's or its subsidiaries' Confidential Information which was communicated to or otherwise learned of or acquired by Executive during the course of his employment with the Company; provided; however, Executive may disclose or use such information under any of the following circumstances: (a) disclosure or use thereof in good faith by Executive in 5 connection with the performance of his duties in the course of his employment by the Company; (b) disclosure which Executive is advised by counsel is required by a court or other governmental agency of competent jurisdiction or (c) disclosure or use by Executive of any such information or data which is generally known within the industry or is otherwise available through independent sources. 6.3. RETURN OF INFORMATION AND EQUIPMENT. Promptly after the termination of employment with the Company (whether or not pursuant to an employment agreement), Executive will deliver to the Company all originals and copies of memoranda, customer lists, samples, records, documents, computer programs, product information, hardware, equipment (e.g., computers, fax machines) and other materials and equipment owned or leased by the Company and requested by the Company which he has obtained from the Company (other than as a gift) while serving in any such capacity. Executive will take all action necessary to remove any Confidential Information from any computers or other electronic devices he may own or possess and upon request certify to the Company that he has done so. 6.4. NON-COMPETITION. Executive agrees that during his employment with the Company and for a period of one year thereafter (or if this period shall be unenforceable by law, then for such lesser period as shall be required by law to make the provisions of this Section enforceable), hereinafter referred to as the "Non Competition Period", so long as the Company is not in breach of this Agreement, Executive will not, without the express written consent of the Company (by an officer other than Executive) or approval of the Board, directly or indirectly, own, manage, participate in, advise or consult with or otherwise engage in or have any connection with (as an employee, representative, agent or otherwise) any business in any geographic area in which the Company then competes which provides any product or service (or similar or related product or service) provided by the Company or actively contemplated to be provided by the Company on the date of termination of Executive's employment with the Company except that Executive shall not be precluded hereby from owning stock or any other securities in a publicly traded company where such investment entitles Executive to less than one percent of the voting control over such company. 6.5. NON-SOLICITATION OF CUSTOMERS, SUBCONTRACTORS AND SUPPLIERS. During Executive's employment with the Company, and for a period of (i) three years following the termination of Executive's employment with the Company for any reason whatsoever, other than breach of this Agreement by the Company (or if this period shall be unenforceable by law, then for such lesser period as shall be required by law to make the provisions of this Section enforceable), or (ii) if the employment of Executive is terminated pursuant to Section 4.1, 12 months following the termination of Executive's employment with the Company, and except in the good faith furtherance of the interests of the Company, Executive will not, without the express written consent of the Company (by an officer other than Executive) or approval of the Board, contact (whether or not initiated by Executive), with a view toward selling any product or service competitive with any product or service sold or, to Executive's knowledge, proposed to be sold by the Company or any subsidiary of the Company at the time of such contact, any person, firm, association or corporation: (a) to which the Company or any subsidiary of the Company sold any product or service during the preceding year, (b) which Executive solicited, contacted or otherwise dealt with on behalf of the Company or any subsidiary of the Company, or (c) which Executive was otherwise aware was a customer or prospective customer, or supplier subcontractor or prospective supplier subcontractor, of the Company or any subsidiary of the Company. Executive will not directly or indirectly make any such contact, either for his benefit or for the benefit of any person, firm, association or corporation, and Executive will not in any manner assist any such person, firm, association or corporation to make any such contact. 6.6. NON-INTERFERENCE. During Executive's employment with the Company, and for a period of three years following the termination of Executive's employment with the Company for any reason whatsoever, other than breach of this Agreement by the Company (or if this period shall be unenforceable by law, then for such lesser period as shall be required by law to make the provisions of this Section enforceable), Executive shall not induce or encourage, directly or indirectly, (a) any employee of the Company to leave his or her employment, or to seek employment with anyone other than the Company, unless it has been determined by the Board or a division head where appropriate, that such employee's performance or other characteristics or circumstances are such that such employee's leaving the Company is in the best interests of the Company, or (b) any customer, subcontractor or supplier (including without limitation, independent contractors engaged by the Company to provide or deliver products to, or perform services for, customers of the Company) of the Company to modify or terminate any relationship, whether or not evidenced by a written contract, with the Company unless it has been determined by the Board or division head, where appropriate, that such modification or termination is in the best interests of the Company. 6 7. INDEPENDENT ADVICE. Each of Executive and the Company hereby represents and warrants to the other that he or it has been advised to and has had the opportunity to seek the advice of independent counsel in connection with this Agreement and the transactions contemplated hereby and has obtained such independent advice or hereby waives his or its right to seek such independent advice. Each further represents that he or it has made the decision to execute this Agreement independent of any other agreement and independent of any statements or opinions which may have been made or given by any counsel, Executive or the Company. 8. ARBITRATION. 8.1. AGREEMENT. The Company and Executive agree to settle any and all claims, disputes or controversies arising out of or relating to (a) Executive's application or candidacy for employment, (b) any aspect of Executive's employment with the Company and/or (c) the cessation of Executive's employment with the Company (hereinafter any such claims, disputes and controversies shall be referred to as "Disputes"), exclusively by final and binding arbitration in the manner set forth in this Agreement, except for Disputes set forth in Section 8.3 which shall not be subject to arbitration. Such arbitration shall be administered by the American Arbitration Association ("AAA") in accordance with the AAA's National Rules for the Resolution of Employment Disputes ("Rules") then in effect, as modified by this Agreement. This means that Disputes subject to arbitration will be decided by a panel of three arbitrators, rather than by a court or jury, and that the Company and Executive waive their rights to a court or jury trial. Additionally, if either party files a lawsuit regarding a Dispute subject to arbitration, the other party may use this Agreement in support of its request to the court to dismiss the lawsuit and require such party to instead use arbitration. If either party files a lawsuit in court involving claims which are, and other claims which are not, subject to arbitration, such party agrees that the court shall stay litigation of the non-arbitrable claims and require that arbitration take place with respect to those claims subject to arbitration. The arbitrators' decision on the arbitrable claims, including any determinations as to the disputed factual or legal issues, shall be entitled to full force and effect in any later court lawsuit on any non-arbitrable claims. Both parties agree that Executive may still file administrative charges with the Equal Employment Opportunity Commission or similar federal, state or local agency, but that upon receipt of a right-to-sue letter or similar administrative determination, Executive shall arbitrate against the Company any Dispute encompassed therein. 8.2. EXAMPLES OF DISPUTES SUBJECT TO ARBITRATION. Disputes subject to arbitration under this Agreement include, without limitation, claims, disputes and controversies arising under the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, as amended, including the amendments of the Civil Rights Act of 1991, the Americans with Disabilities Act, the Fair Labor Standards Act, 42 U.S.C. section 1981, as amended, including the amendments of the Civil Rights Act of 1991, Executive Polygraph Protection-Act, Executive Retirement Income Security Act, the National Labor Relations Act, federal, state or other governmental discrimination statutes, federal, state or other governmental statutes, common law or ordinances regulating employment or employment termination, the law of contract or the law of tort, including, but not limited to, claims for malicious prosecution, wrongful discharge, wrongful arrest/wrongful imprisonment, intentional or negligent infliction of emotional distress or defamation. Additionally, whether a Dispute is subject to arbitration is an issue that shall be decided by arbitration. 8.3. DISPUTES NOT SUBJECT TO ARBITRATION. The only Disputes between the Company and Executive not subject to arbitration are (a) claims by Executive for state unemployment benefits and state workers' compensation benefits, (b) claims by the Company that Executive violated Section 6 of this Agreement and (c) claims by the Company that Executive violated any common law duties owed to the Company after termination of employment (hereinafter any such claims, disputes and controversies shall be referred to as a "Non-Arbitrable Dispute"). Statutory or common law claims alleging that the Company retaliated or discriminated against Executive for filing a state employment insurance claim, however, shall be subject to arbitration. With respect to Section 6 of this Agreement, Executive acknowledges and agrees that the remedy at law for any breach of the provisions therein is inadequate and that the Company, in addition to any other relief available to it, shall be entitled to temporary and permanent injunctive relief without the necessity of proving actual damage. 8.4. PROCEDURES. Commencement of arbitration shall be governed by the Rules. Any Dispute subject to arbitration must be submitted within one year after the date on which the submitting party knew, or through reasonable diligence should have known, of the facts giving rise to Executive's claim(s); 7 however, if such Dispute arises under a particular statute, the time limit provided for in such statute, if any, shall govern. Three arbitrators shall be used and shall be appointed in accordance with Section 8.5. The place of arbitration shall be Torrington, Connecticut and a stenographic record shall be made of any arbitration hearing. The award rendered by the arbitrators shall be in writing and shall be based on applicable law and judicial precedent. Unless the parties otherwise agree, the award shall include the findings of fact and conclusions of law on which the award is based. Judgment on such award may be entered in any court having jurisdiction thereof. The award rendered by the arbitrators shall be final and binding as to both Executive and the Company. Either party may appeal the arbitrators' decision to a court in accordance with the appeal procedures of the Federal Arbitration Act, 9 U.S.C. section 1 et seq. or Delaware's arbitration laws. 8.5. APPOINTMENT OF ARBITRATORS. Each party shall appoint an arbitrator within 20 days after submission of the Dispute to arbitration and the arbitrators so appointed shall appoint a third arbitrator within 10 days from the date of the appointment of the last party-appointed arbitrator. A party not appointing an arbitrator in a timely fashion shall forfeit its right to participate in the selection of the third arbitrator hereunder. If no appointment of the third arbitrator is made within that time or any agreed extension thereof, the AAA may appoint a neutral arbitrator who shall act as chairperson. 8.6. CONFIDENTIALITY. All aspects of an arbitration pursuant to this Agreement and the Rules, including the hearing and record of the proceeding, and the fact of arbitration shall be confidential and shall not be open to the public, except (a) to the extent both parties agree otherwise in writing, (b) as may be appropriate in any subsequent proceeding between the parties, or (c) as may be appropriate in response to a governmental agency or legal process. All settlement negotiations, mediations, and the results thereof shall be confidential. 9. MISCELLANEOUS. 9.1. WAIVER. The waiver of any breach of any provision of this Agreement will not operate or be construed as a waiver of any subsequent breach of the same or other provision of this Agreement. 9.2. ENTIRE AGREEMENT; MODIFICATION. Except as otherwise provided in this Agreement, this Agreement represents the entire understanding among the parties with respect to the subject matter of this Agreement, and this Agreement supersedes any and all prior understandings, agreements, plans, and negotiations, whether written or oral, with respect to the subject matter hereof, including without limitation, any understandings, agreements, or obligations respecting any past or future compensation, bonuses, reimbursements, or other payments to Executive from the Company. All modifications to the Agreement must be in writing and signed by the party against whom enforcement of such modification is sought. 9.3. DELIVERY OF MATERIALS; NOTICES. Materials required to be delivered to either party hereunder shall be delivered as indicated below. Any notice, or other communication under this Agreement shall be in writing and shall be considered given: (a) upon personal delivery or delivery by telecopier (with confirmation of completed delivery by sender), (b) two business days after being deposited with an "overnight" courier or "express mail" service, or (c) seven business days after being mailed by registered or certified first class mail, return receipt requested, in each case addressed to the notified party at its address set forth below (or at such other address as such party may specify by notice to the other delivered in accordance with this section): If to the Company: If to Executive: Royal Precision, Inc. John Lauchnor 535 Migeon Avenue 2251 Moorwood Drive Torrington, Connecticut 06790 Holt, Michigan 48842 Attn.: Chairman of the Board 8 9.4. HEADINGS. The section headings of this Agreement are intended for reference and may not by themselves determine the construction or interpretation of this Agreement. 9.5. GOVERNING LAW. This Agreement is executed in and shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts to be performed solely in the State of Delaware. 9.6. SURVIVAL OF THE COMPANY'S OBLIGATIONS. This Agreement will be binding on, and inure to the benefit of, the executors, administrators, heirs, successors, and assigns of the parties; provided, however, that except as expressly provided in this Agreement, this Agreement may not be assigned either by the Company or by Executive. 9.7. COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which taken together will constitute one and the same Agreement. 9.8. ENFORCEMENT. If any portion of this Agreement is determined to be invalid or unenforceable, that portion of this Agreement will be adjusted, rather than voided, to achieve the intent of the parties under this Agreement. 9.9. LEGAL FEES. For any Dispute subject to arbitration and any Non-Arbitrable Dispute described in Section 8.3(a), regardless of the outcome, each party, having full knowledge that various federal and state statutes provide for the recovery of attorney fees and expenses under certain situations, agrees to be fully responsible for its own attorney fees and incidental costs and such fees and costs shall not be included in any award or order. All other costs, fees and expenses shall be handled as follows: (a) the initial filing fee shall be paid by the party filing for arbitration; (b) the remaining costs of arbitration, including without limitation, the daily or hourly fees and expenses (including travel) of the arbitrators who decide the case, the cost of a reporter who transcribes the proceeding, and expenses of renting a room in which the arbitration is held shall be split evenly between the parties and shall be paid at the time provided for in the Rules. For any Non-Arbitrable Dispute described in Section 8.3(b) or (c), the prevailing party shall be entitled to recover from the other party all costs, legal fees and expenses through all proceedings, trials and appeals. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first written above. ROYAL PRECISION, INC. EXECUTIVE By: /s/ Richard P. Johnston /s/ John Lauchnor ------------------------------- ---------------------------------------- Richard P. Johnston John Lauchnor Chairman of the Board 9