ITEM 1. BUSINESS.
Royal Precision, Inc. ("RP") is a holding company that conducts 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"). In addition, RG has a wholly-owned subsidiary, Royal Grip Headwear Company. RP, FMP and FMP Sales were incorporated in Delaware on May 3, 1996 by a group of investors who acquired, through such companies, substantially all of the assets of the golf club shaft manufacturing business of Brunswick Corporation. RP acquired RG, a Nevada corporation, on August 29, 1997 (the "RG Acquisition").
PRINCIPAL PRODUCTS; MARKETS
The Company sells two main types of products, golf club shafts and golf club grips.
GOLF CLUB SHAFTS. The Company designs, manufactures and distributes steel golf club shafts, sales of which represented 81%, 86% and 84% of total revenues during the fiscal years ended May 31, 2002, 2001, and 2000, respectively. The Company developed and patented the "Rifle", the first modern stepless steel golf club shaft in the industry (see "Patents and Trademarks" below). Management believes that these shafts are the premier steel shafts available in the market today due to their patented internal and external design characteristics which result in superior performance, consistency and strength compared to other steel golf club shafts. The Company also pioneered, patented, and now licenses the technology of Frequency Coefficient Matching ("FCM") golf club shafts using an electronic analyzer. Management believes that FCM is more accurate than any other sorting method, in that it ensures identical shaft flex from club-to-club throughout a set, allowing the golfer to maintain a consistent, natural swing tempo regardless of the club chosen.
The Company also designs and distributes graphite golf club shafts, sales of which represented 3% and 0.5% of total revenues during the fiscal years ended May 31, 2002 and 2001, respectively. The Company first introduced a filament wound "Rifle" Graphite shaft in February 2000. During the fiscal year ended May 31, 2001, the Company expanded its line of "Rifle" Graphite shafts to include sheet wrapped products. Management believes that these products have superior consistency properties based on the proprietary filament winding and finishing processes utilized in their manufacture that give the shafts uniform wall thickness and oscillation characteristics.
GOLF CLUB GRIPS. The Company designs and distributes golf club grips, sales of which represented 16%, 13% and 15% of total revenues during the fiscal years ended May 31, 2002, 2001 and 2000, respectively. In 1989, RG introduced a rubber wrap golf grip that gained widespread acceptance in the golf industry and enabled RG to achieve brand name recognition. The Company currently offers a wide variety of standard and custom models, all of which management believes feature durability and a distinctive feel and appearance. These grips are sold principally into the replacement market which serves those golfers seeking to replace grips that have become worn and slick due to prolonged use.
Additional information about the Company's reportable business segments is included in Note 16 to the consolidated financial statements.
Sales to original equipment manufacturers ("OEMs") account for the vast majority of the Company's sales, with the remainder of the sales being made to distributors, custom club assemblers, pro shops and repair shops. The Company's products are sold by OEMs as a component of the complete golf club through a variety of channels including sporting goods stores, discount stores, mail order catalogs, pro shops and mass merchandisers.
The Company's top ten customers during the fiscal year ended May 31, 2002, 2001 and 2000 represented 76%, 78% and 75% of total net sales, respectively. The Company's exclusive Japanese distributor is its largest customer and is the only international customer of the Company's top ten customers. See "Principal Suppliers and Customers". The Company also has a presence in Europe, Australia, and Canada through other distributor relationships.
BACKLOG
As of May 31, 2002, the Company had open orders from customers totaling $5.3 million for shipment during the fiscal year ending May 31, 2003. Open orders as of May 31, 2001 for shipment during the fiscal year ended May 31, 2002 were $4.0 million.
COMPETITION
The golf equipment industry is highly competitive. There are numerous companies competing in various segments of the golf equipment markets including those which manufacture and sell the golf club component parts which are shafts, grips and heads. Some of the Company's competitors have greater name recognition, more extensive engineering, manufacturing and marketing capabilities, and greater financial, technological and personnel resources than the Company. The Company competes primarily on the basis of product quality, product specifications and design, on-time deliveries, customer relationships and price.
The Company competes primarily with three companies, which manufacture and distribute steel golf club shafts to OEMs. The Company believes that it is the second largest producer of steel shafts, after True Temper Sports, Inc. Management believes that its worldwide market share in steel shafts is approximately 22% while True Temper's market share in steel shafts is believed to be approximately 65%. Other competitors which manufacture steel golf club shafts include Nippon Shaft Co., Ltd. and Far East Machinery Co., Ltd., both of which are located in Asia.
The Company's principal competitors in the golf club grip market include Eaton/Golf Pride and Lamkin Corp. Management believes that its worldwide market share in golf club grips is approximately 3% while Eaton/Golf Pride's and Lamkin's market shares are believed to be approximately 56% and 20%, respectively.
The Company competes with several companies, which manufacture and distribute graphite golf club shafts. Management believes that the largest competitors in this fragmented industry segment are Aldila, HST, and True Temper/Grafalloy with 18%, 13%, and 12% of worldwide market share, respectively.
PRINCIPAL SUPPLIERS AND CUSTOMERS
From January 1997 to February 2000, the Company utilized Acushnet Rubber Company ("Acushnet") as its primary supplier of golf club grips under an exclusive manufacturing and supply agreement. In May 1999, the Company and Acushnet terminated their relationship. The Company has identified several alternative manufacturers and currently purchases its grip inventory from three primary suppliers. Management believes it has an adequate source of supply to meet its current and anticipated future customer needs. However, there can be no assurance that a disruption of supply from any of these companies will not result in the loss of sales and key customers, which would have a material adverse effect on the Company's financial condition and results of operations.
The Company currently utilizes one manufacturer to supply its inventory of graphite golf club shafts. Management believes that there are other acceptable supply sources at comparable prices and quality. Sales of these products to date have been insignificant to the Company's financial condition and results of operations. However, there can be no assurance that a disruption of supply of
inventory will not result in the loss of sales and key customers or hinder the Company's efforts to expand its business into this new product segment.
The Company has two primary suppliers for strip steel. Although the Company has elected to use two primary suppliers of strip steel, management believes that there are other acceptable supply sources at comparable prices and quality and that the loss of a supplier would not have a material adverse effect on the Company's financial condition and results of operations.
The Company has a three-year agreement with Precision FM Japan, Ltd. ("Precision FM") which grants exclusive distribution rights for sale of the Company's golf club grips in Japan and certain other Asian countries. The Company's five-year agreement with Marubeni Corporation ("Marubeni") and Precision Japan, Ltd. ("Precision") which grants exclusive distribution rights for sale of the Company's golf club shafts in Japan and certain other Asian countries, was set to expire in July 2002; however, a six-month extension was signed. Precision FM and Precision are subsidiaries of Marubeni (collectively "Precision Japan"). The grip agreement with Precision Japan will expire in February 2005. Precision Japan may renew the grip agreement for successive two-year terms. The grip agreement is terminable by either party for cause or if they fail to agree upon pricing terms, or by Precision Japan at any time upon six months prior notice to the Company. The Company expects a five-year extension to be signed in the near future. The shaft agreement is terminable by either party for cause or by the Company if Precision Japan fails to meet certain minimum purchase requirements.
The Company is significantly dependent on sales to Precision Japan, TaylorMade-adidas Golf ("TaylorMade") and Callaway Golf Company ("Callaway") which, in the aggregate, represented 44%, 60% and 50% of the Company's total net sales for the fiscal years ended May 31, 2002, 2001 and 2000, respectively. Precision Japan accounted for 19%, 20% and 27% of total net sales during fiscal 2002, 2001 and 2000, respectively. TaylorMade accounted for 19%, 21% and 18% of total net sales during the fiscal years ended May 31, 2002, 2001 and 2000, respectively. Callaway accounted for 6%, 19 and 9% of total net sales during fiscal 2002, 2001 and 2000, respectively. To reduce its credit risk, the Company requires letter of credit agreements from Precision Japan. The Company does not have supply agreements with TaylorMade or Callaway. The loss of sales to any of these companies could have a significant adverse impact on the Company's financial condition and results of operations.
Sales of golf equipment historically have been dependent on discretionary spending by consumers, which may be adversely affected by general economic conditions and the popularity of golf in general. A decrease in consumer spending on golf equipment could have an adverse effect on the Company's business and operating results. Sales in the golf equipment industry have historically been seasonal in nature with consumer demand for product being the strongest during the spring and summer months.
PATENTS, TRADEMARKS
The Company has obtained a trademark and a utility patent on the manufacture and design of its "Rifle" steel golf club shafts. Management believes that its "Rifle" products are superior to other steel shafts in performance, consistency and strength, which provides the Company a competitive advantage in the golf equipment industry. Management believes that principal shaft patents material to its future success are the following:
* its patent which enables a club maker to take frequency sorted steel shafts and calculate what new frequency shafts are needed to produce a set of Frequency Matched products,
* its patent which relates to the same frequency sorting, but for graphite golf club shafts, and
* its patent which relates to the manipulation of flex distribution within a shaft or set of shafts.
These patents expire on May 9, 2006, October 19, 2008, and January 12, 2016, respectively.
The Company also relies upon trademarks to establish and protect its proprietary rights in its golf club grip products and technologies. The RG logo and the name "Royal Grip" have been registered as trademarks in the United States, Japan and in other foreign countries. In addition, the Company has filed trademark applications relating to the names and configurations of several of its grip products in the United States and in foreign countries, including Japan. The Company has also obtained design patents on some of its grips and applied for others, which are pending. The Company protects its proprietary rubber compound and related technologies as trade secrets. Despite such safeguards, there can be no assurance that competitors will not be able to produce golf club grips that successfully imitate the Company's designs and materials without infringing the Company's proprietary rights.
REGULATIONS
The design of new golf clubs is greatly influenced by rules and interpretations of the United States Golf Association ("USGA"). Although the golf equipment standards established by the USGA generally apply only to competitive events sanctioned by that organization, for marketing reasons it has become critical for designers of new products to assure compliance with USGA standards. Although the Company believes that all of its golf club shafts and grips comply with current USGA standards, no assurance can be given that any new products will receive USGA approval or that existing USGA standards will not be altered in ways that adversely affect the sales of the Company's products.
RESEARCH AND DEVELOPMENT
The Company's engineering, sales and other staff, together with independent consultants engaged by the Company, work to conceive of new product opportunities by creating prototypes and masters and by working with suppliers and customers to design and produce finished products. New golf club shaft and golf club grip products are tested through the Company's sales force with customers and various tour players. The Company continues to investigate new manufacturing techniques and component materials used in the manufacture of its products. During the fiscal years ended May 31, 2002, 2001 and 2000, the Company spent approximately $0.5 million, $0.8 million and $0.7 million on research and development, respectively.
EMPLOYEES
As of May 31, 2002, the Company had approximately 200 employees. Approximately 65% of the Company's work force is covered by a collective bargaining agreement which expires in November 2002. The Company believes its relationship with its employees is good.
ITEM 2.
ITEM 2. PROPERTIES.
The Company's principal executive, administrative and sales offices and its golf club shaft manufacturing and its golf club shaft and golf grip warehousing facility are located at 535 Migeon Avenue, Torrington, Connecticut consisting of approximately 230,000 square feet. The manufacturing facility is owned by the Company subject to a mortgage granted to Wells Fargo Business Credit, Inc. See Note 8 to the consolidated financial statements.
The Company's principal executive and administrative offices were located at 15170 North Hayden Road, Suite 1, Scottsdale, Arizona until January 1, 2002. The Company has a lease obligation on this property through May 2004. See Note 7 to the consolidated financial statements.
The Company also formerly leased approximately 9,000 square feet of warehouse space located at 7861 East Gray Road, Suites 107-111, Scottsdale, Arizona. This facility served as a distribution point from which product was shipped to the Company's West Coast customers. The monthly payment under the lease was approximately $9,000 and the term of the lease expired in November 2001.
In the opinion of management, the Torrington facilities are suitable and adequate for the Company's intended use and are adequately covered by insurance.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
LITIGATION
The Company is from time to time a party to various routine legal proceedings, incidental to the Company's business. Management believes that, other than the environmental matters discussed below, none of the current routine proceedings will have a material adverse effect on the Company's financial condition or future operating results.
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 performed an assessment of the FMP plant. A report has been issued setting out the results of that assessment. 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 believes that the environmental issues identified would fall within the scope of the Act or other provisions of the acquisition agreement that would require them to be addressed by Brunswick. 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 were in violation of authorized limits under an existing permit for the discharge of treated wastewater from the FMP plant to the Naugatuck River. The Company submitted its response to the NOV in December 2000 and received drafts of a consent order from the DEP in April 2001 and October 2001. Terms of the draft consent order include, among other things, that the Company pay a civil penalty of approximately $225,000, submit to various compliance audits, and complete a feasibility study to determine if the discharge of treated wastewater from the FMP plant can be diverted from the Naugatuck River. As a result of this study, the Company spent approximately $0.3 million for capital expenditures to comply with the terms of the consent order during the fiscal year ended May 31, 2002. A provision was recorded for the proposed civil penalty and is reflected as a component of Environmental Costs in the accompanying consolidated statement of operations for the fiscal year ended May 31, 2001. However, management believes it is possible that the proposed civil penalty may be reduced when the final consent order is executed.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during the fourth fiscal quarter.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock has been traded on The OTC Bulletin Board ("OTCBB") under the trading symbol "RIFL.OB" since February 25, 2002. Prior thereto, the common stock was traded on the National Market System of the NASDAQ Stock Market. The prices set forth below reflect the high and low sales prices for shares of common stock for each quarter during the past two fiscal years as reported by the National Market System or OTCBB, respectively, for the relevant period.
HIGH LOW ---- --- FISCAL YEAR ENDED MAY 31, 2002 First Quarter $ 2.53 $ 2.00 Second Quarter 2.58 0.70 Third Quarter 1.50 0.20 Fourth Quarter 0.75 0.10
FISCAL YEAR ENDED MAY 31, 2001 First Quarter $ 3.25 $ 1.88 Second Quarter 3.25 1.81 Third Quarter 3.09 1.63 Fourth Quarter 2.35 1.90
As of August 16, 2002, the Company had approximately 89 holders of record of common stock.
The Company has not paid any dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. The Company currently intends to retain any earnings to finance the growth of its business. Any determination as to the payment of dividends will depend upon the future results of operations, capital requirements and financial condition of the Company and such other facts as the Board of Directors of the Company may consider, including any contractual or statutory restrictions on the Company's ability to pay dividends. The Company's two credit facilities each limit the Company's ability to pay dividends on its common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below is derived from the Company's consolidated financial statements. This data should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of this Form 10-K (in thousands, except per share data).
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW --
The Company manufactures and distributes steel golf club shafts and designs and distributes golf club grips and graphite golf club shafts for sale to original equipment manufacturers ("OEMs") and to distributors and retailers for use in the replacement market. The Company's products are sold throughout the United States as well as internationally, primarily in Japan, Europe, Australia and Canada.
Operating results may be affected by certain accounting estimates. The most significant accounting estimates in the financial statements relate to asset valuation allowances (slow moving and obsolete inventories, accounts receivables, property plant and equipment and goodwill) and accruals for restructuring and environmental fees. Management critically evaluates the Companies estimates to establish its reserves and needed accruals. To the extent these estimates change, net income will be affected in the period these changes are determined.
FISCAL YEAR ENDED MAY 31, 2002 COMPARED TO THE FISCAL YEAR ENDED MAY 31, 2001--
NET SALES. Net sales for the fiscal year ended May 31, 2002 were $23.6 million, a decrease of $6.4 million or 21.5% from net sales of $30.0 million in 2001. Net sales of golf club shafts decreased by $6.2 million or 24% and net sales of golf club grips decreased by $0.2 million or 5%. The decrease in golf club shaft sales represents a decline due to reduced sales to a single "OEM" customer from $5.7 million or 22% of net golf shaft sales in 2001 to $1.4 million or 7% of net golf shaft sales in 2002 and due to a decline in the normally strong seasonal net sales in the fourth quarter of each year. Shaft sales for the fourth quarter of 2002 were $5.6 million or 28% of annual net golf shaft sales as compared to $8.7 million or 33% of annual net golf shaft sales in the fourth quarter of 2001. The decreased golf club grip sales is primarily attributable to declines in orders from the Company's exclusive Japanese distributor due to slow general economic conditions in Asia.
COST OF SALES. Cost of sales for the fiscal year ended May 31, 2002 was $20.5 million, a decrease of $1.5 million or 7% over cost of sales of $22.0 million in 2001. As discussed in Note 2 to the consolidated financial statements, the Company recorded write-downs totaling $1.4 million and $0.5 million to reduce the carrying value of finished goods inventories to estimated net realizable value during the fiscal years ended May 31, 2002 and 2001, respectively. The write-downs related to golf shaft inventories were $1.2 million and $0.4 million in fiscal 2002 and 2001, respectively. The write-downs for golf shafts and golf grips in fiscal 2002 were primarily a result of the production of inventory for anticipated fourth quarter sales that did not materialize due to a slowing of the economy. To mitigate this risk in the future, the Company has instituted a policy that reduces the exposure of building excess inventory. Excluding the write-downs of $1.2 million and $0.4 million related to shaft inventories in fiscal 2002 and 2001, respectively, the cost of golf club shaft sales decreased by $2.4 million or 13% primarily as a result of lower total golf shaft net sales, and increased cost of wages and benefits. Excluding the write-down of $0.2 million and $0.1 million related to grip inventories in fiscal 2002 and 2001 respectively, the cost of golf club grips sales decreased by $0.1 million or 2% as a result of product mix.
GROSS PROFIT. Gross profit for the fiscal year ended May 31, 2002 was $3.1 million, a decrease of $4.9 million or 62% from gross profit of $8.0 million in 2001. Gross profit from sales of golf club shafts decreased by $4.7 million or 6% to $2.4 million. Excluding the inventory write-downs of $1.2 million and $0.4 million in fiscal 2002 and 2001, respectively, gross profit from sales of golf club shafts decreased by $3.9 million to 18% of sales from 29% of sales last year. This decline in margin is a result of reduced average selling price per shaft, lower total golf shaft net sales and increased cost of wages and benefits.
Gross profit from sales of golf club grips decreased by $0.2 million or 23% to $0.7 million. Excluding the inventory write-downs of $0.2 million and $0.1 million in fiscal 2002 and 2001, respectively, gross profit from sales of golf grips decreased by $0.1 million to 23% of net golf grip sales from 25% of net golf grip sales last year. This decline in margin relates to a difference in sales mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the fiscal year ended May 31, 2002 were $5.7 million, a decrease of $0.9 million, or 14%, from selling, general and administrative expenses of $6.6 million in 2001. This decrease is primarily attributable to a reduction in spending on advertising and marketing in the current year, and on reduced administrative and support personnel as a result of the Company's restructure, which took place in January 2002.
AMORTIZATION OF GOODWILL. The Company elected to early adopt SFAS no. 142, "Goodwill and Other Intangible Assets" during its fiscal quarter ended August 31, 2001. Therefore, amortization of goodwill was suspended effective June 1, 2001 and amortization expense was $0.0 million for fiscal 2002 as compared to $0.4 million in fiscal 2001.
RESTRUCTURING COSTS. As discussed in note 7 to the consolidated financial statements, costs totaling $1.3 million were recorded during fiscal year ended May 31, 2002 relating to the consolidation of the corporate headquarters leased in Scottsdale, Arizona to the manufacturing facility which the Company owns in Torrington, Connecticut.
ENVIRONMENTAL COSTS. As discussed in Note 18 to the consolidated financial statements, costs totaling $20,000 and $0.4 million were incurred related to various environmental matters during the fiscal years ended May 31, 2002 and 2001, respectively. The amount for fiscal 2001 includes a provision for a proposed civil penalty that was stipulated in a draft consent order from the State of Connecticut Department of Environmental Protection which the Company is negotiating to resolve.
NONRECURRING EXPENSES. As discussed in Note 4 to the consolidated financial statements, expenses totaling $0.1 and $0.5 million were recorded during the fiscal year ended May 31, 2002 and 2001, respectively, to reduce the carrying value of equipment held for sale to estimated net realizable value and to write-off the accumulated costs related to various product development projects.
INTEREST EXPENSE. Interest expense increased to $1.0 million during the fiscal year ended May 31, 2002 from $0.9 million in 2001. The $0.1 increase is the net result of the non-cash accretion charge of a Subordinated Note discount of $0.2 million and a reduction in the prime lending rate, of which the Company's lines-of-credit and term loans use as a base of prime plus 3.0 to 3.75% in fiscal 2002. The prime rate at May 31, 2002 and 2001 was 4.75% and 7.00%, respectively.
TERMINATED MERGER EXPENSES. Legal and other professional fees associated with a proposed acquisition of PH Group Inc. totaling $0.1 million were expensed during the fiscal year ended May 31, 2001.
OTHER INCOME. Other income of $0.1 million and $0.3 million during each of the fiscal years ended May 31, 2001 and 2000, respectively, is principally comprised of royalties earned on sales of Roxxi headwear products as well as royalty fees from other contracts which license certain Company technology and products.
PROVISION FOR INCOME TAXES. Income tax provisions of $0.8 million and $33,000 were recorded during the fiscal years ended May 31, 2002 and 2001, respectively. As of May 31, 2001, the Company had recorded deferred tax assets of $0.8 million, net of a valuation allowance of $1.7 million. Due to the loss recognized during the fiscal year ending May 31, 2002 the valuation allowance was 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. No adjustments to the valuation allowance on deferred tax assets were recorded during the fiscal year ended May 31, 2001.
FISCAL YEAR ENDED MAY 31, 2001 COMPARED TO THE FISCAL YEAR ENDED MAY 31, 2000--
NET SALES. Net sales for the fiscal year ended May 31, 2001 were $30.0 million, a decrease of $0.1 million or 0.3% from net sales of $30.1 million in 2000. Net sales of golf club shafts increased by $0.5 million or 2% and net sales of golf club grips decreased by $0.6 million or 14%. The increased golf club shaft sales reflect continued strong demand for the Company's proprietary "Rifle" shafts. Net sales of the Company's higher priced, pro grade golf club shafts including the "Rifle" increased by $0.9 million or 4%. Net sales of the Company's lower priced, commercial grade golf club shafts decreased by $0.4 million or 13% due primarily to declines in orders from one international distributor that is now focusing more heavily on sales of pro-grade shafts. The decreased golf club grip sales is primarily attributable to declines in orders from the Company's exclusive Japanese distributor due to slow general economic conditions in Asia.
COST OF SALES. Cost of sales for the fiscal year ended May 31, 2001 was $22.0 million, an increase of $1.3 million or 6% over cost of sales of $20.7 million in 2000. As discussed in Note 2 to the consolidated financial statements, the Company recorded write-downs totaling $0.5 million and $0.3 million to reduce the carrying value of finished goods inventories to estimated net realizable value during the fiscal years ended May 31, 2001 and 2000, respectively. Excluding the write-downs of $0.4 million and $0.3 million related to shaft inventories in fiscal 2001 and 2000, respectively, the cost of golf club shaft sales increased by $1.2 million or 7% primarily as a result of higher total net sales, an increased cost of natural gas fuel and higher health and workers' compensation insurance premiums. Excluding the write-down of $0.1 million related to grip inventories, the cost of golf club grips sales decreased by $0.1 million or 5% as a result of lower total net sales.
GROSS PROFIT. Gross profit for the fiscal year ended May 31, 2001 was $8.0 million, a decrease of $1.4 million or 15% from gross profit of $9.4 million in 2000. Gross profit from sales of golf club shafts decreased by $0.9 million or 11% to $7.1 million. Excluding the inventory write-downs of $0.4 million and $0.3 million in fiscal 2001 and 2000, respectively, gross profit from sales of golf club shafts decreased by $0.7 million to 29% of sales from 32% of sales last year. This decline in margin is partially attributable to a $0.3 million increase in the cost of natural gas fuel used at the FMP plant which resulted from significantly higher rates charged by the utility provider. Additionally, health and workers' compensation insurance premiums increased by $0.3 million due to general increases in medical provider costs and more employees at the FMP plant.
Gross profit from sales of golf club grips decreased by $0.5 million or 38% to $0.9 million. Excluding the inventory write-down of $0.1 million, gross profit from sales of golf club grips decreased by $0.4 million to 24% of sales from 31% of sales last year. This decline in margin is attributable to fixed costs being spread over lower unit sales volume and $0.2 million of operating costs at the Company's West Coast distribution center.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the fiscal year ended May 31, 2001 were $6.6 million, a decrease of $0.3 million, or 5%, from selling, general and administrative expenses of $6.9 million in 2000. This decrease is primarily attributable to a reduction in management bonuses paid under an incentive compensation plan based on the profitability of the Company and reduced spending on print advertising in the current year. Expressed as a percentage of sales, selling, general and administrative expenses declined from 23% during the fiscal year ended May 31, 2000 to 22% in 2001.
AMORTIZATION OF GOODWILL. Goodwill was reduced in the fourth quarter of the fiscal year ended May 31, 2000 as a result of the utilization of net operating loss carryforwards established prior to the RG Acquisition ("Pre-Acquisition NOLs") and partial reversal of the valuation allowance on pre-acquisition deferred tax assets. Therefore, amortization expense was reduced from $0.5 million during the fiscal year ended May 31, 2000 to $0.4 million in 2001.
ENVIRONMENTAL COSTS. As discussed in Note 18 to the consolidated financial statements, costs totaling $0.4 million and $0.1 million were incurred related to various environmental matters during the fiscal years ended May 31, 2001 and 2000, respectively. The amount for fiscal 2001 includes a provision for a proposed civil penalty that was stipulated in a draft consent order from the State of Connecticut Department of Environmental Protection which the Company is negotiating to resolve.
NONRECURRING EXPENSES. As discussed in Note 4 to the consolidated financial statements, expenses totaling $0.5 million were recorded during the fiscal year ended May 31, 2001 to reduce the carrying value of equipment held for sale to estimated net realizable value and to write-off the accumulated costs related to various product development projects.
INTEREST EXPENSE. Interest expense increased from $0.6 million during the fiscal year ended May 31, 2000 to $0.9 million in 2001. The $0.3 million increase is primarily the result of an increase in the Company's annual interest rate on its bank credit facilities. Beginning November 1, 2000, following an event of default of a financial loan covenant, the Company's annual interest rate was increased 2% on these facilities. Additionally, during the period from December 2000 to May 2001, the Company had outstanding borrowings under a revolving subordinated promissory note with an annual interest rate of 13% for which interest expense of $0.1 million was recorded.
TERMINATED MERGER EXPENSES. Legal and other professional fees associated with a proposed acquisition of PH Group Inc. totaling $0.1 million were expensed during the fiscal year ended May 31, 2001.
OTHER INCOME. Other income of $0.3 million during each of the fiscal years ended May 31, 2001 and 2000 is principally comprised of royalties earned on sales of Roxxi headwear products as well as royalty fees from other contracts which license certain Company technology and products.
PROVISION FOR INCOME TAXES. Income tax provisions of $33,000 and $0.6 million were recorded during the fiscal years ended May 31, 2001 and 2000, respectively. Taxes are provided based on the estimated effective tax rate for the year, which considers the effect of nondeductible goodwill amortization and, during fiscal 2001, the effect of a nondeductible civil penalty for environmental matters. During the fiscal year ended May 31, 2000, the Company utilized approximately $0.5 million of Pre-Acquisition NOLs and also determined that approximately $1.9 million of Pre-Acquisition NOLs were realizable. As such, the Company reduced the valuation allowance on its deferred income tax assets by approximately $0.7 million (see Notes 2 and 12 to the consolidated financial statements). During fiscal 2000, the Company also reduced the valuation allowance on other deferred income tax assets, not related to the RG Acquisition, by approximately $0.2 million. No adjustments to the valuation allowance on deferred tax assets were recorded during the fiscal year ended May 31, 2001.
INFLATION --
The Company believes that inflation has not had a material impact on its financial condition and results of operations for any of the period presented.
LIQUIDITY AND CAPITAL RESOURCES--
At May 31, 2002, the Company had working capital of $3.1 million and a current ratio of 1.6 to 1 as compared to working capital of $7.7 million and a current ratio of 3.1 to 1 at May 31, 2001.
As of August 16, 2002 the Company refinanced its bank debt. The effects of the refinancing have been retroactively applied to May 31, 2002. The interest rates on the refinanced debt are 1% to 4% lower than the prior rates. Prior to the August 2002 refinancing the Company was not in compliance with certain financial covenants, but was successful in obtaining the necessary waivers and amendments in August 2001, February 2002 and May 2002, to remedy such defaults. Although the Company believes it will be in compliance with the covenants under the refinancing, there can be no assurance that the Company would be able to obtain any necessary waivers or amendments upon the occurrence of any future incidence of noncompliance with loan covenants. As such, any instance of noncompliance could have a material adverse effect on the Company's financial condition.
As refinanced, the Company's bank credit facility includes two lines of credit and two term loans. The outstanding principal balance of the term loans at May 31, 2002 was $2.5 million. The term loans are due in monthly principal installments of $53,517 until August 2004 with a final principal payment of $1,030,150 at their maturity in September 2004. The term loans bear interest at rates ranging from prime plus 3.25% to prime plus 3.75%. The outstanding balance on the lines of credit at May 31, 2002 was $4.6 million and the lines of credit are subject to renewal in July 2003. Amounts borrowed under the lines of credit bear interest at rates ranging from prime to prime plus 3.0%.
During the fiscal year ended May 31, 2002, the Company issued to The Johnston Family Charitable Foundation ("Johnston Foundation"), a related party entity, a subordinated promissory note (the "Subordinated Note") for $1,250,000 and warrants to purchase up to 300,000 shares of common stock at $0.25 per share. An estimated fair value of $433,000 was assigned to the warrants. Subsequently, during the remainder of the current fiscal year, the Johnston Foundation exercised warrants to purchase 147,808 shares of common stock for $37,000 and converted the $1,250,000 Subordinated Note and accrued interest of $28,493 into 5,113,972 shares of common stock.
Also, during the fiscal year ended May 31, 2002, the Company issued additional subordinated promissory notes (the "Additional Subordinated Notes") of $425,000 to certain members of the Board of Directors of the Company or such individuals' affiliated entities. These notes bore interest at a stated fixed annual rate of 13%. The holders of the Additional Subordinated Notes also received warrants to purchase 102,000 shares of common stock at $0.25 per share. The warrants granted to the holders of the Additional Subordinated Notes were determined to have no value. In connection with the August 12, 2002 refinancing, the Additional Subordinated Notes and accrued interest of $16,070 were converted into 1,764,280 shares of common stock. Accordingly, the Additional Subordinated Notes have been classified as long-term debt as of May 31, 2002.
The Company believes that its existing lines of credit are sufficient to fund the planned operating needs for its business over the next twelve months. Existing lines of credit enable the Company to borrow a maximum of $6,500,000 using a formula based on accounts receivable, inventories and letters of credit. The letters of credit were provided by Richard P. Johnston and Christopher A. Johnston.
During the fiscal year ended May 31, 2002, net cash provided by operating activities was $0.2 million. The net loss in fiscal 2002 included significant non-cash charges as shown in the consolidated statement of cash flows aggregating $9.4 million, including a $5.9 million impairment loss. In addition, the Company delayed paying certain liabilities and accelerated accounts receivable collections.
Net cash used in investing activities of $0.5 million for the fiscal year ended May 31, 2002 was primarily for the purchase of machinery and equipment. Of this $0.5 million, $0.3 million was related to the installation of a new waste water system. The Company estimates that capital expenditures for the fiscal year ending May 31, 2003 will be approximately $0.7 million.
Net cash provided by financing activities for the fiscal year ended May 31, 2002, was $0.3 million resulting from proceeds from the issuance of subordinated debt of $1.7 million, offset by net repayments of lines-of-credit and long term debt of $1.4 million.
ENVIRONMENTAL MATTERS --
Environmental Costs related to various matters totaled $20,000 and $0.4 million, net of recoveries, during the fiscal years ended May 31, 2002 and 2001, respectively. See note 18 to the consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Sales of the Company's products outside the United States are denominated in U.S. dollars. The Company does not participate in any market risk sensitive financial instruments or other financial and commodity instruments and holds no investments.
The Company's primary market risk relates to its variable rate debt obligations which are described in Note 8 to the consolidated financial statements. A one percent change in the prime lending rate would have an effect of $0.1 million on interest expense for the fiscal year ending May 31, 2003.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Stockholders of Royal Precision, Inc.
We have audited the accompanying consolidated balance sheet of Royal Precision, Inc. and subsidiaries as of May 31, 2002, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for the year then ended. Our audit also included the financial statement schedule for 2002 listed in the index at item 14(d). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Royal Precision, Inc. and subsidiaries at May 31, 2002 and the results of their operations, and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule for 2002, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
Effective June 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ Ernst & Young LLP
Hartford, Connecticut August 16, 2002
THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH ROYAL PRECISION INC.'S FILING ON FORM 10-K FOR THE YEAR ENDED MAY 31, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM 10-K. THE CONSOLIDATED BALANCE SHEET AS OF MAY 31, 2000, THE CONSOLIDATED STATEMENTS OF OPERATION, STOCKHOLDERS' EQUITY, COMPREHENSIVE INCOME (LOSS) AND CASH FLOWS FOR THE YEAR ENDED MAY 31, 1999 AND THE INFORMATION IN THE SCHEDULE FOR 1999 REFERRED TO IN THIS REPORT HAVE NOT BEEN INCLUDED IN THE ACCOMPANYING FINANCIAL STATEMENTS OR SCHEDULE. SEE EXHIBIT 23.2 TO THIS REPORT ON FORM 10-K FOR INFORMATION REGARDING ARTHUR ANDERSEN LLP.
Report of Independent Public Accountants
To Royal Precision, Inc.:
We have audited the accompanying consolidated balance sheets of Royal Precision, Inc. (a Delaware corporation) and subsidiaries as of May 31, 2001and 2000, and the related consolidated statements of operations, stockholders' equity, comprehensive income (loss) and cash flows for the three years in the period ended May 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Royal Precision, Inc. and subsidiaries as of May 31, 2001 and 2000, and the results of their operations, and their cash flows for the three years in the period ended May 31, 2001 in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of valuation and qualifying accounts and reserves on page S-1 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Phoenix, Arizona July 30, 2001
Royal Precision, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except per share amounts)
MAY 31 2002 2001 -------- -------- ASSETS Current assets: Cash $ 6 $ 33 Accounts receivable, net of allowance of $194 and $187 at May 31, 2002 and 2001, respectively 3,518 4,988 Inventories 4,363 5,920 Other current assets 387 215 Deferred income taxes -- 224 -------- -------- Total current assets 8,274 11,380 Property, plant and equipment, net 5,543 6,004 Goodwill 1,250 7,187 Deferred income taxes -- 582 Intangible pension and other assets 101 54 -------- -------- Total assets $ 15,168 $ 25,207 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,197 $ 1,534 Accrued salaries and benefits 520 529 Accrued pension 364 198 Accrued restructuring costs 376 -- Accrued environmental costs 212 272 Other accrued expenses 422 360 Current portion of long-term debt 1,272 768 -------- -------- Total current liabilities 5,363 3,661 Long-term debt, less current portion 5,808 7,705 Subordinated debt 425 -- -------- -------- Total liabilities 11,596 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; 15,000,000 shares authorized; 10,954,597 and 5,681,711 shares issued and outstanding at May 31, 2002 and 2001, respectively 11 6 Additional paid-in capital 15,491 13,977 Accumulated deficit (11,848) (118) Accumulated other comprehensive loss (82) (24) -------- -------- Total stockholders' equity 3,572 13,841 -------- -------- Total liabilities and stockholders' equity $ 15,168 $ 25,207 ======== ========
The accompanying notes are an integral part of these financial statements.
Royal Precision, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except per share amounts)
The accompanying notes are an integral part of these financial statements
Royal Precision, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) (in thousands, except per share amounts)
(1) Relates exclusively to minimum pension liability.
The accompanying notes are an integral part of these financial statements
Royal Precision, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands)
The accompanying notes are an integral part of these financial statements
ROYAL PRECISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002
1. ORGANIZATION AND BUSINESS
ORGANIZATION
The accompanying consolidated financial statements include Royal Precision, Inc. ("RP"), a holding company, and its three wholly-owned operating subsidiaries: FM Precision Golf Manufacturing Corp. ("FM"), FM Precision Golf Sales Corp. ("FMP Sales") and Royal Grip, Inc. ("RG"), (collectively the "Company"). In addition, RG, has a wholly-owned subsidiary, Royal Grip Headwear Company. RP acquired RG on August 29, 1997 (the "RG Acquisition").
BUSINESS
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 manufactures ("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 Japan, Australia, Europe and Canada.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
All significant inter-company balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including its allowance for bad debts, allowances for excess or obsolete inventories, the net realizable value of its assets held for sale, its liabilities for warranty obligations, and restructuring activities, and its valuation allowance for deferred income tax assets. Actual results could differ from those estimates.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined on the first-in, first-out method. The Company recorded charges of approximately $1,435,000 in 2002 and $477,000 in 2001 to adjust inventory to its expected net realizable value. In addition, as of May 31, 2002 and 2001, the Company has inventory valuation allowances of $150,000 and $70,000, respectively, for obsolete items. Related charges are reflected as a component of cost of sales.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at acquired cost. Major additions and betterments are capitalized, while replacements, maintenance and repairs that do not extend the useful lives of the assets are charged to operations as incurred. Upon the disposition of property, plant and equipment, any resulting gain or loss is recognized in operations. Depreciation of plant and equipment is provided for, commencing when such assets are placed in service, using the straight-line method over the assets estimated useful life as follows:
USEFUL LIVES -------------
Buildings and improvements 27.5-40 years Machinery and equipment 3-12 years Furniture, fixtures and office equipment 3-12 years
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
In June 2001, the Financial Accounting Standards Board "FASB" issued Statement of Financial Accounting Standards "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 fiscal 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 year ended May 31, 2001 on a basis consistent with the new accounting principle (dollars in thousands except per share amounts):
Year Ended May 31, 2001 ------------ Reported net loss $ (584) Add back amortization of goodwill 442 ------- Adjusted net loss $ (142) =======
Reported basic and diluted net income loss per share $ (0.10) Add back effect of goodwill amortization per share 0.08 ------- Adjusted basic and diluted net loss per share $ (0.02) =======
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 tax 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 the then recorded unamortized balance of goodwill of $7,187,000. Therefore, during the year ended May 31, 2002, an impairment of $5,937,000 was recorded which is reflected as the cumulative effect of a change in accounting principle in the accompanying consolidated statement of operations for the year ended May 31, 2002. There was no income tax effect applicable to this change in accounting principle.
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 stipulated in SFAS No. 142. The following table provides a reconciliation of goodwill during the period from May 31, 2001 to May 31, 2002 (in thousands):
Balance as of May 31, 2001 $ 7,187 Impairment loss recorded (5,937) ------- Balance as of May 31, 2002 $ 1,250 =======
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company reviews long-lived assets and certain identifiable intangibles for impairment at each reporting date based on the expected future cash flows of the assets compared to the carrying value of the asset. To the extent that such carrying value exceeds expected future cash flows, a writedown is recorded.
INCOME TAXES
The Company recognizes deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred income tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities and tax NOL carryforwards available for tax reporting purposes, using applicable tax rates for the years in which the differences are expected to reverse. A valuation allowance is recorded for deferred income tax assets unless realization is more likely than not.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation for employees and directors under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25)," and has elected the disclosure-only alternative under SFAS No. 123, "Accounting for Stock Based Compensation." The Company accounts for stock options granted to those other than employees and directors in accordance with SFAS No. 123.
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. All of these conditions are met at the time the Company ships products to its customers.
RESEARCH AND DEVELOPMENT
The Company expenses costs of research and development as incurred. Research and development expense was approximately $0.5 million, $0.8 million and $0.7 million for the fiscal years ended May 31, 2002, 2001 and 2000, respectively.
ADVERTISING
The Company expenses production costs of advertising the first date the advertisements take place. Advertising and marketing costs were approximately $1.3 million, $2.1 million and $2.3 million for the fiscal years ended May 31, 2002, 2001 and 2000, respectively.
NET INCOME (LOSS) PER SHARE
Basic income (loss) per share amounts are based on the weighted average number of common shares outstanding during the fiscal year. Diluted income (loss) per share amounts consider, in addition to the above, the dilutive effect of common share equivalents during the fiscal year. Common share equivalents include stock options using the treasury stock method.
Loss per share for the fiscal years ended May 31, 2002 and 2001 were not affected by approximately 732,000 and 147,000 outstanding stock options, respectively, because their effect was anti-dilutive. For the fiscal year ended May 31, 2000, options to purchase approximately 620,000 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 and, as such, their effect was also anti-dilutive.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which will be effective for the Company's year beginning June 1, 2002. SFAS 144 supercedes the guidance under SFAS 121 with respect to accounting for impairment of long-lived assets as well as changing the presentation and accounting for certain operations that may be discontinued by an entity. The Company does not believe the impact of adopting SFAS 144 will have a significant effect on the Company's financial statements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current year's presentation.
3. INVENTORIES
Inventories, net of valuation allowances, consisted of the following (in thousands):
MAY 31, 2002 2001 ------ ------
Raw materials $ 315 $ 814 Work-in-process 1,304 1,215 Finished goods 2,744 3,891 ------ ------ $4,363 $5,920 ====== ======
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
MAY 31, 2002 2001 ------- -------
Land $ 123 $ 123 Furniture, fixtures and office equipment 599 614 Buildings and improvements 912 955 Machinery and equipment 5,832 5,733 Equipment held for sale 45 120 Construction in progress 625 371 ------- ------- 8,136 7, 916 Accumulated depreciation (2,593) (1,912) ------- ------- $ 5,543 $ 6,004 ======= =======
Depreciation expense was $0.8 million, $0.7 million and $0.7 million during the fiscal years ended May 31, 2002, 2001 and 2000, respectively.
During the year ended May 31, 2001, the Company recorded an impairment write-down of $133,000 and $360,000, respectively, on equipment held for sale, which represents rubber injection presses previously used to manufacture the Company's golf club grips and graphite shafts. Also during the year ended May 31, 2001, the Company recorded an expense of $117,000, respectively, to write-off the accumulated cost of various projects under development to design and construct tooling for the manufacture of golf club grips. These write-downs are reflected as a component of nonrecurring expenses in the statements of operations for the fiscal year ended May 31, 2002 and 2001.
5. SUPPLY CONTRACTS
The Company has contracts for steel strip, graphite shafts, and golf grips. In general, these contracts contain customary supply terms for periods ranging from one to three years. As of May 31, 2002, the Company was not dependent on any single supplier for steel strip and grips.
6. TERMINATED MERGER AGREEMENT
In September 2000, the Company signed a letter of intent to acquire PH Group Inc. ("PHG"), a manufacturer of hydraulic presses and injection molding machines. The Company terminated the letter of intent and ceased negotiations to acquire PHG in November 2000. Legal and other professional fees associated with the due diligence efforts of the proposed acquisition totaled $79,000 and are reflected as terminated merger expenses in the consolidated statement of operations for the fiscal year ended May 31, 2001.
7. CORPORATE RESTRUCTURING
In September 2001, the Company's board of directors approved a restructuring plan designed to streamline operations and reduce expenses. The restructuring included staff reductions and anticipated decreased operating expenses resulting from the consolidation of the corporate headquarters leased in Scottsdale, Arizona to the manufacturing facility which the Company owns in Torrington, Connecticut. 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.
During the fiscal year ended May 31, 2002, the Company recorded a restructuring charge of approximately $1,313,000 for various costs related to the restructuring as shown below. Of the amount expensed to date, $1,290,000 represents cash costs, of which $914,000 has been paid through May 31, 2002.
Employee severance $ 752,000 Lease obligation 347,000 Employee hiring and relocation costs 166,000 Other 48,000 ---------- $1,313,000 ==========
The employment of approximately 25 individuals who performed administrative, sales, marketing, customer service and accounting functions at the Company's corporate headquarters in Scottsdale, Arizona was terminated as a result of the restructuring. The affected employees are to receive severance benefits totaling $752,000. Unpaid severance as of May 31, 2002 is $103,000.
The lease term of the Company's former corporate headquarters in Scottsdale, Arizona continues through May 2004. The Company's monthly rent is approximately $18,000, net of sub-leases, and the aggregate rental obligation over the remaining term of the lease as of May 31, 2002 is $547,000. The Company has retained a real estate broker to assist in the sub-leasing of the property. The Company expects that an agreement will be made with a sub-tenant or the current landlord within the next twelve months to sublease the space or buyout the current lease agreement. The Company has accrued the net estimated expense associated with this lease of $347,000 as part of the restructuring of which $273,000 remains unpaid as of May 31, 2002.
8. LONG-TERM DEBT
As of August 16, 2002, the Company refinanced its bank debt. In connection therewith the Company executed an Amended and Restated Credit and Security Agreement (the Agreement). The Agreement includes lines-of credit and term loans. The lines-of-credit are subject to renewal in July 2003. The term loans mature in September 2004. The effects of the refinancing have been retroactively applied to May 31, 2002. A summary of long-term debt follows:
MAY 31, 2002 2001 ------- -------
Lines-of-credit $ 4,605 $ 4,520 Term loans 2,475 3,385 ------- ------- 7,080 8,473
Current portion (1,272) (768) ------- ------- Total long-term debt $ 5,808 $ 7,705 ======= =======
Scheduled annual maturities of debt for the years ending May 31, 2003, 2004, and 2005 are $1,272,000, $4,617,000 and $1,191,000, respectively.
Under the Agreement a maximum of $6,500,000 may be borrowed under the lines-of-credit using a formula based on accounts receivable, inventories and letters of credit. Amounts borrowed under the lines-of-credit bear interest at rates ranging from prime to prime plus 3.0%. The term loans bear interest at rates ranging from prime plus 3.25% to prime plus 3.75%. Substantially all assets are pledged as collateral for borrowings under the Agreement. Related parties provided the letters of credit. The Agreement also provides for certain financial covenants relating to the amounts of net losses and net assets.
As of May 31, 2002 and 2001, the carrying value of debt approximates fair market value.
9. SUBORDINATED DEBT
During the fiscal year ended May 31, 2002, the Company issued to The Johnston Family Charitable Foundation ("Johnston Foundation"), a related party entity, a subordinated promissory note (the "Subordinated Note") for $1,250,000 and warrants to purchase up to 300,000 shares of common stock at $0.25 per share. An estimated fair value of $433,000 was assigned to the warrants. Subsequently, during the remainder of the current fiscal year, the Johnston Foundation exercised warrants to purchase 147,808 shares of common stock for $37,000 and converted the $1,250,000 Subordinated Note and accrued interest of $28,493 into 5,113,972 shares of common stock.
Also, during the fiscal year ended May 31, 2002, the Company issued additional subordinated promissory notes (the "Additional Subordinated Notes") of $425,000 to certain members of the Board of Directors of the Company or such individuals' affiliated entities. These notes bore interest at a stated fixed annual rate of 13%. The holders of the Additional Subordinated Notes also received warrants to purchase 102,000 shares of common stock at $0.25 per share. The warrants granted to the holders of the Additional Subordinated Notes were determined to have no value. In connection with the August 16, 2002 refinancing, the Additional Subordinated Notes and accrued interest of $16,070 were converted into 1,764,280 shares of common stock. Accordingly, the Additional Subordinated Notes have been classified as long-term debt as of May 31, 2002.
10. OPERATING LEASES
Prior to January 1, 2002, the Company leased its corporate headquarters and certain equipment under operating lease agreements. Rental expense under the leases totaled approximately $0.1 million, $0.2 million and $0.3 million for the fiscal years ended May 31, 2002, 2001 and 2000, respectively. In connection with the restructuring, the Company vacated the leased headquarters. Future net minimum lease payments associated with the remaining term of the lease are included in the restructuring charge for the fiscal year ended May 31, 2002.
11. STOCK OPTION PLANS AND WARRANTS
In connection with the RG Acquisition, options to purchase 41 shares of FM Precision Golf Corp. common stock outstanding as of the RG Acquisition date were converted into options to purchase 169,761 shares of RP common stock. As of May 31, 2002, 76,447 shares of common stock are reserved for issuance upon the exercise of the remaining options outstanding, which expire through May 2005.
Also, in connection with the RG Acquisition, options and warrants to purchase 982,250 shares of RG common stock outstanding as of the RG Acquisition date were converted into options and warrants to purchase 491,124 shares of RP common stock. As of May 31, 2002, 245,874 shares of common stock are reserved for issuance upon the exercise of the remaining options outstanding, which expire through March 2007.
In October 1997, the Company adopted the Royal Precision, Inc. Stock Option Plan (the "RP Plan"). The RP Plan is administered by the Board of Directors and provides for the granting of nonqualified or incentive stock options to purchase shares of the Company's common stock to certain employees, consultants and directors. In October 2000, the Company's stockholders authorized an increase in the number of shares of the Company's common stock available for issuance pursuant to the RP Plan from 750,000 to 1,500,000. As of May 31, 2002, 1,500,000 shares of common stock are reserved for issuance upon the exercise of options outstanding under the RP Plan. As of May 31, 2002, no additional shares of common stock are reserved for options not yet granted under the RP Plan.
In December 1999, warrants to purchase 25,000 shares were granted to a firm which provided consulting services to the Company. None of the warrants, which expire in December 2004, has been exercised as of May 31, 2002.
During the year ended May 31, 2002, warrants to purchase 402,000 shares were granted in conjunction with the issuance of subordinated debt. Warrants to purchase 147,808 shares were exercised. The remaining warrants will expire during fiscal year 2012.
Stock option and warrant activity is as follows:
11. STOCK OPTION PLANS AND WARRANTS (CONTINUED)
A summary of information about stock options outstanding at May 31, 2002 is as follows:
The Company has computed the pro forma disclosures required under SFAS No. 123 for all of the options granted to employees and directors using the Black Scholes option pricing model as prescribed by SFAS No. 123. The weighted average assumptions used are as follows:
YEAR ENDED MAY 31 2002 2001 ---- ---- Risk free interest rate 5.1% 5.4% Expected dividend yield None None Expected life 10 years 10 years Expected volatility 188% 61%
Had compensation cost for the Company's stock plan been recorded in accordance with SFAS No. 123, the Company's net income (loss) and basic and diluted net income (loss) per share would have been the following pro forma amounts for the fiscal years ended May 31,
YEAR ENDED MAY 31 2002 2001 2000 ---- ---- ---- Net income (loss): As reported $ (11,730) $ (584) $ 870 Pro forma (11,876) (1,130) 555
Basic and diluted net income (loss) per share: As reported (1.82) (0.10) 0.15 Pro forma (1.184) (0.20) 0.10
The resulting pro forma compensation cost may not be representative of that to be expected in future years because the pro forma amounts do not consider options granted prior to fiscal 1997 or in future years.
As of May 31, 2002 and 2001, there were outstanding options to purchase 170,583 shares of the company's common stock at an exercise price of $3.19 per share which are subject to variable plan accounting until they are exercised or expire in January 2004. No compensation costs have been recognized to date related to these options.
12. INCOME TAXES
The components of the provision for income taxes from continuing operations are as follows (in thousands):
YEAR ENDED MAY 31 2002 2001 2000 ------- ------- ------- Current (credit) $ (2) $ 16 $ 13 Deferred 806 17 603 ------- ------- ------- $ 804 $ 33 $ 616 ======= ======= =======
The Company's effective income tax rate, as a percent of pretax income from continuing operations, differs from the statutory federal rate as follows:
YEAR ENDED MAY 31 2002 2001 2000 ---- ---- ----
Statutory federal income tax rate (34)% (34)% 34% State taxes, net of federal benefit (4) (6) 6 Nondeductible goodwill amortization -- 29 11 Nondeductible environmental civil penalty -- 14 Change in valuation allowance 45 (11) Other 1 3 1 ---- ---- ---- Effective income tax rate 8% 6% 41% ==== ==== ====
The components of deferred income tax assets (liabilities) are as follows (in thousands):
MAY 31 2002 2001 ------- ------- Current asset (liability): Financial allowances and accruals not currently deductible $ 1,228 $ 523 Valuation allowance (1,228) (299) ------- ------- 0 224 Long-term asset (liability): Tax effect of net operating loss carryforwards 5,862 2,309 Property, plant and equipment (680) (585) Compensation related to grant of stock options 94 94 Other 38 210 Valuation allowance (5,314) (1,446) ------- ------- 0 582 ------- ------- $ 0 $ 806 ======= =======
As of May 31, 2002, the Company has federal and state NOL carryforwards of approximately $15.9 million and $10.7 million, respectively, of which $4.9 million relate to RG for periods prior to the RG Acquisition ("Pre-Acquisition NOLs"). The use of such Pre-Acquisition NOLs is limited to $0.8 million per annum under Section 382 of the Internal Revenue Code. As of May 31, 2002, approximately $2.7 million of Pre-Acquisition NOLs are available under Section 382. The NOLs, if unused, expire beginning in 2009 and ending 2021. Future realization of both Pre-Acquisition and Post Acquisition NOLs is uncertain.
13. OTHER RELATED PARTY TRANSACTIONS
Professional fees of approximately $122,000, $68,000 and $28,000 were paid to certain stockholder affiliates during the fiscal years ended May 31, 2002, 2001 and 2000, respectively.
14. FOREIGN SALES
The Company has export sales to customers located primarily throughout Japan, Australia, the United Kingdom and Canada. Foreign sales were approximately 29%, 23% and 32% of the Company's sales for the fiscal years ended May 31, 2002, 2001 and 2000, respectively. The following table summarizes the Company's sales by major worldwide regions (in thousands):
YEAR ENDED MAY 31, 2002 2001 2000 ------- ------- -------
United States $16,736 $23,144 $20,334 Japan 4,486 5,869 8,210 Other 2,340 984 1,555 ------- ------- ------- Total $23,562 $29,997 $30,099 ======= ======= =======
15. BENEFIT PLANS
401(k) PLAN
The Company sponsors a defined contribution benefit plan under Section 401(k) of the Internal Revenue Code. Each year, eligible participants may elect to make salary reduction contributions up to the lesser of 15% of compensation or the annual maximum contribution established by the Internal Revenue Service. Participants may also make voluntary after-tax contributions to the defined contribution benefit plan. Employer contributions are discretionary and, to date, the Company has not contributed to the defined contribution benefit plan.
PENSION PLAN
Approximately 75% of the Company's work force is covered by a collective bargaining agreement. The Company sponsors the FM Precision Golf Manufacturing Corp. Pension Plan for Represented Hourly Wage Employees (the "Union Plan") for the benefit of its union employees. The Company funds the Union Plan based on actuarial determined amounts sufficient to meet the benefits to be paid to participants under the Union Plan. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Changes in the accumulated benefit obligation follows (in thousands):
YEAR ENDED MAY 31, 2002 2001 ----- -----
Beginning of year accumulated benefit obligation $ 549 $ 368 Service costs 108 92 Interest cost 45 29 Actuarial (gain) loss 101 60 Benefit payments (28) -- ----- ----- End of year accumulated benefit obligation $ 775 $ 549 ===== =====
15. BENEFIT PLANS (CONTINUED)
The reconciliation of the funded status of the Union Plan to amounts shown in the consolidated balance sheets follows (in thousands):
MAY 31, 2002 2001 ----- -----
Accumulated benefit obligation $(775) $(549) Plan assets at fair value 411 351 ----- ----- Funded status (accrued benefit cost) $(364) $(198) ===== =====
The reconciliation of the changes in the fair value of assets of the Union follows (in thousands):
YEAR ENDED MAY 31, 2002 2001 ----- ----- Beginning of year fair value of assets $ 351 $ 265 Employer contributions 108 114 Actual return on plan assets (20) (28) Benefit payments (28) -- ----- ----- End of year fair value of assets $ 411 $ 351 ===== =====
The components of net pension cost were (in thousands):
YEAR ENDED MAY 31, 2002 2001 2000 ----- ----- ----- Service cost $ 108 $ 92 $ 98 Interest cost 45 29 22 Expected return on assets (29) (17) (4) Net amortization and deferral 4 (2) -- ----- ----- ----- Net periodic pension cost $ 128 $ 102 $ 116 ===== ===== =====
A summary of the Company's key actuarial assumptions follows:
2002 2001 2000 ---- ---- ----
Discount rate 7.16% 7.16% 7.75% Expected long-term rate of return on assets 9.00% 9.00% 9.00%
16. INFORMATION ON SEGMENTS
The Company has two reportable segments in continuing operations: golf club shafts and golf club grips. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates the performance of these segments based on segment operating income or loss and cash flows. The Company allocates certain administrative expenses to segments. The amounts in this illustration are the amounts in reports used by the chief operating officer (in thousands):
(A) Unallocated for the year ended May 31, 2002 includes costs associated with a corporate restructuring and accretion of discount on subordinated debt which are not allocated to the segments operating results.
17. CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of trade receivables. Concentrations of credit risk with respect to these receivables are a result of sales to significant customers. During the fiscal years ended May 31, 2002 and 2001, the Company's top five customers accounted for 58% and 72% of total sales, respectively. Two significant customers during the 2002 fiscal year represented amounts greater than 10%, each at 19% of total sales. Three significant customers during the 2001 fiscal year represented amounts greater than 10%, at 21%, 20% and 19%, respectively.
18. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is from time to time a party to various routine legal proceedings which are incidental to the Company's business. Management consults with legal counsel on all such matters and management believes, except for the following environmental matters, that none of the current routine proceedings will have a material adverse effect on the Company's financial condition or future operating results.
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 of 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 performed an assessment of the FMP plant in January 1992 and, in June 1992, the site was deferred from the CERCLIS inventory to the EPA's Resource Conservation and Recovery Act ("RCRA") program. During calendar 2000, the SPA reviewed the status of the property, concluded that the FMP plant is not subject to corrective action under RCRA and returned the site to its active CERCLIS inventory. In November 2000 and April 2001, a contractor for the EPA performed another site assessment 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 April 2000, the Company submitted information regarding the disposal and treatment of waste materials from the FMP plant during the period from 1982 to 1997 to assist the EPA in its investigation of the former National Oil Services, Inc. Superfund site in West Haven, Connecticut. National Oil Services, Inc. was, prior to its bankruptcy, a contractor used by Brunswick, and to a limited degree by the Company, to treat and dispose of non-hazardous waste oils from the FMP plant. In June 2001, the Company executed a consent decree with the EPA and agreed to pay approximately $5,000 in full satisfaction of its liability under this matter, most of which was reimbursed by Brunswick.
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 were in violation of authorized limits under an existing permit for the discharge of treated wastewater from the FMP plant to the Naugatuck River. The Company submitted its response to the NOV in December 2000 and received drafts of a consent order from the DEP in April 2001 and October 2001. Terms of the draft consent order include, among other things, that the Company pay a civil penalty of approximately $225,000, submit to various compliance audits, and complete a feasibility study to determine if the discharge of treated wastewater from the FMP plant can be diverted from the Naugatuck River. As a result of this study, the Company spent approximately $0.3 million for capital expenditures to comply with the terms of the consent order during the fiscal year ended May 31, 2002. A provision was recorded for the proposed civil penalty and is reflected as a component of Environmental Costs in the accompanying consolidated statement of operations for the fiscal year ended May 31, 2001. However, Management believes it is possible that the proposed civil penalty may be reduced when the final consent order is executed.
Environmental Costs related to the various matters discussed above totaled $20,000 and $0.4 million, net of recoveries, during the fiscal years ended May 31, 2002 and 2001, respectively.
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data (in thousands except per s hare data) follows:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Richard P. Johnston, age 71, has been a director of the Company since its organization in 1996 and served as Chairman of the Board, Chief Executive Officer, of the Company from May 1996 to October 1997 and from October 1999 to the present. Mr. Johnston was Chairman of the Board of Merbanco, Inc., a merchant banking company, from 1991 to 1998. Mr. Johnston is a director of Myers Industries, Inc. (MYE: NYSE), a plastic and rubber products manufacturer, Results Radio LLC, a radio broadcasting company, and Hotel Online.com, an Internet service provider for hotels. On February 28, 2002, the Johnston Family Living Trust u/a dtd. April 11, 1994 (the "Trust"), was granted the right to designate one person to be nominated for election to the Board of Directors of the Company pursuant to a Designation Agreement between the Company and the Trust for so long as the Trust owns of record or beneficially at least 1% of the outstanding shares of common stock of the Company. Pursuant to the Designation Agreement, such designee is to initially be Richard P. Johnston. Richard P. Johnston is the father of David E. Johnston and Christopher A. Johnston, directors of the Company.
Charles S. Mechem, Jr., age 71, has served as a director since March 2000. Mr. Mechem retired as Chairman of Convergys Corporation, a provider of outsourced customer management services in May 2000, a post he was elected to in January 1999. He served as Chairman of Cincinnati Bell Inc., a telecommunications services holding company, from April 1996 to December 1998 and has been a consultant with Arnold Palmer Enterprises since March 1996. Mr. Mechem retired in December 1995 as Commissioner of the Ladies Professional Golf Association and is now Commissioner Emeritus of that organization. Mr. Mechem is a director of J. M. Smucker & Co., a maker of jams and jellies.
Christopher A. Johnston, age 41, served as a director and President of the Company from its inception in 1996 until October 1997 and director and Chairman of the Board and Treasurer from October 1997 until August 1998. Mr. Johnston was elected again as a director to fill a vacancy on the Board in January 2001. Mr. Johnston has been President of Merbanco, Inc. since 1991. Christopher A. Johnston is the son of Richard P. Johnston and the brother of David E. Johnston.
David E. Johnston, age 47, served as Vice President of the Company from its organization in 1996 until October 1997, Executive Vice President, Chief Operating Officer from October 1997 until August 1998, and Executive Vice President, Special Projects from August 1998 to October 1999. Mr. Johnston has been a director of the Company since June 1996. Mr. Johnston is President of the Johnston Family Charitable Foundation, a private charitable foundation (the "Foundation"). On March 1, 2002, the Foundation was granted the right to designate one person to be nominated for election to the Board of Directors of the Company pursuant to a Designation Agreement between the Company and the Foundation for so long as the Foundation owns of record or beneficially at least 10% of the outstanding shares of common stock of the Company. Pursuant to the Designation Agreement, such designee is to initially be David E. Johnston. At such date, the Foundation acknowledged that David E. Johnston would thereafter be serving on the Board of Directors of the Company as the deputy of the Foundation, thereby making the Foundation a director by deputization. David E. Johnston is the son of Richard P. Johnston and the brother of Christopher A. Johnston.
Kenneth J. Warren, age 59, served as Secretary of the Company and as a director from its organization in 1996 to August 1999, and was elected again as Secretary and a director in March 2001. Mr. Warren has been a practicing attorney for over 35 years. Prior to 1996, he was a partner in Schwartz, Kelm, Warren & Ramirez and during 1996, he was of counsel to its successor, Schwartz, Warren & Ramirez L.L.C. in Columbus, Ohio. In January 1997, he opened his own office for the practice of law in Dublin, Ohio.
John C. Lauchnor, age 39, has served as a director and President, Chief Operating Officer, since September 2001. From 1996 until 1998, Mr. Lauchnor was Vice President-Operations, of HPM Corporation, an injection molding machinery company, and from 1998 to 2001, was President of PCC Olofsson, a machine tool manufacturing and metal fabrication company.
Raymond J. Minella, age 52, was a director of the Company from its organization in 1996 (and served as Chairman of the Board from August 1998 to October 1999) until his resignation as a director on July 24, 2002. The vacancy on the Board created by Mr. Minella's resignation has not been filled.
EXECUTIVE OFFICERS
The principal occupation of each other executive officer of the Company for the past five years is as follows:
Ronald L. Chalmers, age 58, served as Director of Sales/Marketing of Brunswick Corporation from 1992 to May 1996. From May 1996 until October 1997, he served as President of FM Precision Golf Manufacturing Corp., the Company's golf club shaft manufacturing subsidiary. He was a director of the Company from June 1996 to August 1999 and served as Executive Vice President - Administration/Manufacturing of the Company from October 1997 to October 1999, served as Executive Vice President - Manufacturing from October 1999 to September 2001, and now serves as Executive Vice President International Sales.
Frank Mertes, age 44, has served as Vice President - Finance and Chief Financial Officer since January 2002. From May 1997 until September 1999, he served as Director of Finance for Perstorp Compounds, Inc, a producer of Urea and Melimine Compounds. From October 1999 until December 2001, he served as corporate controller of Telaxis Communications Corp., a developer and supplier of broadband wireless access products.
James Davidson, age 38, has served as Executive Vice President - Manufacturing since September 2001. From April 1996 until December 1998, he served as plant manager for True Temper Sports, producer of steel golf club shafts. From January 1999 until September 2001, he served as plant manager of Mueller Copper Tube, a manufacturer of copper tube products.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on its review of Forms 3 and 4 and amendments thereto furnished to the Company pursuant to Rule 16a-3(e) received by it during its most recent fiscal year, and written representations from the reporting persons that no Forms 5 were required for those persons, the Company believes that during its fiscal year ended May 31, 2002, all filing requirements of the executive officers, directors and greater than 10% stockholders as required by Section 16(a) of the Securities Exchange Act were complied with in a timely fashion except that (a) in a single joint Form 4 report of Richard P. Johnston and related parties for the month of March 2002 which had been timely filed, two components of a transaction were inadvertently omitted and such report was later amended to report (i) the acquisition of a related warrant and (ii) acquisition of beneficial ownership of shares issuable in connection with a guaranty agreement; and (b) a Form 4 report of Richard P. Johnston and related parties for the month of November 2001 was incorrect and subsequently amended to reflect that 1,000 shares shown as having been purchased by the Johnston Charitable Remainder Unitrust #3 ("CRT #3") CRT#3 were not purchased and 300 shares that had been purchased were not reported, resulting in an overstatement of 700 shares owned by CRT#3.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the annual and long term compensation of the chief executive officer and the four most highly paid executive ("Named Executives"), for the three fiscal years ended May 31, 2002:
(a) The Chairman of the Board, by reason of his position, functions as the chief executive officer of the Company. The Chairman of the Board receives no compensation (other than an initial grant of an option to purchase 20,000 shares, his normal director fees of $2,500 per quarter and annual grant of an option to purchase 5,000 shares) for serving as such chief executive officer. (b) Elected September 25, 2001. (c) Relocation expenses (d) Club dues and automobile expenses. (e) Elected September 1, 2001. (f) Elected January 2, 2002. (g) Mr. Schneider resigned effective October 2, 2001. See "Severance Agreements" below. (h) Includes severance payments of $111,154. (i) Mr. Montgomery resigned effective November 15, 2001. See "Severance Agreements" below. (j) Includes severance payments of $126,154.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to options to purchase securities from the Company granted to the named executives during fiscal year 2002 (excludes warrants issued in financings described in Item 13):
- ---------- (a) Options vest one-quarter on each annual stockholder meeting date held more than six months after grant. (b) Options vest one-quarter on each of the first four anniversaries of the date of grant. (c) The Grant Date Present Value was determined using the standard application of the Black-Scholes option pricing model using the following weighted average assumptions: volatility 187.5%, dividend yield 0%, and a risk free interest rate of 5.08% based on the options being outstanding for approximately 10 years. The Grant Date Present Values do not take into account risk factors such as non-transferability and limits on exercisability. In assessing the Grant Date Present Values indicated in the above table, it should be kept in mind that no matter what theoretical value is placed on an option on the date of grant, the ultimate value of the option is dependent on the market value of the Common Stock at a future date, and the extent, if any, by which such market value exceeds the exercise price on the date of exercise.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain information concerning the number and value of unexercised Options held by the Named Executives at the end of the fiscal year ended May 31, 2002:
* at may 31, 2002 and within 60 days thereafter.
COMPENSATION OF DIRECTORS
Non-employee directors receive a quarterly retainer of $2,500 as well as reimbursement for certain travel expenses incurred in connection with attending meetings. Pursuant to the Royal Precision, Inc. Stock Option Plan, each non-employee member of the Board of Directors receives (i) upon his initial election, an option to purchase 20,000 shares and (ii) an annual grant of an option to purchase 5,000 shares if he has completed at least one year of service as a director and if he attends 75% of the meetings of the directors and committees upon which he serves, at a price equal to the fair market value of such shares on the day preceding the date of grant. On July 24, 2001, options for 20,000 shares were granted to the following directors: Richard P. Johnston, David E. Johnston, Kenneth J. Warren, Christopher A. Johnston and Raymond J. Minella. Mr. Mechem did not receive such a grant because he was granted a similar option upon his first becoming a director. Mr. Lauchnor did not receive a grant at such time because his compensation is independently reviewed; he did, however, receive an option to purchase 250,000 shares under the Royal Precision, Inc. Stock Option Plan on September 24, 2001. No annual grant of options to Board members to purchase 5,000 shares was made in 2002. For a description of future cash compensation to be paid to Richard P. Johnston and Christopher A. Johnston indirectly through Royal Associates, Inc. commencing in January 2003, see "Item 13. Certain Relationships and Related Transactions".
EMPLOYMENT AGREEMENTS
On September 1, 2001, the Company entered into an Executive Employment Agreement with John C. Lauchnor whereby the Company would employ Mr. Lauchnor effective September 24, 2001 as President and Chief Operating Officer of the Company. Among other things, the Executive Employment Agreement provided for a term of three years, subject to termination in certain events. As payment for the services to be rendered by Mr. Lauchnor, Mr. Lauchnor is to receive a Base Salary initially at $185,000 annually together with a bonus that would equal up to 50% of his Base Salary if key objectives are accomplished. The Agreement provided that Mr. Lauchnor would participate in all employee benefit plans maintained by the Company, insurance programs, paid vacations and similar plans or programs. In lieu of other life insurance benefits, the Company was to use reasonable efforts in good faith to secure a $500,000 term life insurance policy on the life of Mr. Lauchnor which would be owned by the Company, with Mr. Lauchnor selecting the beneficiary of such policy. Mr. Lauchnor received a signing bonus in the amount of $30,000, $15,000 of which was paid November 15, 2001 and $15,000 of which was paid December 15, 2001. Mr. Lauchnor was also to receive reimbursement 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, together with taxes that may be due by Mr. Lauchnor as a result of the receipt of such reimbursement, and reimbursement for the initiation fee for one country club up to $25,000 which reimbursement has not been paid.
On March 18, 2002, the Company entered into an Employment Agreement with James Davidson who was currently employed by the Company in consideration of his remaining with the Company which provided, among other things, that in the event that prior to the second anniversary of the date of the agreement, Mr. Davidson's employment is terminated other than for "Cause", Mr. Davidson would be paid as severance pay an amount equal to his then base salary for the period commencing on the date that his employment is terminated and ending on the later of (a) the second anniversary of the date of the agreement, or (b) 12 months from the termination date, payable in accordance with the customary pay practices of the Company (the "Employment Package").
SEVERANCE AGREEMENTS
The Company had entered into severance agreements with former Company executive officers, Thomas A. Schneider, Anthony J. Montgomery and Kevin L. Neill, which would take effect when the employee's employment was terminated by the Company (or any purchaser or successor to the Company) for any reason, other than cause, or there was a change in the terms of the employee's employment resulting in his relocation from the Phoenix area or travel requirements by such employee of more than 10 days per month; a reduction in pay; demotion, or change in authority or duties. These agreements provided for severance pay of twelve months, nine months and seven months, respectively, to be paid at the time of termination of employment, paid coverage under the Company's existing medical and dental plans for like terms, acceleration of vesting of all outstanding options held by the employee and extension of the exercise period of such
options for one year. The termination of the employment of these employees occurred on October 2, 2001, November 15, 2001, and January 16, 2002, respectively.
On October 1, 2001, Thomas A. Schneider entered into an Agreement to Terminate Employment with the Company which provided that, among other things, Mr. Schneider would receive $170,000, without interest, payable according to his existing bi-weekly payment cycle from October 3, 2001 to October 2, 2002 and all employee stock options previously granted to Mr. Schneider would immediately vest and Mr. Schneider would be entitled to exercise all such options during the respective option terms prior to the respective expiration dates of such options.
On November 15, 2001, Anthony J. Montgomery entered into an Agreement to Terminate Employment with the Company which provided that, among other things, Mr. Montgomery would receive $132,154 payable from November 23, 2001 through June 2002 according to the second monthly salaried pay cycle, and existing health and dental insurance through August 2002. The terms of all options having a strike price equal to or less than the closing price of the Company's common stock on the date of execution of the agreement would remain in effect. The terms for all options that have a strike price greater than the closing price of the Company's common stock on the date of execution of the agreement would be immediately vested and Mr. Montgomery would be entitled to exercise all such options during the respective option terms prior to the respective expiration dates of such options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Raymond J. Minella (Chair), Charles S. Mechem, Jr. and Christopher A. Johnston, outside directors, served on the Personnel and Compensation Committee in fiscal year 2002. Mr. Minella resigned as a director for personal reasons unrelated to the Company in July 2002. Christopher A. Johnston is a former officer of the Company and entered into a transaction with the Company in March 2002 whereby Mr. Johnston loaned to the Company $150,000 and received in exchange therefor the Company's subordinated promissory note and a warrant to purchase 36,000 shares of the Company's common stock at $.25 per share. The note has since been converted to common stock. See "Certain Relationships and Related Transactions" below. No director or executive officer of the Company serves on the compensation committee of the board of directors of any company for which Messrs. Mechem and Johnston serve as directors.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
During fiscal year 2002, Raymond J. Minella (Chair), Christopher A. Johnston and Charles S. Mechem, Jr. functioned as the Personnel and Compensation Committee (the "Committee"). Mr. Minella resigned as a director in July 2002. This Committee reviews and approves the Company's compensation philosophy and policies and the application of such policies to the compensation of the executive officers. The Company's philosophy is to link executive pay to performance that enhances stockholder value. The goals of the compensation program are to provide compensation levels necessary to attract and retain exceptional talent, to motivate the executives to achieve the Company's business goals, and to recognize individual contributions as well as overall business results.
The key elements of the Company's executive compensation are base salary, performance based bonus and long-term incentives in the form of stock options. The Committee does not use a formula to weight the various factors it considers. The Company's policies with respect to each of the elements are discussed below.
BASE SALARIES
Base salaries for executive officers are determined by evaluating the responsibilities of the position and the experience of the individual, and by reference to the competitive marketplace for executive talent, including a comparison to base salaries for comparable positions at other companies included in the Company's peer group. Base salary adjustments are determined annually by evaluating the financial performance and, where appropriate, certain non-financial performance measures of the Company, and the individual performance of each executive officer.
Richard P. Johnston is the Chief Executive Officer and served as Chairman of the Board during fiscal year 2002. The Chairman of the Board has not received compensation in such capacity but is reimbursed for all travel and out of pocket costs incurred in connection with his duties. John C. Lauchnor is the President and Chief Operating Officer and in the fiscal year ended May 31, 2002, his base salary was determined based on both his past individual performance and market comparisons, including companies in the Peer Index referred to below.
For a description of future cash compensation to be paid to Richard P. Johnston and Christopher A. Johnston indirectly through Royal Associates, Inc. commencing in January 2003, see "Item 13. Certain Relationships and Related Transactions".
EXECUTIVE BONUSES
The Company's executive officers were eligible for an annual cash bonus under an incentive compensation plan for management established and monitored by the Board of Directors. Individual and corporate performance objectives are established at the beginning of each year by the Committee. Eligible executives are assigned target bonus levels. The corporate performance measure for bonus payments for the fiscal year ended May 31, 2002 was based on the Company's pre-tax profitability. In fiscal 2002, the Company did not meet its primary profitability goals and no bonuses were awarded under the plan. The Company has adopted an Executive Bonus Program for Fiscal Year 2003 which will include managers and executives who are continuously employed from the beginning of each fiscal year through the date of bonus. If employment is for less than a full year, those persons are eligible only if approved by the Chairman of the Board. Bonus opportunity levels are assigned to each participant based on competitive rates of pay, internal equity and the ability to influence results. The Executive Bonus Program for Fiscal Year 2003 has been filed as an Exhibit to this Form 10-K Report.
The Committee established a plan outlining how the bonus provided for under Mr. Lauchnor's Employment Agreement was to be earned for fiscal year 2002 and the years thereafter. Initially, for fiscal year 2002, 75% of the bonus was to 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 was to be based upon cash flow of the Company from operations for the same period.
STOCK OPTIONS
The purpose of the Company's stock option plan is to enable the Company to attract and retain capable employees, officers, directors and consultants and to provide them with long-term incentives to continue their service to the Company, align their interests with those of the stockholders, to maximize the value of the Company to its stockholders and to aid the employee in acquiring an ownership interest in the Company.
In fiscal 2002, Messrs. Lauchnor, Davidson and. Mertes received options to purchase 250,000, 75,000 and 75,000 shares of common stock, respectively, at an exercise price equal to the fair market value of a share on the day preceding the date of grant. The stock option grants to Messrs. Lauchnor, Davidson and Mertes were negotiated as part of the terms of their employment and took into account the duties and responsibilities of the individual, their potential impact on the performance of the Company, individual performance, and years of work experience.
POLICY ON DEDUCTIBILITY OF COMPENSATION
The Budget Reconciliation Act of 1993 amended the Internal Revenue Code to add Section 162(m) which bars a deduction to any publicly held corporation for compensation paid to a "covered employee" in excess of $1 million per year. Generally, the Company intends that compensation paid to its "covered employees" shall be deductible to the fullest extent permitted by law.
CONCLUSION
Through the programs described above, a significant portion of the Company's executive compensation is linked directly to corporate and individual performance and stock price appreciation. The Compensation Committee intends to continue the policy of linking executive compensation to corporate performance and returns to stockholders.
PERSONNEL AND COMPENSATION COMMITTEE Charles S. Mechem, Jr. Christopher A. Johnston
PERFORMANCE GRAPH
The performance graph compares the cumulative total shareholder return on the Company's Common Stock with the cumulative total return for the NASDAQ Stock Market (the "Market Index") and an index of NASDAQ Stocks (SIC 3949) - Sporting and Athletic Goods (the "Peer Index"), assuming an investment of $100 on May 31, 1998 in each of the Company's Common Stock, the stock comprising the Market Index and the stock comprising the Peer Index.
[LINE GRAPH]
5/31/1998 5/31/1999 5/31/2000 5/31/2001 5/31/2002 --------- --------- --------- --------- --------- ROYAL PRECISION $100 $ 58 $ 57 $ 39 $ 4 MARKET INDEX $100 $139 $191 $119 $ 91 PEER INDEX $100 $ 78 $ 68 $ 77 $ 74
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
EQUITY COMPENSATION PLAN INFORMATION
The following table gives information about the Company's common stock that may be issued upon the exercise of options, warrants and rights under all of the Company's existing equity compensation plans as of May 31, 2002, including the 1997 Stock Option Plan.
The following table sets forth, as of August 12, 2002, certain information with respect to the beneficial ownership of shares of Common Stock by (i) each person known to the Company to be the beneficial owner of more than five percent of the outstanding shares of Common Stock, (ii) each director or nominee for director of the Company, (iii) each of the Named Executives (see "EXECUTIVE COMPENSATION; Summary Compensation Table"), and (iv) the Company's directors and executive officers as a group.
NUMBER OF PERCENT BENEFICIAL OWNER SHARES (A) OF CLASS ---------------- ---------- --------
Ronald L. Chalmers (c) 170,813 1.3%
Anthony J. Montgomery (d) 236,265 1.9%
Frank Mertes (e) -0- --
James Davidson (f) 18,750 (f) --
Thomas A. Schneider (g) 310,228 (g) 2.4%
John C. Lauchnor (h) 359,781 (h) 2.8%
Kenneth J. Warren (i) 1,257,351 (i) 9.8%
David E. Johnston (j) 234,875 (j) 1.8%
Richard P. Johnston (k) 10,836,656 (k) 69.5%
Charles S. Mechem, Jr. (l) 288,262 (l) 2.3%
Christopher A. Johnston (m) 2,081,750 (m) 16.3%
Raymond J. Minella (n) 507,447 3.0%
Johnston Family Charitable Remainder Unitrust # 3 (o) 1,384,135 (o) 10.9%
Johnston Family Living Trust (p) 3,377,135 (p) 22.0%
Johnston Family Charitable Foundation (q) 5,413,972 (q) 42.1%
All directors and officers as a group (9 persons) 14,625,551 (r) 90.9%
- ---------- (a) Unless otherwise indicated, the beneficial owner has sole voting and dispositive power over these shares subject to the spousal rights, if any, of the spouses of those beneficial owners who have spouses.
(b) Less than 1%.
(c) Mr. Chalmers' address is 535 Migeon Avenue, Torrington, CT 06790. Pursuant to Rule 13d-3(d)(1). This amount includes 45,453 shares issuable upon the exercise of options which are exercisable within 60 days. Mr. Chalmers' shares are subject to an agreement with the Company which grants the Company a right of first refusal and a call right upon termination of his employment with the Company. These rights are not currently exercisable within 60 days.
(d) Mr. Montgomery's address is 9762 East Palm Ridge Drive, Scottsdale, AZ 85260. Pursuant to Rule 13d-3(d)(1). This amount includes 200,000 shares issuable upon the exercise of options which are exercisable within 60 days.
(e) Mr. Mertes' address is 535 Migeon Avenue, Torrington, CT 06790.
(f) Mr. Davidson's address is 535 Migeon Avenue, Torrington, CT 06790. This amount includes 18,750 shares issuable upon the exercise of options which are exercisable within 60 days.
(g) Mr. Schneider's address is 4111 East Becker Lane, Phoenix, AZ 85028. Pursuant to Rule 13d-3(d)(1). This amount includes 310,228 shares issuable upon the exercise of options which are exercisable within 60 days.
(h) Mr. Lauchnor's address is 535 Migeon Avenue, Torrington, CT 06790. This amount includes (i) 6,000 shares currently exercisable pursuant to a warrant dated February 28, 2002 and (ii) 62,500 shares issuable upon the exercise of an option (the "JCL Option") which are exercisable within 60 days and (iii) pursuant to the proviso to Rule 13d-3 (d)(1)(i), 187,500 shares subject to the JCL Option which are not exercisable within the next 60 days.
(i) Mr. Warren's address is 5134 Blazer Parkway, Dublin, OH 43017. This amount includes (a) (i) 12,000 shares currently exercisable pursuant to a warrant dated February 28, 2002 (the "KJW Warrant") held by DWR, Custodian for Kenneth Warren, Attorney at Law, fbo Kenneth J. Warren, VIP Plus Profit Sharing Plan (the "Profit Sharing Plan"); (ii) 207,862 shares held by the Profit Sharing Plan; (iii) 20,323 shares issuable upon the exercise of options which are exercisable within 60 days (the "KJW Options"); (iv) 622,687 shares held by RIFL Holdings, LLC ("RIFL LLC") in which KJW is a 50.1% member, (v) 6,000 shares owned by CRT#3 (see note (o)) subject to the currently exercisable portion of an option dated July 24, 2001 granted by CRT#3 to purchase such shares from CRT#3 (the "KJW-CRT#3 Option") which are currently exercisable;(vi) 121,750 shares subject to a one-year option (renewable for four successive years) granted to Christopher A. Johnston on February 28, 2002 to purchase such shares from Mr. Warren, which option is currently exercisable and (vii) 344,472 shares which have been pledged to RPJ/JAJ Partners, Ltd. under a pledge agreement pursuant to which the pledgee will only acquire voting power or dispositive power over the shares upon the occurrence of certain contingencies which has not yet occurred and, (b) pursuant to the proviso to Rule 13d-3(d)(1)(i), the following which are not exercisable within the next 60 days: (i) 24,000 shares subject to the KJW - CRT #3 Option; and (ii) 20,000 shares subject to the
non-exercisable portion of the KJW Options. Mr. Warren is a party to a stockholders agreement under which the holders of 59,006 shares have granted to him and Christopher A. Johnston rights of first refusal, which rights are not currently exercisable, and Mr. Warren has granted a right of first refusal and a call right on his shares to Christopher A. Johnston, which rights are not currently exercisable. See "Item 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company paid legal fees of $209,704 to Kenneth J. Warren, a director, Secretary and general counsel, during the fiscal year ended May 31, 2002.
On October 26, 2001, the Johnston Family Charitable Foundation ("Foundation") lent to the Company $1,250,000 in exchange for a subordinated note ("Subordinated Note") convertible into common stock at $0.25 per share and a warrant for 300,000 shares exercisable at $0.25 per share, as reported in the Company's proxy statement for the Special Meeting of Stockholders which occurred on January 28, 2002. Richard P. Johnston, Chairman of the Board and CEO, beneficial owner of 69.5% of the Company's stock and director; his spouse, Jayne A. Johnston; and Kenneth J. Warren, Secretary of the Company and director and beneficial owners of a 9.8% of the Company's stock, are Trustees of the Foundation. David E. Johnston, director of the Company, and son of Richard P. Johnston and Jayne A. Johnston, is President of the Foundation.
On February 28, 2002, in a privately negotiated transaction, the Johnston Family Living Trust (the "Trust") lent to the Company the sum of $150,000 and received therefor Trust Warrant 1 providing for the purchase of up to 36,000 shares at a price of $.25 per share and the Trust Note convertible into 600,000 shares at a price of $.25 per share based on its original principal amount (plus additional shares for interest), which is not convertible until the occurrence of a default. The Trust has agreed in principle to a subordination arrangement with the Company's lender on substantially the same terms as are contained in an existing subordination agreement between the Foundation, the Company and the Company's lender. In connection with this transaction, the Trust entered into a Registration Rights Agreement. The Trust and the Company have entered into a Designation Agreement described under "Item 10" above.
In a privately negotiated transaction, the Company entered into a Conversion Agreement dated March 11, 2002 with the Foundation pursuant to which the Foundation converted its principal debt of $1,250,000 represented by the Subordinated Note into equity and, upon request of the Company's institutional lender, the conversion was deemed to have occurred on March 11, 2002. The conversion also covered shares issuable on conversion in respect of interest accruing through March 31, 2002. The shares issuable under the terms of the Conversion Agreement are included in the shares reported as beneficially owned by Richard P. Johnston. The Foundation and the Company have entered into a Designation Agreement described under "Item 10" above.
In a privately negotiated transaction, on March 19, 2002, the Company entered into a Guaranty Agreement with the Trust, whereby, the Trust agreed to provide a guarantee of the repayment of certain amounts of money the Company is obligated to pay to the Issuer's institutional lender and others. If the Trust was required to provide the maximum amount of funds under the Guaranty Agreement, $605,000, and the Trust elected to convert the amount of such debt into shares at the rate of $.25 per share, the Trust would receive 2,420,000 shares, excluding any shares that may be obtainable by converting any additional amounts of interest that may be either paid by the Trust on behalf of debt owed by the Issuer, or owed to the Trust. In exchange for entering into the Guaranty Agreement, the Trust was granted Trust Warrant 2 providing for the purchase of up to 59,200 shares at a price of $.25 per share, and the right to purchase an additional 86,000 shares at the same price upon the occurrence of certain events. On April 10, 2002, the Guaranty Agreement and Trust Warrant 2 were amended. Under the amended agreements, the Trust would still receive 2,420,000 shares, excluding any shares that may be obtainable by converting any additional amounts of interest that may be either paid by the Trust on behalf of debt owed by the Company, or owed to the Trust but now would immediately receive the right to purchase 145,200 shares at a price of $.25 per share. The shares issuable under the terms of the Guaranty Agreement and Trust Warrant 2 are included in the shares reported as beneficially owned by Richard P. Johnston.
In a privately negotiated transaction, the Company entered into Trust Conversion Agreement II dated as of August 9, 2002 with the Trust whereby the Trust converted the entire indebtedness of $155,571.81 evidenced by the Trust note into 622,687 shares at the price of $.25 per share on August 9, 2002. The conversion covered shares issuable on conversion in respect of interest accrued through August 9, 2002. These shares are included in the shares reported as beneficially owned by Richard P. Johnston.
On August 9, 2002, Richard P. Johnston entered into an agreement concerning letter of credit with the Company's lending bank and delivered an irrevocable letter of credit to the lending bank to secure up to $1.0 million of certain of the Company's indebtedness to the lending bank. Concurrently therewith, RA has agreed to issue to Mr. Johnston 2,000 shares of RA stock. No compensation in respect of the agreement concerning letter of credit is to be provided to Mr. Johnston by the Company other than the expenses incurred relating to the letter of credit ($15,000).
Richard P. Johnston has guaranteed the full and timely payment by the Company to James Davidson of Mr. Davidson's Employment Package.
On February 28, 2002, in a privately negotiated transaction, DWR, Custodian for Kenneth Warren, Attorney at Law, fbo Kenneth J. Warren, VIP Plus Profit Sharing Plan (the "Profit Sharing Plan") lent to the Company the sum of $50,000 and received therefor the KJW Warrant to purchase up to 12,000 shares at a price of $.25 per share and the KJW Note convertible into 200,000 shares at a price of $.25 per share based on its original principal amount (plus additional shares for interest), which is not convertible until the occurrence of a default. Mr. Warren has agreed in principle to a subordination arrangement with the Company's lender on substantially the same terms as are contained in an existing subordination agreement between the Foundation, the Company and the Company's lender. In connection with this transaction, the Profit Sharing Plan entered into a Registration Rights Agreement with the Company. On August 9, 2002, the Profit Sharing Plan entered into a Conversion Agreement with the Company whereby the Profit Sharing Plan converted the entire indebtedness evidenced by the KJW Note into 207,562 shares at the price of $.25 per share. The conversion covered shares issuable on conversion in respect of interest accrued through August 9, 2002. These shares are included in the shares reported as beneficially owned by Mr. Warren.
On March 8, 2002, in a privately negotiated transaction, Christopher A. Johnston lent to the Company the sum of $150,000 and received therefor the CAJ Warrant to purchase up to 36,000 shares at a price of $.25 per share and the CAJ Note convertible into 600,000 shares at a price of $.25 per share based on its original principal amount (plus additional shares for interest), which is not convertible until the occurrence of a default. Mr. Johnston agreed in principle to a subordination arrangement with the Company's lender on substantially the same terms as are contained in an existing subordination agreement between the Foundation, the Company and the Company's lender. In connection with this transaction, Mr. Johnston entered into a Registration Rights Agreement with the Company.
On August 9, 2002, Christopher A. Johnston, as a 49.9% owner, and Kenneth J. Warren, as a 50.1% owner, formed RIFL LLC. Thereafter, in a privately negotiated transaction, RIFL LLC purchased from Mr. Johnston's IRA the CAJ Note (to which Mr. Johnston had assigned the CAJ Note) in exchange for a promissory note of RIFL LLC in the original principal amount of $150,000 plus accrued and unpaid interest on the CAJ Note. In a privately negotiated transaction, the Company entered into a Conversion Agreement dated as of August 9, 2002 with RIFL LLC pursuant to which RIFL LLC converted the entire indebtedness of $155,671.81 evidenced by the CAJ Note into 622,687 shares at $.25 per share on August 9, 2002. The conversion covered shares issuable on conversion in respect of interest accrued through August 9, 2002. These shares are included in the shares reported as beneficially owned by Messrs. Warren and Johnston.
On August 9, 2002, Christopher A. Johnston entered into an agreement concerning letter of credit with the Company's lending bank and delivered an irrevocable letter of credit to the lending bank to secure up to $1.0 million of the Company's indebtedness to the lending bank. Concurrently therewith, RA has agreed to issue to Mr. Johnston 2,000 shares of RA stock. No compensation in respect of the agreement concerning letter of credit is to be provided to Mr. Johnston by the Company other than the expenses incurred relating to the letter of credit ($38,500).
On February 28, 2002, in a privately negotiated transaction, Charles S. Mechem, Jr. lent to the Company the sum of $50,000 and received therefor the CSM Warrant to purchase up to 12,000 shares at a price of $.25 per share and the CSM Note convertible into 200,000 shares at a price of $.25 per share based on its original principal amount (plus additional shares for interest), which is not convertible until the occurrence of a default. Mr. Mechem has agreed in principle to a subordination arrangement with the Company's lender on substantially the same terms as are contained in an existing subordination agreement between the Foundation, the Company and the Company's lender. In connection with this transaction, Mr. Mechem entered into a Registration Rights Agreement with the Company. On August 9, 2002, Mr. Mechem entered into a Conversion Agreement with the Company whereby he converted the entire indebtedness evidenced by the CSM Note into 207,562 shares at the price of $.25
per share. The conversion covered shares issuable on conversion in respect of interest accrued through August 9, 2002. These shares are included in the shares reported as beneficially owned by Mr. Mechem.
On February 28, 2002, in a privately negotiated transaction, John C. Lauchnor lent to the Company the sum of $25,000 and received therefor the JCL Warrant to purchase up to 6,000 shares at a price of $.25 per share and the JCL Note convertible into 100,000 shares at a price of $.25 per share based on its original principal amount (plus additional shares for interest), which is not convertible until the occurrence of a default. Mr. Lauchnor has agreed in principle to a subordination arrangement with the Company's lender on substantially the same terms as are contained in an existing subordination agreement between the Foundation, the Company and the Company's lender. In connection with this transaction, Mr. Lauchnor entered into a Registration Rights Agreement with the Company. On August 9, 2002, Mr. Lauchnor entered into a Conversion Agreement with the Company whereby he converted the entire indebtedness evidenced by the JCL Note into 103,781 shares at the price of $.25 per share. The conversion covered shares issuable on conversion in respect of interest accrued through August 9, 2002. These shares are included in the shares reported as beneficially owned by Mr. Lauchnor.
On April 17, 2002, Royal Associates, Inc. ("RA"), a corporation, the shares of which are owned by Richard P. Johnston, Christopher A. Johnston, David E. Johnston, Kenneth J. Warren, John C. Lauchnor, Charles S. Mechem, Jr., all directors of the Company, and Robert Jaycox, presented an offer to the Company whereby the Company would be merged with RA or a subsidiary thereof and certain parties affiliated with RA and shares held by stockholders perfecting their dissenting rights under Delaware law, would be converted into the right to receive cash upon surrender of the certificate representing such shares. On June 11, 2002, RA orally amended its April 17 proposal to the Company increasing the proposed merger consideration from $.30 per share to $.37 per share. On the same day, the Company and a Special Committee then consisting of Raymond J. Minella, an outside director, received the oral opinion from a financial advisor as to the fairness of the offer. The transaction remains subject to the negotiation and execution of a definitive merger agreement, approval of the Company's stockholders and certain other conditions. If the merger is consummated, after the merger, RA will be a holding company with the Company as its majority-owned subsidiary.
Commencing in January 2003, the Company proposes to begin paying to RA a management fee of $240,000 per year for services rendered and to be rendered to the Company. In turn, substantially all of such fee is expected to be paid by RA to Richard P. Johnston and Christopher A. Johnston as salary for performing the services RA is to perform for the Company. Richard P. Johnston is an executive officer, director and beneficial owner of 69.5% of the Company's common stock and is an officer, director and beneficial owner of approximately 61.2% of the common stock of RA. Christopher A. Johnston is a director and beneficial owner of 16.3% of the Company's common stock and is an officer, director and beneficial owner of approximately 14.2% of the common stock of RA..
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements.
Report of Ernst & Young LLP Independent Auditors....................14 Report of Independent Public Accountants............................15 Consolidated Balance Sheets.........................................16 Consolidated Statements of Operations...............................17 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss).....................................................18 Consolidated Statements of Cash Flows...............................19 Notes to Consolidated Financial Statements..........................20
(b) Reports on Form 8-K.
The following current reports on Form 8-K were filed during the last quarter of the period covered by this report:
(i) Current Report on Form 8-K filed March 2, 2002; (ii) Amendment No. 1 dated April 25, 2002 to Current Report on Form 8-K filed February 1, 2002; and (iii) Current Report on Form 8-K filed May 24, 2002.
(c) Exhibits.
The Index to Exhibits and required Exhibits are included following the Financial Statement Schedule beginning on page 51 of this report.
(d) Financial Statement Schedule.
Schedule II - Valuation and Qualifying Accounts and Reserves.......S-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 22, 2002 ROYAL PRECISION, INC. (the "Registrant")
By /s/ John C. Lauchnor ------------------------------------- John C. Lauchnor, President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 22nd day of August, 2002.
NAME TITLE (CAPACITY) ---- ----------------
/s/ John C. Lauchnor President and Chief Operating - ------------------------------------- Officer (principal executive John C. Lauchnor officer)
/s/ Frank W. Mertes* Vice President-Finance, Chief - ------------------------------------- Financial Officer (principal Frank W. Mertes financial officer)
/s/ Richard P. Johnston* Director - ------------------------------------- Richard P. Johnston
/s/ David E. Johnston* Director - ------------------------------------- David E. Johnston
/s/ Raymond J. Minella* Director - ------------------------------------- Raymond J. Minella
/s/ Charles S. Mechem, Jr.* Director - ------------------------------------- Charles S. Mechem, Jr.
/s/ Christopher A. Johnston* Director - ------------------------------------- Christopher A. Johnston
/s/ Kenneth J. Warren* Director - ------------------------------------- Kenneth J. Warren
* John C. Lauchnor, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a Power of Attorney duly executed by such persons.
By: /s/ John C. Lauchnor ------------------------------------- John C. Lauchnor, Attorney in Fact
ROYAL PRECISION, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000 (DOLLARS IN THOUSANDS)
(a) Reduction in goodwill related to preacquisition net operating loss carryforwards.
S-1
EXHIBIT INDEX
* Incorporated by reference.
** Compensatory plan for executive officers and directors.
The Registrant will furnish a copy of any exhibit to a beneficial owner of its securities or to any person from whom a proxy was solicited in connection with the Registrant's most recent Annual Meeting of Stockholders upon the payment of a fee of fifty cents ($.50) per page.