ROYAL ROBBINS, INC.
| August 31, | May 31, | |||||||||
| 2003 | 2003 | |||||||||
| (Unaudited) | ||||||||||
| ASSETS | ||||||||||
| CURRENT ASSETS: | ||||||||||
| Cash and cash equivalents | $ | 401,000 | $ | 503,000 | ||||||
| Accounts receivable, less allowance for doubtful accounts of $65,000 | 3,816,000 | 4,332,000 | ||||||||
| Receivable from affiliate | — | 1,506,000 | ||||||||
| Receivable from stockholder | 14,000 | 14,000 | ||||||||
| Inventory | 2,392,000 | 1,880,000 | ||||||||
| Prepaid expenses | 693,000 | 212,000 | ||||||||
| Deferred income taxes | 163,000 | 165,000 | ||||||||
| Total current assets | 7,479,000 | 8,612,000 | ||||||||
| PROPERTY AND EQUIPMENT, Net | 535,000 | 587,000 | ||||||||
| DEPOSITS | 13,000 | 13,000 | ||||||||
| TOTAL | $ | 8,027,000 | $ | 9,212,000 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
| CURRENT LIABILITIES: | ||||||||||
| Accounts payable and accrued expenses | 1,565,000 | 1,118,000 | ||||||||
| Line of credit borrowings | 1,588,000 | 3,338,000 | ||||||||
| Demand notes payable, stockholders’ trust | 600,000 | 600,000 | ||||||||
| Current maturities of notes payable | 319,000 | 346,000 | ||||||||
| Current maturities of notes payable to stockholders’ trust | 161,000 | 214,000 | ||||||||
| Total current liabilities | 4,233,000 | 5,616,000 | ||||||||
| DEFERRED INCOME TAXES | 2,000 | |||||||||
| LONG-TERM DEBT: | ||||||||||
| Income taxes payable | 80,000 | — | ||||||||
| Notes payable, less current maturities | 18,000 | 18,000 | ||||||||
| Notes payable to stockholders’ trusts, less current maturities | 692,000 | 692,000 | ||||||||
| Total long-term debt | 790,000 | 710,000 | ||||||||
| COMMITMENTS | ||||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||||
| Common stock, no par value; 1,068,760 shares authorized, 900,000 shares issued and outstanding | 134,000 | 134,000 | ||||||||
| Retained earnings | 2,870,000 | 2,750,000 | ||||||||
| Total stockholders’ equity | 3,004,000 | 2,884,000 | ||||||||
| TOTAL | $ | 8,027,000 | $ | 9,212,000 | ||||||
See notes to financial statements.
ROYAL ROBBINS, INC.
| Three Months Ended | ||||||||||
| August 31, | August 31, | |||||||||
| 2003 | 2002 | |||||||||
| NET SALES | $ | 3,304,000 | $ | 3,129,000 | ||||||
| COST OF GOODS SOLD | 1,600,000 | 1,671,000 | ||||||||
| GROSS PROFIT | 1,704,000 | 1,458,000 | ||||||||
| ROYALTY INCOME | 49,000 | 59,000 | ||||||||
| GROSS PROFIT AND ROYALTY INCOME | 1,753,000 | 1,517,000 | ||||||||
| OPERATING EXPENSES: | ||||||||||
| Selling, general and administrative expenses | 1,498,000 | 1,784,000 | ||||||||
| Other expenses — net | — | — | ||||||||
| Total operating expenses | 1,498,000 | 1,784,000 | ||||||||
| OPERATING INCOME (LOSS) | 255,000 | (267,000 | ) | |||||||
| INTEREST EXPENSE | 55,000 | 47,000 | ||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 200,000 | (314,000 | ) | |||||||
| INCOME TAX PROVISION (BENEFIT) | 80,000 | (126,000 | ) | |||||||
| NET INCOME (LOSS) | $ | 120,000 | $ | (188,000 | ) | |||||
See notes to financial statements.
ROYAL ROBBINS, INC.
| Three Months Ended | ||||||||||||
| August 31, | August 31, | |||||||||||
| 2003 | 2002 | |||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net Income (loss) | $ | 120,000 | $ | (188,000 | ) | |||||||
| Adjustments to reconcile net income (loss) to net cash (used) provided by operating activities: Depreciation and amortization | 52,000 | 55,000 | ||||||||||
| Changes in assets and liabilities: | ||||||||||||
| (Increase) decrease in: | ||||||||||||
| Accounts receivable — net | 517,000 | 1,037,000 | ||||||||||
| Inventories — net | (511,000 | ) | (878,000 | ) | ||||||||
| Receivable from affiliate | 1,506,000 | — | ||||||||||
| Other current assets | (483,000 | ) | 63,000 | |||||||||
| Increase (decrease) in: | ||||||||||||
| Accounts payable | 447,000 | (12,000 | ) | |||||||||
| Income taxes payable | 80,000 | (126,000 | ) | |||||||||
| Net cash provided (used) by operating activities | 1,728,000 | (49,000 | ) | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Net (payments) borrowings on note payable — line of credit | (1,750,000 | ) | 260,000 | |||||||||
| Proceeds on note payable and related party borrowings | (80,000 | ) | (37,000 | ) | ||||||||
| Net cash (used) by financing activities | (1,830,000 | ) | 223,000 | |||||||||
| NET DECREASE IN CASH | (102,000 | ) | 174,000 | |||||||||
| CASH — Beginning of period | 503,000 | 126,000 | ||||||||||
| CASH — End of period | $ | 401,000 | $ | 300,000 | ||||||||
| SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||||||
| Cash paid during the period for: | ||||||||||||
| Interest | $ | 91,000 | $ | 47,000 | ||||||||
| Income taxes | $ | 5,000 | $ | — | ||||||||
See notes to Financial Statements.
ROYAL ROBBINS, INC.
NOTES TO FINANCIAL STATEMENTS
| 1. | Description of Business and Significant Accounting Policies |
Description — Royal Robbins Inc., a California corporation, (the “Company”) is a wholesaler, designer and retailer of outdoor sportswear located in Modesto, California. The Company’s principal market includes specialty retailers with single and multiple locations throughout the United States. The Company also sells its products through two Company owned retail stores and the internet. In fiscal 2003, wholesale and retail sales were approximately 91% and 9% of net sales, respectively.
The Company transferred its tactical clothing line, which comprised approximately 23% of the Company’s sales to outside parties in fiscal 2003, to an affiliate (see Note 5).
On October 2, 2003, the Company’s stockholders signed an agreement to sell their common stock in the Company (see Note 5).
Use of Estimates — 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. Actual results could differ from those estimates.
| 2. | Notes Payable to Related Parties |
The Company has notes payable to the majority stockholders’ trust in the amount of $255,000, $245,000 and $100,000, originating in February, March and April 2001, respectively. The notes bear interest at an annual rate of 7.5%. Interest is paid monthly. The principal and any accrued, unpaid, interest are payable to the stockholder on demand. Each note is unsecured and subordinated to the bank debt. At August 31, 2003 and May 31, 2003, a total of $600,000 was outstanding under these notes (see Note 5).
| 3. | Line of Credit |
The Company has a revolving credit facility with a bank, which allows for borrowings of up to $8,000,000 through June 1, 2003 and $7,000,000 thereafter, and provides for letters of credit, acceptances and working capital advances. The facility expires on February 15, 2004.
The maximum credit available under the facility is adjusted based on accounts receivable and inventory balances to determine the eligible borrowing base. The current facility bears an interest rate on advances at the bank’s prime rate plus 0.75%.
The credit facility is collateralized by inventory, accounts receivable and equipment and requires the Company to comply with certain financial and non-financial covenants, which among other things, require the Company to maintain certain financial ratios as defined by the loan. As of May 31, 2003, the Company was not in compliance with certain financial covenants; accordingly, the related debt is callable by the bank and has been classified as current at May 31, 2003. The credit facility is also personally guaranteed up to $3,500,000 by the majority stockholder.
Long-Term Debt
The Company has long-term debt consisting of notes payable to majority stockholders’ revocable trust and various banks and financials institutions. Total long-term debt as of May 31, 2003 and August 31, 2003 was $1.3 million and $1.2 million, respectively.
NOTES TO FINANCIAL STATEMENTS — (Continued)
| 4. | Related Party Transactions |
During fiscal 2003, the Company transferred to an affiliated entity, 5.11, Inc. (“5.11”), a commonly controlled affiliate formed for the purpose of acquiring the tactical clothing line of the Company, inventory from its tactical line at book value of $1,375,000 and certain fixed assets at book value of $35,000. Additionally, during fiscal 2003 the Company incurred expenses on behalf of 5.11 in the amount of $96,000 (see Note 5). As of May 31, 2003, the aggregate of such amounts ($1,506,000) comprises receivable from affiliate.
In February 2003, the Company entered into an agreement for certain corporate advisory services to be performed related to planning for a potential sale of the Company. Such fees, aggregating $50,000 through May 31, 2003, were paid by the majority stockholder and such payment has been reflected in other expenses and as a capital contribution.
| 5. | Subsequent Events |
Subsequent to the end of the fiscal year ended May 31, 2003, pursuant to an agreement between the Company and 5.11, the Company transferred to 5.11, the remaining assets and liabilities of the tactical clothing line at book value. The primary assets of the tactical clothing line, inventory and fixed assets, had been transferred prior to the end of the fiscal year. The Company transferred to 5.11 foreign accounts receivable ($80,000), trademarks, patents and other intangibles, pending sales orders, accounts payable, a facility lease, and other assets and liabilities as further defined in the agreement. The Company also granted to 5.11 a five year, royalty-free license to use certain licensed trademarks in connection with tactical line products and agreed not to engage in competition with 5.11 for a period of five years. Additionally, 5.11 granted the Company a perpetual royalty-free license to use certain licensed trademarks in connection with the Company’s products.
On October 2, 2003, the Company’s stockholders signed a Stock Purchase Agreement, (“SPA”) effectively selling 100% of the Company’s common stock to Phoenix Footwear Group (“Phoenix”), a publicly-traded company, for total consideration of $6.5 million, of which $6.0 million is payable in cash, less amounts to be paid by Phoenix related to notes payable to the stockholder and stockholders’ trust and the award letters (see below), and 71,889 shares of Phoenix common stock valued at $500,000. Under the SPA, additional consideration which is contingent upon the Company’s gross profit performance in fiscal 2004 and 2005, would also be payable to the stockholders and former Plan participants. The transaction is expected to close by October 31, 2003.
As further described in the SPA, upon the close of the transaction, the phantom stock plan will be terminated and award letters executed by each plan participant. The award letters provide that, upon closing, plan participants will be paid up to $450,000 in cash as compensation for phantom shares held under the terminated plan.
Additionally, under the terms of the SPA, all the Company’s transactions with affiliates must be settled prior to or as a part of the close of the transaction.
