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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDING MARCH 2, 1996
COMMISSION FILE NO. 0-921
PROGROUP, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 062-0331019
- ------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
6201 MOUNTAIN VIEW ROAD, OOLTEWAH, TN 37363
- ----------------------------------------------------- ----------------
Registrant's telephone number, (including area code) (423) 238-5890
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Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK -- PAR VALUE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
$.50 PER SHARE AUTOMATED QUOTATION SYSTEM -- SMALL CAP MARKET
- ------------------------- ------------------------------------------------
(Title of Class) (Name of Exchange on which Registered)
Securities registered pursuant to Section 12(g) of the Act:
NONE
----------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of May 24, 1996, the aggregate market value of the voting stock held by
non-affiliates was approximately $8,805,000 (based on the closing price on that
date of $5.00 per share).
As of May 24, 1996, 2,826,805 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the Registrant's Proxy Statement for the Annual
Meeting of Shareholders to be held July 15, 1996, are incorporated by reference
into Part III of this Form 10-K. Other documents incorporated by reference in
this report are listed in the Exhibit Index.
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PART I
ITEM 1. BUSINESS
GENERAL
ProGroup, Inc. ("ProGroup" or the "Company") was incorporated in Tennessee
in 1932 and began operations as the Professional Golf Co., Inc. In 1966 it
merged with First Flight Co. and in 1975 changed its name to ProGroup, Inc.
ProGroup manufactures, markets and distributes a full line of golf products,
including Arnold Palmer and First Flight golf equipment, and Hot-Z golf bags and
luggage. ProGroup owns, subject to certain exceptions, the exclusive worldwide
right to the Arnold Palmer trade name in connection with the Company's
manufacture, sale and distribution of golf products. For purposes of this
report, "fiscal 1996, 1995, and 1994" refer to the fiscal years ended March 2,
1996, February 25, 1995 and February 26, 1994, respectively.
DEVELOPMENTS DURING FISCAL 1996
In May 1995, the Company announced the sale of its Duckster line of golf
apparel. The operating results for the apparel segment through the date of the
sale have been reflected as discontinued operations in the Company's 1996
operating results. In the fourth quarter of fiscal 1996, the Company entered
into a long-term licensing agreement with Cobra Golf Incorporated, pursuant to
which Cobra Golf will exclusively license ProGroup's patented heel weighting and
hosel technology and the Company will be paid a royalty. Effective December 7,
1995, the Company's stock began trading on the Nasdaq Small Cap Market.
Effective January 1, 1996, George H. Nichols became the Company's President and
Chief Operating Officer. The Company announced that it will change its name to
The Arnold Palmer Golf Company, subject to shareholder approval at the July 15,
1996 shareholders meeting.
PRINCIPAL PRODUCTS
The Company manufactures and markets golf clubs, golf bags, golf
accessories and luggage.
MARKETS
The principal market for the products sold by the Company is the United
States. Foreign sales were negligible in fiscal 1996. Certain golf equipment is
manufactured and distributed on a contract basis to other wholesalers. Branded
golf products are sold to pro shops and retailers.
METHODS OF DISTRIBUTION
The principal method of distribution of the Company's products is through
independent sales representatives. The Company's products are sold through
separate and distinct trade channels: golf courses and resorts; golf shops not
affiliated with golf courses; major retailers; and special markets. In
connection with the sale of the Company's apparel operations in May 1995, the
buyer employed the sales representatives and sales management personnel
previously employed by the Company and the Company entered into a three year
agreement with the buyer to provide sales representation services with regard to
its Hot-Z and Palmer products.
SOURCES OF SUPPLIES OR RAW MATERIALS
The Company's major sources of supplies or raw materials are as follows:
<TABLE>
<CAPTION>
SOURCE RAW MATERIAL
------------------------------------------------------------------------------------
<S> <C>
Morbern USA Ltd. Vinyl
YKK, Inc. Zippers, sliders, webbing, Velcro
Intro-Union Trading Limited Iron Heads, Wood Heads
True Temper Sports, Inc. Shafts
</TABLE>
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While the Company has not experienced significant delays in receiving
supplies or raw materials, it does recognize the fact that, in some cases, only
a limited number of suppliers are available.
LICENSES, PATENTS, ETC.
As of March 1, 1992, the Company entered into an agreement (the "License
Agreement") with Arnold Palmer Enterprises, Inc. ("Enterprises"), pursuant to
which the Company obtained a license to use the name, likeness and endorsement
of Arnold Palmer ("Palmer"), a Director of the Company, in connection with the
advertisement, promotion and sale of golf clubs, bags, balls, gloves and other
products.
The License Agreement grants to the Company an exclusive worldwide right,
subject to certain exceptions, to use words or symbols, photographic
representations, images, likenesses or endorsements of Palmer in connection with
the Company's manufacture, sale and distribution of golf products for a period
of ten years from March 1, 1992, the effective date of the License Agreement.
The Company also has the right under the License Agreement to sublicense to
third parties the right to use the licensed trademarks. The contract period may
be extended from March 1, 2002 for successive five year terms upon the
satisfaction of certain conditions. The License Agreement may also be earlier
terminated upon the death or disability of Palmer. The License Agreement also
gives the Company the right to acquire the use of the Palmer identification in
connection with the manufacture, sale and distribution of certain other products
upon the termination of certain licensing arrangements with third party
licensees. In exchange for the grant of such license, the Company pays
Enterprises as a royalty a specified percentage of net sales of each different
product category. The Company also pays a minimum annual royalty regardless of
the royalty amount determined as a percentage of product sales. The License
Agreement also sets forth the manner in which the Company and Enterprises divide
sublicensing royalties. In addition to the foregoing, the License Agreement
contains provisions relative to the appearances of Palmer to promote the
licensed products and product usage by Palmer.
The Company is in the process of negotiating an extension of the License
Agreement and a modification of certain of its terms. It is expected that this
modification will be completed by early June 1996.
SEASONAL BUSINESS
Golf equipment manufactured and marketed by the Company is largely for warm
weather recreation. The first quarter of the Company's fiscal year, the spring,
is the start of the golf season and typically the Company's sales are at their
highest level of the year. Sales for the second quarter, June through August,
consist largely of reorders, to fill in customer service levels. The second half
of the year, fall and winter, generates a lower level of sales.
WORKING CAPITAL PRACTICES
It is necessary for the Company and the industry to carry significant
amounts of finished goods inventory during the winter months to meet customer
demands in the spring and summer months.
The Company and the industry provide extended payment terms to customers
due to the seasonal nature of the business in an effort to generate higher
sales. Also, the Company and the industry provide rights to return merchandise
in certain circumstances.
CUSTOMERS
The Company's three largest customers accounted for 13%, 11% and 7%,
respectively, of the Company's total sales during fiscal 1996.
BACKLOGS
With regard to continuing operations, the Company's backlog of unshipped
orders was approximately $4,749,000 on March 2, 1996, and approximately
$3,367,000 on February 25, 1995.
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GOVERNMENT CONTRACTS
No material portion of the Company's business is subject to renegotiation
of profits on termination of contracts or subcontracts at the election of the
Government.
COMPETITIVE CONDITIONS
The principal methods of competition of the Company are through customer
service, pricing and the quality of the products sold. One negative factor
pertaining to the competitive position of the Company is that the number of
suppliers for raw materials such as shafts and club heads for making golf clubs
is limited. Another negative factor is the proliferation of competitive products
available resulting in keen price competition in the golf industry. Among the
Company's competitors are numerous companies that have substantially greater
financial resources, manufacturing capabilities, and larger design, sales and
marketing staffs than the Company.
RESEARCH
No material amount was spent by the Company during fiscal 1996, 1995, or
1994 on Company-sponsored research and development activities. No material
amount was spent in such years on customer-sponsored research activities
relating to the development of new products, services or techniques or the
improvement of existing products, services or techniques.
ENVIRONMENTAL MATTERS
Compliance with federal, state and local provisions which have been enacted
or adopted regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment, has not had, and is not
expected to have any material adverse effect upon the capital expenditures,
earnings or competitive position of the Company.
EMPLOYEES
The Company employed 198 people as of March 2, 1996.
OPERATIONS AND SALES TO FOREIGN COUNTRIES
The Company markets its products on a limited basis in foreign countries.
The revenue derived from such foreign sales was less than 1% of net sales for
fiscal 1996, 1995 and 1994. Foreign sales are not expected to be material during
the 1996 fiscal year ending September 30, 1996.
ITEM 2. PROPERTIES
The Company owns or leases materially important properties as follows:
(a) 6201 Mountain View Road, Ooltewah, Tennessee, is a leased building
of cinder block and wood construction containing approximately 95,000
square feet. The Company leases approximately 20,000 square feet of office
space to house its main administrative offices.
(b) Hotze Road, Pocahontas, Arkansas, is an owned facility consisting
of a building of metal structure containing 72,000 square feet. This
facility is used for manufacturing golf bags and warehousing raw
materials.
(c) Route #1, Pocahontas, Arkansas, is an owned facility consisting of
a two story brick and cinder block building containing 33,000 square feet.
This facility is idle and was sold subsequent to year end.
(d) 2100 West Fifth Street, Lumberton, North Carolina, is an owned
facility consisting of a building of brick and frame structure containing
66,000 square feet. This facility is idle and currently for sale.
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(e) 1512 Sholar Avenue, Chattanooga, Tennessee, is a leased building
of cinder block and concrete construction containing 47,400 square feet.
This building is used for manufacturing golf clubs, warehousing and
shipping.
(f) 195 Highway 62 West, Pocahontas, Arkansas, is a leased building of
cinder block and concrete construction containing 52,345 square feet. This
building is used for warehousing and shipping.
ITEM 3. LEGAL PROCEEDINGS
Except as set forth below, the Company is not a party to any material
pending legal proceedings, other than ordinary routine litigation incidental to
the business, nor is any of its property the subject of any such proceedings.
On March 25, 1996, Richard E. Wenz, the former CEO of the Company, filed a
lawsuit against Arthur P. Becker, formerly Chairman of the Board and currently a
Board member of the Company, in the United States District Court for the
Southern District of New York. The lawsuit arises out of the publication in the
June 12, 1995 edition of Fortune magazine of certain statements relating to Mr.
Wenz's relationship with the Company which were attributed to Mr. Becker.
The complaint alleges a cause of action against Mr. Becker for defamation
per se and seeks compensatory damages of at least $10 million, plus punitive
damages in an unspecified amount. Pursuant to the provisions of the Amended and
Restated By-Laws of the Company and the applicable provisions of the Tennessee
Business Corporation Act, the Company has agreed to indemnify Mr. Becker from
liability which he may incur as a result of the lawsuit. The Company has also
agreed to advance certain costs of defense of the lawsuit to Mr. Becker.
On May 21, 1996, Mr. Wenz amended his complaint by adding Time Inc., the
publisher of Fortune magazine, as an additional defendant in the lawsuit. The
cause of action alleged against Time Inc. is also for defamation per se, arises
out of the same June 12, 1995 article, and also seeks compensatory damages of at
least $10 million.
On April 15, 1996, Mr. Becker filed his answer to the original complaint.
The answer denied all allegations of wrongdoing and set forth 15 affirmative
defenses. As of this date, Time Inc. has not answered or otherwise responded to
the amended complaint.
As of this date, no discovery has taken place, and it is premature to
speculate upon the ultimate resolution or outcome of the lawsuit. Mr. Becker
intends to defend the suit vigorously.
The Company is involved in litigation with Richard E. Wenz in which Mr.
Wenz has alleged the Company has breached the terms of Mr. Wenz's employment
agreement and separation agreement with the Company. The Company does not
expect the resolution of the suit to have a material adverse effect on the
operating or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal 1996 to a
vote of security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
MARKET PRICES
The Company's common shares trade on The Nasdaq Stock Market under the
symbol "PRGR." Based upon transfer agent records, the Company's common shares
were held by approximately 1,600 shareholders as of May 24, 1996.
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A quarterly summary of the high and low market prices per common share for
fiscal 1996 and 1995 as reported by Nasdaq is shown below:
<TABLE>
<CAPTION>
1996 1995
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QUARTER ENDED: HIGH LOW HIGH LOW
----- ----- ------ -----
<S> <C> <C> <C> <C>
May............................................ $8.50 $5.00 $13.75 $9.50
August......................................... 5.75 3.75 10.25 5.75
November....................................... 6.00 3.50 10.25 5.50
February....................................... 6.50 3.75 9.00 5.75
</TABLE>
DIVIDENDS
Payment of dividends is at the discretion of the Company's Board of
Directors and depends, among other factors, on earnings, capital requirements
for planned growth, and the operating and fiscal condition of the Company. No
dividends were paid during fiscal 1996 and 1995.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 1992
----------------------------------------------- TRANSITION
1996 1995 1994 1993 1991 PERIOD
------- ------- ------- ------- ------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Information:
Net sales............................. $21,185 $24,621 $24,726 $18,697 $18,623 $ 4,425
Net loss from continuing operations... (5,625) (9,460) (1,054) (1,016) (702) (2,617)
Balance Sheet Information:
Total assets.......................... 18,560 31,271 40,258 36,435 27,275 25,060
Long-term obligations................. 4,671 7,473 3,621 572 2,409 651
Per Common Share Data:
Net loss per share from continuing
operations......................... (2.15) (3.73) (.42) (.42) (.30) (1.11)
Dividends per share................... $ 0 $ 0 $ 0 $ 0 $ .10 $ 0
Common shares outstanding at end of
period............................. 2,635 2,539 2,537 2,517 2,353 2,353
</TABLE>
In February 1992, the board of directors of the Company approved a change
in fiscal year-end from one ending on the Saturday closest to the end of
September to one ending on the Saturday closest to the end of February. Selected
financial data for fiscal 1996, 1995, 1994 and 1993 relates to the years ended
March 2, 1996, February 25, 1995, February 26, 1994, and February 27, 1993,
while fiscal 1991 relates to the year ended September 28, 1991. The 1992
transition period relates to the five-month period ended February 22, 1992.
Effective February 28, 1993, the Company elected to change its method of
inventory valuation from the last-in, first-out ("LIFO") method to the first-in,
first-out ("FIFO") method. As required by generally accepted accounting
principles, the Company has retroactively restated the prior period financial
statements for this change.
In May 1995, the Company sold its Duckster line of business. The results of
discontinued operations have been reported separately from the results of
continuing operations.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Comparison of Years Ended March 2, 1996, and February 25, 1995
FINANCIAL CONDITION
As of March 2, 1996, the Company had working capital of $1.3 million and a
current ratio of 1.1 to one. The Company generally relies upon internally
generated cash and short-term borrowings to satisfy working capital and capital
expenditure needs. Due to the seasonality of the golf industry, the Company
maintains a $15 million short-term line of credit which was utilized as needed
throughout fiscal 1996. Generally, borrowings under the line increase from
December through April due to higher levels of inventory purchases to support
the Spring shipping season. Outstanding borrowings under the short-term line of
credit as of March 2, 1996, were $10.1 million. Advances under this line bear
interest at LIBOR plus 2 points (7.8125% at March 2, 1996) on the first $6
million outstanding and 7.1562% on the next $3.7 million outstanding.
Outstanding amounts in excess of $9.7 million bear interest at the prime rate
less .50% (7.75% at March 2, 1996).
The $15 million line of credit agreement was executed with a bank in
September 1995 and was scheduled to mature on July 15, 1996. Subsequent to
March 2, 1996, the maturity date was extended to February 1997. The new line of
credit replaced the Company's previous line of credit under which the Company
had been in violation of financial covenants. There are no required financial
covenants under the new line of credit, which is unconditionally guaranteed by
a significant shareholder and director (the "Guarantor"). The Company believes
that available borrowings under its line of credit and internally generated
funds are sufficient to support current working capital and capital expenditure
requirements during the next fiscal year. Additionally, the Company has a
$1.126 million note receivable due in October 1996, which is the final payment
due from the sale of its Duckster Division. The Company expects capital
expenditures to be approximately $0.3 million for the next fiscal year.
During fiscal 1996, proceeds from the sale of property, plant and equipment
and payments received on the note receivable from the buyer of Duckster, were
used to decrease short-term borrowings, retire long-term obligations and reduce
accounts payable.
RESULTS OF OPERATIONS
Net sales from continuing operations for fiscal year 1996 decreased by $3.4
million, to $21.2 million, compared with fiscal year 1995. Club sales decreased
$2.4 million or 19.6% for fiscal year 1996 compared to fiscal year 1995. The
decrease in club sales is attributable primarily to the retail line of golf
equipment, due to a decrease in demand for these products from mass
merchandisers during fiscal 1996. Pro club sales were relatively unchanged from
fiscal 1995. Sales of golf bags decreased approximately $1.0 million in fiscal
1996 compared to fiscal 1995. The decrease in bag sales was primarily in the pro
line, which is sold to on-course golf shops and off-course golf equipment
stores. In early fiscal 1996, the decision was made by former management to
import a greater portion of the pro bag line. The features and quality of the
imported bags were not consistent with the bags historically manufactured by the
Company. As a result, the bags were not well received in the market place, thus
the decline in the pro segment of the bag line. During the latter part of fiscal
1996, the Company returned to domestic production of its high end pro bags.
Gross profit as a percent of net sales increased to 15.1% from 13.1% in fiscal
1995. The increase resulted primarily from reductions in manufacturing
variances. The loss from continuing operations was $5.6 million on net sales of
$21.2 million in fiscal 1996, compared to the loss from continuing operations of
$9.5 million on net sales of $24.6 million in fiscal 1995.
Selling expenses decreased by $1.8 million or 28.4% for fiscal year 1996
compared to the previous year. When the Company sold its Duckster apparel
division in May 1995, the sales force became employees of Duckster. However,
through a sales representative agreement between Duckster and the Company, they
continue to sell the Company's pro line of golf clubs and bags with compensation
being on a commission basis. The result for ProGroup, Inc. was substantially
reduced expenses for salaries and fringe benefits. Other selling expenses such
as royalties, were less due to reduced sales volume in fiscal 1996.
Additionally, lower expenditures for advertising and promotions were factors in
the decrease in selling expenses.
General and administrative expenses decreased $1.9 million or 43.1% in
fiscal 1996. Most of the decrease was related to lower salaries and fringe
benefits due to the disposal of Duckster, which necessitated a reduction in
general and administrative overhead. Other components of the decrease were
reduced legal fees and other professional services.
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Interest expense increased 119%, or $1.6 million, in fiscal 1996 compared
to fiscal 1995. Substantially all the increase was non-cash interest related to
amortization of subordinated debt discounts, subordinated notes and accrued
interest thereon.
Other income increased $1.1 million in fiscal year 1996 compared to fiscal
year 1995. Royalty income increased by $.4 million, gain on asset dispositions
increased $.4 million, and the Company reported $.1 million of rental income
during fiscal 1996.
Due to operating losses for fiscal 1996, no tax provision was necessary.
IMPACT OF INFLATION AND CHANGING PRICES
Management believes that the impact of inflation and other changes in
prices during fiscal 1996 and 1995 had no material effect on the Company's
financial condition or operating results.
Comparison of Years Ended February 25, 1995, and February 26, 1994
FINANCIAL CONDITION
As of February 25, 1995, the Company had working capital of $2.8 million
and a current ratio of 1.1 to one. The Company maintained a $16 million
short-term line of credit. Outstanding borrowings under the short-term line of
credit as of February 25, 1995, were $11.8 million.
At the end of the first two quarters of fiscal 1995, the Company was in
violation of certain of the loan covenants related to its short-term line of
credit and term loan with a bank. In October, 1994, the Company executed a loan
modification agreement with the bank, whereby the Company was no longer in
violation of any of the covenants, and the maturity date of the line of credit
was accelerated to January 31, 1995. Additionally, the October loan modification
agreement increased interest rates substantially and the Company agreed to
assign certain intellectual property to the bank if the Company could not secure
additional capital investment. The Company was able to secure additional capital
through a November 3, 1994 private placement of $5.0 million in subordinated
notes with detachable stock purchase warrants. In the fourth quarter of fiscal
1995, the Company renegotiated the loan agreement with the bank, resulting in an
extension of the loan's maturity date to August 30, 1996. The Company's
obligations to the bank under the line of credit were guaranteed by the
Company's Chairman and CEO (the Guarantor). The Company obtained an additional
$4.0 million revolving credit facility which was also guaranteed by the
Guarantor.
During fiscal year 1995, cash was provided primarily through the issuance
of subordinated debt and warrants of $5.0 million, the decrease in accounts
receivable of $4.9 million, the increase in accrued liabilities of $1.4 million
and the increase of $1.2 million in the revolving line of credit. Cash,
generated from the above sources, was used primarily to fund the operating loss.
RESULTS OF OPERATIONS
Net sales from continuing operations for fiscal year 1995 decreased
slightly by $105,000, to $24.6 million, compared with fiscal year 1994. Retail
sales increased 38% resulting from a 48% increase in club sales and a 20%
increase in bag sales. Sales to golf courses and golf shops decreased 28% to
$10.2 million from $14.1 million in fiscal 1994. The decrease was primarily in
club sales while bag sales were relatively unchanged. Gross profit as a percent
of net sales decreased to 13.6% in fiscal 1995 from 29.5% in the prior year.
Large inventory write-downs and manufacturing inefficiencies, especially in the
Company's bag production facilities, were the primary reasons for the decrease.
The Company's new management took a more aggressive approach to selling
prior season inventories in order to turn them into cash more quickly than in
prior years. During fiscal 1995, the Company took steps to outsource a portion
of its bag production in order to decrease manufacturing variances.
Selling expenses increased by $1.4 million or 28.8% for fiscal year 1995
compared to the previous year. Advertising expenses for clubs comprised the
majority of the increase along with increases in expenditures for playing pro
contracts and salesmen's commissions on retail sales.
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General and administrative expenses increased $.4 million or 9.8% in fiscal
1995. Increased legal and professional services, employee relocation costs and a
full year of funding the Company's 401(k) plan were the major factors in the
increase.
Interest expense increased 127%, or $.8 million, in fiscal 1995 compared to
fiscal 1994. Increased long-term borrowings from the issuance of $5.0 million of
subordinated debt and higher interest rates on the Company's short-term line of
credit and term loan caused the increase.
During fiscal year 1995, the Company recorded an income tax provision of
$735,000. The income tax provision was principally the result of recording a
valuation allowance against previously recognized deferred tax assets due to the
uncertainty of the realization of the related benefits.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Schedules
Report of Independent Public Accountants
Balance Sheets as of March 2, 1996 and February 25, 1995
Statements of Operations for the Years Ended March 2, 1996, February 25,
1995 and February 26, 1994
Statements of Stockholders' Equity (Deficit) for the Years Ended March 2,
1996, February 25, 1995 and February 26, 1994
Statements of Cash Flows for the Years Ended March 2, 1996, February 25,
1995 and February 26, 1994
Notes to Financial Statements
Financial Statement Schedules
See Part IV, Item 14(a)2
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of ProGroup, Inc.:
We have audited the accompanying balance sheets of PROGROUP, INC. (a
Tennessee corporation) as of March 2, 1996 and February 25, 1995 and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended March 2, 1996, February 25, 1995, and February 26, 1994. 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 generally accepted auditing
standards. 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 ProGroup, Inc. as of March
2, 1996 and February 25, 1995 and the results of its operations and its cash
flows for the years ended March 2, 1996, February 25, 1995, and February 26,
1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
May 29, 1996
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PROGROUP, INC.
D/B/A
THE ARNOLD PALMER GOLF COMPANY
BALANCE SHEETS
MARCH 2, 1996 AND FEBRUARY 25, 1995
<TABLE>
<CAPTION>
1996 1995
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................................... $ 10 $ 34
Accounts receivable, less allowance for doubtful accounts of $758 in
1996 and $1,049 in 1995............................................. 3,776 7,184
Note receivable from sale of Duckster.................................. 1,126 0
Inventories............................................................ 9,896 15,101
Prepaid expenses and other............................................. 759 478
------- -------
Total current assets........................................... 15,567 22,797
------- -------
PROPERTY, PLANT AND EQUIPMENT, net....................................... 1,188 3,778
------- -------
OTHER ASSETS:
Non-current assets of discontinued operations.......................... 265 2,423
Goodwill............................................................... 85 85
Other.................................................................. 1,455 2,188
------- -------
Total other assets............................................. 1,805 4,696
------- -------
$18,560 $31,271
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term obligations............................ $ 71 $ 407
Short-term borrowings from bank........................................ 10,096 11,829
Accounts payable....................................................... 1,718 4,120
Accrued liabilities.................................................... 2,409 3,629
------- -------
Total current liabilities...................................... 14,294 19,985
------- -------
LONG-TERM OBLIGATIONS, net of current maturities......................... 4,600 7,066
------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.50 par value, 10,000,000 shares authorized;
2,634,991 and 2,539,366 shares issued and outstanding in 1996 and
1995, respectively................................................. 1,317 1,270
Additional paid-in capital............................................. 4,794 4,118
Accumulated deficit.................................................... (6,445) (1,168)
------- -------
Total stockholders' equity (deficit)........................... (334) 4,220
------- -------
$18,560 $31,271
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE> 12
PROGROUP, INC.
D/B/A
THE ARNOLD PALMER GOLF COMPANY
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
MARCH 2, 1996, FEBRUARY 25, 1995, AND FEBRUARY 26, 1994
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
NET SALES........................................................ $21,185 $ 24,621 $24,726
COST OF SALES.................................................... 17,983 21,280 17,427
------- -------- -------
Gross profit........................................... 3,202 3,341 7,299
SELLING EXPENSES................................................. 4,559 6,368 4,959
GENERAL AND ADMINISTRATIVE EXPENSES.............................. 2,573 4,520 4,105
------- -------- -------
(3,930) (7,547) (1,765)
------- -------- -------
OTHER INCOME (EXPENSE):
Interest expense, net.......................................... (2,965) (1,354) (596)
Gain on pension curtailment.................................... 0 0 394
Other, net..................................................... 1,270 176 323
------- -------- -------
(1,695) (1,178) 121
------- -------- -------
Loss from continuing operations before income taxes......... (5,625) (8,725) (1,644)
BENEFIT (PROVISION) FOR INCOME TAXES............................. 0 (735) 590
------- -------- -------
LOSS FROM CONTINUING OPERATIONS.................................. (5,625) (9,460) (1,054)
------- -------- -------
DISCONTINUED OPERATIONS (NOTE 10):
Income (loss) from discontinued operations, net of tax benefit
of $513 in 1994............................................. 348 (6,082) (920)
Loss on disposal of discontinued operations.................... 0 (1,244) 0
------- -------- -------
348 (7,326) (920)
------- -------- -------
NET LOSS......................................................... $(5,277) $(16,786) $(1,974)
======= ======== =======
NET INCOME (LOSS) PER SHARE FROM:
Continuing operations.......................................... $ (2.15) $ (3.73) $ (.42)
Discontinued operations........................................ 0.13 (2.88) (.36)
------- -------- -------
$ (2.02) $ (6.61) $ (.78)
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE> 13
PROGROUP, INC.
D/B/A
THE ARNOLD PALMER GOLF COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 2, 1996, FEBRUARY 25, 1995, AND FEBRUARY 26, 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED
--------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ---------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE at February 27, 1993....................... 2,517 $1,258 $2,125 $ 17,592 $20,975
Net loss......................................... 0 0 0 (1,974) (1,974)
Exercise of stock options........................ 20 10 170 0 180
------ ------ ---------- -------- -------
BALANCE at February 26, 1994....................... 2,537 1,268 2,295 15,618 19,181
Net loss......................................... 0 0 0 (16,786) (16,786)
Exercise of stock options........................ 2 2 17 0 19
Issuance of warrants for 1,158 shares of common
stock......................................... 0 0 1,806 0 1,806
------ ------ ---------- -------- -------
BALANCE at February 25, 1995....................... 2,539 1,270 4,118 (1,168) 4,220
Net loss......................................... 0 0 0 (5,277) (5,277)
Issuance of warrants for 232 shares of common
stock......................................... 0 0 139 0 139
Issuance of common stock......................... 96 47 537 0 584
------ ------ ---------- -------- -------
BALANCE at March 2, 1996........................... 2,635 $1,317 $4,794 $ (6,445) $ (334)
===== ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE> 14
PROGROUP, INC.
D/B/A
THE ARNOLD PALMER GOLF COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 2, 1996, FEBRUARY 25, 1995, AND FEBRUARY 26, 1994
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss....................................................... $(5,277) $(16,786) $(1,974)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization............................... 2,074 832 791
Deferred income tax provision (benefit)..................... 0 476 (1,103)
Gain on pension curtailment................................. 0 0 (394)
(Gain) loss on disposal of property, plant, and equipment... (100) 114 5
Loss on disposal of discontinued operations................. 0 1,244 0
Other....................................................... 0 348 0
Changes in operating assets and liabilities:
Accounts receivable....................................... 3,409 4,909 (2,078)
Refundable income taxes and deferred income tax benefit... 0 259 876
Inventories............................................... 2,479 605 (340)
Prepaid expenses and other................................ 452 1,117 (1,327)
Accounts payable.......................................... (2,400) (40) 308
Accrued liabilities....................................... (1,577) 1,420 924
------- -------- -------
Net cash used in operating activities.................. (940) (5,502) (4,312)
------- -------- -------
INVESTING ACTIVITIES:
Additions to property, plant, and equipment.................... (150) (400) (905)
Proceeds from sale of property, plant, and equipment........... 3,855 117 0
Payments received on note receivable........................... 1,600 0 0
Other.......................................................... 0 0 (122)
------- -------- -------
Net cash provided by (used in) investing activities.... 5,305 (283) (1,027)
------- -------- -------
FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings from bank..... (1,733) 1,168 2,326
Proceeds from debt issuance and related warrants............... 0 5,000 0
Proceeds from term debt........................................ 0 0 3,000
Principal payments on long-term obligations.................... (2,656) (418) (167)
Issuance of common stock....................................... 0 19 180
------- -------- -------
Net cash provided by (used in) financing activities.... (4,389) 5,769 5,339
------- -------- -------
NET DECREASE IN CASH............................................. (24) (16) 0
CASH, beginning of period........................................ 34 50 50
------- -------- -------
CASH, end of period.............................................. $ 10 $ 34 $ 50
======= ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments (refunds) during the period for:
Interest.................................................... $ 1,085 $ 1,088 $ 544
======= ======== =======
Income taxes, net........................................... $ (5) $ (534) $ (365)
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE> 15
PROGROUP, INC.
D/B/A
THE ARNOLD PALMER GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS
(For purposes of these financial statements, "fiscal years 1996, 1995, and
1994" relate to the years ended March 2, 1996, February 25, 1995, and February
26, 1994, respectively. All monetary amounts are expressed in thousands of
dollars unless contrarily evident.)
1. NATURE OF OPERATIONS
ProGroup, Inc. ("ProGroup" or the "Company") manufactures, markets and
distributes golf products, including Arnold Palmer and First Flight golf
equipment and Hot-Z golf bags and luggage. The Company's principal market is the
United States. ProGroup owns, subject to certain exceptions, the exclusive
worldwide right to the Arnold Palmer trade name in connection with the Company's
manufacture, sale and distribution of golf products. The Company sells primarily
to retailers and grants credit to customers based on defined payment terms.
Three large retail customers accounted for 32%, 36%, and 23% of net sales from
continuing operations for fiscal 1996, 1995, and 1994, respectively.
As discussed in Note 10, on May 5, 1995, the Company sold its Duckster line
of headwear, outerwear, and shirts. In 1996 the Company began doing business as
The Arnold Palmer Golf Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DISCONTINUED OPERATIONS
Consistent with the provisions of Accounting Principles Board Opinion No.
30 ("APB 30"), the results of discontinued operations have been reported
separately from the results of continuing operations, and a provision was made
in 1995 for the estimated loss on the disposal of the Duckster line of business.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost includes
material, labor and factory overhead. Market is net realizable value for
finished goods. For raw materials and work-in-process, market is replacement
cost.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost, less accumulated
depreciation and amortization. Expenditures for maintenance and repairs are
charged to expense as incurred. The property, plant, and equipment balances
consisted of the following at March 2, 1996 and February 25, 1995:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Land............................................................... $ 75 $ 479
Buildings and improvements......................................... 824 3,599
Machinery and equipment............................................ 2,727 2,611
Furniture and fixtures............................................. 263 829
Construction in progress........................................... 42 173
------- -------
3,931 7,691
Less accumulated depreciation and amortization..................... (2,743) (3,913)
------- -------
$ 1,188 $ 3,778
======= =======
</TABLE>
Included in non-current assets of discontinued operations for 1996 and 1995
are $265 and $2,111 of property, plant, and equipment stated at the lower of
cost or estimated net realizable value.
15
<PAGE> 16
PROGROUP, INC.
D/B/A
THE ARNOLD PALMER GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciable assets are depreciated principally using the straight-line
method for financial reporting purposes and accelerated methods for income tax
purposes over the estimated useful lives of the related assets. The estimated
useful lives used in computing annual depreciation provisions are as follows:
<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Buildings and improvements.................................................. 5 to 31
Machinery and equipment..................................................... 3 to 10
Furniture and fixtures...................................................... 3 to 10
</TABLE>
ADVERTISING EXPENSES
The Company expenses production costs of advertising the first time the
advertising takes place, except for direct-response advertising, which is
capitalized and amortized over its expected period of future benefits.
Direct-response advertising consists primarily of catalogs for the
Company's products. Capitalized costs of the catalogs are amortized from the
time the catalog is published until it is expected to be superseded.
At March 2, 1996 and February 25, 1995, the Company reported $287 and $321,
respectively, of advertising as other non-current assets in the accompanying
balance sheets. Advertising expense for the years ended 1996, 1995, and 1994 was
$547, $1,988, and $1,465, respectively.
FISCAL YEAR
The Company's fiscal year is based on a 52-53-week period ending on the
Saturday closest to the end of February. Subsequent to March 2, 1996, the
Company's Board of Directors elected to change the Company's year end to
September 30, effective September 30, 1996.
NET LOSS PER SHARE
The computation of net loss per share is based on the weighted average
number of common shares outstanding during the period after adding common stock
equivalents having a dilutive effect. The weighted average number of shares and
equivalents outstanding for fiscal 1996, 1995, and 1994 are 2,615,619,
2,537,876, and 2,521,674, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
fiscal 1996 financial statement presentation.
16
<PAGE> 17
PROGROUP, INC.
D/B/A
THE ARNOLD PALMER GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventories as of March 2, 1996 and February 25, 1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Raw materials...................................................... $4,270 $ 4,521
Work-in-process.................................................... 372 1,474
Finished goods..................................................... 5,254 9,106
------ -------
$9,896 $15,101
====== =======
</TABLE>
4. SHORT-TERM BORROWINGS
Short-term borrowings during fiscal 1996 and 1995 consisted of advances
under various lines of credit. In connection with a guarantee of the Company's
line of credit in January 1995 by a significant shareholder and director (the
"Guarantor"), the line of credit was amended to extend the maturity date to
August 30, 1996.
As consideration to the Guarantor for the guarantee, the Company issued an
$850 subordinated convertible note and a warrant to purchase up to 390,000
common shares of the Company (Notes 5 and 8). Additionally, the Guarantor was
given preemptive rights through January 27, 2000 with respect to future
issuances by the Company sufficient to enable the Guarantor to maintain his
fully diluted common stock ownership percentage.
In March 1995, the Company entered into an additional $4 million, prime
plus 2% revolving credit facility with the Guarantor. For each $100 drawn under
this facility, the Guarantor was issued 3,750 shares of the Company's common
stock. Under this facility the Guarantor was issued 80,625 shares.
In September 1995, the Company executed a $15 million line of credit
agreement with a bank, which was scheduled to mature on July 15, 1996.
Subsequent to March 2, 1996, the maturity date was extended to February 1997.
The new line of credit replaced the Company's previous lines of credit. There
are no financial covenants under the new line of credit, which is
unconditionally guaranteed by the Guarantor. Advances under the new line of
credit bear interest at LIBOR plus 2 points (7.8125% at March 2, 1996) on the
first $6 million outstanding and 7.1562% on the next $3.7 million outstanding.
Outstanding amounts in excess of $9.7 million bear interest at the prime rate
less .50% (7.75% at March 2, 1996). At March 2, 1996, $10.1 million was
outstanding under this line of credit.
17
<PAGE> 18
PROGROUP, INC.
D/B/A
THE ARNOLD PALMER GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following at March 2, 1996 and
February 25, 1995:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Term loan with bank, due in monthly installments of $45 (including
interest at 9.5%) through November 2000; paid in 1996 from proceeds
on the sale of related property, plant, and equipment.............. $ 0 $2,590
Capital lease obligation, due in monthly installments of $9
(including interest at 10.0%) through December 2000; assumed by
purchaser of related property, plant, and equipment in 1996........ 0 456
Subordinated notes ($5,000 face amount) to related parties, net of
discount of $1,340 and $1,589 in 1996 and 1995, interest payable
quarterly at 6.0% (effective interest rate of 15.9%), due November
2, 1999............................................................ 3,660 3,411
Subordinated convertible note to Guarantor, interest payable
quarterly at the prime rate plus 2% (10.25% at March 2, 1996), due
August 3, 1996..................................................... 850 850
Other obligations.................................................... 161 166
------ ------
4,671 7,473
Less: current maturities............................................. (71) (407)
------ ------
$4,600 $7,066
====== ======
</TABLE>
In November 1994, the Company completed a private placement of $5,000 in
subordinated notes. The holders of the $5,000 subordinated notes (which include
an officer and certain directors of the Company) also received warrants to
purchase up to 1,000,000 shares of common stock of the Company at $5.50 per
share. The estimated fair value of the warrants was recorded as additional
paid-in capital. Based on the borrowing rates currently available to the
Company, at March 2, 1996, the fair value of the $5,000 subordinated notes is
$4,747.
The $850 subordinated note (Note 4) is convertible to common stock at the
Guarantor's option. Subsequent to March 2, 1996, the note plus accrued interest
was converted to 191,814 shares of common stock under the terms of the note.
Future scheduled maturities of long-term obligations as of March 2, 1996
(after giving effect to the conversion of the $850 subordinated convertible
note), were as follows:
<TABLE>
<S> <C>
1997........................................................................ $ 71
1998........................................................................ 52
1999........................................................................ 38
2000........................................................................ 3,660
</TABLE>
18
<PAGE> 19
PROGROUP, INC.
D/B/A
THE ARNOLD PALMER GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
Income tax benefit (provision) from continuing operations consists of:
<TABLE>
<CAPTION>
FISCAL YEARS
-----------------------
1996 1995 1994
---- ----- ----
<S> <C> <C> <C>
Current...................................................... $0 $ 0 $ 0
Deferred..................................................... 0 (735) 590
---- ----- ----
$0 $(735) $590
==== ===== ====
</TABLE>
There was no current income tax provision or benefit recorded during fiscal
1996, 1995, and 1994 due to the losses sustained by the Company. The provision
for income taxes in fiscal 1995 resulted principally from recording a valuation
allowance against previously recognized deferred tax assets due to the
uncertainty of the realization of the related benefits.
Deferred income tax assets and liabilities for fiscal 1996 and 1995 reflect
the impact of temporary differences between the amounts of assets and
liabilities for financial reporting and income tax reporting purposes. Temporary
differences and carryforwards which give rise to deferred tax assets and
liabilities at March 2, 1996 and February 25, 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Tax loss carryforwards......................................... $ 9,037 $ 5,299
Inventory and receivables reserves............................. 752 1,274
Other accruals and reserves.................................... 581 1,356
------- -------
10,370 7,929
------- -------
Deferred tax assets valuation allowance.......................... (9,426) (6,726)
------- -------
Deferred tax liabilities:
LIFO to FIFO change............................................ 470 627
Prepaid expenses............................................... 119 131
Excess tax depreciation........................................ 35 141
Other.......................................................... 320 304
------- -------
944 1,203
------- -------
Net deferred tax asset........................................... $ 0 $ 0
======= =======
</TABLE>
At March 2, 1996, the Company had federal tax loss carryforwards of
approximately $23,800 which expire in years 2010 and 2011 if not utilized
earlier.
19
<PAGE> 20
PROGROUP, INC.
D/B/A
THE ARNOLD PALMER GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the benefit (provision) for income taxes and the
amount computed by multiplying the loss from continuing operations before income
taxes by the statutory rate is summarized as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
----------------------------
1996 1995 1994
------- ------- ----
<S> <C> <C> <C>
Expected tax benefit..................................... $ 1,913 $ 2,966 $559
Increase in valuation allowance relating to continuing
operations............................................. (2,138) (3,791) 0
State income taxes, net of federal income tax benefit.... 225 349 66
Other, net............................................... 0 (259) (35)
------- ------- ----
Benefit (provision) for income taxes from continuing
operations.......................................... $ 0 $ (735) $590
======= ======= ====
</TABLE>
A valuation allowance was recorded related to the entire amount of losses
from discontinued operations in fiscal 1995; accordingly, no income tax
provision or benefit was recognized for discontinued operations in 1995.
7. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has noncontributory defined benefit pension plans covering
substantially all salaried and hourly employees. The plans provide benefits
based on years of service and compensation levels. In the opinion of management,
the Company's funding policy is consistent with the requirements of the Employee
Retirement Income Security Act of 1974. Plan assets are invested primarily in
common stocks and corporate debt securities.
Pension income for fiscal 1996, 1995, and 1994 included the following
components:
<TABLE>
<CAPTION>
FISCAL YEARS
-----------------------
1996 1995 1994
------- ----- -----
<S> <C> <C> <C>
Service cost................................................. $ 86 $ 97 $ 199
Interest cost on projected benefit obligation................ 365 376 371
Actual (return) loss on plan assets.......................... (1,047) 177 (456)
Net amortization and deferral................................ 430 (932) (592)
------- ----- -----
Net pension income........................................... $ (166) $(282) $(478)
======= ===== =====
</TABLE>
20
<PAGE> 21
PROGROUP, INC.
D/B/A
THE ARNOLD PALMER GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the funded status of the plans as of March
2, 1996 and February 25, 1995:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation.......................................... $4,774 $4,104
Nonvested benefit obligation....................................... 0 0
------ ------
Accumulated benefit obligation....................................... $4,774 $4,104
====== ======
Projected benefit obligation......................................... $5,034 $4,338
Plan assets at fair value............................................ 6,011 5,634
------ ------
Projected benefit obligation less than plan assets................... 977 1,296
Unrecognized net (gain) loss......................................... 242 (155)
Unrecognized prior service cost...................................... 180 196
Unrecognized initial net asset....................................... (434) (538)
Additional liability................................................. (123) 0
------ ------
Net pension asset recognized on the balance sheets................... $ 842 $ 799
====== ======
</TABLE>
The following assumptions were used to measure the net periodic pension
income and the projected benefit obligation:
<TABLE>
<CAPTION>
FISCAL YEARS
------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate used to determine the projected benefit obligation.... 7.25% 8.0% 7.0%
Rate of increase in future compensation levels used to determine the
projected benefit obligation...................................... 5.0% 5.0% 5.0%
Expected long-term rate of return on plan assets used to determine
net periodic pension income....................................... 9.0% 9.5% 9.5%
</TABLE>
During fiscal 1994, the Company curtailed the benefits under its defined
benefit plans. Under this curtailment, nonunion employees that are not at least
age 50 with at least five years of service will accrue no further benefits under
the plan. As a result of this partial curtailment, a gain of $394 has been
reflected in the net amortization and deferral component of pension income for
fiscal 1994. This gain is separately classified in other income in the
accompanying statement of operations.
401(K) PROFIT-SHARING PLAN
During fiscal 1994, the Company established a 401(k) profit-sharing plan
covering substantially all employees at least 21 years of age with six months of
service. The Plan allows for employees to contribute a portion of their
compensation, subject to certain limitations. The Company may make discretionary
contributions to the Plan. Total discretionary contributions during 1996, 1995,
and 1994 were $39, $91, and $7, respectively.
8. CAPITAL STOCK
PREFERRED STOCK
On July 18, 1995, the Company's shareholders approved an amendment to the
Restated Articles of Incorporation to create and authorize the issuance of up to
1 million shares of preferred stock, having a par value of $.50 per share. The
designation, powers, preferences, and rights of the shares shall be determined
by
21
<PAGE> 22
PROGROUP, INC.
D/B/A
THE ARNOLD PALMER GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the Company's board of directors prior to issuance. At March 2, 1996, there were
no shares of preferred stock outstanding.
STOCK OPTION PLANS
The Company has incentive stock option plans which were adopted under a
1981 plan and a 1992 plan for its officers and key employees which provide for
issuance of options to purchase up to 500,000 and 324,032 common shares,
respectively. At March 2, 1996, the total number of shares available for options
was as follows:
<TABLE>
<S> <C>
Reserved for:
Outstanding stock options................................................ 596,532
Stock options authorized but not granted................................. 67,400
-------
663,932
=======
</TABLE>
Stock option activity during the years ended March 2, 1996 and February 25,
1995, is as follows:
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
--------- -------------
<S> <C> <C>
Outstanding at February 26, 1994............................ 533,232 $7.12 - 14.25
Granted................................................... 40,000 7.75 - 11.00
Exercised................................................. (2,500) 7.12
Canceled or expired....................................... (145,000) 8.10 - 13.00
---------
Outstanding at February 25, 1995............................ 425,732 7.12 - 14.25
Granted................................................... 241,000 3.75 - 7.63
Canceled or expired....................................... (70,200) 7.12 - 14.25
---------
Outstanding at March 2, 1996................................ 596,532 $3.75 - 10.93
=========
</TABLE>
Stock options are generally exercisable at the market price on the date of
grant and expire on various dates through 2006. Stock options generally vest
ratably over a three-year period from the date of grant. All stock options have
been granted at not less than fair market value at the date of grant.
STOCK PURCHASE WARRANTS
The Company, in conjunction with the issuance of the $5,000 subordinated
notes (Note 5), issued warrants to purchase 1,000,000 shares of common stock at
an exercise price of $5.50. Each warrant may be exercised with $5.50 in cash or
principal value of the notes at any time during the life of the warrants, which
expire on November 3, 1999.
In connection with the January 1995 guarantee of the Company's line of
credit (Note 4), the Guarantor was issued a warrant to purchase up to 390,000
common shares at $6.25 per share. These warrants expire January 27, 2000. In
connection with the March 1995 revolving credit facility (Note 4), all 390,000
warrants were immediately vested and subject to a reset price of $5.00 per
share.
22
<PAGE> 23
PROGROUP, INC.
D/B/A
THE ARNOLD PALMER GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has entered into various operating leases for buildings and
office equipment. Rent expense was approximately $433, $355, and $301 for fiscal
years 1996, 1995 and 1994, respectively. Approximate future minimum rental
commitments for the next five years for all noncancelable operating leases as of
March 2, 1996, were as follows:
<TABLE>
<S> <C>
1997.......................................................................... $570
1998.......................................................................... 540
1999.......................................................................... 377
2000.......................................................................... 304
2001.......................................................................... 128
</TABLE>
LITIGATION
On March 25, 1996, Richard E. Wenz, the former CEO of the Company, filed a
lawsuit against Arthur P. Becker, formerly Chairman of the Board and currently a
Board member of the Company, in the United States District Court for the
Southern District of New York. The lawsuit arises out of the publication in the
June 12, 1995 edition of Fortune magazine of certain statements relating to Mr.
Wenz's relationship with the Company which were attributed to Mr. Becker.
The complaint alleges a cause of action against Mr. Becker for defamation
per se and seeks compensatory damages of at least $10 million, plus punitive
damages in an unspecified amount. Pursuant to the provisions of the Amended and
Restated By-Laws of the Company and the applicable provisions of the Tennessee
Business Corporation Act, the Company has agreed to indemnify Mr. Becker from
liability which he may incur as a result of the lawsuit. The Company has also
agreed to advance certain costs of defense of the lawsuit to Mr. Becker.
On May 21, 1996, Mr. Wenz amended his complaint by adding Time Inc., the
publisher of Fortune magazine, as an additional defendant in the lawsuit. The
cause of action alleged against Time Inc. is also for defamation per se, arises
out of the same June 12, 1995 article, and also seeks compensatory damages of at
least $10 million.
On April 15, 1996, Mr. Becker filed his answer to the original complaint.
The answer denied all allegations of wrongdoing and set forth 15 affirmative
defenses. As of this date, Time Inc. has not answered or otherwise responded to
the amended complaint.
As of this date, no discovery has taken place, and it is premature to
speculate upon the ultimate resolution or outcome of the lawsuit. Mr. Becker
intends to defend the suit vigorously.
The Company is party to certain other legal proceedings incidental to its
business. In the opinion of management, based in part on the advice of legal
counsel, the ultimate disposition of these matters will not have a material
adverse effect on the Company's financial position or results of operations.
ROYALTY COMMITMENTS
During fiscal year 1993, the Company renegotiated an existing license
agreement with a member of its board of directors which the Company believes
will significantly enhance its advertisement, promotion and sale of golf
equipment. The agreement expires March 1, 2002, but may be extended for
successive five-year periods.
23
<PAGE> 24
PROGROUP, INC.
D/B/A
THE ARNOLD PALMER GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Under the terms of the agreement, the Company will pay royalties of 1%
to 5% of net sales of specified products. In exchange for expanded product and
territorial rights, the Company has committed to pay minimum royalties ranging
from $600 in 1997 to $750 in 2002. During 1996, 1995 and 1994, the Company
incurred royalty expense under this agreement of approximately $500, $524, and
$340, respectively.
10. DISCONTINUED OPERATIONS -- SALE OF DUCKSTER
On May 5, 1995, the Company sold its Duckster line of headwear, outerwear,
and shirts for approximately $3,000 in cash and a $2,726 installment promissory
note, of which $1,126 remained outstanding at March 2, 1996 and is scheduled for
repayment in October 1996. The Company retained approximately $4,200 in existing
accounts receivable and will receive a royalty on sales of Duckster products for
a three-year period beginning January 1, 1996.
The sale resulted in an estimated loss on disposal of $1,244, which has
been included as a component of discontinued operations in 1995. Duckster
revenues for fiscal 1996, 1995, and 1994 were $4,649, $15,485, and $20,170,
respectively.
24
<PAGE> 25
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No event described in Item 304 of Regulation S-K has occurred.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Directors
The information found in the section titled Election of Directors in the
Company's 1996 Proxy Statement is incorporated herein by reference.
(b) Executive Officers
The following lists the names of all executive officers of the Company,
their ages, their positions with the Company and the year in which they were
first elected to these positions:
John T. Lupton. Age 69. Mr. Lupton was named Chairman of the Board of
Directors and Chief Executive Officer of ProGroup in March, 1995. Mr.
Lupton is the former Chairman of JTL Corp., a bottler of Coca-Cola and
related products, and a private investor.
George H. Nichols. Age 56. Mr. Nichols has been President and Chief
Operating Officer of ProGroup effective January 1, 1996. Mr. Nichols
served as a consultant from November to December, 1995. Prior to joining
the Company, Mr. Nichols was Chairman, President, and Chief Executive
Officer of Square Two Golf, Inc. from April, 1991 to October, 1995.
Robert R. Winskowicz. Age 35. Mr. Winskowicz has been Senior Vice
President -- Sales and Marketing since January 1996. Prior to joining the
Company, Mr. Winskowicz was Regional Sales
<PAGE> 26
Manager of MacGregor Golf from March 1994 until December 1995. Mr.
Winskowicz served as National Account Manager at Dep Corporation from
August 1992 through March 1994, and was Regional Sales Manager of Alberto
Culver from December 1990 until August 1992.
Claire V. Bradford. Age 41. Ms. Bradford has been Vice
President -- Sales and Staff Services since December, 1995. She joined the
Company as Director of Human Resources in December 1992. Prior to joining
the Company, Ms. Bradford was a consultant in human resources management
for Suter & Associates, a private consulting firm, and Director of Human
Resources for MEDCORP, a private medical management company from 1991 to
1992.
Frederick J. Frazier, III. Age 31. Mr. Frazier has been Vice
President and General Manager -- Golf Club Division since November 1993. He
joined the Company in July, 1993 as Director of Marketing -- Golf Clubs.
Prior to joining ProGroup, Mr. Frazier was Business Manager of Winchester
Ammunition and Director of Marketing at RAM Golf Corp.
Dexter Scudder Graybeal. Age 55. Mr. Graybeal has been Vice
President -- Special Markets since April, 1994. He has been employed by the
Company since March of 1972 in various capacities including Regional and
National Sales Manager, Director of Sales, Vice President -- Sales and Vice
President/General Manager -- Arnold Palmer Golf Co.
David J. Kirby. Age 47. Mr. Kirby has been Vice President -- Finance
since February, 1996. He joined the Company as Cost Accountant in January,
1993, and was named Controller in November 1994. Prior to 1993, Mr. Kirby
served as Financial Analyst and Controller at Balsam Corporation.
ITEM 11. EXECUTIVE COMPENSATION
The information found in the section titled Executive Compensation and
Other Information in the Company's 1996 Proxy Statement is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information found in the section titled Voting Securities and Principal
Holders Thereof in the Company's 1996 Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information found in the sections titled Certain Transactions and
Agreements with Certain Executive Officers in the Company's 1996 Proxy Statement
is incorporated herein by reference.
25
<PAGE> 27
ITEM 14. EXHIBITS. FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements are incorporated by reference under Part II, Item
8 and are set forth in the Index to Financial Statements and Schedules found in
Part II, Item 8.
2. Financial Statement Schedules:
Report of Independent Public Accountants
Schedule II -- Valuation and Qualifying Accounts
3. Exhibits:
See the Exhibit Index on page 31 of this Form 10-K.
(b) The Registrant filed the following report on Form 8-K during the fourth
quarter of fiscal 1996:
Form 8-K dated February 13, 1996 regarding changing the Company's
fiscal year end from the Saturday closest to the end of February to
September 30.
26
<PAGE> 28
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 who are duly authorized to do so.
PROGROUP, INC.
<TABLE>
<S> <C>
Date: May 30, 1996 By /s/ JOHN T. LUPTON
---------------------------------------------
(John T. Lupton)
Chief Executive Officer
Date: May 30, 1996 By /s/ GEORGE H. NICHOLS
---------------------------------------------
(George H. Nichols)
President (Chief Operating Officer)
Date: May 30, 1996 By /s/ DAVID J. KIRBY
---------------------------------------------
(David J. Kirby)
Vice President Finance (Chief Financial
Officer)
</TABLE>
29
<PAGE> 29
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 and on the dates indicated.
<TABLE>
<S> <C>
Date: May 30, 1996 /s/ ARTHUR P. BECKER
---------------------------------------------
(Arthur P. Becker)
Director
Date: May 30, 1996 /s/ ROBERT H. CALDWELL
---------------------------------------------
(Robert H. Caldwell)
Director
Date: May 30, 1996 /s/ DAVID S. GONZENBACH
---------------------------------------------
(David S. Gonzenbach)
Director
Date: May 30, 1996 /s/ JAMES L.E. HILL
---------------------------------------------
(James L.E. Hill)
Director
Date: May 30, 1996 /s/ RICHARD HORTON
---------------------------------------------
(Richard Horton)
Director
Date: May 30, 1996 /s/ JOHN T. LUPTON
---------------------------------------------
(John T. Lupton)
Chairman of the Board
Date: May 30, 1996 /s/ RUSSELL B. NEWTON III
---------------------------------------------
(Russell B. Newton III)
Director
Date: May 30, 1996 /s/ GEORGE H. NICHOLS
---------------------------------------------
(George H. Nichols)
Director
Date: May 30, 1996 ---------------------------------------------
(Arnold D. Palmer)
Director
</TABLE>
30
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of ProGroup, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements included in Part II, Item 8 of this Form 10-K and have
issued our report thereon dated May 29, 1996. Our audits were made for the
purpose of forming an opinion on those statements taken as a whole. Schedule II
is the responsibility of the Company's management and 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 our audit 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.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
May 29, 1996
27
<PAGE> 31
SCHEDULES
PROGROUP, INC.
D/B/A
THE ARNOLD PALMER GOLF COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 2, 1996, FEBRUARY 25, 1995, AND FEBRUARY 26, 1994
<TABLE>
<CAPTION>
COL. C
-----------------------
COL. B ADDITIONS
----------- ----------------------- COL. E
COL. A BALANCE AT CHARGED TO CHARGED TO COL. D --------------
- ------------------------------------- BEGINNING COST AND OTHER ------------- BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) OF PERIOD
- ------------------------------------- ----------- ---------- ---------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
For the year ended March 2, 1996:
Allowance for doubtful accounts.... $ 1,049 $ 0 $ 20 $ (311) $ 758
======== ======== ======== ========== ===========
For the year ended February 25, 1995:
Allowance for doubtful accounts.... $ 478 $1,226 $ 112 $ (767) $1,049
======== ======== ======== ========== ===========
For the year ended February 26, 1994:
Allowance for doubtful accounts.... $ 399 $ 250 $ 58 $ (229) $ 478
======== ======== ======== ========== ===========
</TABLE>
- ---------------
(1) Recoveries on accounts written off.
(2) Accounts written off.
28
<PAGE> 32
PROGROUP, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <S> <C>
3.1* -- Amended and Restated Charter of ProGroup, Inc.
3.2* -- Amended and Restated Bylaws of ProGroup, Inc.
10.1*** -- Employment Agreement between The Company and George H. Nichols
dated as of January 1, 1996
10.2*** -- Stock Option Agreement between the Company and George H. Nichols
dated as of January 1, 1996.
22** -- Subsidiaries of the Company
24 -- Consent of Arthur Andersen LLP, Independent Public Accountants
27 -- Financial Data Schedule
</TABLE>
- ---------------
* Incorporated by reference herein from the Company's Form 10-K for the year
ended February 25, 1995.
** Incorporated by reference herein from the Company's Form 10-K for the
transition period ended February 22, 1992.
*** To be filed by amendment.
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously filed
S-8 Registration Statements (File No. 33-72152 and File No. 33-72154).
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
May 31, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-02-1996
<PERIOD-START> FEB-26-1995
<PERIOD-END> MAR-02-1996
<CASH> 10
<SECURITIES> 0
<RECEIVABLES> 4,534
<ALLOWANCES> 758
<INVENTORY> 9,896
<CURRENT-ASSETS> 15,567
<PP&E> 3,931
<DEPRECIATION> 2,743
<TOTAL-ASSETS> 18,560
<CURRENT-LIABILITIES> 14,294
<BONDS> 0
0
0
<COMMON> 1,317
<OTHER-SE> (1,651)
<TOTAL-LIABILITY-AND-EQUITY> 18,560
<SALES> 21,185
<TOTAL-REVENUES> 21,185
<CGS> 17,983
<TOTAL-COSTS> 17,983
<OTHER-EXPENSES> 7,132
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,965
<INCOME-PRETAX> (5,625)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,625)
<DISCONTINUED> 348
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,277)
<EPS-PRIMARY> (2.02)
<EPS-DILUTED> (2.02)
</TABLE>
