<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1997 Commission File Number 0-921
--------------------- -------
THE ARNOLD PALMER GOLF COMPANY
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-0331019
- -------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
6201 Mountain View Road, Ooltewah, Tennessee 37363
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number 423-238-5890
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 twelve months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes x . No .
----------- ----------
As of April 13, 1997, 833,333 shares of Series NB Preferred Stock and
3,004,367 shares of Common Stock were outstanding.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Part I. Financial Information
Balance Sheets - March 31, 1997 and
September 30, 1996 1
Statements of Operations - Three and Six Months
Ended March 31, 1997 and April 6, 1996 2
Statements of Cash Flows - Six Months Ended
March 31, 1997 and April 6, 1996 3
Notes to Financial Statements 4 - 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 -10
Part II. Other Information 11
Signature Page 12
</TABLE>
<PAGE> 3
Page 1 Form 10-Q
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BALANCE SHEETS
MARCH 31, 1997 AND SEPTEMBER 30, 1996
($ in thousands)
<TABLE>
<CAPTION>
ASSETS
March 31, 1997 Sept 30, 1996
--------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 525 $ 47
Trade receivables 10,496 6,350
less: allowance for doubtful accounts (629) (720)
--------------- -------------
Net receivables 9,867 5,630
Inventories, net 12,410 9,491
Prepaid expenses and other 953 913
--------------- -------------
Total current assets 23,755 16,081
Property, plant and equipment 4,769 4,195
less: accumulated depreciation (2,869) (2,750)
--------------- -------------
Net property, plant and equipment 1,900 1,445
Other assets:
Investment in NBHI 5,000 5,000
Property held for sale 271 271
Goodwill 517 532
Other 1,203 1,605
--------------- -------------
6,991 7,408
--------------- -------------
TOTAL ASSETS $ 32,646 $ 24,934
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
obligations $ 103 $ 112
Short-term borrowings 9,550 796
Accounts payable 3,674 2,139
Accrued liabilities 1,322 2,288
--------------- -------------
Total current liabilities 14,649 5,335
Long-term obligations, net of
current maturities 16,022 15,884
Redeemable preferred stock 5,000 5,000
Stockholders' equity (deficit):
Common stock, $.50 par value,
10,000,000 shares authorized,
3,004,367 and 2,926,805 shares
issued and outstanding at March 31, 1997
and September 30, 1996, respectively 1,502 1,463
Additional paid-in capital 6,313 5,991
Accumulated deficit (10,840) (8,739)
--------------- -------------
Total stockholders' equity (deficit) (3,025) (1,285)
--------------- -------------
TOTAL LIABILITIES & STOCK-
HOLDERS' EQUITY (DEFICIT) $ 32,646 $ 24,934
=============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
Page 2 Form 10-Q
STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED MARCH 31, 1997 AND APRIL 6, 1996
(Unaudited)
($ in thousands except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -------------------------------
March 31, 1997 April 6, 1996 March 31, 1997 April 6, 1996
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 7,919 $ 6,505 $ 12,847 $ 10,626
Cost of sales 5,986 6,366 9,650 9,840
------------- ------------ ------------- --------------
Gross profit 1,933 139 3,197 786
Selling and marketing expenses 1,974 1,519 3,324 2,448
General and administrative expenses 1,089 1,122 1,939 1,637
------------- ------------ ------------- --------------
Loss from operations (1,130) (2,502) (2,066) (3,299)
Other income (expense):
Royalty and sub-license income, net 401 600 884 768
Other, net - 142 55 224
------------- ------------ ------------- --------------
401 742 939 992
Loss before interest and income taxes (729) (1,760) (1,127) (2,307)
Interest expense 541 793 974 1,505
------------- ------------ ------------- --------------
Loss before income taxes (1,270) (2,553) (2,101) (3,812)
Provision for income taxes - - - -
------------- ------------ ------------- --------------
Net loss $ (1,270) $ (2,553) $ (2,101) $ (3,812)
============= ============ ============= ==============
Net loss per share $ (0.43) $ (0.97) $ (0.71) $ (1.45)
============= ============ ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
Page 3 Form 10-Q
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1997 AND APRIL 6, 1996
(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Mar. 31, 1997 Apr. 6, 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss $ (2,101) $ (3,812)
Adjustments to reconcile net income to net cash
used for operating activities -
Depreciation 168 70
Amortization 210 1,086
Gain on sale of assets (1) (74)
Changes in operating assets and liabilities -
Receivables (4,237) (2,680)
Inventories (2,919) 365
Prepaid expenses and other (40) (547)
Accounts payable 1,535 1,225
Accrued liabilities (544) 688
-------------- --------------
Net cash used for operating activities (7,929) (3,679)
-------------- --------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property, plant and equipment (313) (35)
Proceeds from sale of property, plant & equipment 2 2,209
Payments received on note receivable - 1,600
-------------- --------------
Net cash provided by (used for)
investing activities (311) 3,774
-------------- --------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net increase in short-term borrowings
from bank 8,754 1,800
Principal payments on long-term obligations (36) (1,892)
-------------- --------------
Net cash provided by (used for)
financing activities 8,718 (92)
-------------- --------------
NET CHANGE IN CASH 478 3
CASH, beginning of period 47 7
-------------- --------------
CASH, end of period $ 525 $ 10
============== ==============
Supplemental disclosures of
cash flow information:
Cash paid during the period for:
Interest $ 675 $ 422
============== ==============
Income taxes $ - $ -
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
Page 4 Form 10-Q
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The quarterly financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission for interim financial information. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. These condensed financial statements should be read in conjunction
with the Company's latest annual report on Form 10-K. In the opinion of
management of the Company, all adjustments necessary, consisting only of normal
recurring adjustments, to present fairly (1) the financial position of The
Arnold Palmer Golf Company as of March 31, 1997; (2) the results of its
operations and its cash flows for the six months ended March 31, 1997 and April
6, 1996; and (3) the results of its operations for the three months ended March
31, 1997 and April 6, 1996, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the full
year.
Reference is also made to the Company's annual report on Form 10-K for the seven
month transition period ended September 30, 1996, for a discussion of the
Company's significant accounting policies.
NOTE 2
INCOME TAXES:
The Company has federal tax loss carryforwards of approximately $24.0 million at
September 30, 1996. There was no current income tax provision or benefit
recorded during the six months ending March 31, 1997 due to the losses sustained
by the Company.
<PAGE> 7
Page 5 Form 10-Q
NOTE 3
SHORT-TERM BORROWINGS:
Short-term borrowings consist of advances under a $12.0 million line of credit
agreement with a bank. There are no financial covenants under the line of
credit, which is unconditionally guaranteed by a significant shareholder and
director of the Company (the "Guarantor").
Advances under the line of credit bear interest at the lesser of the prime rate
minus 0.50% or one, two or three month LIBOR plus 2 points. As of March 31,
1997, total advances outstanding under the line of credit were $9.6 million and
bear interest at the prime rate less 0.50% (8.00% at March 31, 1997).
The Company's previous $15.0 million bank line of credit was scheduled to mature
in July 1997. In December 1996, the Company and the bank agreed to convert $12.0
million of the line of credit to term debt due December 1999 and enter a new
line of credit agreement for $12.0 million due December 1997, providing a total
of $24.0 million in financing, which is guaranteed by the Guarantor. As a result
of these new agreements, $12.0 million of the amount outstanding under the line
of credit at September 30, 1996 has been classified as long-term debt in the
accompanying balance sheet. The unsecured term loan bears interest at the fixed
rate of 8.25% with interest payable monthly in arrears. During the quarter ended
December 31, 1996, the Company borrowed $1.1 million from the Guarantor, which
amount plus accrued interest was repaid on January 9, 1997. The Company's Board
of Directors is considering appropriate compensation to be paid to the Guarantor
in consideration of his guarantee of the new credit facility.
<PAGE> 8
Page 6 Form 10-Q
NOTE 4
NET LOSS PER COMMON SHARE:
The computation of net loss per common share and common equivalent share is
based on the monthly weighted average number of common shares outstanding during
the period after adding common stock equivalents (stock options) having a
dilutive effect.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- ---------------------------
MAR 31, 1997 APR 6, 1996 MAR 31, 1997 APR 6, 1996
---------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Weighted average
number of common
shares outstanding 2,977,121 2,632,134 2,951,686 2,628,695
Effect of assumed
exercise of stock
options (where dilutive) -- -- -- --
--------- --------- --------- ---------
Weighted average
common and common
equivalent shares
outstanding 2,977,121 2,632,134 2,951,686 2,628,695
========= ========= ========= =========
</TABLE>
NOTE 5
INVENTORIES:
Inventories as of March 31, 1997 and September 30, 1996, were as follows (in
thousands):
<TABLE>
<CAPTION>
Mar. 31, 1997 Sept. 30, 1996
------------------ ---------------
<S> <C> <C>
Inventories:
Raw materials $ 5,298 $ 4,344
Work-in-process 217 221
Finished goods 6,895 4,926
------------------ ---------------
$ 12,410 $ 9,491
================== ===============
</TABLE>
<PAGE> 9
Page 7 Form 10-Q
NOTE 6
MATERIAL CONTINGENCIES:
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, 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. On June 11, 1996, Mr. Becker filed his answer to the amended
complaint, repeating his denials of all wrongdoing and repeating the 15
affirmative defenses. On or about June 12, 1996, Time, Inc. filed its answer,
also denying all wrongdoing, and setting forth nine affirmative defenses.
As of this date, discovery is in process but has not yet been completed, and no
trial date has been set. Accordingly, it is premature to speculate upon the
ultimate resolution or outcome of the lawsuit. Mr. Becker intends to defend the
suit vigorously.
NOTE 7
RECENT ACCOUNTING PRONOUNCEMENTS:
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128 changes
the criteria for reporting earnings per share ("EPS") by replacing primary EPS
with basic EPS and fully diluted EPS with diluted EPS. Due to the losses
sustained by the Company (which make common stock equivalents anti-dilutive),
SFAS 128 will not have any impact on current year or retroactive EPS
calculations.
<PAGE> 10
Page 8 Form 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
As of March 31, 1997, the Company had working capital of $9.1 million and a
current ratio of 1.6 to one. This compares to working capital of $10.7 million
and a current ratio of 3.0 to one as of September 30, 1996. As of March 31,
1997, current borrowings under the Company's line of credit had increased $8.8
million from period ending September 30, 1996. During the same period, other
current liabilities increased $560,000. The increase in total current
liabilities was used to fund an increase in trade receivables of $4.2 million
and an increase in inventory of $2.9 million. The increase in borrowings was
also used for capital expenditures and to fund the Company's six month operating
loss of $2.1 million. As the Company moves into the third and fourth quarters of
its fiscal year ending September 30, 1997, collections of trade receivables are
anticipated to increase substantially above first and second quarter levels due
to the terms of the Company's fall and winter sales programs which offer
extended payment terms to these periods. Likewise, inventory purchases were at
higher levels during winter months to prepare for the Spring and Summer sales
season. Due to the seasonality of the golf industry, inventory purchases are
expected to decrease during the Company's third and fourth quarters. Due to the
increase in receivable collections and the decrease in inventory purchases, cash
generated during the second half of the fiscal year is expected to be sufficient
to meet working capital needs and to reduce the amount outstanding on the
Company's line of credit facility. Capital expenditures for the six month period
ending March 31, 1997, were approximately $300,000 and are expected to total
approximately $600,000 for the fiscal year ending September 30, 1997.
RESULTS OF OPERATIONS
The tables below compare net sales by product line and market segment for the
Company's second quarter and six months ending March 31, 1997, to comparable
prior year periods.
<PAGE> 11
Page 9
<TABLE>
<CAPTION>
Sales By Product Line
($'s in thousands)
2nd Quarter Year to Date
-------------------------------- ---------------------------------
1997 1996 % Change 1997 1996 % Change
-------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Clubs 3,766 3,739 0.7 6,462 5,601 15.4
Bags 3,439 2,739 25.6 5,351 4,771 12.2
Outlet 99 27 266.7 246 254 (3.1)
Components 601 - - - - - - 774 - - - - - -
Other 14 - - - - - - 14 - - - - - -
------------------------------- ---------------------------------
Total 7,919 6,505 21.7 12,847 10,626 20.9
------------------------------- ---------------------------------
Sales By Market Segment
($'s in thousands)
2nd Quarter Year to Date
-------------------------------- --------------------------------
1997 1996 % Change 1997 1996 % Change
-------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pro 3,504 2,718 28.9 6,556 4,296 52.6
Retail 3,151 3,760 (16.2) 4,562 6,076 (24.9)
Contract 399 - - - - - - 472 - - - - - -
Outlet 99 27 266.7 246 254 (3.1)
Components 601 - - - - - - 774 - - - - - -
Other 165 - - - - - - 237 - - - - - -
-------------------------------- --------------------------------
Total 7,919 6,505 21.7 12,847 10,626 20.9
-------------------------------- --------------------------------
</TABLE>
Sales by Product Line
Total net sales for the second quarter ending March 31, 1997 were $7.9 million,
an increase of $1.4 million, or 21.7% over the comparable prior year period. Net
sales for the six month period ending March 31, 1997, were $2.2 million above
the prior year six month period, an increase of 20.9%. Sales growth was
primarily in the Company's core product lines, clubs and bags, which increased
$1.4 million during the current year's six month period, a 13.9% increase over
the prior year six month period. The Company's recently acquired component
division, National Golf Suppliers, recorded sales of $774,000 for the six month
period ending March 31, 1997. The component division was acquired in June 1996,
therefore prior year sales are not included in the Company's results of
operations.
Sales by Market Segment
The Company achieved significant sales growth during the second quarter and six
months ending March 31, 1997, over the same prior year periods, in its pro line
business. Sales of pro line products increased $2.3 million during the current
six month period over the comparable prior year period, an increase of 52.6%.
The increase in pro line product sales is consistent with the Company's
strategic goal to increase its presence in this more profitable market segment.
Pro line sales during the Company's current six month period were 59.0% of
combined pro and retail sales, compared to 41.4% during the comparable prior
year six month period.
<PAGE> 12
Page 10
Sales to mass merchandisers declined $1.5 million during the Company's current
six month period, a 24.9% decrease. The decline in this market segment was due
to the overstocked inventories in the retail market as merchants entered their
1996 Fall and 1997 Spring buying season. Current year contract sales of $472,000
consist primarily of bags manufactured for other golf companies. Other year to
date sales of $237,000 represent sales of club raw materials to the Company's
sub-licensees.
The Company's gross profit as a percentage of net sales for the second quarter
and six month period ending March 31, 1997, was 24.4% and 24.9% respectively.
Gross profit for the comparable prior year periods was 2.1% and 7.4%, which
reflect inventory write-downs of approximately $1.1 million. Disregarding the
effect of the write-downs, gross profits would have been 19.7% and 18.2% in the
comparable prior year periods. Gross profits in the current year reflect the
shift in product mix toward the more profitable pro line business segment.
Selling and marketing expenses increased $455,000 and $876,000 for the second
quarter and six months ending March 31, 1997, over the same prior year periods.
Increased expenses for commissions and royalties due to the growth in pro line
business over prior year periods accounted for approximately $150,000 of the
increase. Also, the Company's investment in promotional and advertising programs
necessary to achieve continued growth in the pro line market was approximately
$450,000 above prior year levels.
General and administrative expenses during the Company's second quarter ending
March 31, 1997, decreased $33,000 from the same prior year period. For the six
month period ending March 31, 1997, general and administrative expenses
increased $302,000 above the comparable prior year period. A portion of the year
to date increase is due to key management positions being filled which were
vacant for a portion of the prior year period. Legal expenses relative to
continued litigation with the Company's former CEO also contributed to the
increase.
Other income decreased slightly for the six months ending March 31, 1997,
compared to the same prior year period. Royalty and sub-license income increased
$116,000 during the current year six month period over the same prior year six
month period. The increase was offset by a decrease in other income from
$224,000 for the six month period ending April 6, 1996 to $55,000 for the
current fiscal year six month period. Prior year other income reflects the gain
recorded on the sale of the Company's East Pocahontas, Arkansas facility.
Interest expense for the six month period ending March 31, 1997, decreased
35.3%, or $531,000 from the comparable prior year six month period. Cash
interest expense during the current year six month period increased $252,000
above the same prior year six month period, while non-cash interest decreased by
$783,000. The decrease in non-cash interest was due to amortization of the
Company's subordinated notes during the prior year six month period ending April
6, 1996, not recurring during the current year.
<PAGE> 13
Page 11 Form 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company has settled the litigation filed against the Company on
November 21, 1994, by Richard E. Wenz, the former CEO of the Company,
arising from the termination of his employment with the Company, in the
case styled Richard E. Wenz v. ProGroup, Inc., in the Chancery Court of
Hamilton County, Tennessee. The case was dismissed with prejudice with
respect to all claims by court order dated March 11, 1997, in exchange
for the payment by the Company of approximately $176,000 to Mr. Wenz.
The settlement has no effect on the previously disclosed pending
litigation between Mr. Wenz and Mr. Becker for which the Company has
agreed to indemnify Mr. Becker.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
See Exhibit Index on page 13 of this Form 10-Q.
(b) Reports on Form 8-K -
The Registrant did not file any reports on Form 8-K during the
quarter ending March 31, 1997.
<PAGE> 14
Page 12 Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ARNOLD PALMER GOLF COMPANY
------------------------------------------------
(Registrant)
/s/ Roger M. Helms
------------------------------------------------
Roger M. Helms
President and Chief Operating Officer
/s/ David J. Kirby
------------------------------------------------
David J. Kirby
Vice President Finance (Chief Financial Officer)
Date April 30, 1997
-------------------
<PAGE> 15
Page 13 Form 10-Q
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1* Amended and Restated Charter of The Arnold
Palmer Golf Company.
3.2** Amended and Restated Bylaws of ProGroup, Inc.
27 Financial Data Schedule (for SEC use only).
</TABLE>
* Incorporated by reference herein from the Company's Form 10-Q
for the quarter ended August 31, 1996.
** Incorporated by reference herein from the Company's Form 10-K
for the year ended February 25, 1995.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 525
<SECURITIES> 0
<RECEIVABLES> 10,496
<ALLOWANCES> 629
<INVENTORY> 12,410
<CURRENT-ASSETS> 23,755
<PP&E> 4,769
<DEPRECIATION> 2,869
<TOTAL-ASSETS> 32,646
<CURRENT-LIABILITIES> 14,649
<BONDS> 0
5,000
0
<COMMON> 1,502
<OTHER-SE> (4,527)
<TOTAL-LIABILITY-AND-EQUITY> 32,646
<SALES> 12,847
<TOTAL-REVENUES> 12,847
<CGS> 9,650
<TOTAL-COSTS> 9,650
<OTHER-EXPENSES> 5,263
<LOSS-PROVISION> 88
<INTEREST-EXPENSE> 974
<INCOME-PRETAX> (2,101)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,101)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,101)
<EPS-PRIMARY> (.71)
<EPS-DILUTED> (.71)
</TABLE>
