<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 27, 1998 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 May 8, 1998, 833,333 shares of Series NB Preferred Stock and 3,054,367
shares of Common Stock were outstanding.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Pages
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<S> <C> <C>
Part I. Financial Information
Balance Sheets - March 27, 1998 and
September 30, 1997 1
Statements of Operations - Three and Six Months
Ended March 27, 1998 and March 31, 1997 2
Statements of Cash Flows - Six Months Ended
March 27, 1998 and March 31, 1997 3
Notes to Financial Statements 4 - 6
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7 - 9
Part II. Other Information 10
Signature Page 11
</TABLE>
<PAGE> 3
Page 1 Form 10-Q
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BALANCE SHEETS
MARCH 27, 1998 AND SEPTEMBER 30, 1997
($ in thousands except per share amounts)
<TABLE>
<CAPTION>
ASSETS
March 27, 1998 Sept. 30, 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 555 $ 703
Trade receivables 6,549 6,154
less: allowance for doubtful accounts (684) (843)
------- -------
Net receivables 5,865 5,311
Inventories, net 9,895 7,375
Prepaid expenses and other 1,128 847
------- -------
Total current assets 17,443 14,236
Property, plant and equipment 5,162 4,465
less: accumulated depreciation (3,283) (2,972)
------- -------
Net property, plant and equipment 1,879 1,493
Other assets:
Investment in NBHI 5,000 5,000
Property held for sale 170 170
Goodwill 488 502
Other 1,407 1,352
------- -------
7,065 7,024
------- -------
TOTAL ASSETS $26,387 $22,753
======= =======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
March 27, 1998 Sept. 30, 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Current maturities of long-term
obligations $ 92 $ 102
Short-term borrowings 7,550 150
Accounts payable 3,463 2,121
Accrued liabilities 1,921 1,370
-------- --------
Total current liabilities 13,026 3,743
Long-term obligations, net of
current maturities 26,327 26,162
Redeemable preferred stock 5,000 5,000
Stockholders' equity (deficit):
Common stock, $.50 per value,
10,000,000 shares authorized,
3,054,367 and 3,004,367 shares
issued and outstanding at March 27,
1998 and September 30, 1997,
respectively 1,527 1,502
Additional paid-in capital 6,401 6,513
Accumulated deficit (25,894) (19,967)
-------- --------
Total stockholders' equity (deficit) (17,966) (12,152)
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY $ 26,387 $ 22,753
======== ========
</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 27, 1998 AND MARCH 31, 1997
(Unaudited)
($ in thousands except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------- ---------------------------------
March 27, 1998 March 31, 1997 March 27, 1998 March 31, 1997
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 5,588 $ 7,919 $ 9,575 $12,847
Cost of sales 4,493 5,986 7,964 9,650
------- ------- ------- -------
Gross profit 1,095 1,933 1,611 3,197
Selling and marketing expenses 2,080 1,974 3,734 3,324
General and administrative expenses 1,316 1,089 2,462 1,939
Severance and restructuring expenses 127 - 797
------- ------- ------- -------
Loss from operations (2,428) (1,130) (5,382) (2,066)
Other income (expense):
Royalty and sub-license income, net 343 401 704 884
Other, net 83 - 87 55
------- ------- ------- -------
426 401 791 939
Loss before interest and income taxes (2,002) (729) (4,591) (1,127)
Interest expense 707 541 1,336 974
------- ------- ------- -------
Loss before income taxes (2,709) (1,270) (5,927) (2,101)
Provision for income taxes - - - -
------- ------- ------- -------
Net loss $(2,709) $(1,270) $(5,927) $(2,101)
======= ======= ======= =======
Net loss per share - basic and diluted $ (0.89) $ (0.43) $ (1.96) $ (0.71)
======= ======= ======= =======
</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 27, 1998 AND MARCH 31, 1997
(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Mar. 27, 1998 Mar.31, 1997
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<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss $(5,927) $(2,101)
Adjustments to reconcile net income to
net cash used for operating
activities -
Depreciation 311 168
Amortization 201 210
Gain on sale of assets - (1)
Changes in operating assets and
liabilities -
Receivables (554) (4,237)
Inventories (2,520) (2,919)
Prepaid expenses and other (281) (40)
Accounts payable 1,342 1,535
Accured liabilities 551 (544)
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Net cash used for operating activities (6,877) (7,929)
------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property, plant and equipment (697) (313)
Proceeds from sale of property, plant &
equipment - 2
Other Assets (62) -
------- -------
Net cash used for
investing activities (759) (311)
------- -------
</TABLE>
<TABLE>
<CAPTION>
Mar. 27, 1998 Mar. 31, 1997
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<S> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net increase in short-term borrowings
from bank 7,400 $8,754
Issuance of common stock 113
Principal payments on long-term obligations (25) (36)
------- ------
Net cash provided by
financing activities 7,488 8,718
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NET CHANGE IN CASH (148) 478
CASH, beginning of period 703 47
------- ------
CASH, end of period $ 555 $ 525
======= ======
Supplemental disclosures of
cash flow information:
Cash paid during the period for:
Interest $ 1,059 $ 675
======= ======
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 27, 1998; (2) the results of its
operations and its cash flows for the six months ended March 27, 1998 and March
31, 1997; and (3) the results of its operations for the three months ended March
27, 1998 and March 31, 1997, 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 year
ended September 30, 1997, for a discussion of the Company's significant
accounting policies.
NOTE 2
INCOME TAXES:
The Company has federal tax loss carry forwards of approximately $32.3 million
at September 30, 1997. There was no current income tax provision or benefit
recorded during the six months ending March 27, 1998 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 which is scheduled to mature December 31, 1998. There are
no financial covenants under the line of credit, which is unconditionally
guaranteed by the Company's Chairman (the "Guarantor").
At the option of the Company, advances under the line of credit bear interest at
prime minus 0.50% or one, two or three month LIBOR plus 2.0% (8.0% at March 27,
1998).
NOTE 4
NET LOSS PER COMMON SHARE:
The computation of basic net loss per share is based on the weighted average
number of common shares outstanding during the period. Diluted earnings per
share would also include common share equivalents outstanding. Due to the
Company's net loss for all periods presented, all common stock equivalents would
be anti-dilutive to Basic EPS.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-----------------------------------------------------------------
Mar 27, 1998 Mar 31, 1997 Mar 27, 1998 Mar 31, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss (in thousands) ($2,709) ($1,270) ($5,927) ($2,101)
Weighted average shares 3,054,367 2,977,121 3,027,963 2,951,686
Net loss per share -
basic and diluted ($0.89) ($0.43) ($1.96) ($0.71)
</TABLE>
At March 27, 1998, there were options outstanding to purchase 629,395 shares of
stock, with per share prices ranging from $2.94 to $10.93. Additionally there
were warrants outstanding to purchase 1,390,000 shares of stock with per share
prices ranging from $5.00 to $5.50. Also, the Company has 833,333 shares of
redeemable preferred stock, which have a stated value of $6.00 per share and are
convertible to common on a one to one ratio.
<PAGE> 8
Page 6 Form 10-Q
NOTE 5
INVENTORIES:
Inventories as of March 27, 1998 and September 30, 1997, were as follows (in
thousands):
<TABLE>
<CAPTION>
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Mar. 27, 1998 Sept. 30, 1997
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<S> <C> <C>
Raw Materials $3,737 $3,602
Work-in-process 6 14
Finished Goods 6,152 3,759
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Total $9,895 $7,375
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</TABLE>
NOTE 6
SEVERANCE AND RESTRUCTURING EXPENSES:
During the six month period ending March 27, 1998, in addition to other work
force reductions, certain executives left the Company under severance
agreements. As a result of these items, the Company recorded a charge of $0.8
million in the six month period.
<PAGE> 9
Page 7 Form 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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FINANCIAL CONDITION
As of March 27, 1998, the Company had working capital of $4.4 million and a
current ratio of 1.3 to one. This compares to working capital of $10.5 million
and a current ratio of 3.8 to one as of September 30, 1997. As of the period
ending March 27, 1998, current borrowings under the Company's line of credit
increased $7.4 million from the period ending September 30, 1997. Accounts
payable and other accrued liabilities increased $1.9 million. The increases were
used to fund the Company's net loss for the period of $5.9 million and an
increase in accounts receivable and inventory of $0.6 million and $2.5 million
respectively. During the Company's first and second fiscal quarters, October
through March, working capital requirements are met primarily through increased
borrowings under its line of credit. Generally working capital requirements
during the Company's third and fourth fiscal quarters, April through September,
are provided from internally generated funds. However, the Company does
anticipate the need for additional borrowings under its line of credit during
its third quarter to support inventory requirements for initial product
shipments of its Nancy Lopez Golf division. Capital expenditures for the six
month period ending March 27, 1998, were approximately $0.7 million. Additional
capital expenditures for the fiscal year ending September 30, 1998 are expected
to be minimal.
RESULTS OF OPERATIONS
The tables below compare net sales by product line and market segment for the
Company's second quarter and six months ending March 27, 1998, to the comparable
prior year periods.
<PAGE> 10
Page 8 Form 10-Q
Sales By Product Line
($'s in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------------- ----------------------------------------
Mar 27, 1998 Mar 31, 1997 %Change Mar 27, 1998 Mar 31, 1997 %Change
-------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Clubs 2,169 3,766 (42.4) 4,220 6,464 (34.7)
Bags 2,636 3,439 (23.3) 4,058 5,351 (24.2)
Outlet 111 99 12.1 300 246 22.0
Components 583 601 (3.0) 851 772 10.2
Apparel 89 14 535.7 146 14 942.9
------------------------------------- ----------------------------------------
Total 5,588 7,919 (29.4) 9,575 12,847 (25.5)
------------------------------------- ----------------------------------------
</TABLE>
Sales By Market Segment
($'s in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------------- ----------------------------------------
Mar 27, 1998 Mar 31, 1997 %Change Mar 27, 1998 Mar 31, 1997 %Change
--------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pro 1,857 3,504 (47.0) 3,653 6,558 (44.3)
Retail 1,731 2,897 (40.2) 2,342 3,911 (40.1)
Contract 178 399 (55.4) 275 472 (41.7)
Outlet 111 99 12.1 300 246 22.0
Components 583 601 (3.0) 851 772 10.2
Closeouts 1,040 270 285.2 2,045 684 199.0
Other 88 149 (40.9) 109 204 (46.6)
------------------------------------- ---------------------------------------
Total 5,588 7,919 (29.4) 9,575 12,847 (25.5)
------------------------------------- ---------------------------------------
</TABLE>
Net sales for the quarter ending March 27, 1998 were $5.6 million compared to
$7.9 million for the comparable prior year period, a decrease of 29.4%. Sales
for the six month period decreased 25.5% to $9.6 million, from $12.8 million in
the prior year same six month period. Substantially all the decline in current
year sales was in the Company's club and bag product lines. The decline is
attributable to 1) the reorganization of the Company's sales force during the
Company's second quarter, 2) late delivery of raw materials from overseas
suppliers and 3)
excess inventories in the market place going into the Spring season.
The Company's gross profit as a percentage of net sales for the second quarter
and six month period ending March 27, 1998, was 19.6% and 16.8% respectively.
Gross profit for the comparable prior year periods was 24.4% and 24.9%. The
decline in gross profit is attributable to significant closeout sales during the
Company's reporting period and manufacturing variances in the Company's club
division. Year to date closeout sales were $2.0 million and represented
approximately 34% of sales of the Company's core products, clubs and bags. Gross
profit on the closeout sales was 14.9%. Manufacturing variances in the Company's
club manufacturing facility accounted for approximately 5.0% of the decline in
gross profit, and was attributable to air freight charges for shipment of raw
materials from overseas suppliers and under-absorbed factory overhead due to the
decline in sales. Adjusting for the closeout margins
<PAGE> 11
Page 9 Form 10-Q
and manufacturing variances, gross profit would have been 22.4% and 22.3% for
the second quarter and six months ending March 27, 1998.
Selling and marketing expenses increased $0.1 million and $0.4 million for the
three months and six months ending March 27, 1998. The increase was due in part
to marketing and development costs related to the Company's new Nancy Lopez Golf
division. Variable selling expenses, commissions and royalties, decreased $0.4
million during the six months ending March 27, 1998. The decrease was offset by
an increase of $0.6 million in personnel related costs as the Company added
sales management personnel and replaced its sales force of independent
representatives with employee representatives who are compensated on a salary
and commission pay structure.
General and administrative expenses increased $0.2 million and $0.5 million for
the quarter and year to date periods ending March 27, 1998 over the same prior
year periods. General and administrative expenses through March 27, 1998
relating to the Company's management change and reorganization were $0.7
million. Excluding these costs, general and administrative expenses would have
decreased $0.2 million from the prior year. During the six month period ending
March 27, 1998, in addition to other work force reductions, certain executives
left the Company under severance agreements. As a result of these items, the
Company recorded a charge of $0.8 million.
Royalty income decreased primarily due to the termination of a licensing
agreement with a fitness equipment manufacturer, who filed bankruptcy during
1997. Interest expense increased $0.2 million and $0.4 million for the three
month and six month period ending March 27, 1998. The increase was due to higher
monthly average short term and long term debt during the Company's current
reporting period. Average total monthly debt was $7.6 million higher during the
six month period ending March 27, 1998 than in the same prior year six month
period ending March 30, 1997.
<PAGE> 12
Page 10 Form 10-Q
PART II. OTHER INFORMATION
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 filed a report on Form 8-K on January 30, 1998
regarding the Company's withdrawal from the NASDAQ Small Cap
Market.
.
<PAGE> 13
Page 11 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/ Cindy L. Davis
-------------------------------------------------
Cindy L. Davis
President and Chief Executive Officer
/s/ David J. Kirby
-------------------------------------------------
David J. Kirby
Vice President Finance (Chief Accounting Officer)
Date May 8, 1998
-----------------
<PAGE> 14
Page 12 Form 10-Q
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
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<S> <C>
3.1* Amended and Restated Charter of The Arnold Palmer
Golf Company.
3.2** Amended and Restated Bylaws of The Arnold Palmer Golf
Company
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-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-27-1998
<CASH> 525
<SECURITIES> 0
<RECEIVABLES> 6,549
<ALLOWANCES> 684
<INVENTORY> 9,895
<CURRENT-ASSETS> 17,443
<PP&E> 5,162
<DEPRECIATION> 3,283
<TOTAL-ASSETS> 26,387
<CURRENT-LIABILITIES> 13,026
<BONDS> 0
5,000
0
<COMMON> 1,527
<OTHER-SE> (19,493)
<TOTAL-LIABILITY-AND-EQUITY> 26,387
<SALES> 9,575
<TOTAL-REVENUES> 9,575
<CGS> 7,964
<TOTAL-COSTS> 7,964
<OTHER-EXPENSES> 6,993
<LOSS-PROVISION> 39
<INTEREST-EXPENSE> 1,336
<INCOME-PRETAX> (5,927)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,927)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,927)
<EPS-PRIMARY> ($1.96)
<EPS-DILUTED> ($1.96)
</TABLE>
