<PAGE> 1
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 September 30, 1998
Commission File No. 0-921
THE ARNOLD PALMER GOLF COMPANY
----------------------------------------------------
(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
------------------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock - par value
$.50 per share None
- --------------------------------------------------------------------------------
(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 November 30, 1998, the aggregate market value of the voting stock
held by non-affiliates was approximately $849,102 (based on the closing price on
that date of $0.375 per share).
As of November 30, 1998, 3,887,700 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 February 23, 1999, 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.
<PAGE> 2
PART I
Item 1. Business
General
The Arnold Palmer Golf Company ("APGC" 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. In July 1996, the Company changed its name to The Arnold Palmer Golf
Company. APGC manufactures, markets and distributes a full line of golf
products, including PALMER, NancyLopezGolf and First Flight golf equipment,
and HOTZ golf bags and luggage. APGC owns, subject to certain exceptions, the
exclusive worldwide right to the Arnold Palmer and Nancy Lopez trade names in
connection with the Company's manufacture, sale and distribution of golf
products. For purposes of this report, "fiscal 1998, 1997, and 1996" refer to
the fiscal years ended September 30, 1998, September 30, 1997 and March 2, 1996,
respectively. The "1996 transition period" refers to the seven-month period
ended September 30, 1996.
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 during fiscal 1998. 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
employee sales representatives and 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; and major
retailers.
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>
Mortex International Ltd. Bag material/hardware
SungLing Golf & Casting Co., LTD,
Dynamic Precision Casting Co., LTD. Iron heads, Metal wood heads
Aldila, Inc., True Temper Sports, Inc. Shafts
</TABLE>
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 "Palmer
Agreement") with Arnold Palmer Enterprises, Inc. ("Palmer 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.
2
<PAGE> 3
The Palmer 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. The Company also has the
right under the Palmer Agreement to sublicense to third parties the right to use
the licensed trademarks. The Palmer 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 Palmer Enterprises as a
royalty a specified percentage of net sales ranging from 1% to 5% 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 Palmer Agreement also sets forth the manner in which the Company and Palmer
Enterprises divide sublicensing royalties. In addition to the foregoing, the
Palmer Agreement contains provisions relative to the appearances of Palmer to
promote the licensed products and product usage by Palmer.
The term of the License Agreement extends through March 1, 2007.
Effective January 1, 1998, the Company entered into a licensing agreement (the
"Lopez Agreement") with Nancy Lopez Enterprises, Inc., whereas the Company was
granted the exclusive world wide rights to use of the name, likeness,
endorsement and trademarks of Nancy Lopez ("Lopez") in connection with the
advertisement, promotion, and sale of licensed products. Licensed products
include golf clubs, bags, gloves, shoes, balls, apparel and other related golf
products. The Company was also granted the right to sublicense to third parties
the right to use of the Lopez Identification. In exchange for the rights granted
to the Company in the agreement, the Company will pay to Lopez Enterprises,
royalties equal to 3.25% of its net sales of licensed products in addition to
fixed royalties regardless of the amount of royalties payable as a percentage of
product sales. In addition to the foregoing, Lopez agrees to provide ancillary
marketing services to the Company at times and locations mutually convenient for
Lopez and the Company. Such ancillary services provided by Lopez will relate to
development and review of licensed products and production of print and
television advertising.
The term of the Lopez Agreement extends through December 31, 2007.
Seasonal Business
Golf equipment manufactured and marketed by the Company is largely for warm
weather recreation. The spring quarter of the Company's fiscal year is the start
of the golf season and typically the Company's sales are at their highest level
of the year. Sales for the summer quarter consist largely of reorders to fill in
customer service levels. The fall and winter quarters generate a lower level of
sales.
Working Capital Practices
It is necessary for the Company and the industry to begin purchasing raw
material inventory during the winter months to meet customer demands in the
spring and summer months.
3
<PAGE> 4
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, KMart Corporation, Wal-Mart Stores Inc.,
and Nevada Bob's Pro Shop, Inc., accounted for 12.5%, 4.7% and 4.0%,
respectively, of the Company's total sales during fiscal 1998.
Backlogs
With regard to continuing operations, the Company's backlog of unshipped orders
was approximately $653,000 on September 30, 1998, and approximately $2,391,000
on September 30, 1997.
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 Company's principal methods of competition 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
The Company spent approximately $550,000 on product research and development
during fiscal 1998. No material amount was spent by the Company during fiscal
1997, 1996 or the 1996 transition period 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 123 people as of September 30, 1998.
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 2% of net sales for fiscal
1998, 1997, 1996 and the 1996 transition period. Foreign sales are not expected
to be material during the fiscal year ending September 30, 1999.
4
<PAGE> 5
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. During fiscal 1998 the property was used for
manufacturing golf clubs and warehousing finished goods and raw
materials. A portion of the property also houses the Company's
corporate offices. Subsequent to September 30, 1998, the Company
consolidated its golf club operations into its bag manufacturing
facility in Pocahontas, Arkansas.
(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 clubs and golf bags and
warehousing raw materials.
(c) 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, which had been idle, was
sold October 5, 1998.
(d) 1512 Sholar Avenue, Chattanooga, Tennessee, is a leased building of
cinder block and concrete construction containing 47,400 square feet.
This building was used for manufacturing golf clubs, warehousing and
shipping until September 1997, at which time club operations were
consolidated into the facility at 6201 Mountain View Road. The
Company's lease obligation on this facility continues through December
1998. The Company subleased a portion of the building during fiscal
1998.
(e) 300 Tanger Boulevard, Suite 405, Branson, Missouri, is a leased unit
in a building of cinder block and concrete construction, said unit
containing 2,900 square feet. This facility is used for retail sales.
Item 3. Legal Proceedings
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.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of fiscal 1998 to a vote of
security holders through the solicitation of proxies or otherwise.
5
<PAGE> 6
PART II
Item 5. Market for the Company's Common Stock and Related Security
Holder Matters.
MARKET PRICES
The Company's common shares traded on The Nasdaq Stock Market under the symbol
"APGC.", until February 23, 1998. The Nasdaq Stock Market notified the Company
that under its revised continued listing requirements, the Company would no
longer qualify for continued listing on the Nasdaq Stock Market as of February
23, 1998, at which time the Company's common shares began trading through the
OTC-Bulletin Board under the same symbol (APGC). Based upon transfer agent
records, the Company's common shares were held by approximately 1,600
shareholders as of November 30, 1998. As of September 30, 1998, the Company also
had 833,333 shares of Series NB Preferred Stock outstanding which was held by an
affiliate of the Company and not actively traded. On October 1, 1998, the
affiliate of the Company elected to convert 833,333 shares of NB Preferred Stock
to 833,333 shares of Common Stock in accordance with the terms of the Series NB
Preferred Stock.
A quarterly summary of the high and low market prices per common share for
fiscal 1998 and 1997 is shown below:
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
-------------------------------------
Quarter High Low High Low
------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First $2.9375 $1.7500 $4.2500 $3.8750
Second 2.8750 1.5000 4.5000 4.2500
Third 3.0625 1.5000 3.7500 3.3750
Fourth 3.0000 0.5625 3.2500 2.9375
</TABLE>
DIVIDENDS
Payment of dividends is subject to certain conditions contained in the Company's
loan agreements and 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 1998, 1997, 1996 and the 1996 transition period.
6
<PAGE> 7
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA
FOR FISCAL 1998, 1997, 1996, 1995, AND 1994, AND THE 1996 TRANSITION PERIOD
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 1996
-------------------------------------------------------- Transition
1998 1997 1996 1995 1994 Period
-------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS INFORMATION:
Net sales $ 21,893 $ 28,454 $ 21,185 $ 24,621 $ 24,726 $ 18,456
Net loss from continuing operations $(15,223) $(11,228) $ (5,625) $ (9,460) $ (1,054) $ (2,294)
BALANCE SHEET INFORMATION:
Total assets $ 20,478 $ 22,753 $ 18,560 $ 31,271 $ 40,258 $ 24,934
Long-term obligations and redeemable preferred stock $ 31,528 $ 31,264 $ 4,671 $ 7,473 $ 3,621 $ 20,996
PER COMMON SHARE DATA:
Net loss per share from continuing operations -
basic and dilutive $ (5.01) $ (3.77) $ (2.15) $ (3.73) $ (.42) $ (.80)
Common shares outstanding at end of period 3,054 3,004 2,635 2,539 2,537 2,927
</TABLE>
The Company changed its fiscal year end from one ending on the Saturday closest
to the end of February to one ending September 30, effective September 30, 1996.
Therefore, the 1996 transition period relates to the seven-month period ended
September 30, 1996. Selected financial data for fiscal 1998, 1997, 1996, 1995,
and 1994 relates to the years ended September 30, 1998 and 1997, March 2, 1996,
February 25, 1995 and February 26, 1994.
In May 1995, the Company sold its Duckster apparel line of business. The results
of discontinued operations have been reported separately from the results of
continuing operations.
7
<PAGE> 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations
The Company's revenues for the fiscal year ending September 30, 1998 were
approximately $21.9 million compared to $28.5 million for the fiscal year ended
September 30, 1997. The net loss for the fiscal year 1998 was approximately
$15.2 million, or $5.01 per share, compared to a net loss for fiscal 1997 of
approximately $11.2 million, or $3.77 per share.
In 1998, the Company, like other golf manufacturing companies, endured extremely
difficult market conditions that resulted in industry-wide declines in sales
and excessive manufacturing and retail inventories. These conditions, combined
with financial challenges in the Asian markets, largely reduced manufacturing
and retail margins industry-wide. In fiscal 1998 the Company continued to
experience difficulty in selling premium and higher retail priced men's golf
products, causing inventory buildup and a longer-term evaluation of the product
lines' proper marketplace positioning. At the same time, a similar excessive
inventory situation, a manufacturing price-cutting environment, and out-dated
product designs affected the Company's market for golf bags. The challenging
market conditions in fiscal 1998 coupled with the unplanned reduction in Company
sales arising from the difficulty experienced by the premium and higher retail
priced men's golf products and bag lines resulted in large inventory write-downs
and a higher frequency of low margin close-out sales. Also in fiscal 1998, the
Company invested substantially in the development and introduction of
NancyLopezGolf, a new brand offering of golf equipment, bags, gloves and
accessories for women golfers. With the shipment of this product occurring
essentially after the peak retail selling months, and facing the same
challenging market conditions, the brand achieved strong initial product
placement and assisted the Company in creating new distribution ventures,
largely with off-course stores.
Recognizing these marketplace and individual brand challenges as well as the
additional ongoing operational and financial difficulties of the Company, the
Company's Board of Directors embarked upon numerous strategic business
initiatives in an effort to positively restructure the Company for the future.
These actions, largely implemented in the last six months of fiscal year 1998,
included: a complete management restructuring; the consolidation of the
Company's Tennessee-based manufacturing facility to its Arkansas-based
manufacturing facility; a downsizing of corporate personnel; a thorough analysis
and establishment of a long term plan for each brand's marketing, sales and
distribution strategy; and the effectuation of a financial restructuring
including the sale of National Golf Suppliers, an asset unrelated to the
Company's core business, and the sale of Company's investment in Nevada Bob's
Series D preferred stock. The Company also undertook to restructure the
Company's existing debt obligations with its third party lender. The Company's
restructuring plan is expected to be completed early in calendar 1999.
Comparison of the Years Ended September 30, 1998 and September 30, 1997
Net sales for fiscal year 1998 decreased $6.6 million to $21.9 million, a 22.9%
decrease from fiscal year 1997 net sales of $28.5 million. The tables below
compare the Company's net sales by product line and market segment for the year
ending September 30, 1998 to the year ending September 30, 1997.
Sales By Product Line
($'s in millions)
<TABLE>
<CAPTION>
1998 1997 % Change
---- ---- --------
<S> <C> <C> <C>
Club 11.0 14.1 -22.0%
Bags 7.8 11.0 -29.0%
Apparel 0.2 0.2 -0.9%
Outlet 0.8 0.7 21.4%
Components 2.1 2.5 -15.3%
-------------------------------------------------------------------------
Total 21.9 28.5 -22.9%
-------------------------------------------------------------------------
</TABLE>
Sales By Market Segment
($'s in millions)
<TABLE>
<CAPTION>
1998 1997 % Change
---- ---- --------
<S> <C> <C> <C>
Pro 12.0 14.0 -14.1%
Retail 6.6 10.1 -33.9%
Outlet 0.8 0.7 21.4%
Contract 0.2 0.8 -78.7%
Components 2.1 2.5 -15.3%
Export 0.2 0.4 -56.9%
-------------------------------------------------------------------------
Total 21.9 28.5 -22.9%
-------------------------------------------------------------------------
</TABLE>
A $3.1 million decrease in club sales and a $3.2 million decrease in bag sales
accounted for essentially all the decrease in the Company's sales for year
ending September 30, 1998. Sales to pro accounts (on-course golf shops and
off-course golf equipment stores), decreased 14.1% for the year ending September
30, 1998 while retail sales (mass merchants), decreased 33.9%. The sales
decrease was mostly attributable to soft market conditions during the year
resulting in overstocked inventories in the retail market. Additionally, one of
the Company's major mass merchant accounts which accounted for approximately
$1.6 million of sales during fiscal year ending September 30, 1997, did not
purchase significant amounts of product from the Company during fiscal year
1998.
Gross profit for the fiscal year ending September 30, 1998 was 5.3% compared to
7.1% for the fiscal year ending September 30, 1997. Inventory write downs and
adjustments of approximately $1.8 million accounted for 8.2% margin loss, while
approximately 15.1% of the Company's fiscal 1998 sales were closeout sales
generating only 4.1% gross profit.
Total selling and marketing expenses remained essentially unchanged for the
fiscal year ending September 30, 1998 compared to the fiscal year ending
September 30, 1997. As a percent of net sales, selling and marketing expenses
were 34.1% and 26.3% for years ending September 30, 1998 and September 30, 1997.
Selling expenses were less variable in fiscal 1998 as the Company replaced its
sales force of independent representatives with employee representatives who are
compensated on a salary and commission pay structure. The employee
representatives are also reimbursed for travel and certain other expenses
incurred by the employees.
General and administrative expenses were $6.8 million for the fiscal year ending
September 30, 1998 and included $2.4 million related to the Company's management
changes and reorganization. Costs in this category included severance for
terminated executives, severance related to the closed
8
<PAGE> 9
Ooltewah, Tennessee club plant (which was consolidated into the Pocahontas,
Arkansas plant) and outside consulting services. Excluding these non-recurring
items, general and administrative expenses were $4.4 million compared to $5.0
million for the fiscal year ending September 30, 1997. Expense reductions were
primarily in salaries and benefits and legal expenses.
Interest expense for the year ending September 30, 1998 increased 37.3% to $3.0
million from $2.2 million for year ending September 30, 1997. The increase was
due to an increase in long term debt of $10.0 million on which the per annum
interest expense was 7.97%. Royalty and other income decreased $0.5 million for
the year ending September 30, 1998 compared to the same prior year period. The
decrease was due to the losses related to the sale of the Company's component
division (National Golf Suppliers) and it's idle plant facility in Lumberton,
North Carolina. The loss on the sale of the component division was $0.4 million
and the loss on the idle plant facility was $0.1 million. A royalty agreement
held by the Company provided $1.0 million of royalty income in 1998. Beginning
October 1, 1998, the maximum royalty per the agreement will be $50,000 annually
and as a result, the Company expects a decrease in royalty income for fiscal
1999.
Comparison of the Years Ended September 30, 1997 and September 30, 1996
Net sales for fiscal year 1997 increased $3.6 million to $28.5 million, compared
to sales of $24.9 million for the twelve month period ending September 30, 1996.
The tables below compare the Company's net sales by product line and market
segment for year ending September 30, 1997 to the comparable period ending
September 30, 1996.
Sales By Product Line
($'s in millions)
<TABLE>
<CAPTION>
1997 1996 % Change
---- ---- --------
<S> <C> <C> <C>
Club 14.1 13.5 4.8%
Bags 11.0 10.6 3.4%
Apparel 0.2 0.0 0.0%
Outlet 0.6 0.5 26.5%
Components 2.5 0.3 *
------------------------------------------------------------------------
Total 28.5 24.9 14.4%
------------------------------------------------------------------------
</TABLE>
Sales By Market Segment
($'s in millions)
<TABLE>
<CAPTION>
1997 1996 % Change
---- ---- --------
<S> <C> <C> <C>
Pro 14.0 12.3 13.4%
Retail 10.1 11.7 -13.7%
Outlet 0.6 0.5 26.5%
Contract 0.8 0.0 0.0%
Components 2.5 0.3 *
Export 0.4 0.1 *
------------------------------------------------------------------------
Total 28.5 24.9 14.4%
------------------------------------------------------------------------
</TABLE>
* Due to insignificance of 1996 sales, percent change is not meaningful.
Although combined sales for clubs and bags increased 4.2% to $24.1 million, the
most significant increase in sales was in the Company's component division. The
Company acquired its component
9
<PAGE> 10
division, National Golf Suppliers, in June 1996, therefore 1996 component sales
are fiscal fourth quarter sales only. Pro sales (primarily to off-course golf
equipment stores), increased $1.7 million in fiscal 1997 to $14.0 million. Pro
club sales were adversely affected by returns of approximately $370,000 in
fiscal 1997 resulting from a license claim by COBRA Golf in which the Company
voluntarily pulled its Standard Plus II product from customers and ceased
selling the product. Retail sales decreased 13.7% in fiscal 1997 to $10.1
million. The decrease was primarily attributable to overstocked inventories in
the retail market as merchants entered their Fall 1996 and Spring 1997 buying
season.
Gross profit for fiscal 1997 was 7.1% compared to 19.4% for the twelve months
ending September 30, 1996. Excess inventory write-downs to lower of cost or
market of $2.4 million ($1.4 million in clubs and club raw material and $1.0
million in bags and bag raw materials), accounted for 8.3% of the decrease in
gross profit contribution. The write-downs were taken due to an approximate 50%
reduction in club and bag stock keeping units, in order to better manage
inventory levels and to improve manufacturing and customer service operations.
The Company believes the write downs were necessary to market the discontinued
products in alternate trade channels to protect its current product line. In
addition to the above, write downs on the Company's Standard Plus II product
were $618,000 for fiscal 1997 and accounted for 2.2% of the gross profit
decrease. Write downs on plant assets and other costs associated with plant
restructuring totaled $471,000, or 1.7% of net sales. Fiscal 1997 gross profits
were also lower due to closeout pricing on approximately $4.2 million of
discontinued merchandise.
Selling and marketing expenses increased $1.2 million in fiscal 1997. The
increase was primarily due to costs associated with replacing the Company's
sales force consisting of non-employee sales agents with employee-sales
representatives and regional sales management personnel. Fiscal 1997 selling
expense also includes a $335,000 write off of point-of-purchase display units
not currently being used. General and administrative expenses increased $1.1
million in fiscal 1997, of which approximately $0.5 million were in increased
legal fees. The increase in legal expenses related primarily to litigation
between the Company and its former CEO, and the dispute between the Company and
COBRA Golf, regarding the Standard Plus II product. Other increases in general
and administrative expenses reflect a full year of expenses from the Company's
component division (National Golf Suppliers) and additional senior management
personnel.
Other income increased $0.2 million in fiscal 1997, due to increased royalty
payments from the Company's sub-licensees. Interest expense decreased 8.3% from
$2.4 million to $2.2 million for fiscal 1997. Cash interest expense increased
$0.6 million due to interest expense on higher average revolving credit facility
balances during fiscal 1997 and interest on the Company's $12 million long term
note. The increase in cash interest expense was offset by a $0.8 million
decrease in non-cash interest expense relating to amortization of the Company's
subordinated debt discount and subordinated notes in 1996, which was not as
significant in 1997.
10
<PAGE> 11
Comparison of the Seven-Month Periods Ended September 30, 1996 and
September 30, 1995
Net sales from continuing operations for the seven month transition period
ending September 30, 1996, increased $3.7 million or 25.0% compared to the same
period in 1995. As shown in the table below, the Company's significant growth
was in golf club sales, which increased 63.9% to $10.0 million, and accounted
for 54.0% of the Company's total net sales for the 1996 transition period.
Sales By Product Line
($'s in millions)
<TABLE>
<CAPTION>
1996 1995 % Change
---- ---- --------
<S> <C> <C> <C>
Clubs 10.0 6.1 63.9%
Bags 7.3 8.1 -9.9%
Outlet 0.6 0.4 50.0%
Other 0.6 0.2 200.0%
------------------------------------------------------------------------
Total 18.5 14.8 25.0%
------------------------------------------------------------------------
</TABLE>
Sales By Market Segment
($'s in millions)
<TABLE>
<CAPTION>
1996 1995 % Change
---- ---- --------
<S> <C> <C> <C>
Pro 9.6 6.8 41.2%
Retail 7.7 7.4 4.1%
Outlet 0.6 0.4 50.0%
Other 0.6 0.2 200.0%
------------------------------------------------------------------------
Total 18.5 14.8 25.0%
------------------------------------------------------------------------
</TABLE>
The decrease in bag sales of $0.8 million was attributable to a decline in
retail bag sales, which declined 26.5% from 1995 sales of $3.4 million. Pro bag
sales were $4.8 million compared to $4.7 million in 1995.
The most favorable sales increase for the Company was a 41.2% increase in its
pro business segment, which increased to $9.6 million in 1996 from $6.8 million
in 1995. Essentially all the increase in the pro business was in golf club
sales. The increase in club sales was primarily in the off-course golf equipment
stores. Pro sales accounted for 51.9% of the Company's total sales in the 1996
transition period compared to 45.9% in the comparable 1995 period. Net margins
on total sales increased to 27.9% compared to 25.5% in 1995, and was
attributable to the more favorable product mix and higher margins in pro clubs.
While total bag net margins remained constant with prior year at 28.8%, total
club margins increased to 32.3% compared to 29.7% in 1995. A decrease in retail
club margins to 28.1% in 1996 from 32.2% in 1995, was offset by a significant
increase in pro club margins of 40.0% in 1996, compared to 29.4% in 1995.
Selling and marketing expenses increased $1.7 million for the seven months
ending September 30, 1996. A substantial portion of the increase was in
advertising and promotion as the Company was not investing significant resources
in this area in the prior year. Additionally, commission and royalty expenses
were greater than prior year due to sales growth. General and administrative
expenses increased $1.2 million over 1995 primarily resulting from expenditures
relative to the
11
<PAGE> 12
Company's ongoing training and implementation of its new fully integrated
management information systems.
Interest expense decreased 38.8% to $1.1 million for the seven months ending
September 30, 1996. This was due to a decrease in non-cash interest expense
relating to amortization of the Company's subordinated debt discounts and
subordinated notes. Interest expense was also reduced due to the sale of certain
properties and the retirement of related debt.
Other income for the 1996 transition period increased approximately $0.8 million
over the same prior year period, most of which was royalty income from the
Company's licensing agreement for its patented hosel design (PHD) technology. In
the 1996 transition period, the Company also recognized $0.2 million in other
income related to the increase in the net pension asset recognized on the
balance sheet. None was recognized in the seven months ending September 30,
1995.
The Company recorded a $0.9 million charge against other income for the period
ending September 30, 1996. The Company was due to receive $1.2 million on
October 10, 1996, as final payment for the sale of its Duckster apparel division
to DeLong Sportswear. In September 1996, the Company became aware that DeLong
Sportswear would default on the final payment, and in lieu of payment accepted
manufacturing equipment and certain apparel items with a fair market value of
approximately $0.3 million in addition to other considerations beneficial for
the Company. The charge against other income reflects the writedown of the note
plus accrued interest, to $0.3 million.
Liquidity and Capital Resources
The Company generally relies upon internally generated cash and short-term
borrowings to satisfy working capital and capital expenditure requirements.
Generally, short-term borrowings increase from December to April, because the
Company builds inventory through the winter to support its spring shipping
season. Capital expenditures for 1999 are expected to be minimal.
The Company had negative working capital of $4.2 million as of September 30,
1998 and a current ratio of 0.74 to one. This compares to working capital of
$10.5 million and a current ratio of 3.8 to one at September 30, 1997. As of
September 30, 1998, the Company's outstanding balance on its revolving credit
facility was $12.3 million compared to $0.2 million at September 30, 1997. The
outstanding balance at September 30, 1998 was due to mature on December 31,
1998. In addition, the Company had long term debt of $22.0 million as of
September 30, 1998 which was due to mature December 31, 1999.
Due to the continued losses of the Company, the board of Directors embarked upon
numerous strategic business initiatives including the effectuation of a
financial restructuring plan as more fully discussed above. With the consent of
the Company's Chairman, the guarantor of the Company's existing indebtedness
(the "Guarantor"), the Company sold National Golf Suppliers, an asset unrelated
to the Company's core business, and the Company's investment in Nevada Bob's
Series D preferred stock. The Company also entered into negotiations to replace
the existing third-party lender of the Company with an affiliate of the
Guarantor. With the financial support of the Guarantor and of his affiliates,
the Company has been able to meet its outstanding financial commitments.
On October 20, 1998, an affiliate of the Guarantor, the Thomas C. Lupton Trust,
("Trust"), purchased the Company's $5.0 million investment in Nevada Bob's
Holdings, Inc. Series D Preferred Stock at cost. Proceeds from the sale of the
Series D Shares were used to pay $5.0 million on the Company's September 30,
1998 revolver balance of $12.3 million. On October 30, 1998, the Trust purchased
the remaining current revolver debt of $7.3 million and the Company's long term
debt of $22.0 million from the bank which held the notes.
The Trust has agreed to suspend interest payments on the revolver debt and the
term debt, and to amend the due date on the revolver debt to December 31, 1999.
12
<PAGE> 13
Also subsequent to September 30, 1998, a $5.0 million revolving credit facility
was established with a bank. This credit facility is an unsecured promissory
note due on December 30, 1999, and is guaranteed by the Guarantor. The Company
believes this facility will satisfy working capital and capital expenditure
requirements through fiscal 1999.
Impact of Inflation and Changing Prices
Management believes that the impact of inflation and other changes in prices
during fiscal 1998, 1997 and 1996 and the 1996 transition period, had no
material effect on the Company's financial condition or operating results.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in the contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The
Company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the Company's election, before January
1, 1998).
SFAS No. 133 could increase the volatility in earnings and other comprehensive
income, however, based on the Company's current and anticipated level of
derivative instruments and hedging activities, the Company does not believe the
impact would be material.
Year 2000
The Company's information system and business processes applications operate on
an IBM AS/400 mid range computer. The hardware and its related License Internal
Code (LIC) have been upgraded to a Year 2000 compliant level. The Company's
software applications operating on the AS/400 are fully integrated management
information system developed by JBA International. The Company began the
conversion to the JBA software in mid calendar year 1996. The only remaining JBA
application to be implemented is Fixed Assets, which the Company anticipates
having implemented no later than July 1999. The Company's PC based applications,
which consist primarily of Lotus Smart Suite and cc: Mail, have been in the
process of upgrading to a Year 2000 compliance level with an anticipated
completion date no later than mid calendar year 1999. The cost for completing
the PC based applications upgrade is not expected to be material.
13
<PAGE> 14
The Company does not believe there are any significant risks to its continuing
operations related to Year 2000 issues. Certain customers in the mass
merchandise market, submit their orders via EDI processing to the Company. These
customers have notified the Company that their systems will be Year 2000
compliant within the required time frame to ensure uninterrupted data
interchange related to order fulfillment. The Company has also received
notification from certain raw material suppliers that their systems will be
Year 2000 compliant within the required time frame. Although the Company does
not anticipate any issues related to timely supply of raw materials, it is
seeking confirmation from its other major suppliers that their systems will
likewise be Year 2000 compliant.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements and Schedules
Report of Independent Public Accountants
Balance Sheets as of September 30, 1998 and September 30, 1997
Statements of Operations for the Years Ended September 30, 1998,
September 30, 1997, March 2, 1996 and the Seven-Month Period Ended
September 30, 1996
Statements of Stockholders' Equity (Deficit) for the Years Ended
September 30, 1998, September 30, 1997, March 2, 1996 and the
Seven-Month Period Ended September 30, 1996.
Statements of Cash Flows for the Years Ended September 30, 1998,
September 30, 1997, March 2, 1996 and the Seven-Month Period Ended
September 30, 1996.
Notes to Financial Statements
Financial Statement Schedules
See Part IV, Item 14(a)2
14
<PAGE> 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Arnold Palmer Golf Company:
We have audited the accompanying balance sheets of THE ARNOLD PALMER GOLF
COMPANY (a Tennessee corporation) as of September 30, 1998 and 1997 and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the years ended September 30, 1998 and 1997, the seven-month period ended
September 30, 1996, and the year ended March 2, 1996. 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 The Arnold Palmer Golf Company
as of September 30, 1998 and 1997, and the results of its operations and its
cash flows for the years ended September 30, 1998 and 1997, the seven-month
period ended September 30, 1996, and the year ended March 2, 1996, in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
December 4, 1998
15
<PAGE> 16
THE ARNOLD PALMER GOLF COMPANY
BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 371 $ 703
Accounts receivable, less allowance for doubtful accounts of $977 and
$843 at September 30, 1998 and 1997 3,514 5,311
Inventories 7,004 7,375
Prepaid expenses and other 1,162 847
------- -------
Total current assets 12,051 14,236
------- -------
PROPERTY, PLANT, AND EQUIPMENT, NET 1,669 1,493
------- -------
OTHER ASSETS:
Investment in Nevada Bob's Holdings, Inc. 5,000 5,000
Property held for sale 94 170
Goodwill 85 502
Other 1,579 1,352
------- -------
Total other assets 6,758 7,024
------- -------
$20,478 $22,753
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 17
THE ARNOLD PALMER GOLF COMPANY
BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 3 $ 102
Short-term borrowings from bank 12,250 150
Accounts payable 1,573 2,121
Accrued liabilities 2,389 1,370
------- -------
Total current liabilities 16,215 3,743
------- -------
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES 26,525 26,162
------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
REDEEMABLE PREFERRED STOCK, $.50 par value, 833,333 shares authorized,
issued, and outstanding (liquidation preference of $5,000 plus
accumulated dividends) 5,000 5,000
------- -------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.50 par value, 10,000,000 shares authorized; 3,054,367 and
3,004,367 shares issued and outstanding at September 30, 1998 and 1997 1,527 1,502
Additional paid-in capital 6,401 6,313
Accumulated deficit (35,190) (19,967)
------- -------
Total stockholders' equity (deficit) (27,262) (12,152)
------- -------
$20,478 $22,753
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 18
THE ARNOLD PALMER GOLF COMPANY
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
SEPTEMBER 30, 1998 AND 1997, MARCH 2, 1996, AND
THE SEVEN-MONTH PERIOD ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Years 1996
------------------------------------ Transition
1998 1997 1996 Period
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 21,893 $ 28,454 $ 21,185 $ 18,456
COST OF SALES 20,730 26,447 17,983 13,301
-------- -------- -------- --------
Gross profit 1,163 2,007 3,202 5,155
SELLING EXPENSES 7,469 7,479 4,559 4,466
GENERAL AND ADMINISTRATIVE EXPENSES 6,775 4,955 2,573 2,405
-------- -------- -------- --------
(13,081) (10,427) (3,930) (1,716)
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense, net (3,038) (2,212) (2,965) (1,129)
Royalty and sub-license income, net 1,459 1,402 974 937
Writedown of note receivable 0 0 0 (894)
Other, net (563) 9 296 508
-------- -------- -------- --------
(2,142) (801) (1,695) (578)
-------- -------- -------- --------
Loss from continuing operations before income taxes (15,223) (11,228) (5,625) (2,294)
--------
PROVISION FOR INCOME TAXES 0 0 0 0
-------- -------- -------- --------
LOSS FROM CONTINUING OPERATIONS (15,223) (11,228) (5,625) (2,294)
-------- -------- -------- --------
DISCONTINUED OPERATIONS (NOTE 13):
Income from discontinued operations 0 0 348 0
-------- -------- -------- --------
0 0 348 0
-------- -------- -------- --------
NET LOSS $(15,223) $(11,228) $ (5,277) $ (2,294)
======== ======== ======== ========
BASIC AND DILUTIVE NET INCOME (LOSS) PER SHARE FROM:
Continuing operations $ (5.01) $ (3.77) $ (2.15) $ (.80)
Discontinued operations .00 .00 .13 .00
-------- -------- -------- --------
$ (5.01) $ (3.77) $ (2.02) $ (.80)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 19
THE ARNOLD PALMER GOLF COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED
SEPTEMBER 30, 1998 AND 1997, MARCH 2, 1996,
AND THE SEVEN-MONTH PERIOD ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------- -------- --------
<S> <C> <C> <C> <C> <C>
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)
Net loss 0 0 0 (2,294) (2,294)
Conversion of subordinated convertible note into 192
shares of common stock 192 96 863 0 959
Issuance of common stock 100 50 334 0 384
----- ------ ------ -------- --------
BALANCE AT SEPTEMBER 30, 1996 2,927 1,463 5,991 (8,739) (1,285)
Net loss 0 0 0 (11,228) (11,228)
Issuance of common stock 77 39 322 0 361
----- ------ ------ -------- --------
BALANCE AT SEPTEMBER 30, 1997 3,004 1,502 6,313 (19,967) (12,152)
----- ------ ------ -------- --------
Net loss 0 0 0 (15,223) (15,223)
Issuance of common stock 50 25 88 0 113
----- ------ ------ -------- --------
BALANCE AT SEPTEMBER 30, 1998 3,054 $1,527 $6,401 $(35,190) $(27,262)
===== ====== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 20
THE ARNOLD PALMER GOLF COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997, MARCH 2, 1996, AND
THE SEVEN-MONTH PERIOD ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Years 1996
------------------------------------ Transition
1998 1997 1996 Period
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(15,223) $(11,228) $(5,277) $(2,294)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 457 407 400 140
Amortization 454 364 1,674 433
(Gain) loss on disposal of property, plant, and 269 (11) (100) (98)
equipment
Loss on disposal of National Golf Suppliers 476 0 0 0
Writedown of note receivable 0 0 0 894
Writedown of property, plant and equipment 76 727 0 0
Changes in operating assets and liabilities, net of effects from
the purchase and sale of National Golf Suppliers:
Accounts receivable 1,599 319 3,409 (1,778)
Inventories (327) 2,116 2,479 489
Prepaid expenses and other 233 254 452 (481)
Accounts payable (533) (18) (2,400) 251
Accrued liabilities 1,157 (557) (1,577) (12)
-------- -------- ------- -------
Net cash used in operating activities (11,362) (7,627) (940) (2,456)
-------- -------- ------- -------
INVESTING ACTIVITIES:
Additions to property, plant, and equipment (1,137) (1,041) (150) (291)
Proceeds from sale of property, plant, and equipment 214 23 3,855 125
Investment in Nevada Bob's Holdings, Inc. 0 0 0 (5,000)
Payments received on note receivable 0 0 1,600 0
-------- -------- ------- -------
Net cash provided by (used in) investing
activities (923) (1,018) 5,305 (5,166)
-------- -------- ------- -------
FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings from bank 12,100 9,354 (1,733) 2,700
Proceeds from debt obligations 0 1,109 0 0
Principal payments on debt obligations (147) (1,162) (2,656) (41)
Issuance of redeemable preferred stock 0 0 0 5,000
-------- -------- ------- -------
Net cash provided by (used in) financing
activities $ 11,953 9,301 (4,389) 7,659
======== ======== ======= =======
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH $ (332) 656 (24) 37
CASH, BEGINNING OF PERIOD 703 47 34 10
-------- -------- ------- -------
CASH, END OF PERIOD $ 371 $ 703 $ 10 $ 47
======== ======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments (refunds) during the period for:
Interest $ 2,390 $ 1,810 $ 1,085 $ 613
======== ======== ======= =======
Income taxes, net $ 0 $ 0 $ (5) $ 0
======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 22
THE ARNOLD PALMER GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS
For purposes of these financial statements and notes to these financial
statements, "fiscal 1998 and 1997" relates to the years ended September 30, 1998
and 1997, while "fiscal 1996" pertains to the year ended March 2, 1996. The
"1996 transition period" relates to the seven-month period ended September 30,
1996. All monetary amounts are expressed in thousands of dollars unless
otherwise indicated.
1. NATURE OF OPERATIONS
The Arnold Palmer Golf Company (the "Company") manufactures, markets and
distributes golf products, including PALMER and NancyLopezGolf equipment
and HOTZ golf bags and luggage. The Company's principal market is the
United States. The Company owns, subject to certain exceptions, the
exclusive worldwide right to the Arnold Palmer and Nancy Lopez trade names
in connection with the Company's manufacture, sale and distribution of
golf products. The Company sells primarily to retailers and golf specialty
stores and grants credit to customers based on defined payment terms. The
Company performs ongoing credit evaluations and generally does not require
collateral. Three large customers accounted for 21%, 17%, 25%, and 32%, of
net sales from continuing operations for fiscal 1998 and 1997, the 1996
transition period, and fiscal 1996, respectively.
In July 1996, the Company changed its name to The Arnold Palmer Golf
Company from ProGroup, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DISCONTINUED OPERATIONS
As discussed in Note 13, on May 5, 1995, the Company sold its Duckster
line of headwear, outerwear, and shirts. Consistent with the provisions of
Accounting Principles Board Opinion No. 30, the results of discontinued
operations have been reported separately from the results of continuing
operations, and a provision was made in fiscal 1995 for the loss on the
disposal of the Duckster line of business.
REVENUE RECOGNITION
Revenue is recognized when the Company's products are shipped to its
customers.
22
<PAGE> 23
INVENTORIES
Inventories are valued at the lower of cost or market using the first-in,
first-out (FIFO) method. 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 September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Land $ 70 $ 70
Buildings and improvements 735 595
Machinery and equipment 2,209 2,936
Furniture and fixtures 805 630
Construction in progress 467 234
------- -------
4,286 4,465
Less accumulated depreciation and amortization (2,617) (2,972)
------- -------
$ 1,669 $ 1,493
======= =======
</TABLE>
Included in property held for sale at September 30, 1998 and 1997 is the
Company's idle Lumberton, North Carolina plant, which was sold October 5,
1998.
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>
During fiscal 1998 and 1997, the Company recorded impairment losses of
approximately $76 and $727. The write-down related to a $76 and $101
write-down of its idle Lumberton, North Carolina facility in fiscal 1998
and 1997, respectively, as well as certain construction in progress and
tooling costs in 1997, which the Company will not utilize in the future.
GOODWILL
Goodwill of $85 relates to a business acquired before November 1, 1970,
and is not required to be amortized. The Company continually evaluates
whether subsequent events and circumstances have occurred that indicate
that the remaining balance may not be
23
<PAGE> 24
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the future
undiscounted net cash flows of the related businesses over the remaining
life of the goodwill in measuring whether goodwill is recoverable. The
Company recognized $30 of goodwill amortization expense in fiscal 1998 and
1997 related to a business line that was sold September 30, 1998 (Note 3).
ADVERTISING EXPENSES
The Company expenses advertising costs as incurred. Advertising expense
for fiscal 1998, 1997, the 1996 transition period, and fiscal 1996 was
$869, $1,133, $883, and $547, respectively.
FISCAL YEAR
During the 1996 transition period, the Company's Board of Directors
elected to change the Company's year end to September 30, effective
September 30, 1996. Fiscal 1996 was based on a 52-53-week period ending on
the Saturday closest to the end of February.
NET LOSS PER SHARE
Effective for the year ended September 30, 1998, the Company adopted
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("SFAS No. 128"), which 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 losses in each period presented, the diluted
EPS calculation includes no common share equivalents due to their
anti-dilutive effect. The weighted average number of shares outstanding
for fiscal 1998, 1997, the 1996 transition period, and for fiscal 1996 are
3,041,490, 2,978,099, 2,852,213, and 2,615,619, 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.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25"). Effective in the 1996 transition period, the
Company adopted the disclosure option of Statement of Financial Accounting
Standards ("SFAS No. 123") "Accounting for Stock-Based Compensation".
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments
24
<PAGE> 25
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a
company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
The Company may also implement the Statement as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16,
1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS
No. 133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1997 (and, at the
Company's election, before January 1, 1998).
SFAS No. 133 could increase the volatility in earnings and other
comprehensive income; however, based on the Company's current and
anticipated level of derivative instruments and hedging activities, the
Company does not believe the impact would be material.
3. ACQUISITION AND DISPOSAL OF NATIONAL GOLF SUPPLIERS, INC.
In June 1996, the Company issued 100,000 shares of its common stock in
exchange for certain assets and liabilities of National Golf Suppliers,
Inc. ("NGS"), a wholesaler of golf club component parts located in
Louisville, KY.
The acquisition of NGS was accounted for under the purchase method of
accounting. Accordingly, the operating results of NGS have been included
in the Company's results of operations from the date of acquisition. The
excess of the aggregate purchase price over the fair value of net assets
acquired was recorded as goodwill and was being amortized on a
straight-line basis over a 15 year period. The impact of the acquisition
on pro forma net loss and loss per share, as if the acquisition had taken
place at the beginning of fiscal 1996, was not significant for the 1996
transition period and fiscal 1996.
On September 30, 1998, the Company sold NGS for a $538 short-term
receivable which was paid in full in October 1998, a $230 installment
promissory note, and a minority ownership interest in the successor
entity. The Company does not exercise significant influence over the
successor entity and the investment is accounted for under the cost method
of accounting. The sale resulted in a loss of approximately $476. The
promissory note is due to be repaid through September 2001, and bears
interest at the rate of 9.5%
25
<PAGE> 26
4. INVENTORIES
Inventories as of September 30, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Raw materials $3,503 $3,602
Work-in-process 9 14
Finished goods 3,492 3,759
------ ------
$7,004 $7,375
====== ======
</TABLE>
5. INVESTMENT IN NEVADA BOB'S HOLDINGS, INC.
In August 1996, the Company purchased 625,000 mandatorily redeemable,
convertible shares of Series D Preferred Stock ("Series D Shares") of
Nevada Bob's Holdings, Inc. ("NBHI") for $5,000. The shares are
convertible to common shares of NBHI at any time at the currently
effective conversion rate, as defined, and will automatically convert to
common shares if NBHI successfully completes an initial public offering of
at least $20,000. If the Series D Shares are not converted to common
shares of NBHI by August 21, 2000, NBHI shall redeem 33 1/3% of the shares
annually over a three year period at 150% of the original cost per share
plus any declared but unpaid dividends. This investment is classified as
held-to-maturity and is accounted for using the cost method of accounting.
In October 1998, the Series D Shares were sold for $5,000 to a trust (the
"Trust") affiliated with the Company's Chairman (the "Guarantor"). The
Trust has agreed to maintain the sharing agreement with the Company on
any investment gains the Series D Shares yield (Note 11).
6. SHORT-TERM BORROWINGS
Short-term borrowings consist of advances under a $12,000 line of credit
agreement and a separate $2,000 line of credit agreement with a bank . The
lines of credit and long-term obligations are collaterized by accounts
receivable, inventory, and other business assets and are guaranteed by the
Guarantor.
There are no financial covenants under the lines of credit. Advances under
the lines of credit bear interest at the bank's prime rate less .5% (7.75%
at September 30, 1998). Interest is payable monthly. At September 30,
1998, advances outstanding under the lines of credit were $12,250, letters
of credit outstanding were $520, and $1,230 was unused.
The line of credit was scheduled to mature December 31, 1998. However,
subsequent to September 30, 1998, the Company reduced outstanding
borrowings on the line of credit $5,000 from the sale of its investment in
NBHI, and the Trust purchased the remaining $7,250 from the bank. The
Trust has agreed to extend the due date and suspend interest payments on
the $7,250 until December 31, 1999.
In fiscal 1997, the Company borrowed and repaid $1,100 from the Guarantor.
26
<PAGE> 27
7. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following at September 30, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Term loan with bank, interest payable monthly at 8.25%, due December 31, 1999 $ 12,000 $ 12,000
Term loan with bank, interest payable monthly at LIBOR plus 2% (7.97% at
September 30, 1998), due December 31, 1999 10,000 10,000
Subordinated notes ($5,000 face amount) to related parties, net of discount
of $478 and $853 at September 30, 1998 and 1997, interest payable
monthly at 6.0% (effective interest rate of 15.9%), due November 2, 1999 4,522 4,147
Other obligations 6 117
-------- --------
26,528 26,264
Less: current maturities (3) (102)
-------- --------
$ 26,525 $ 26,162
======== ========
</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 the Guarantor and another director 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.
Future scheduled maturities of long-term obligations as of September 30,
1998, were as follows:
1999 $ 3
2000 26,525
Subsequent to September 30, 1998, the Trust purchased the outstanding
$22,000 of term loans from the bank. The Trust has agreed to suspend any
interest or principal payments until the maturity date of December 31,
1999.
8. INCOME TAXES
There was no current income tax provision or benefit recorded during
fiscal 1998, 1997, the 1996 transition period, and fiscal 1996 due to the
losses sustained by the Company.
27
<PAGE> 28
Deferred income tax assets and liabilities 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
September 30, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Tax loss carryforwards $ 18,004 $ 12,086
Inventory and receivables reserves 943 1,221
Other accruals and reserves 591 550
-------- --------
19,538 13,857
-------- --------
Deferred tax assets valuation allowance (18,860) (13,114)
-------- --------
Deferred tax liabilities:
Pension asset 457 417
LIFO to FIFO change 65 222
Prepaid expenses 0 32
Excess tax depreciation 156 72
-------- --------
678 743
-------- --------
Net deferred tax asset $ 0 $ 0
======== ========
</TABLE>
At September 30, 1998 and 1997, the Company had federal tax loss
carryforwards of approximately $48,300 and $32,300 which expire in years
2009 through 2013 if not utilized earlier.
The difference between the 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
----------------------------------------------- Transition
1998 1997 1996 Period
------- ------- ------- ------
<S> <C> <C> <C> <C>
Expected tax benefit $ 5,746 $ 3,818 $ 1,913 $ 780
Change in valuation allowance (5,746) (3,818) (1,913) (780)
------- ------- ------- -----
Provision for income taxes from
continuing operations $ 0 $ 0 $ 0 $ 0
======= ======= ======= =====
</TABLE>
9. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has a noncontributory defined benefit pension plan covering
substantially all salaried and hourly employees. The plan provides
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.
28
<PAGE> 29
Pension income for fiscal 1998, 1997, the 1996 transition period, and
fiscal 1996 included the following components:
<TABLE>
<CAPTION>
Fiscal Years 1996
--------------------------------- Transition
1998 1997 1996 Period
----- ----- ------- ------
<S> <C> <C> <C> <C>
Service cost $ 38 $ 56 $ 86 $ 36
Interest cost on projected benefit obligation 337 346 365 199
Actual return on plan assets (1) (864) (1,047) (342)
Net amortization and deferral (478) 161 430 (35)
Net loss due to special early retirement
benefits 0 251 0 0
----- ----- ------- -----
Net pension income $(104) $ (50) $ (166) $(142)
===== ===== ======= =====
</TABLE>
The following table sets forth the funded status of the plan as of
September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation $ 5,260 $ 4,223
Nonvested benefit obligation 112 110
------- -------
Accumulated benefit obligation $ 5,372 $ 4,333
======= =======
Projected benefit obligation $ 5,484 $ 4,433
Plan assets at fair value 5,612 6,103
------- -------
Plan assets in excess of projected benefit obligation 128 1,670
Unrecognized net (gain) loss 1,165 (451)
Unrecognized prior service cost 140 156
Unrecognized initial net asset (231) (277)
------- -------
Net pension asset recognized on the balance sheet $ 1,202 $ 1,098
======= =======
</TABLE>
29
<PAGE> 30
The following assumptions were used to measure the net periodic pension
income and the projected benefit obligation:
<TABLE>
<CAPTION>
Fiscal Years 1996
--------------------------- Transition
1998 1997 1996 Period
---- ---- ---- ------
<S> <C> <C> <C> <C>
Discount rate used to determine the projected
benefit obligation 6.0% 7.5% 7.25% 7.5%
Rate of increase in future compensation levels
used to determine the projected benefit
obligation 5.0% 5.0% 5.0% 5.0%
Expected long-term rate of return on plan assets
used to determine net periodic pension income 8.0% 9.0% 9.0% 9.0%
</TABLE>
The Company curtailed the benefits under its defined benefit plan in 1994.
Under this curtailment, nonunion employees that were not at least age 50
with at least five years of service accrue no further benefits under the
plan.
401(K) PROFIT-SHARING PLAN
The Company has 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 fiscal
1998, 1997, the 1996 transition period, and fiscal 1996 were $32, $38,
$20, and $39, respectively.
10. CAPITAL STOCK
STOCK ISSUANCES
In fiscal 1998 and 1997, the Company issued 50,000 and 77,562 common
shares, respectively, to certain professional golfers as compensation
under endorsement agreements.
As consideration to the Guarantor for his guarantee of a line of credit in
January 1995, the Company issued an $850 subordinated convertible note and
a warrant to purchase up to 390,000 common shares of the Company. The cost
of the guarantee was set up as a deferred asset and amortized to interest
expense over the life of the note. 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 1996, the
$850 subordinated note plus accrued interest was converted to 191,814
shares of common stock under the terms of the note.
30
<PAGE> 31
In March 1995, the Company entered into a 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 fiscal 1996.
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 950,000 and 324,032 common
shares, respectively. The plans are administered by the Executive
Committee of the Board of Directors.
At September 30, 1998, the total number of shares available for options
was as follows:
<TABLE>
<S> <C>
Reserved for:
Outstanding stock options 631,127
Stock options authorized but not granted 482,805
---------
1,113,932
=========
</TABLE>
Stock options are exercisable at the market price on the date of grant and
expire on various dates through 2007. Stock options generally vest ratably
over a 3 year period from the date of grant or date of hire.
Stock option activity for fiscal 1998, 1997, the 1996 transition period,
and fiscal 1996, was as follows:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
-------- --------------
<S> <C> <C>
Outstanding at February 25, 1995 425,732 $ 8.68
Granted at market price 241,000 4.09
Canceled or expired (70,200) 11.23
--------
Outstanding at March 2, 1996 596,532 6.53
Granted at market price 80,000 5.38
Canceled or expired (20,000) 7.63
--------
Outstanding at September 30, 1996 656,532 6.36
Granted at market price 152,000 3.89
Canceled or expired (179,137) 7.14
--------
Outstanding at September 30, 1997 629,395 5.54
Granted at market price 320,000 3.39
Canceled or expired (318,268) 6.56
--------
Outstanding at September 30, 1998 631,127 3.93
=======
</TABLE>
Of the options outstanding at September 30, 1998, 120,000 have an exercise
price of $1.55 and a remaining contractual life of 8.9 years. Options to
exercise an additional 466,000
31
<PAGE> 32
shares have exercise prices between $3.0 and $5.38, with a weighted
average exercise price of $4.07 and a weighted average remaining
contractual life of 10 years. Of these options, 200,334 are exercisable at
a weighted average exercise price of $3.94. The remaining 45,127 options
have exercise prices between $7.12 and $10.93, with a weighted average
exercise price of $8.82, and a weighted average contractual life of 1.2
years. All of these options are exercisable at a weighted average price of
$8.82.
Of the options outstanding at September 30, 1998, 1997, and 1996, and
March 2, 1996, total shares exercisable were 245,461, 315,729, 362,199,
and 348,865, respectively, with weighted average price of $4.84, $7.10,
$8.11, and $8.19, respectively.
The Company accounts for the plans under APB No. 25, under which no
compensation cost has been recognized for stock options granted with
exercise prices equal to the fair value of the Company's common shares on
the date of grant. The Company adopted SFAS No. 123 for disclosure
purposes only in the 1996 transaction period. Had compensation cost for
these plans been determined consistent with SFAS No. 123, the Company's
net loss and loss per share would have been increased to the following pro
forma amounts:
<TABLE>
<CAPTION>
FISCAL YEARS 1996
----------------------------------- TRANSITION
1998 1997 1996 PERIOD
-------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net loss: As reported $(15,223) $(11,228) $(5,277) $(2,294)
Pro Forma (15,478) (11,335) (5,364) (2,490)
Loss per share: As reported $ (5.01) $ (3.77) $ (2.02) $ (0.80)
Pro Forma (5.09) (3.81) (.05) (0.87)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to February 26, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years.
The fair value of option grants is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal 1998 and 1997, the 1996 transition
period, and fiscal 1996, respectively: risk-free interest rates of 5.49,
6.05, 6.30, and 5.40 percent; expected dividend yields of 0 percent;
expected lives of one year after vesting; expected volatility of 72%, 60%,
73%, and 73%. Using these assumptions, the fair value of the stock options
granted in fiscal 1998 and 1997, the 1996 transition period and fiscal
1996 is $253, $264, $165, and $503, respectively, which would be amortized
as compensation over the vesting period of the options. The weighted
average fair value of options granted during fiscal 1998 and 1997, the
1996 transition period, and fiscal 1996 is $0.79, $1.74, $2.13, and $2.09,
respectively.
STOCK PURCHASE WARRANTS
The Company, in conjunction with the November 1994 issuance of its $5,000
subordinated notes, issued warrants to purchase 1,000,000 shares of common
stock at an exercise price of
32
<PAGE> 33
$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, 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 March 1995, all 390,000 warrants were immediately vested and subject to
a reset price of $5.00 per share.
PREFERRED STOCK
The Company's shareholders have authorized 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 the Company's Board of Directors prior to issuance. As
discussed in Note 11, 833,333 shares of preferred stock have been issued.
11. REDEEMABLE PREFERRED STOCK
In August 1996, the Company issued 833,333 shares of Series NB Preferred
Stock ("NB Shares") for $5,000 to the Guarantor to fund the Company's
investment in NBHI. The NB Shares, which were subsequently transferred to
the Trust, have a stated value of $6 per share and are convertible at any
time to common stock on a one to one ratio. The NB Shares are entitled to
cumulative dividends equal to 30% of the earnings realized by the Company
from its investment in NBHI's Series D Shares. The NB Shares shall have a
preference in liquidation of $5,000 plus accumulated dividends and are
required to be redeemed upon sale or redemption of the Series D Shares of
NBHI.
In October 1998, the Trust converted all the NB Shares to 833,333 shares
of common stock.
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has entered into various operating leases for buildings and
office equipment. Rent expense was approximately $821, $768, $405, and
$433, for fiscal 1998, 1997, the 1996 transition period, and fiscal 1996,
respectively. Approximate future minimum rental commitments for the next
five years for noncancelable operating leases as of September 30, 1998,
were as follows:
1999 $553
2000 347
2001 49
Included in fiscal 1998 and 1997 rent expense is $166 and $82,
respectively, of lease payments to an entity controlled by the Guarantor,
the owner of the Company's Ooltewah, Tennessee headquarters since April
1997.
33
<PAGE> 34
LITIGATION
The Company is party to certain 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
The Company pays royalties under a license agreement with Arnold Palmer
Enterprises, Inc., a company controlled by a shareholder and a member of
the Company's Board of Directors. The Company has the right to sub-license
its rights under this agreement. The agreement expires March 1, 2007, but
may be extended for successive five-year periods. Under the terms of the
agreement, the Company will pay royalties of 1% to 5% of net sales of
specified products and a portion of sub-licensing royalties. The Company
has committed to pay minimum royalties of $750 through 2007. During fiscal
1998, 1997, the 1996 transition period, and fiscal 1996, the Company
incurred royalty expense under this agreement of approximately $750, $700,
$442, and $500, respectively.
Effective January 1, 1998, the Company entered into a license agreement
with Nancy Lopez Enterprises, Inc., a company controlled by a member of
the Company's Board of Directors. The Company has the right to sub-license
its rights under this agreement. The agreement expires December 31, 2007
and provides that the Company will pay royalties of 3.25% of net sales of
licensed products, as defined. The Company has committed to pay minimum
royalties ranging from $207 in calendar year 1998 to $426 in calendar year
2007 and make minimum advertising expenditures for promotion of specified
products ranging from $1,000 in calendar year 1998 to $2,700 in calendar
year 2007. During fiscal 1998 the Company incurred royalty expense under
this agreement of approximately $174.
13. 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. The Company also retained approximately $4,200 in
existing accounts receivable. The sale resulted in an estimated loss on
disposal of $1,244, which was included as a component of discontinued
operations in fiscal 1995.
Approximately $1,126 of the promissory note receivable was not repaid by
the buyer. In lieu of payment, the buyer turned over certain manufacturing
equipment and other consideration to the Company. As a result, in the 1996
transition period the Company wrote the note receivable and related
accrued interest receivable down $894 to $300, the estimated fair value of
the consideration received.
34
<PAGE> 35
14. CHANGE IN FISCAL YEAR
During the 1996 transition period, the Company changed its fiscal year end
to September 30 from the Saturday closest to the end of February.
Accordingly, the September 30, 1996 results of operations are for a
seven-month period.
Following are selected financial data for the seven-month periods ended
September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- -------
(Unaudited)
<S> <C> <C>
Net sales $18,456 $14,777
Gross profit 5,155 3,765
Loss from continuing operations (2,294) (1,446)
Income from discontinued operations 0 348
Net loss (2,294) (1,098)
Loss per share from continuing
operations-basic and diluted (0.80) (0.55)
Loss per share-basic and diluted (0.80) (0.42)
</TABLE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, accounts payable and
accrued liabilities are reasonable estimates of their fair values because
of the short maturity of these financial instruments. Due to the fact that
no liquid market exists for: a) the Company's investment in the NBHI
Series D Shares, b) the subordinated notes payable, and c) the Company's
Series NB Preferred Stock, it is not practicable to estimate the fair
value of these financial instruments. Due to the guarantee of the lines of
credit and term loans by the Guarantor, it is not practicable to estimate
the fair value of these financial instruments.
16. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company currently outsources a significant portion of its bag
manufacturing from one supplier in the Far East. Transactions with this
entity are subject to government regulations. Although there are a limited
number of manufacturers of golf bags, management believes that other
suppliers could provide a similar product on reasonably comparable terms.
Also, the Company could manufacture bags at its Pocahontas, Arkansas
plant. A change in suppliers, however, could cause a delay in
manufacturing and a possible loss of sales, which would affect operating
results adversely.
35
<PAGE> 36
17. SUBSEQUENT EVENT
Subsequent to year-end, the Company and a bank entered into a $5,000
unsecured loan commitment due December 30, 1999, which is guaranteed by
the Guarantor. The proceeds are to be used to meet working capital
requirements.
36
<PAGE> 37
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 1999 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 72. Mr. Lupton was initially named Chairman of the
Board of Directors and Chief Executive Officer of the Company in
March, 1995 and continued as Chairman and Chief Executive Officer
through February 20, 1997. Mr. Lupton was re-appointed as Chairman and
Chief Executive Officer on November 21, 1997. In March 1998 the
Company named a new President & Chief Executive Officer. Mr. Lupton
continued serving as Chairman of the Board of Directors. Mr. Lupton is
the former Chairman of JTL Corp., a bottler of Coca-Cola and related
products, and a private investor.
Cynthia L. Davis. Age 36. Ms. Davis has been President & Chief
Executive Office since March 1998. Ms. Davis joined the Company in
June 1997 as Executive Vice President & General Manager. Prior to
joining the Company, Ms. Davis served as Vice President of the Ladies
Professional Golf Association (LPGA) from 1994 to 1997, and as
Executive Director, Teaching & Club Pro Division of the LPGA from 1992
to 1993.
Dexter Scudder Graybeal. Age 57. Mr.. Graybeal has been Vice President
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 49. 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 1999 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 1999 Proxy Statement is incorporated herein by
reference.
37
<PAGE> 38
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 1999 Proxy Statement is
incorporated herein by reference.
PART IV
Item 14. Exhibits. Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The financial statements are set forth 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 xx of this Form 10-K.
(b) The Registrant did not file any reports on Form 8-K during the
last quarter of fiscal 1998.
38
<PAGE> 39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Arnold Palmer Golf Company:
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 December 4, 1998. Our audits were made for the
purpose of forming an opinion on these 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.
/s/ ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
December 4, 1998
39
<PAGE> 40
SCHEDULE II
THE ARNOLD PALMER GOLF COMPANY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997, MARCH 2, 1996, AND
THE SEVEN-MONTH PERIOD ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
----------- --------- ------------------------- ------------- ------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COST AND OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD
----------- --------- -------- ----------- ------------- ------
<S> <C> <C> <C> <C> <C>
For the year ended September 30, 1998:
Allowance for doubtful accounts $ 843 $389 $ 1 $(256) $977
====== ==== === ===== ====
For the year ended September 30, 1997:
Allowance for doubtful accounts $ 720 $533 $62 $(472) $843
====== ==== === ===== ====
For the seven-month period ended September 30, 1996:
Allowance for doubtful accounts $ 758 $373 $35 $(446) $720
====== ==== === ===== ====
For the year ended March 2, 1996:
Allowance for doubtful accounts $1,049 $ 0 $20 $(311) $758
====== ==== === ===== ====
</TABLE>
(l) Recoveries on accounts written off.
(2) Accounts written off.
40
<PAGE> 41
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.
THE ARNOLD PALMER GOLF COMPANY
Date: December 18, 1998 By /s/ Cynthia L. Davis
-----------------------------------
(Cynthia L. Davis)
President & Chief Executive Officer
Date: December 18, 1998 By /s/ David J. Kirby
-----------------------------------
(David J. Kirby)
Vice President Finance
(Chief Financial Officer)
41
<PAGE> 42
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.
Date: December 18, 1998 /s/ John T. Lupton
---------------------------------------------
(John T. Lupton) Chairman of the Board
Date: December 18, 1998 /s/ Cynthia L. Davis
---------------------------------------------
(Cynthia L. Davis) Director
Date: December 18, 1998 /s/ David S. Gonzenbach
---------------------------------------------
(David S. Gonzenbach) Director
Date: December 18, 1998 /s/ James L.E. Hill
---------------------------------------------
(James L.E. Hill) Director
Date: December 18, 1998 /s/ Richard J. Horton
---------------------------------------------
(Richard J. Horton) Director
Date: December 18, 1998 /s/ Nancy Lopez
---------------------------------------------
(Nancy Lopez) Director
Date: December 18, 1998 /s/ Charles S. Mechem, Jr.
---------------------------------------------
(Charles S. Mechem, Jr.) Director
Date: December 18, 1998 /s/ Arnold D. Palmer
---------------------------------------------
(Arnold D. Palmer) Director
Date: December 18, 1998 /s/ Joel W. Richardson, Jr.
---------------------------------------------
(Joel W. Richardson, Jr.) Director
42
<PAGE> 43
THE ARNOLD PALMER GOLF COMPANY
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.
10.1 Licensing Agreement dated March 30, 1997 by and between the
Company and Nancy Lopez Enterprises, Inc.
10.2 Option Agreement dated April 12, 1997 by and between the
Company and Nancy Lopez Enterprises, Inc.
22*** Subsidiaries of the Company
23 Consent of Arthur Andersen LLP, independent public accountants
27 Financial Data Schedule
</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.
*** Incorporated by reference herein from the Company's Form 10-K for the
transition period ended February 22, 1992.
43
<PAGE> 1
EXHIBIT 10.1
LICENSING AGREEMENT
THIS LICENSING AGREEMENT (this "Agreement"), made and entered into as
of this 30th day of March, 1997, by and between NANCY LOPEZ ENTERPRISES, INC.
(hereinafter referred to as "Licensor") having an address at One Erieview Plaza,
Suite 1300, Cleveland, Ohio 44114, and THE ARNOLD PALMER GOLF COMPANY of 6201
Mountain View Road, Ooltewah, Tennessee 37363 (hereinafter referred to as
"Company");
WITNESSETH:
WHEREAS, Company desires to obtain the right to use the name, likeness
and endorsement of Nancy Lopez (hereinafter called "Golfer") in connection with
the advertisement, promotion and sale of "Licensed Products" (hereinafter
defined);
WHEREAS, Golfer has granted such exclusive rights to Licensor together
with the right to sublicense such rights;
NOW, THEREFORE, for and in consideration of the premises and of the
mutual promises and conditions herein contained, the parties do hereby agree as
follows:
1. Definitions. As used herein, the following terms shall be defined as
set forth below:
(a) "Golfer Identification" shall mean the full name NANCY LOPEZ,
the facsimile signature of Nancy Lopez, the Trademarks
(defined below), and the image, likeness, photograph and
endorsement of Golfer, and any combination thereof as may be
approved in advance by Licensor.
(b) "Trademarks" shall mean those trademark registrations owned or
controlled by Licensor or Golfer in any country or territory
of the world for the name Nancy Lopez, the facsimile signature
of Nancy Lopez, and any "Golfer Logo."
(c) "Products" as used herein shall mean golf clubs and components
thereof (heads, shafts and grips), golf caddy bags and golf
caddy bag accessories (travel covers, etc.), golf gloves, golf
shoes, golf balls, golf practice and training devices, and
golf apparel including golf rainwear and golf headwear.
(d) "Licensed Products" shall mean all Products of Company which
have any part of the Golfer Identification affixed or attached
thereto in any permanent, non removable manner or which are
sold in packages which bear the Golfer Identification.
(e) "Contract Period" shall mean that period often (10) Contract
Years which shall commence January 1, 1998 and which shall
continue until December 31, 2007 unless terminated earlier
pursuant to the terms hereof. If [Tommy Armour] agrees to and
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does release Licensor from its current contract with [Tommy
Armour] on or before August 31, 1997, then the Contract Period
shall commence as of September 1, 1997.
(f) "Contract Year" shall mean a period of twelve (12) successive
months commencing on any first day of January and ending on
the last day of December during the Contract Period, except
that if [Tommy Armour] agrees to and does release Licensor
from its current contract with [Tommy Armour] on or before
August 31, 1997 the first Contract Year shall commence as of
September 1, 1997 and end on December 31, 1998.
(g) "Contract Territory" shall mean the world.
2. Grant of Rights. Licensor hereby grants to Company, subject to all
of the terms and conditions of this Agreement, the exclusive right and license
to use the Golfer Identification during the term of the Contract Period
throughout the Contract Territory in connection with the manufacture,
advertisement, distribution and sale of Licensed Products. The right to use the
Golfer Identification will not be granted to any third party (any party other
than Company) for use anywhere in the Contract Territory during the Contract
Period in connection with the advertisement, promotion, distribution or sale of
Products. The foregoing exclusive rights to distribute and sell Licensed
Products shall include the right to make catalogue sales of Licensed Products,
and the right to distribute Licensed Products by direct sales to consumers.
Company shall be solely responsible for ensuring that all uses of Golfer
Identification and the manufacture, advertisement, distribution and sale of the
Licensed Products comply with applicable law.
3. Marketing Efforts. Company agrees that, during the Contract Period,
it will use its diligent efforts to actively and aggressively promote the sale
of Licensed Products throughout the Contract Territory. Company agrees that it
will budget and spend, each Contract Year, for the advertising and promotion of
Licensed Products within the Contract Territory, an amount which is no less than
the corresponding "Advertising Commitment" set forth in the schedule as follows:
Contract Year Advertising Commitment
------------- ----------------------
First US$1,000,000
Second US$1,400,000
Third US$2,000,000
Fourth US$2,400,000
Each Contract Year US$2,700,000
thereafter
Within forty-five (45) days following the conclusion of each Contract Year,
Company shall deliver to Licensor a report on the foregoing marketing
expenditures (including invoices) evidencing the required level of expenditure.
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4. Subcontract Manufacturers; Sublicenses. (a) Company shall have the
right to make arrangements for the subcontract manufacture, finishing, packaging
and storing of Licensed Products, provided that Company shall ensure that no
such subcontractor shall take any action contrary to or inconsistent with the
terms and conditions set forth in this Agreement and that Licensor is
acknowledged as an intended third party creditor beneficiary with respect to any
such arrangement, and further provided that no corporate name, trade name or
brand name other than Company's may be used on or in connection with Licensed
Products.
(b) Licensor agrees that Company shall have the right to sublicense any
of the rights herein granted to Company provided that any such sublicensee
agrees to be bound by the terms hereof and any such sublicense shall be
co-terminus with the term hereof. Company agrees to use its best efforts to
monitor and enforce such compliance.
5. Ancillary Marketing Services of Golfer. (a) To facilitate Company's
usage of the exclusive right and license to the Golfer Identification, as
provided herein, Licensor agrees, at the request of Company and upon adequate
notice provided Company is not in default hereunder and subject always to
Golfer's personal and professional schedule, to provide the ancillary marketing
services as set forth below. Licensor shall cause Golfer to attend the following
one-half day sessions (each such session referred to hereafter as a "Service
Day"):
(i) during the first Contract Year, up to six (6) Service
Days for development and review of Licensed Products
of Licensed Products ("Review Days"), and up to one
additional Service Day for production of print and/or
television advertising ("Production Days"); and
(ii) during the second and each subsequent Contract Year,
up to four (4) Review Days and up to one Production
Day.
(b) All such Service Days shall be at a mutually convenient location
selected by Licensor and on such dates and times as are mutually convenient.
Service Days shall not exceed four (4) hours of Golfer's time (excluding lunch
or break time and providing that transportation time for such day does not
exceed two hours). Company is not entitled to substitute Review Days for
Production Days (or vice versa). In addition, unused Service Days may not be
carried forward or backward from one Contract Year to another. Failure to
utilize any or all of the ancillary services as provided above shall not result
in any reduction in remuneration payable to Licensor in accordance with this
Agreement.
(c) With respect to the ancillary marketing services provided by
Golfer, Company agrees to provide Golfer and one (1) traveling companion with
reasonable first class travel expenses, hotel, meals and local ground
transportation required in connection with the foregoing services.
(d) If Licensor confirms Golfer's availability for any Service Day, and
an illness, injury or other emergency prevents Golfer from appearing on that
date, Licensor shall so notify Company immediately and then the parties will
attempt in good faith to reschedule for another mutually agreed upon date,
subject always to prior bona fide commitments. Golfer's nonappearance for the
foregoing
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reasons is not a breach of this Agreement; and neither Licensor nor Golfer is
responsible for any expenses incurred by Company in connection with such
nonappearance.
(e) Licensor agrees that during the period of the First through Fifth
Contract Years (collectively), Licensor will cause Golfer to participate in no
fewer than fifty (50) LPGA sanctioned ladies professional golf tournaments,
provided that if Golfer shall become ill or injured and, as a result, is
prevented from playing professional golf for any period, then the foregoing term
(the First through Fifth Contract Years) during which Golfer is required to
participate in such minimum number of tournaments shall (for these purposes) be
extended until such time that Golfer shall have participated in the required
minimum number of tournaments. Company acknowledges that such extension shall be
Company's sole remedy in such event.
(f) It is understood that neither Licensor nor Golfer shall have any
liability at all to Company or any third party with respect to such development
or review input provided hereunder.
(g) In addition to and separate from any other remuneration, if Company
uses any performance or service of Golfer hereunder in any way that is subject
to the jurisdiction of any applicable artists' union, guild or other
organization (including, without limitation, SAG, ACTRA and AFTRA), Company
shall pay directly to such organization all payments, dues and/or fees (for
benefit plans or otherwise) required by such entity to be made with respect to
Golfer' performance or services. Without limiting the foregoing, the parties
agree for the purposes of this subparagraph that the value of Company's use of
Golfer's appearance in any television commercial(s) shall be an amount equal to
the then-existing minimum or scale payments required to be paid to principal
performers appearing in a commercial shot and used in accordance with applicable
provisions of the applicable ACTRA, AFTRA or SAG contracts or other collective
bargaining agreement. Any such minimum or scale payments so required to be paid
(and actually paid) to Golfer shall be credited against amounts otherwise
payable to Golfer hereunder. This provision shall survive any expiration or
termination of this Agreement.
6. Use of Licensed Products. (a) Company acknowledges that Licensor has
developed a valuable right in the Golfer Identification which is an integral
part of this Agreement and subject to an exclusive license to Company as
provided herein. In an effort to maintain and enhance the goodwill associated
with the Golf Identification and to assist Company in the usage of the Golfer
Identification, and provided that Company is not in default of any of its
obligations hereunder, and provided further that Company shall supply Golfer at
no cost or expense with sufficient quantities of Licensed Products (including,
as to golf clubs, irons, driver and woods) which are fully acceptable to Golfer
for her use in tournament play, then Licensor agrees that Golfer will use
Licensed Products exclusively whenever she participates publicly in any golf
tournament, exhibition, clinic, or other similar golf-related event in which she
participates publicly anywhere in the world. Company shall have the right to
have those Licensed Products used by Golfer hereunder identified with the Golfer
Identification in the same manner such Licensed Products are identified when
distributed and sold to consumers. It is understood, however, that any such
identification must be of a size, shape and location not in conflict with LPGA
rules or the rules governing any professional golf tournament in which Golfer
participates. Company further acknowledges that Licensor shall have the right to
display one advertising patch on the golf caddy bag (which shall be
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a Product of Company) used by Golfer and two advertising patches (one on each
sleeve) of the shirt and/or any outerwear worn by Golfer during her
participation in golf tournaments, exhibitions and other golf related events in
which she participates any where in the world during the Contract Period. It is
understood, however, that any such advertising patch shall not incorporate any
name, logo or identification of any third party involved in the manufacture,
advertising, distribution or sale of articles of the same generic type as
Licensed Products.
(b) Notwithstanding the foregoing, it is understood and agreed that if
Golfer shall find in her sincere good faith judgment that any Licensed Products
as previously supplied by Company are not satisfactory for her use, then
Licensor shall immediately so notify Company, and Company shall use its best
efforts to supply Golfer with Licensed Products which are fully satisfactory to
Golfer. In no event shall Golfer be required to use Licensed Products which are
unsatisfactory, including during any period in which Company is attempting to
replace such Licensed Products with satisfactory ones.
7. Remuneration. (a) Fixed Royalty. In consideration of the rights
herein granted and the ancillary marketing services to be provided hereunder,
Company shall pay to Licensor, with respect to each Contract Year during the
Contract Period, annual non-refundable amounts set forth as follows ("Fixed
Royalty"):
CONTRACT YEAR FIXED ROYALTY
------------- -------------
First US$100,000
Second US$125,000
Third US$150,000
Fourth US$150,000
Fifth US$125,000
Each Contract US$ 75,000
Year thereafter
Each such Fixed Royalty amount shall be payable in two (2) equal semi-annual
installments due on or before the first day of January and the first day July
during the relevant Contract Year.
(b) Fixed Royalty on Licensed Products. In consideration of the rights
herein granted and the ancillary marketing services to be provided hereunder,
Company shall pay to Licensor, with respect to each Contract Year, fixed
royalties on Licensed Products ("Fixed Royalties on Licensed Products") in the
amounts set forth as follows:
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FIXED ROYALTY ON
CONTRACT YEAR LICENSED PRODUCTS
------------- -----------------
First US$106,500
Second US$154,000
Third US$224,500
Fourth US$293,000
Each Contract US$351,000
Year Thereafter
Each such Guaranteed Fixed Royalty on Licensed Products shall be payable in two
(2) equal semi-annual installments due on or before the first day of January and
the first day July during the relevant Contract Year.
(c) Overflow Royalty. In consideration of the rights herein granted and
the ancillary marketing services to be provided hereunder, Company agrees to pay
to Licensor additional royalties (the "Overflow Royalty") at the rate of three
and one-quarter percent (3.25%) of the total "Net Sales Price" of all Licensed
Products sold hereunder by Company during the relevant Contract Year; provided,
however, that the full amount of the Fixed Royalty on Licensed Products payable
to Licensor by Company as described above which is applicable to the Contract
Year concerned shall first be credited against the payment of any Overflow
Royalties with respect to Licensed Products sold during such Contract Year. No
part of any Fixed Royalty on Licensed Products shall be carried forward (or
back) as a credit from one Contract Year to another. Overflow Royalties shall be
payable within forty-five (45) days following the conclusion of each calendar
year half period during each Contract Year with respect to sales made during
such quarterly period. Company's "Net Sales Price" for Licensed Products shall
mean Company's invoiced billing price to its customers or distributors, less
only shipping charges, freight, duties, insurance, sales taxes, value-added
taxes, customary discounts and credits allowed for returned or defective
merchandise (but no reserve for returns). All Overflow Royalties due Licensor
shall accrue upon the sale of the Licensed Products regardless of the time of
collection by Company. Licensed Products shall be considered "sold" as of the
date on which said Licensed Products are invoiced, shipped or paid for,
whichever first occurs. If sales are made to any party affiliated with or
related to Company, Overflow Royalties shall be computed based upon the regular
price for such Licensed Products charged to unrelated third parties. There shall
be no deduction from "Net Sales Price" for uncollectible accounts. For purposes
of calculating Overflow Royalties, Products that are the same as Licensed
Products, except for the labeling or packaging, shall be considered Licensed
Products.
(d) Bonuses. In recognition of the increased value of the Golfer
Identification resulting from any of the following achievements, Company shall
pay to Licensor the following bonuses ("Bonuses") during each Contract Year:
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(i) U.S. Open, Nabisco Dinah Shore, LPGA Championships,
and Skins Game.
Achievement Bonus
----------- -----
Winner US$30,000
Runner Up (or tie) US$10,000
Third-Fifth (or tie) US$ 2,500
(ii) Any LPGA Tournament (other than the above)
Achievement Bonus
----------- -----
Winner US$10,000
Runner Up (or tie) US$ 5,000
Third-Fifth (or tie) US$ 2,000
(iii) Named U.S. LPGA Player of the Year: Bonus in the
amount of US$25,000.
(iv) Awarded Vare Trophy: Bonus in the amount of
US$25,000.
If any one or more of the above-named tournaments or awards are canceled,
Licensor and Company shall agree in good faith upon an appropriate replacement.
All Bonuses payable under this section shall be in addition to amounts otherwise
payable hereunder to Licensor. All Bonuses due for each tournament shall be paid
within thirty(30) days after the conclusion of the tournament or the date of the
achievement concerned (on thirty (30) days after Company has received
verification of the achievement and an invoice with respect to such amount, if
later) and shall be payable in accordance with the procedures set forth below.
(e) In consideration of the rights herein granted and the ancillary
marketing services to be provided hereunder, simultaneously with the execution
hereof, Company is granting to Licensor an option (the "Option") to purchase up
to 200,000 shares of common stock par value $.50 per share of Company (the
"Shares") at an exercise price equal to the Market Price (as defined in the
option agreement being entered into simultaneously herewith (the "Option
Agreement") on the date hereof, as such price and such number of Shares may be
adjusted pursuant to the Option Agreement. The Option shall be exercisable, from
time to time, in whole or in part, as set forth and in accordance with the terms
of the Option Agreement.
8. Books and Records. (a) Company shall supply Licensor with a sales
report with respect to all sales of Licensed Products sold by Company during
each calendar year quarter during each Contract Year, said sales reports to be
delivered to Licensor within forty-five (45) days following the conclusion of
each such quarterly period. Such sales report shall indicate, separately for
each category of Licensed Products, the number of each item of Licensed Products
sold during each month and the Net Sales Price of each such item.
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(b) Company shall keep and maintain accurate books and records with
respect to all sales of Licensed Products and the computation of remuneration
earned or accrued with respect thereto, which books and records shall be
available upon reasonable advance notice for inspection and copying by Licensor
or its authorized agents or representatives during ordinary business hours prior
to the conclusion of a two-year period following the conclusion of the relevant
quarterly period. In the event that an error is discovered in the calculation of
the amount of amounts payable to Licensor, the party that received the benefit
of the error shall promptly thereafter pay to the other the amount of
overpayment or underpayment, as the case may be. An underpayment by Company
based on an error in such calculation shall not be deemed to be a breach of this
Agreement so long as the calculation was made in good faith. If any underpayment
by Company for a period examined by Licensor is 3% or more, Company shall pay
Licensor's reasonable out-of-pocket costs with respect to such examination and
the next subsequent reexamination. Receipt or acceptance by Licensor of any
statement, or any of the sums paid hereunder, shall not preclude Licensor from
challenging the correctness of a royalty statement, or any part or portion
thereof, at any time.
9. Payments. All payments to Licensor pursuant to this Agreement shall
be made by wire transfer as follows:
Huntington National Bank
917 Euclid Avenue
Cleveland, Ohio 44115
Name: Nancy Lopez Enterprises, Inc.
ABA Route No. 044-000024
Account No. 03668644096
(Please note the name of the payee and the purpose of
the payment.)
Past due payments hereunder shall bear interest at the rate of (i) one and
one-half percent (1.5%) per month, or (ii) the maximum interest rate permissible
under law, whichever is less. All payments hereunder shall be subject to
deduction of the relevant governmental withholding tax, but shall otherwise be
paid without deduction of any cable charges, bank charges, remittance charges,
or any other fees or expenses.
10. Approval of Licensed Products. (a) Company agrees that Licensor
shall have the right to approve or disapprove in advance of sale the quality,
style, colors, appearance, material and workmanship of all Licensed Products and
the packaging therefor, and to approve or disapprove any and all endorsements,
trademarks, trade names, designs and logos (whether using Golfer Identification
or not) used in connection with Licensed Products Company shall not distribute
or sell any such Product which has not been approved by Licensor or which is, at
any time, disapproved by Licensor in accordance with the provisions hereinbelow.
In all instances, Licensor's approval shall not be unreasonably withheld.
(b) Before selling or distributing any Licensed Products hereunder,
Company shall submit to Licensor, at the address set forth herein, for its
examination and approval or disapproval,
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a production sample thereof together with its containers, labels and the like.
Licensor agrees that it will promptly examine and either approve or disapprove
such samples, and that Licensor will promptly notify Company of its approval or
disapproval. Licensor agrees that it will not unreasonably disapprove any item
and, if any is disapproved, that Company will be advised of the specific reasons
in each case. Licensor agrees that any item submitted for approval hereunder at
the address set forth herein may be deemed by Company to have been approved
hereunder if the same is not disapproved in writing within ten (10) days after
receipt thereof.
11. Approval of Use of Golfer Identification. (a) Company agrees that
Licensor shall have the right to approve or disapprove in advance the contents,
appearance and presentation of any and all materials which incorporate the
Golfer Identification. Company agrees that it will not produce, publish or in
any manner distribute any such materials which have not been approved in advance
by Licensor or which are, at any time, disapproved by Licensor in accordance
with the provisions hereinbelow. In all instances, Licensor's approval shall not
be unreasonably withheld.
(b) Before producing, publishing or distributing any materials
hereunder, Company shall submit to Licensor, at the address set forth herein,
for its examination and approval or disapproval, a sample thereof together with
text, coloring and a copy of any photograph proposed to be used. Licensor agrees
that it will promptly examine and either approve or disapprove such sample
material, and that Licensor will promptly notify Company of its approval or
disapproval. Licensor agrees that it will not unreasonably disapprove any sample
material and, if any is disapproved, that Company will be advised of the
specific reasons in each case. Licensor agrees that any item submitted for
approval hereunder at the address set forth herein may be deemed by Company to
have been approved hereunder if the same is not disapproved in writing within
ten (10) days after receipt thereof.
12. Notices and Submissions. (a) All notices or submissions to be made
or delivered by Company to Licensor pursuant to this agreement shall be
delivered to the address of Licensor as follows:
Nancy Lopez Enterprises, Inc.
c/o International Management, Inc.
One Erieview Plaza, Suite 1300
Cleveland, Ohio 44114-1782
Attention: Peter Johnson
All such materials shall be delivered to Licensor free of all charges such as,
for example, shipping charges or customs charges. In the event that any such
charges are paid by Licensor, Company agrees to make prompt reimbursement.
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(b) All notices or submissions to be made or delivered by Licensor to
Company pursuant to this Agreement shall be delivered to the address of Company
as follows:
The Arnold Palmer Golf Company
6201 Mountain View Road
Ooltewah, Tennessee 37363
Attention: President
13. Products for the Use of Golfer. During the Contract Period, Company
shall supply Licensor, at no charge, with such amounts of Licensed Products (up
to $2,000 wholesale sales value per Contract Year) as Licensor may reasonably
request for Golfer's and Golfer's family's personal use as and when Licensor so
requests.
14. Trademarks. (a) Licensor represents and warrants that there is set
forth in subparagraph (g) immediately below a full and complete list of all
trademark registrations and applications owned or controlled by Licensor and/or
Golfer, anywhere in the world in those trademark classes which relate to the
Licensed Products. Licensor agrees that it will use its diligent efforts, at its
own expense, to maintain in effect those registrations set forth in subparagraph
(g) immediately below. As used herein, the full name NANCY LOPEZ and the
facsimile signature of Nancy Lopez are hereinafter referred to as the "Existing
Marks."
(b) If, at any time during the Contract Period, Company should intend
or desire to create and use in connection with Licensed Products any new or
additional names, words, logos, designs or devices which include any part of the
Existing Marks and/or any other part of the Golfer Identification (such a
newly-created mark being hereinafter referred to as a "Golfer Logo"), then and
in such event Company may at its election and at its cost and expense create one
or more sample proposed Golfer Logos and submit the same to Licensor. Licensor
shall have the right to approve or disapprove any such proposed Golfer Logo in
its sole discretion, and Company agrees it will not make any use of any proposed
Golfer Logo until the same shall have been approved in writing by Licensor.
Approval of any Golfer Logo by Licensor shall not be unreasonably withheld.
(c) Following approval by Licensor of the Golfer Logo, as described
immediately above, Licensor agrees that Company shall have the right to
undertake procedures to apply for and seek registration of such Golfer Logo
(and/or, at the election of Company, any Existing Mark) in the name of Golfer
(or such other name as Licensor may from time-to-time notify Company) in any one
or more countries or territories of the world (as Company may select) in any
trademark class or classes which relate to Licensed Products. Company agrees to
use its diligent efforts to obtain final registration of such applications, but
the parties hereto acknowledge that the Golfer Logo may or may not be capable of
registration in one or more countries of the world in one or more trademark
categories.
(d) All costs and expenses of Licensor in filing those trademark
applications, and in applying for and seeking the registrations, referred to in
the subparagraph immediately above, including, without limitation, trademark
search fees, trademark filing fees, the fees and expenses of local trademark
attorneys (which will be retained in consultation with Licensor's trademark
counsel)
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and all other fees, costs and expenses related thereto, shall be paid by
Company, and Company shall record such expenses in an account referred to as the
"Trademark Account." Company agrees to maintain receipts and other evidence of
payment of all expenses recorded in the Trademark Account. All costs and
expenses set forth in the Trademark Account shall be solely for the account of
Company, provided, however, that Licensor shall reimburse Company, on an annual
basis, for amounts recorded in the Trademark Account up to a total of US$12,000
during any Contract Year, such reimbursements to be made within thirty (30) days
following the conclusion of each Contract Year (limited to the First-Fifth
Contract Years). Excess amounts in the Trademark Account which are not
reimbursed during a particular Contract Year may be carried forward by Company
for reimbursement in a later Contract Year (limited to the First-Fifth Contract
Years) provided that the total reimbursement shall not exceed US$60,000.
(e) Upon the registration of the Golfer Logo in any trademark class in
any country or territory of the world, or upon the registration of an Existing
Mark in any trademark class in any country or territory of the world (each such
registration being hereinafter referred to as a "Licensed Trademark"), Licensor
agrees to grant and does hereby grant to Company the exclusive right to use such
Licensed Trademark within the relevant trademark class within the relevant
jurisdiction on or in connection with Licensed Products, which right shall be
coextensive and coterminous with the rights hereinbefore granted to Company for
the use of the Golfer Identification.
(f) Any other provisions herein to the contrary notwithstanding, if
Company shall intend or desire to manufacture, advertise, distribute or sell
Licensed Products with the use of any one or more of the Golfer Logos in any one
or more countries or territories of the world in any trademark class or classes
whether or not the relevant Mark has theretofore been registered, such use shall
be at the sole risk and liability of Company.
(g) Licensor represents that Golfer is the owner of Japanese trademark
registration No. 1,571,425, registered March 2S, 1993, in Japanese Class 17
(apparel) for the mark NANCY LOPEZ.
(h) Company agrees that it will not, during the Contract Period,
sanction any other party to use any mark identical with or confusingly similar
to any part of the Golfer Identification, except to the extent permitted by the
license herein granted or sublicenses permitted hereunder.
(i) Company agrees that nothing herein contained shall give to Company
any right, title or interest in the Existing Marks, any Golfer Logo, or any
other part of the Golfer Identification (except the licensed rights in
accordance with this Agreement), and that each and every part of the Golfer
Identification and any mark registered pursuant to this paragraph is the sole
property of Licensor and that any and all use by Company of any part of the
Golfer Identification, and the goodwill arising therefrom, shall inure to the
benefit of Licensor.
(j) Company agrees never to raise or to cause to be raised any question
concerning, or objection to the validity of, the Golfer Identification or the
right of Licensor thereto, on any grounds whatsoever.
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(k) Company agrees that it will not, during the Contract Period or
thereafter, file any application for any mark (other than in the name of
Licensor or Golfer as provided herein), or obtain or attempt to obtain ownership
of any mark or trade name, in any country of the world, which refers to or is
suggestive of the name Nancy Lopez, any other part of the Golfer Identification,
or any mark, design or logo intended to identify Golfer.
(l) In the event that Licensor makes application for trademark
registration of any part of the Golfer Identification, Company agrees to provide
Licensor all reasonable assistance towards obtaining such registration,
including the execution of documents deemed necessary or desirable by Licensor.
(m) In no event shall an Existing Mark, a Golfer Logo, or any other
part of the Golfer Identification, be commingled with any trademarks of Company,
or elements thereof, in such a manner as to create a separate logo or trademark.
15. Trademark Indemnity. (a) In the event a third party should make or
file against Company any claim or action in which it is alleged that use by
Company of the Trademarks in compliance with this Agreement (and not together
with any other intellectual property) infringes the trademark rights of such
claimant, then Company shall promptly notify Licensor of such claim, and
thereafter Licensor shall undertake diligent efforts to have such claim
withdrawn, compromised, or defended. In this connection, Company shall cooperate
with Licensor's efforts (for example, by providing Licensor at Licensor's
request with evidence of Company's use of the Golfer Identification in
advertising, labels, packaging and otherwise).
(b) Licensor shall, at its sole expense and in accordance with its own
reasonable business judgment, take whatever steps it deems necessary or
appropriate to finally dispose of such claim (including, at Licensor's election,
defending any legal action to final judgment). If such claim is disposed of by
the payment of money to the claimant, Licensor shall be solely responsible for
such payment. If such claim is disposed of by an agreed suspension in the sales
of Licensed Products or limitation on the items of merchandise on which the
Golfer Identification may be used (or if any court shall direct such suspension
or limitation), then Company shall, upon notice from Licensor to that effect, so
suspend or limit its sales of Licensed Products and Company and Licensor shall
promptly meet to discuss an appropriate adjustment in the rate of royalty to be
paid by Company to Licensor. Licensor shall not agree to any such suspension
without first consulting with Company and attempting to secure an adequate
sell-off period for inventory on hand and in process.
(c) Neither Licensor nor Golfer is responsible for initiating action
against, enjoining or otherwise attempting to dissuade any person or entity not
licensed by Licensor or Golfer, including without limitation, any former
licensee of Licensor or Golfer, the media or any advertiser, promoter or other
entity, which in contravention of this Agreement or otherwise makes unauthorized
use of anything, including without limitation, any unauthorized use of the
Golfer Identification, in promoting or advertising any product (or products) or
services whatsoever, including without limitation, any products which are the
same as or similar to or directly competitive with the Company Products. Neither
Licensor nor Golfer shall incur any liability to Company or any third party
arising out of any such activity by any such person or entity. If there should
occur any
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infringement of the Trademarks by third parties, Licensor shall have the right
in the first instance to take action at its sole expense in response to any such
infringing activities. In the event that Licensor fails to file suit to seek
injunctive relief and/or damages for such infringing activities within thirty
(30) days of learning of such activities, Company shall have the right to file
such a suit at its sole expense. Each party agrees to consult with the other
with regard to any suits filed pursuant to this Section, and to execute such
consents or other documents as may be reasonably necessary for the other party
to file or pursue a suit (for example, a consent for Company to file suit in
Licensor's or Golfer's name) pursuant to this Section. Any monetary proceeds of
any enforcement action taken pursuant to this Section shall be retained by, and
be the sole property of, the party taking the enforcement action or, if both
parties participate in such action, the proceeds shall be divided pro rata based
on the amounts expended by each party in pursuing the action.
16. Labels. Company agrees that each Licensed Product advertised,
promoted, distributed and sold by Company shall have affixed thereto a permanent
label or imprint stamped on the container or packaging for Licensed Products
which includes some element of the Golfer Identification. It is understood that
each unit of Licensed Products shall have affixed thereto, either on the
product, itself, or on the packaging therefor, a trademark which identifies
Company.
17. Company Indemnity; Insurance. (a) Company agrees to protect,
indemnify and save harmless Licensor and Golfer, or either of them, from and
against any and all expenses, damages, claims, suits, actions, judgments and
costs whatsoever, including reasonable attorneys' fees, arising out of, or in
any way connected with, any claim or action for personal injury, death or
property damage resulting from actual or alleged defects in Licensed Products,
or any breach by Company of any statutory or regulatory obligation, any actual
or threatened breach by Company of any provision hereof; any actual or alleged
infringement by Company of the patent rights, copyrights, trademarks, design
rights, personal or proprietary rights of any third party (not including any
claim falling within the scope of Licensor's indemnity set forth above); any use
of the Golfer Identification; or any services of Golfer hereunder.
(b) Company shall provide and maintain, at its own expense, commercial
general liability insurance, including product liability and advertising injury
coverage, with limits of not less than Five Million Dollars ($5,000,000.00), and
shall cause such policy to be endorsed to state that Licensor and Golfer are
additional named insureds thereunder. A certificate of insurance evidencing such
coverage shall be furnished to Licensor within thirty (30) days of the full
execution of this Agreement. Such insurance policy shall provide that the
insurer shall not terminate or materially modify such policy or remove Licensor
or Golfer as additional named insured without prior written notice to Licensor
at least twenty (20) days in advance thereof.
18. Termination for Default. If either party at any time during the
Contract Period shall (a) fail to make any payment of any sum of money herein
specified to be made, or (b) fail to observe or perform any of the covenants,
agreements, or obligations hereunder (other than the payment of money), the
non-defaulting party may terminate this Agreement as follows: as to (a) if such
payment is not made within ten (10) days after the defaulting party shall have
received written notice of such failure to make payment, or as to (b) if such
default is not cured within thirty (30) days after the defaulting party shall
have received written notice specifying such default. Failure to terminate this
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Agreement pursuant to this section shall not effect or constitute a waiver of
any remedies the non-defaulting party would have been entitled to demand in the
absence of this section, whether by way of damages, termination or otherwise.
Termination of this Agreement for whatever reason shall be without prejudice to
the rights and liabilities of either party to the other in respect of any matter
arising under this agreement.
19. Prohibition on Premium Sales. Company agrees that Licensed Products
will not be sold or otherwise supplied to any third party if such Licensed
Products are intended to be given away free of charge or sold at a substantial
discount by such third party as a part of any plan intended to promote the
products, services or business of any third party.
20. Force Majeure. If at any time during the term of this Agreement,
Licensor is prevented from or hampered or interrupted or interfered with in any
manner whatever in fully performing its duties hereunder, by reason of any
present or future statute, law, ordinance, regulation, order, judgment or
decree, whether legislative, executive or judicial (whether or not later
repealed or determined to be invalid), act of God, earthquake, flood, fire,
epidemic, accident, explosion, casualty, lockout, boycott, strike, labor
controversy (including but not limited to threat of lockout, boycott or strike),
riot, civil disturbance, war or armed conflict (whether or not there has been an
official declaration of war or official statement as to the existence of a state
of war), invasion, occupation, intervention of military forces, act of public
enemy, embargo, delay of a common carrier, inability without fault on Licensor's
part to obtain sufficient material, labor, transportation, power or other
essential commodity required in the conduct of its business; or by reason of any
other cause or causes of any similar nature (all of the foregoing being herein
referred to as an "event of force majeure"), then Licensor's obligations
hereunder shall be suspended as often as any such event occurs and during such
periods of time as such events exist and such nonperformance shall not be deemed
to be a breach of this agreement.
21. Use of Golfer Identification After Termination. It is understood
and agreed by Company that from and after the termination or expiration of the
Contract Period, all of the rights of Company to the use of the Golfer
Identification shall, except as hereinafter expressly provided in the paragraph
next following, cease absolutely, and Company shall not thereafter manufacture
or sell any item whatsoever with the use of the Golfer Identification or use the
Golfer Identification in any way whatsoever.
22. Inventory of Licensed Products on Termination. Any Licensed
Products that may have been manufactured by or for Company prior to the early
termination or expiration (if good faith negotiations regarding extension or
renewal of the Agreement were being conducted during the six months immediately
preceding such expiration date) of the Contract Period, or which were in the
process of manufacture by Company, or were required to fill purchase orders from
customers accepted by Company on or prior to date of termination or expiration
(if good faith negotiations regarding extension or renewal of the Agreement were
being conducted during the six months immediately preceding such expiration
date), may be sold by Company during the two hundred seventy (270) day period
next following the date of termination, provided that:
(a) Company is not in default of any term or condition of this
Agreement;
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(b) the quantity of such Licensed Products in inventory at the
time of such termination is not in excess of a reasonable
quantity taking into account Company's sales requirements for
Licensed Products;
(c) Company shall furnish to Licensor within thirty (30) days
after the effective date of the termination of the Contract
Period a written statement of the number and description of
such Licensed Products in inventory as of the effective date
of termination.
(d) Company shall continue to pay to Licensor with respect to such
sales an earned royalty at the rate specified in Paragraph
7(c) hereof without credit or set-off of any other amounts;
(e) earned royalty amounts payable pursuant to this Paragraph
shall be paid within thirty (30) days following the end of
said sell-off period.
23. Limit of Liability. Notwithstanding anything to the contrary
contained herein, in the event Company incurs any expenses, damages or other
liabilities (including, without limitation, reasonable attorneys' fees) in
connection herewith, Licensor's liability to Company hereunder (including, but
not limited to, pursuant to the indemnification provisions hereof) shall not
exceed cash fees, excluding reimbursement of expenses, actually paid to Licensor
by Company hereunder. In no event shall Licensor be liable for any
consequential, punitive, indirect, incidental, reliance, or special damages,
whether or not Licensor has been advised about the possibility thereof. It is
understood Golfer is not a party hereto and has no liability hereunder but is an
intended specific third party creditor beneficiary hereof.
24. Waiver. The failure of either party at any time or times to demand
strict performance by the other of any of the terms, covenants or conditions set
forth herein shall not be construed as a continuing waiver or relinquishment
thereof and each may at any time demand strict and complete performance by the
other of said terms, covenants and conditions.
25. Bankruptcy. If Company shall become bankrupt or insolvent, or if
Company's business shall be placed in the hands of a receiver, assignee or
trustee, whether by voluntary act of Company or otherwise, the Contract Period
shall, at the election of Licensor, immediately terminate.
26. Assignment. This Agreement shall bind and inure to the benefit of
Licensor, and the successors and assigns of Licensor. The rights granted Company
hereunder shall be personal to it and shall not, without the prior written
consent of Licensor, be transferred or assigned to any other party, which
consent shall not be unreasonably withheld. Likewise, Licensor may not assign it
rights or obligations hereunder to any third party other than Golfer or another
entity controlled by Golfer without the Company's prior written consent. In the
event of the merger or consolidation of Company with any other entity, and in
the event that Company is not the surviving entity, Licensor shall have the
right to terminate the Contract Period by so notifying Company in writing on or
before sixty (60) days after Licensor has received notice of such merger or
consolidation.
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27. Significance of Headings. Section headings contained herein are
solely for the purpose of aiding in speedy location of subject matter and are
not in any sense to be given weight in the construction of this agreement.
Accordingly, in case of any question with respect to the construction of this
agreement, it is to be construed as though such section headings had been
omitted.
28. Entire Agreement. This writing constitutes the entire agreement
between the parties hereto and may not be changed or modified except by a
writing signed by the party or parties to be charged thereby.
29. Governing Law. This agreement shall be governed and construed
according to the laws of the State of Tennessee without regard to conflict of
laws. The parties agree to submit to arbitration any dispute related to this
Agreement and agree that the arbitration process shall be the exclusive means
for resolving disputes which the parties cannot resolve. Any arbitration
hereunder shall be conducted under the Dispute Resolution Rules of the American
Arbitration Association ("AAA") as modified herein. Arbitration proceedings
shall take place in Cleveland, Ohio, before a single arbitrator who shall be a
lawyer. All arbitration proceedings shall be confidential. Neither party shall
disclose any information about the evidence produced by the other party in the
arbitration proceedings, except in the course of judicial, regulatory, or
arbitration proceeding, or as may be demanded by government authority. Before
making any disclosure permitted by the preceding sentence, a party shall give
the other party reasonable advance written notice of the intended disclosure and
an opportunity to prevent disclosure. In connection with any arbitration
provisions hereunder, each party shall have the right to take the deposition of
one individual and any expert witness retained by the other party. Additional
discovery may be had only where the arbitrator so orders, upon a showing of
substantial need. Only evidence that is directly relevant to the issues may be
obtained in discovery. Each party bears the burden of persuasion of any claim or
counterclaim raised by that party. The arbitration provisions of this Agreement
shall not prevent any party from obtaining injunctive relief from a court of
competent jurisdiction to enforce the obligations for which such party may
obtain provisional relief pending a decision on the merits by the arbitrator.
Each of the parties hereby consents to the jurisdiction of Ohio courts for such
purpose. The arbitrator shall have authority to award any remedy or relief that
a court of the State of Ohio could grant in conformity to applicable law, except
that the arbitrator shall have no authority to award attorneys' fees or punitive
damages. Any arbitration award shall be accompanied by a written statement
containing a summary of the issues in controversy, a description of the award,
and an explanation of the reasons for the award. The arbitrator's award shall be
final and judgment may be entered upon such award by any court.
30. Reservation of Rights. All rights not herein specifically granted
to Company shall remain the property of Licensor to be used in any manner
Licensor deems appropriate. Company understands that Licensor has reserved the
right to authorize others to use Golfer Identification during the Contract
Period in connection with all tangible and intangible items and services other
than Products themselves.
31. Joint Venture. This Agreement does not constitute and shall not be
construed as constituting a partnership or joint venture between Licensor and
Company. Neither party shall have
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any right to obligate or bind the other party in any manner whatsoever, and
nothing herein contained shall give, or is intended to give, any rights of any
kind to any third person.
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized representative to execute this agreement to be executed as of the
date first above written.
THE ARNOLD PALMER GOLF COMPANY NANCY LOPEZ ENTERPRISES, INC.
By: /s/ George H. Nichols By: /s/ Nancy Lopez
---------------------------------- --------------------------------
Name: George H. Nichols Name: Nancy Lopez
Title: Chairman & CEO Title: President
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EXHIBIT 10.2
OPTION AGREEMENT
OPTION AGREEMENT, dated as of April 12, 1997, by and between THE ARNOLD
PALMER GOLF COMPANY, a Tennessee corporation, with offices at 6201 Mountain View
Road, Ooltewah, Tennessee 37363 ("APGC"), and NANCY LOPEZ ENTERPRISES, INC., an
Ohio corporation, c/o International Management, Inc., One Erieview Plaza, Suite
1300, Cleveland, Ohio 44114 ("Enterprises"):
WITNESSETH:
WHEREAS, Enterprises and APGC are entering into a licensing agreement
(the "Licensing Agreement") simultaneously herewith which Licensing Agreement
provides for the use by APGC of the name, likeness and endorsement of Nancy
Lopez ("Lopez") in connection with the advertisement and promotion of certain of
APGC's Products (as defined therein). All terms used but not defined herein
shall have the meanings ascribed to them in the Licensing Agreement;
WHEREAS, as part of the remuneration to be paid to Enterprises pursuant
to the Licensing Agreement, Enterprises will be granted options to purchase
Shares (as defined herein) on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and intending to be legally bound, Enterprises and APGC hereby
agree as follows:
SECTION 1. Definitions.
For purposes of this Agreement, the following capitalized terms shall
have the respective meanings indicated below.
"Additional Shares" shall mean all Shares (including treasury Shares,
but excluding Shares issued or sold pursuant to employee benefit plans and
Shares issued upon exercise of options) issued or sold (or, deemed to be issued
or sold) by APGC after the date hereof, whether or not subsequently reacquired
or retired by APGC.
"Affiliate" shall mean any Person which, directly or indirectly,
controls, is controlled by or is under common control with the relevant Person
and, if such Person is an individual, any member of the immediate family
(including parents, spouse and children) of such individual and any trust whose
principal beneficiary is such individual, or one or more members of such
immediate family or any Person who is controlled by any such member or trust.
For the purposes of this definition, "control" (including, with correlative
meanings, the terms "controlled by" and "under common control with"), as used
with respect to any Person, shall mean a member of the board of directors, a
partner or an officer of such Person, or any other Person having, directly or
indirectly, the power
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to direct or cause the direction of the management and policies of such Person,
through the ownership (of record, as trustee, by voting agreement or by proxy)
of voting securities or similar equity interests, by contract or otherwise. Any
Person owning or controlling directly or indirectly 10% or more of the voting
securities or similar equity interests of another Person shall be deemed to be
an Affiliate of such person.
"Business Day" shall mean any other than a Saturday or a Sunday or a
day on which commercial banking institutions in the City of New York are
authorized by law or other governmental action to be closed. Any reference to
"days" (unless Business Days are specified) shall mean calendar days.
"Convertible Securities" shall mean any evidence of indebtedness,
shares of stock (other than Shares) or other securities directly or indirectly
convertible into or exchangeable for Additional Shares.
"Current Market Price" shall mean on any date specified herein, the
average daily Market Price during the period of the most recent 20 days, ending
on such date, on which the national securities exchanges were open for trading,
except that if no Shares are then listed or admitted to trading on any national
securities exchange or quoted in the over-the-counter market, the Current Market
Price shall be the Market Price on such date.
"Exercise Date" means the date on which an Option first becomes
exercisable.
"Fifth Year Option" shall mean the right of Enterprises to purchase, at
Enterprises' election, in accordance with the terms of this Agreement, a number
of Shares up to the Fifth Year Option Number, upon payment of the Aggregate
Option Share Price for the number of Shares so purchased, subject to adjustment
as provided herein.
"Fifth Year Option Number" shall mean 40,000 Shares, as such number may
be adjusted as provided herein.
"First Year Option" shall mean the right of Enterprises to purchase, at
Enterprises' election, in accordance with the terms of this Agreement, a number
of Shares up to the First Year Option Number, upon payment of the Aggregate
Option Share Price for the number of Shares so purchased, subject to adjustment
as provided herein.
"First Year Option Number" shall mean 40,000 Shares, as such number may
be adjusted as provided herein.
"Fourth Year Option" shall mean the right of Enterprises to purchase,
at Enterprises' election, in accordance with the terms of this Agreement, a
number of Shares up to the Fourth Year Option Number, upon payment of the
Aggregate Option Share Price for the number of Shares so purchased, subject to
adjustment as provided herein.
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"Fourth Year Option Number" shall mean 40,000 Shares, as such number
may be adjusted as provided herein.
"Market Price" shall mean on any date specified herein, the amount per
share of the Shares, equal to (a) the last sale price of such Shares, regular
way, on such date or, if no such sale takes place on such date, the average of
the closing bid and asked prices thereof on such date, in each case as
officially reported on the principal national securities exchange on which such
Shares is then listed or admitted to trading, or (b) if such Shares are not then
listed or admitted to trading on any national securities exchange but it
designated as a national market system security by the NASD, the last trading
price of the Shares on such date, or (c) if there shall have been not trading on
such date or if the Shares are not so designated, the average of the closing bid
and asked prices of the Shares on such date as shown by the NASD automated
quotation system, or (d) if such Shares are not then listed or admitted to
trading on any national exchange or quoted in the over-the-counter market, the
higher of (x) the book value thereof as determined by any firm of independent
public accountants of recognized standing selected by the Board of Directors of
APGC as of the last day of any month ending with 60 days preceding the date as
of which the determination is to be made or (y) the fair value thereof
determined in good faith by the Board of Directors of APGC as of a date which is
within 180 days of the date as of which the determination is to be made.
"NASD" shall mean The National Association of Securities Dealers, Inc.
"Option" and "Options" shall mean one or more of the First Year Option,
the Second Year Option, the Third Year Option, the Fourth Year Option and the
Fifth Year Option.
"Option Share Price" shall be, on a per Share basis, the Market Price
on the date hereof. The Option Share Price shall be adjusted and readjusted from
time to time as provided herein and, as so adjusted or readjusted, shall remain
in effect until a further adjustment or readjustment thereof is required hereby.
In the event of a Share dividend, Share split, or combination of Shares which
results in a proportionate increase or decrease in the number of Shares, the
Option Share Price then in effect shall be decreased (in the case of a
proportionate increase in Shares outstanding) or increased (in the case of a
proportionate decrease in Shares outstanding) in the same proportion. In the
event of a recapitalization, reorganization, consolidation, merger or similar
transaction where Shares consisting of common stock of APGC are changed into or
exchanged for a different number of Shares of common stock or different capital
stock or other securities, the Option Share Price then in effect shall apply to
so much of the different common stock, capital stock or other securities as are
received with respect to each Share of common stock so changed or exchanged.
Enterprises shall be given prompt written notice of any such event, which notice
shall include in reasonable detail the calculation of any adjustments to the
Option Share Price.
"Other Options" shall mean rights or options (other than the Options)
to subscribe for, purchase or otherwise acquire either Additional Shares or
Convertible Securities.
"Person" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated organization or
government (or any agency, instrumentality or political subdivision thereof).
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"Second Year Option" shall mean the right of Enterprises to purchase,
at Enterprises' election, in accordance with the terms of this Agreement, a
number of Shares up to the Second Year Option Number, upon payment of the
Aggregate Option Share Price for the number of Shares so purchased, subject to
adjustment as provided herein.
"Second Year Option Number" shall mean 40,000 Shares, as such number
may be adjusted as provided herein.
"Shares" shall mean the shares of the common stock of APGC, $.50 par
value per share, outstanding at any time and any stock or other securities into
which such common stock may hereafter be changed or for which such common stock
may be exchanged after giving effect to the terms of such change or exchange (by
way of reorganization, recapitalization, merger, consolidation or otherwise) and
all other stock of any class or classes (however designated) of APGC the holders
of which have the right, without limitation as to amount, either to all or to a
share of the balance of current dividends and liquidating dividends after the
payment of dividends and distributions on any shares entitled to preference.
"Third Year Option" shall mean the right of Enterprises to purchase, at
Enterprises' election, in accordance with the terms of this Agreement, a number
of Shares up to the Third Year Option Number, upon payment of the Aggregate
Option Share Price for the number of Shares so purchased, subject to adjustment
as provided herein.
"Third Year Option Number" shall mean 40,000 Shares, as such number may
be adjusted as provided herein.
SECTION 2. Option to Purchase Shares.
2.1 Grant of Option.
2.1.1 Grant of First Year Option. APGC hereby grants to
Enterprises the First Year Option, which is immediately exercisable. The First
Year Option may be exercised in full or in any number of partial exercises in
denominations of at least 500 shares at any time at or prior to the tenth
anniversary hereof.
2.1.2 Grant of Second Year Option. APGC hereby grants to
Enterprises the Second Year Option, which is exercisable upon the first
anniversary hereof. The Second Year Option may be exercised in full or in any
number of partial exercises at any time on or after the Exercise Date for such
Option and at or prior to the tenth anniversary of the Exercise Date for such
Option.
2.1.3 Grant of Third Year Option. APGC hereby grants to
Enterprises the Third Year Option, which is exercisable upon the second
anniversary hereof. The Third Year Option may be exercised in full or in any
number of partial exercises in denominations of at least 500 shares at any time
on or after the Exercise Date for such Option and at or prior to the tenth
anniversary of the Exercise Date for such Option.
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2.1.4 Grant of Fourth Year Option. APGC hereby grants to
Enterprises the Fourth Year Option, which is exercisable upon the third
anniversary hereof. The Fourth Year Option may be exercised in full or in any
number of partial exercises in denominations of at least 500 shares at any time
on or after the Exercise Date for such Option and at or prior to the tenth
anniversary of the Exercise Date for such Option.
2.1.5 Grant of Fifth Year Option. APGC hereby grants to
Enterprises the Fifth Year Option, which is exercisable upon the fourth
anniversary hereof. The Fifth Year Option may be exercised in full or in any
number of partial exercises in denominations of at least 500 shares at any time
on or after the Exercise Date for such Option and at or prior to the tenth
anniversary of the Exercise Date for such Option.
2.2 Exercise of Option. An Option may be exercised in whole or in part
by Enterprises by serving written notice (the "Option Notice") upon APGC
specifying the number of Shares then to be purchased. An Option shall be
exercisable at a purchase price equal to the product of the number of Shares to
be purchased multiplied by the Option Share Price then in effect. The closing
for each such purchase shall be held at the offices of APGC on a day not later
than 30 Business Days after the date of the Option Notice. At the closing, APGC
shall deliver to Enterprises, against payment of the purchase price specified in
this Section 2.2, certificates for the Shares purchased, free and clear of all
pledges, options, claims, liens, security interests and encumbrances of any
kind, other than the requirements of federal and state securities laws
respecting limitations on the subsequent transfer thereof and with all requisite
stock transfer tax stamps attached or provided for. Notwithstanding the
foregoing, if the Licensing Agreement is terminated solely due to a default by
Enterprises thereunder, no Option having an Exercise Date after the effective
date of such termination shall become exercisable, having an Exercise Date after
the effective date of such termination, and all such Options shall immediately
lapse on the termination date. In no event shall the termination (for any
reason) or expiration of the Licensing Agreement affect any Options having an
Exercise Date prior to or on the effective date of such termination or
expiration or affect any Options having an Exercise Date after the effective
date of such termination or expiration except as expressly provided herein.
SECTION 3. Adjustment of Shares Issuable Upon Exercise.
3.1 General; Option Share Price. The number of Shares which Enterprises
shall be entitled to receive upon each exercise hereof shall be determined by
multiplying the number of Shares which would otherwise (but for the provisions
of this Section) be issuable upon such exercise, as designated by Enterprises,
by the fraction of which (a) the numerator is the Option Share Price in effect
on the date hereof and (b) the denominator is the Option Share Price in effect
on the date of such exercise.
3.2 Adjustment of Option Share Price.
3.2.1 Issuance of Additional Shares. In case APGC at any time
or from time to time after the date hereof shall issue or sell Additional Shares
(including Additional Shares deemed to be issued pursuant hereto, but excluding
Shares issued pursuant to the conversion of [name of Stock]
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outstanding as of the date hereof) without consideration or for a consideration
per Share less than the greater of the Current Market Price and two times the
Option Share Price in effect immediately prior to such issue or sale, then, and
in each such case, subject to Section 3.7, such Option Share Price shall be
reduced, concurrently with such issue or sale, to a price (calculated to the
nearest .001 of a cent) determined by multiplying such Option Share Price by a
fraction
(a) the numerator of which shall be (i) the number of
Shares outstanding immediately prior to such issue or sale plus (ii) the number
of Shares which the aggregate consideration received by APGC for the total
number of such Additional Shares so issued or sold would purchase at the greater
of such Current Market Price and two times such Option Share Price, and
(b) the denominator of which shall be the number of
Shares outstanding immediately after such issue or sale, provided that, for the
purposes of this subsection, (x) immediately after any Additional Shares are
deemed to have been issued pursuant to Section 3.3 or 3.4, such Additional
Shares shall be deemed to be outstanding and (y) treasury Shares or Shares owned
by APGC shall not be deemed to be outstanding.
3.2.2 Extraordinary Dividends and Distributions. In case APGC
at any time or from time to time after the date hereof shall declare, order, pay
or make a dividend or other distribution (including, without limitation, any
distribution of other or additional stock or other securities or property or
Other Options by way of dividend or spin-off, reclassification, recapitalization
or similar corporate rearrangement) on the Shares, other than (a) a dividend
payable in Additional Shares or (b) a regular periodic cash dividend at a rate
not in excess of 110% of the rate of the last regular periodic cash dividend
theretofore paid, then, and in each such case, subject to Section 3.7, the
Option Share Price in effect immediately prior to the close of business on the
record date affixed for the determination of holders of any class of securities
entitled to receive such dividend or distribution shall be reduced, effective as
of the close of business on such record date, to a price (calculated to the
nearest .001 of a cent) determined by multiplying such Option Share Price by a
fraction
(x) the numerator of which shall be the Current
Market Price in effect on such record date or, if the Shares trade on an
ex-dividend basis, on the date prior to the commencement of ex-dividend trading,
less the amount of such dividend or distribution (as determined in good faith by
the Board of Directors of APGC) applicable to one Share, and
(y) the denominator of which shall be such Current
Market Price,
provided that, in the event that the amount of such dividend as so determined is
equal to or greater than 50% of such Current Market Price or in the event that
such fraction is less than 1/2, in lieu of the foregoing adjustment, adequate
provision shall be made so that Enterprises shall receive a pro rata share of
such dividend based upon the maximum number of shares at the time issuable to
Enterprises (determined without regard to whether the Option is exercisable at
such time).
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3.3 Treatment of Other Options and Convertible Securities. In case APGC
at any time or from time to time after the date hereof shall issue, sell, grant
or assume, or shall fix a record date for the determination of holders of any
class of securities entitled to received, any Other Options or Convertible
Securities, then, and in each such case, the maximum number of Additional Shares
issuable upon the exercise of such Other Options or, in the case of Convertible
Securities and Other Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares issued as of the
time of such issue, sale, grant or assumption or, in case such a record date
shall have been fixed, as of the close of business on such record date (or, if
the Shares trade on an ex-dividend basis, on the date prior to the commencement
of ex-dividend trading).
3.4 Treatment of Share Dividends, Share Splits, etc.. In case APGC at
any time or from time to time after the date hereof shall declare or pay any
dividend on the Shares payable in Shares, or shall effect a subdivision of the
outstanding Shares into a greater number of Shares (by reclassification or
otherwise than by payment of a dividend in Shares), then, and in each such case,
Additional Shares shall be deemed to have been issued (a) in the case of any
such dividend, immediately after the close of business on the record date for
the determination of holders of any class of securities entitled to receive such
dividend, or (b) in the case of any such subdivision, at the close of business
on the day immediately prior to the day upon which such corporate action becomes
effective.
3.5 Computation of Consideration. For the purposes of this Section,
(a) the consideration for the issue or sale of any Additional
Shares shall, irrespective of the accounting treatment of such consideration,
(i) insofar as it consists of cash, be computed at
the net amount of cash received by APGC, without deducting any expenses paid or
incurred by APGC or any commissions or compensations paid or concessions or
discounts allowed to underwriters, dealers or others performing similar services
in connection with such issue or sale,
(ii) insofar as it consists of property (including
securities) other than cash, be computed at the fair value thereof at the time
of such issue or sale, as determined in good faith by the Board of Directors of
APGC, and
(iii) in case Additional Shares are issued or sold
together with other stock or securities or other assets of APGC for a
consideration which covers both, be the portion of such consideration so
received, computed as provided in clauses (i) and (ii) above, allocable to such
Additional Shares, all as determined in good faith by the Board of Directors of
APGC;
(b) Additional Shares deemed to have been issued pursuant to
Section 3.3, relating to Other Options and Convertible Securities, shall be
deemed to have been issued for a consideration per share determined by dividing
(i) the total amount, if any, received and receivable
by APGC as consideration for the issue, sale, grant or assumption of the Other
Options or Convertible Securities
7
<PAGE> 8
in question, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration to protect
against dilution) payable to APGC upon the exercise in full of such Other
Options or the conversion or exchange of such Convertible Securities or, in the
case of Other Options for Convertible Securities, the exercise of such Other
Options for Convertible Securities and the conversion or exchange of such
Convertible Securities, in each case computing such consideration as provided in
the foregoing subdivision (a),
by
(ii) the maximum number of Shares (as set forth in
the instruments relating thereto, without regard to any provision contained
therein for a subsequent adjustment of such number to protect against dilution)
issuable upon the exercise of such Other Options or the conversion or exchange
of such Convertible Securities; and
(c) Additional Shares deemed to have been issued pursuant to
Section 3.4, relating to stock dividends, stock splits, etc., shall be deemed to
have been issue for no consideration.
3.6 Adjustments for Combinations, etc.. In case the outstanding Shares
shall be combined or consolidated, by reclassification, reverse stock split or
otherwise, into a lesser number of Shares, the Option Share Price in effect
immediately prior to such combination or consolidation shall, concurrently with
the effectiveness of such combination or consolidation, be proportionately
increased.
3.7 Minimum Adjustment of Option Share Price. If the amount of any
adjustment of the Option Share Price required pursuant to this Section would be
less than one percent (1%) of the Option Share Price in effect at the time such
adjustment is otherwise so required to be made, such amount shall be carried
forward and adjustment with respect thereto made at the time of and together
with any subsequent adjustment which, together with such amount and any other
amount or amounts so carried forward, shall aggregate at least one percent (1%)
of such Option Share Price. If the amount of any adjustment of the Option Share
Price required pursuant to this Section, together with any subsequent
adjustments, does not aggregate at least one percent (1%) of such Option Share
Price, no adjustment shall be made.
SECTION 4. Consolidation, Merger, etc..
4.1 Adjustments for Consolidation, Merger, Sale of Assets,
Reorganization, etc.. In case APGC after the date hereof (a) shall consolidate
with or merge into any other Person and shall not be the continuing or surviving
corporation of such consolidation or merger, or (b) shall permit any other
Person to consolidate with or merge into APGC and APGC shall be the continuing
or surviving Person but, in connection with such consolidation or merger, the
Shares shall be changed into or exchanged for stock or other securities of any
other Person or cash or any other property, or (c) shall transfer all or
substantially all of its properties or assets to any other Person, or (d) shall
effect a capital reorganization or reclassification of the Shares (other than a
capital reorganization or reclassification resulting in the issue of Additional
Shares for which adjustment in the Option Share
8
<PAGE> 9
Price is provided herein), then, and in the case of each such transaction,
proper provision shall be made so that, upon the basis and the terms and in the
manner provided in this Option, Enterprises, upon the exercise hereof at any
time after the consummation of such transaction, shall be entitled to receive
(at the aggregate Option Share Price in effect at the time of such consummation
for all Shares issuable upon such exercise immediately prior to such
consummation), in lieu of the Shares issuable upon such exercise prior to such
consummation, the highest amount of securities, cash or other property to which
such holder would actually have been entitled as a shareholder upon such
consummation if such holder had exercised the rights represented by this Option
immediately prior thereto (determined without regard to whether the Option is
exercisable at such time).
4.2 Assumption of Obligations. Notwithstanding anything contained in
the Option to the contrary, APGC will not effect any of the transactions
described in subdivision (a) through (d) of Section 4.1 unless, prior to the
consummation thereof, each Person (other than APGC) which may be required to
deliver any stock securities, cash or property upon the exercise of this Option
as provided herein shall assume, by written instrument delivered to, and
reasonably satisfactory to, the holder of this Option, (a) the obligations of
APGC under this Option (and if APGC shall survive the consummation of such
transaction, such assumption shall be in addition to, and shall not release APGC
from, any continuing obligations of APGC under this Option), and (b) the
obligation to deliver to such holder such shares of stock securities, cash or
property as, in accordance with the foregoing provisions of this Section 4, such
holder may be entitled to receive, and such Person shall have similarly
delivered to such holder an opinion of counsel for such Person, which counsel
shall be reasonably satisfactory to such holder, stating that this Option shall
thereafter continue in full force and effect and the terms hereof (including,
without limitation, all of the provisions of this Section 4) shall be applicable
to the stock, securities, cash or property which such Person may be required to
deliver upon any exercise of this Option or the exercise of any rights pursuant
hereto.
SECTION 5. Representations and Warranties.
(a) APGC Representations. APGC represents and warrants to Enterprises
as follows:
(i) Organization and Qualification. APGC is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Tennessee.
(ii) Authority Relative to this Agreement. APGC has the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated thereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate actions and no other
proceedings on the part of APGC or its stockholders are necessary to authorize
this Agreement and the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by APGC, and (assuming this Agreement is
the valid and binding obligation of Enterprises) constitutes a valid and binding
agreement of APGC, enforceable against APGC in accordance with its terms, except
that (A) such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium and other similar laws now or hereafter in effect
relating to creditors' rights generally and (B) the remedy of specific
performance and injunctive and other forms
9
<PAGE> 10
of equitable relief may be subject to equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought.
(iii) No Violation. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby and
thereby will not (A) constitute a breach or violation of or default under the
Charter or the By-laws of APGC or (B) violate, conflict with, or result in a
breach of any provisions of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination of, or accelerate the performance required by, or result in a
right of termination or acceleration under, or result in the creation or
imposition of any lien, security interest, charge or encumbrance upon any of the
properties or assets of APGC under, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement
or other instrument or obligation to which APGC is a party or to which APGC or
any of its properties or assets maybe subject, other than, in the case of clause
(B), such events that would not, either individually or in the aggregate,
prevent or delay the consummation of the transactions contemplated hereby. The
(A) execution, delivery and performance of this Agreement by APGC will not
require the consent or approval of any other party, and (B) the execution,
delivery and performance by APGC of this Agreement and the consummation of the
transactions contemplated hereby will not constitute a breach or violation of or
default under any law, rule or regulation or any judgment, decree, order,
governmental permit or license to which APGC is subject. To the knowledge of
APGC, no challenges to the validity or effectiveness of this Agreement, or any
other agreement or instrument necessary to consummate the transactions
contemplated hereby, have been made by any governmental authority or other
person.
(iv) Ownership of Shares. Upon payment of the Option Share
Price, Enterprises will acquire, good, valid and marketable title to the Shares
received, free and clear of any lien, charge, encumbrance, security interest,
claim or right of others of whatever nature other than the requirements of the
federal and state securities laws respecting limitations on the subsequent
transfer thereof.
(b) Enterprises Representations. Enterprises represents and warrants to
APGC as follows:
(i) Organization and Qualification. Enterprises is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Ohio.
(ii) Authority Relative to this Agreement. Enterprises has the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated thereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate actions and no other
proceedings on the part of Enterprises or its stockholders are necessary to
authorize this Agreement and the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by Enterprises, and
(assuming this Agreement is the valid and binding obligation of Enterprises)
constitutes a valid and binding agreement of Enterprises, enforceable against
Enterprises in accordance with its terms, except that (A) such enforcement may
be subject to bankruptcy, insolvency, reorganization, moratorium and other
similar laws now or hereafter in
10
<PAGE> 11
effect relating to creditors' rights generally and (B) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(iii) No Violation. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby and
thereby will not (A) constitute a breach or violation of or default under the
Certificate of Incorporation or the Regulations of Enterprises or (13) violate,
conflict with, or result in a breach of any provisions of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation or imposition of any lien, security interest,
charge or encumbrance upon any of the properties or assets of Enterprises under,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which Enterprises is a party or to which Enterprises or any of its
properties or assets may be subject, other than, in the case of clause (13),
such events that would not, either individually or in the aggregate, prevent or
delay the consummation of the transactions contemplated hereby. The (A)
execution, delivery and performance of this Agreement by Enterprises will not
require the consent or approval of any other party, and (B) the execution,
delivery and performance by Enterprises of this Agreement and the consummation
of the transactions contemplated hereby will not constitute a breach or
violation of or default under any law, rule or regulation or any judgment,
decree, order, governmental permit or license to which Enterprises is subject.
To the knowledge of Enterprises, no challenges to the validity or effectiveness
of this Agreement, or any other agreement or instrument necessary to consummate
the transactions contemplated hereby, have been made by any governmental
authority or other person.
(iv) Investment Intent. Enterprises is acquiring the Options,
and upon exercise of the Options, the Shares for investment for its own account
and not with a view to the resale or distribution thereof.
SECTION 6. Reservation of Shares, etc..
APGC will at all times reserve and keep available, solely for issuance
and delivery upon exercise of the Option the number of Shares from time to time
issuable upon full exercise of the Options. All Shares issuable upon exercise of
the Options at any time shall be duly authorized and, when issued upon such
exercise, shall be validly issued and fully paid and non-assessable with no
liability on the part of Enterprises.
SECTION 7. No Dilution or Impairment.
APGC will not, by amendment of its charter or through any
consolidation, merger, reorganization, transfer of assets, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Option, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the holder of this Option against dilution or other impairment.
Without limiting the generality of the foregoing, APGC (a) will not
11
<PAGE> 12
permit the par value of any Shares receivable upon the exercise of this Option
to exceed the amount payable therefor upon such exercise, (b) will take all such
action as may be necessary or appropriate in order that APGC may validly and
legally issue fully paid and non-assessable Shares on the exercise of the
Options from time to time, (c) will not take any action which results in any
adjustment of the Option Share Price if the total number of Shares issuable
after the action upon full exercise of the Option would exceed the total number
of Shares then authorized by APGC's Charter and available for the purpose of
issue upon such exercise, and (d) will not authorize any additional Shares of
capital stock of any class which is preferred as to dividends or as to the
distribution of assets upon voluntary or involuntary dissolution, liquidation or
winding-up, unless the rights of the holders thereof shall be limited to a fixed
sum or percentage of par value or a sum determined by reference to a formula
based on a published index of interest rates, an interest rate publicly
announced by a financial institution or a similar indicator of interest rates in
respect of participation in dividends and to a fixed sum or percentage of par
value in any such distribution of assets. In case any event shall occur as to
which any of the provisions of this Option are not strictly applicable but the
failure to make any adjustment would not fairly protect the purchase rights
represented by this Option in accordance with the essential intent and
principles contained herein, then, in each such case, APGC shall, at its sole
cost and expense, appoint a firm of independent certified public accountants of
recognized national standing (which may be the regular auditors of APGC), which
shall give their opinion upon the adjustment, if any, on a basis consistent with
the essential intent and principles established herein, necessary to preserve,
without dilution, the purchase rights represented by this Option. Upon receipt
of such opinion, APGC will promptly mail a copy thereof to the holder of this
Option and shall make the adjustments described therein.
SECTION 8. Registration Upon Issuance of Shares.
If any Shares required to be reserved for purposes of exercise of this
Option require registration with or approval of any governmental authority under
any federal or state law (including, but not limited to, the Securities Act of
1933) before such Shares may be issued upon exercise, APGC will, at its expense
and as expeditiously as possible, cause such Shares to be duly registered or
approved, as the case may be. Without limiting the foregoing, the Shares
issuable upon exercise of this Option (or upon conversion of any capital stock
of APGC issued upon such exercise) shall be duly registered under the Securities
Act of 1933 and all applicable "blue sky" laws. At any such time as Shares are
listed on any national securities exchange, APGC will, at its expense, obtain
promptly and maintain the approval for listing on each such exchange, upon
official notice of issuance, the Shares issuable upon exercise of the then
outstanding portion of the Option and maintain the listing of such Shares after
their issuance; and APGC will also list on such national securities exchange,
will register under the Securities Exchange Act of 1934 and will maintain such
listing of, any other securities that at any time are issuable upon exercise of
the Option, if and at the time that any securities of the same class shall be
listed on such national securities exchange by APGC.
SECTION 9. Specific Performance; Remedies.
The parties acknowledge and agree that irreparable damage will result
to Enterprises in the event that this Agreement is not specifically enforced.
Therefore, the rights to, or obligations of,
12
<PAGE> 13
purchase and sale of the Shares hereunder shall be enforceable in a court of
equity, or other tribunal with jurisdiction, by a decree of specific performance
and appropriate injunctive relief may be applied for and granted in connection
therewith. Such remedies and all other remedies provided for in this Agreement
or available at law or in equity shall, however, be cumulative and not exclusive
and shall be in addition to any other remedies which either party may have under
this Agreement or otherwise.
SECTION 10. Severability.
If any provisions of this Agreement shall, for any reason, be adjudged
by any court of competent jurisdiction to be invalid or unenforceable, such
judgment shall not affect, impair or invalidate the remainder of this Agreement
but shall be confined in its operation to the provision of this Agreement
directly involved in the controversy in which such judgment shall have been
rendered.
SECTION 11. Notices.
All notices, requests, demands and other communications hereunder must
be in writing and shall be deemed to have been duly given if mailed by first
class, registered mail, return receipt required, postage and registry fees
prepaid, and addressed as follows:
If to APGC: The Arnold Palmer Golf Company
6201 Mountain View Road
Ooltewah, Tennessee 37363
If to Enterprises: Nancy Lopez Enterprises, Inc.
c/o International Management, Inc.
One Erieview Plaza, Suite 1300,
Cleveland, Ohio 44114
Either party by notice in writing mailed to the other party may change the name
and address to which notices, requests, demands and other communications shall
be mailed.
SECTION 12. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Tennessee without regard to any conflict of law
principles that might require the application of the laws of another
jurisdiction.
SECTION 13. Arbitration.
The parties agree to submit to arbitration any dispute related to this
Agreement and agree that the arbitration process shall be the exclusive means
for resolving disputes which the parties cannot resolve. Any arbitration
hereunder shall be conducted under the Dispute Resolution Rules of the American
Arbitration Association ("AAA") as modified herein. Arbitration proceedings
shall take
13
<PAGE> 14
place in Cleveland, Ohio, before a single arbitrator who shall be a lawyer. All
arbitration proceedings shall be confidential. Neither party shall disclose any
information about the evidence produced by the other party in the arbitration
proceedings, except in the course of judicial, regulatory, or arbitration
proceeding, or as may be demanded by government authority. Before making any
disclosure permitted by the preceding sentence, a party shall give the other
party reasonable advance written notice of the intended disclosure and an
opportunity to prevent disclosure. In connection with any arbitration provisions
hereunder, each party shall have the right to take the deposition of one
individual and any expert witness retained by the other party. Additional
discovery may be had only where the arbitrator so orders, upon a showing of
substantial need. Only evidence that is directly relevant to the issues may be
obtained in discovery. Each party bears the burden of persuasion of any claim or
counterclaim raised by that party. The arbitration provisions of this Agreement
shall not prevent any party from obtaining injunctive relief from a court of
competent jurisdiction to enforce the obligations for which such party may
obtain provisional relief pending a decision on the merits by the arbitrator.
Each of the parties hereby consents to the jurisdiction of Ohio courts for such
purpose. The arbitrator shall have authority to award any remedy or relief that
a court of the State of Ohio could grant in conformity to applicable law, except
that the arbitrator shall have no authority to award attorneys' fees or punitive
damages. Any arbitration award shall be accompanied by a written statement
containing a summary of the issues in controversy, a description of the award,
and an explanation of the reasons for the award. The arbitrator's award shall be
final and judgment may be entered upon such award by any court. Any reference in
this clause to the Employer also refers to all subsidiary and affiliated
entities and all benefit plans, sponsors and trustees of benefit plans,
fiduciaries, administrators, officers and directors.
SECTION 14. Amendments, etc..
This Agreement may not be modified or amended, and no provision hereof
may be waived, except by an instrument in writing signed by the parties hereto.
SECTION 15. Successors and Assigns.
The provisions of this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors, assigns and
transferees. No party hereto may assign their rights and obligations hereunder
without the prior written consent of the other party hereto; except that
Enterprises may, after providing APGC with written notice, transfer and assign
its rights under this Agreement (including but not limited to the Options
themselves) to Lopez, any other corporation wholly owned by Lopez or to one or
more trusts for Lopez's estate planning purposes.
SECTION 16. Counterparts.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
14
<PAGE> 15
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
NANCY LOPEZ ENTERPRISES, INC. THE ARNOLD PALMER GOLF COMPANY
By: /s/ Nancy Lopez By: /s/ George H. Nichols
---------------------------- ------------------------------------
Name: Nancy Lopez Name: George H. Nichols
Title: President Title: Chairman and Chief Executive
Officer
15
<PAGE> 1
EXHIBIT 23
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. 333-19329, File No. 33-72152, and File No.
33-72154).
/s/ ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
December 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 371
<SECURITIES> 0
<RECEIVABLES> 4,491
<ALLOWANCES> 977
<INVENTORY> 7,004
<CURRENT-ASSETS> 12,051
<PP&E> 4,286
<DEPRECIATION> 2,617
<TOTAL-ASSETS> 20,478
<CURRENT-LIABILITIES> 16,215
<BONDS> 0
5,000
0
<COMMON> 1,527
<OTHER-SE> (35,190)
<TOTAL-LIABILITY-AND-EQUITY> 20,478
<SALES> 21,893
<TOTAL-REVENUES> 21,893
<CGS> 20,730
<TOTAL-COSTS> 20,730
<OTHER-EXPENSES> 14,244
<LOSS-PROVISION> 389
<INTEREST-EXPENSE> 3,038
<INCOME-PRETAX> (15,223)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,223)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,223)
<EPS-PRIMARY> (5.01)
<EPS-DILUTED> (5.01)
</TABLE>
