<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended April 2, 1999 Commission File Number 0-921
-------------------- ----------
THE ARNOLD PALMER GOLF COMPANY
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(Exact name of registrant as specified in its charter)
Tennessee 62-0331019
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(State of Incorporation) (I.R.S. Employer Identification No.)
6201 Mountain View Road, Ooltewah, Tennessee 37363
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number 423-238-5890
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes x . No .
-------- ---------
As of May 14, 1999, 3,927,700 shares of Common Stock were outstanding.
<PAGE> 2
INDEX
Pages
-----
Part I. Financial Information
Balance Sheets - April 2, 1999 and
September 30, 1998 1
Statements of Operations - Three and Six Months Ended
April 2, 1999 and March 27, 1998 2
Statements of Cash Flows - Six Months Ended
April 2, 1999 and March 27, 1998 3
Notes to Financial Statements 4 - 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 - 13
Part II. Other Information 14
Signature Page 15
<PAGE> 3
Page 1 Form 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
APRIL 2, 1999 AND SEPTEMBER 30, 1998
($ in thousands except per share amounts)
<TABLE>
<CAPTION>
April 2, 1999 Sept 30, 1998
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 469 $ 371
Trade receivables 5,902 4,491
less: allowance for doubtful accounts (689) (977)
-------- --------
Net receivables 5,213 3,514
Inventories, net 6,248 7,004
Prepaid expenses and other 542 1,162
-------- --------
Total current assets 12,472 12,051
Property, plant and equipment 4,251 4,286
less: accumulated depreciation (2,748) (2,617)
-------- --------
Net property, plant and equipment 1,503 1,669
Other assets:
Investment in NBHI -- 5,000
Property held for sale -- 94
Goodwill 85 85
Other 1,679 1,579
-------- --------
1,764 6,758
-------- --------
TOTAL ASSETS $ 15,739 $ 20,478
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
obligations $ 33,988 $ 3
Short-term borrowings 3,000 12,250
Accounts payable 996 1,573
Accrued liabilities 1,889 2,389
-------- --------
Total current liabilities 39,873 16,215
Long-term obligations, net of
current maturities -- 26,525
Redeemable preferred stock -- 5,000
Stockholders' equity (deficit):
Common stock, $.50 par value,
10,000,000 shares authorized, 3,927,700 and
3,054,367 shares issued and outstanding
at April 2, 1999 and September 30, 1998, respectively 1,964 1,527
Additional paid-in capital 12,029 6,401
Accumulated deficit (38,127) (35,190)
-------- --------
Total stockholders' equity (deficit) (24,134) (27,262)
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 15,739 $ 20,478
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
Page 2 Form 10-Q
STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED APRIL 2, 1999 AND MARCH 27, 1998
(Unaudited)
($ in thousands except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
April 2, March 27, April 2, March 27,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 4,729 $ 5,588 $ 8,148 $ 9,575
Cost of sales 3,574 4,493 6,362 7,964
------- ------- ------- -------
Gross profit 1,155 1,095 1,786 1,611
Selling and marketing expenses 1,358 2,080 2,225 3,734
General and administrative expenses 631 1,316 1,200 2,462
Severance and restructuring expenses -- 127 -- 797
------- ------- ------- -------
Loss from operations (834) (2,428) (1,639) (5,382)
Other income:
Royalty and sub-license income, net 171 343 355 704
Other, net 10 83 17 87
------- ------- ------- -------
181 426 372 791
Loss before interest and income taxes (653) (2,002) (1,267) (4,591)
Interest expense 850 707 1,671 1,336
------- ------- ------- -------
Loss before income taxes (1,503) (2,709) (2,938) (5,927)
Provision for income taxes -- -- -- --
------- ------- ------- -------
Net loss $(1,503) $(2,709) $(2,938) $(5,927)
======= ======= ======= =======
Net loss per share - basic and diluted $ (0.38) $ (0.89) $ (0.75) $ (1.96)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
Page 3 Form 10-Q
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED APRIL 2, 1999 AND MARCH 27, 1998
(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Apr. 2, 1999 Mar. 27, 1998
------------ -------------
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss $(2,938) $(5,927)
Adjustments to reconcile net income to net cash
used for operating activities -
Depreciation 182 311
Amortization 230 201
Changes in operating assets and liabilities -
Receivables (1,699) (554)
Inventories 756 (2,520)
Prepaid expenses and other 620 (281)
Accounts payable (577) 1,342
Accrued liabilities 526 551
------- -------
Net cash used for operating activities (2,900) (6,877)
------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property, plant and equipment (16) (697)
Proceeds from sale of investments 5,000 (62)
------- -------
Net cash provided by (used for)
investing activities 4,984 (759)
------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net increase (decrease) in short-term
borrowings (9,250) $ 7,400
Issuance of common stock 14 113
Net increase (decrease) in long-term
obligations 7,250 (25)
------- -------
Net cash provided by (used for)
financing activities (1,986) 7,488
------- -------
NET CHANGE IN CASH 98 (148)
CASH, beginning of period 371 703
------- -------
CASH, end of period $ 469 $ 555
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 327 $ 1,059
======= =======
Income taxes $ -- $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
Page 4 Form 10-Q
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The quarterly financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission for interim financial information. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. These condensed financial statements should be read in conjunction
with the Company's latest annual report on Form 10-K. In the opinion of
management of the Company, all adjustments necessary, consisting only of normal
recurring adjustments, to present fairly (1) the financial position of The
Arnold Palmer Golf Company as of April 2, 1999; (2) the results of its
operations and its cash flows for the six months ended April 2, 1999 and March
27, 1998; and (3) the results of its operations for the three months ended April
2, 1999 and March 27, 1998, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the full
year.
Reference is also made to the Company's annual report on Form 10-K for the year
ended September 30, 1998, for a discussion of the Company's significant
accounting policies.
NOTE 2
INCOME TAXES:
The Company has federal tax loss carry forwards of approximately $48.3 million
at September 30, 1998. There was no current income tax provision or benefit
recorded during the six months ending April 2, 1999 due to the losses sustained
by the Company.
<PAGE> 7
Page 5 Form 10-Q
NOTE 3
SHORT-TERM BORROWINGS:
Short-term borrowings consist of advances under a $5.0 million line of credit
agreement with a bank. There are no financial covenants under the line of
credit, which is unconditionally guaranteed by the Company's Chairman (the
"Guarantor").
At the option of the borrower, advances under the line of credit bear interest
at prime minus 0.50% or one, two or three month LIBOR plus 1.5% (7.75% at April
2, 1999).
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
investment 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 September 30, 1998 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.
All the Company's long-term debt and subordinated notes as discussed below in
Item 2, are due and payable on or before December 31, 1999, and are therefore
classified as current obligations on the Company's balance sheet.
NOTE 4
NET LOSS PER COMMON SHARE:
The computation of basic net loss per share is based on the weighted average
number of common shares outstanding during the period. Diluted earnings per
share would also include dilutive common share equivalents outstanding. Due to
the Company's net loss for all periods presented, all common stock equivalents
would be anti-dilutive to Basic EPS.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------------------------------------------
Apr 2, 1999 Mar 27, 1998 Apr 2, 1999 Mar 27, 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss (in thousands) ($1,503) ($2,709) ($2,938) ($5,927)
Weighted average shares 3,927,700 3,054,367 3,907,376 3,027,963
Net loss per share - basic and diluted ($0.38) ($0.89) ($0.75) ($1.96)
</TABLE>
At April 2, 1999, there were options outstanding to purchase 631,127 shares of
stock, with per share prices ranging from $1.55 to $10.93. Additionally there
were warrants outstanding to purchase 1,390,000 shares of stock with per share
prices ranging from $5.00 to $5.50.
<PAGE> 8
Page 6 Form 10-Q
NOTE 5
INVENTORIES:
Inventories as of April 2, 1999 and September 30, 1998, were as follows (in
thousands):
<TABLE>
<CAPTION>
------------ --------------
Apr. 2, 1999 Sept. 30, 1998
------------ --------------
<S> <C> <C>
Raw Materials $3,453 $3,503
Work-in-process 9 9
Finished Goods 2,786 3,492
------ ------
Total $6,248 $7,004
------ ------
</TABLE>
NOTE 6
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.
NOTE 7
PROPOSAL FOR BUY-OUT
On April 29, 1999, the Company received a proposal from APGC Holdings Company,
LLC, ("Holdings") for the acquisition of the Company pursuant to which the
Company would be merged with Holdings or its subsidiary in a cash-out merger
with public shareholders of the
<PAGE> 9
Page 7 Form 10-Q
Company receiving $1.20 per share in cash. If the acquisition set forth in the
proposal is consummated, the Company would no longer be publicly traded.
Holdings is a closely held company formed by Cindy L. Davis, President and Chief
Executive Officer of the Company, and certain directors and shareholders of the
Company including John T. Lupton and Arnold D. Palmer. If the proposal is
accepted, these individuals have agreed to contribute approximately 41 percent
of the outstanding common stock of the Company to Holdings pursuant to separate
agreements. The proposal is subject to certain conditions imposed by Holdings
and Holdings has reserved the right to withdraw the proposal at any time.
The board of directors of the Company unanimously approved the appointment of a
special committee to review the proposal and to determine whether the proposal
is in the best interests of the Company and its shareholders. The special
committee is considering the proposal and it is currently unclear whether the
proposal will be accepted.
Consummation of the acquisition would be subject to the negotiation and
execution of a definitive merger agreement and the approval of the board of
directors and the shareholders of the Company, as well as other customary
conditions of a transaction of this nature, including receipt of all necessary
regulatory approvals.
<PAGE> 10
Page 8 Form 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
PROPOSAL FOR BUY-OUT
On April 29, 1999, the Company received a proposal from APGC Holdings Company,
LLC, ("Holdings") for the acquisition of the Company pursuant to which the
Company would be merged with Holdings or its subsidiary in a cash-out merger
with public shareholders of the Company receiving $1.20 per share in cash. If
the acquisition set forth in the proposal is consummated, the Company would no
longer be publicly traded.
Holdings is a closely held company formed by Cindy L. Davis, President and Chief
Executive Officer of the Company, and certain directors and shareholders of the
Company including John T. Lupton and Arnold D. Palmer. If the proposal is
accepted, these individuals have agreed to contribute approximately 41 percent
of the outstanding common stock of the Company to Holdings pursuant to separate
agreements. The proposal is subject to certain conditions imposed by Holdings
and Holdings has reserved the right to withdraw the proposal at any time.
The board of directors of the Company unanimously approved the appointment of a
special committee to review the proposal and to determine whether the proposal
is in the best interests of the Company and its shareholders. The special
committee is considering the proposal and it is currently unclear whether the
proposal will be accepted.
Consummation of the acquisition would be subject to the negotiation and
execution of a definitive merger agreement and the approval of the board of
directors and the shareholders of the Company, as well as other customary
conditions of a transaction of this nature, including receipt of all necessary
regulatory approvals.
FINANCIAL CONDITION
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 these months to support its spring shipping
season. Capital expenditures for 1999 are expected to be minimal.
All the Company's long-term debt and subordinated notes (as discussed below),
are due and payable on or before December 31, 1999, and are therefore classified
as current obligations on the Company's balance sheet. As of April 2, 1999, the
Company had negative working capital of $27.8 million and a current ratio of .30
to one. This compares to negative working capital of $4.2 million and a current
ratio of 0.74 to one at September 30, 1998. As of April 2, 1999, the Company's
outstanding balance on its revolving credit facility was $3.0 million compared
to $12.3 million at September 30, 1998.
<PAGE> 11
Page 9 Form 10-Q
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
investment 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 September 30, 1998 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 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. Also
on March 31, 1999, the Trust agreed to contribute to paid in capital of the
Company, all accrued interest on the debt owed the Trust for the period October
1998 through March 1999. Therefore, $1,051,000 of accrued interest was
reclassified to additional paid-in capital from accrued liabilities on the April
2, 1999 balance sheet.
On December 1, 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.
In November 1994, the Company completed a private placement of $5.0 million in
subordinated notes to related parties. These notes, which bear interest payable
monthly at 6%, are due to mature on November 2, 1999. The Company's Chairman and
another director, who collectively hold $3.0 million of the notes, agreed to
forego interest payments and agreed that accrued interest would be added to the
principal balance due in November 1999. The note balance at April 2, 1999 was
$4.7 million (the face value of $5.0 million less the unamortized portion of the
original subordinated debt discount), and is carried on the Company's balance
sheet as current obligations.
Due to the continued losses of the Company, the Board of Directors have embarked
upon numerous strategic business initiatives including the effectuation of a
financial restructuring plan. Discussions are currently underway to determine
methods by which the Company's obligations for its long-term debt and
subordinated notes can be met. It is unlikely that the long-term debt and
subordinated notes can be refinanced through third party lenders. Accordingly,
the liquidity of the Company is dependent upon the ability of the Company to
restructure the long-term debt and subordinated notes with the current holders
of the long-term debt and subordinated notes. Only with the financial support of
the Guarantor and of his affiliates, has the Company been able to meet its
outstanding financial commitments.
The proposal for the acquisition of the Company by Holdings noted above is
conditioned upon, among other things, the satisfactory restructuring of the
Company's indebtedness including the Company's outstanding indebtedness to the
holders of the long-term debt and subordinated notes of the Company. It is
currently unclear whether this condition to the proposal can be satisfied.
<PAGE> 12
Page 10 Form 10-Q
RESULTS OF OPERATIONS
The tables below compare net sales by product line and market segment for the
Company's second quarter and six months ending April 2, 1999, to the comparable
prior year periods.
Sales By Product Line
($'s in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------------------------- --------------------------------------------
Apr 2, 1999 Mar 27, 1998 %Change Apr 2, 1999 Mar 27, 1998 %Change
---------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Clubs $2,254 $2,169 3.9 $3,530 $4,220 (16.4)
Bags 2,368 2,636 (10.2) 4,324 4,058 6.6
Outlet 87 111 (21.6) 251 300 (16.3)
Components --- 583 (100.0) --- 851 (100.0)
Apparel 20 89 (77.5) 43 146 (70.5)
---------------------------------------------- --------------------------------------------
Total $4,729 $5,588 (15.4) $8,148 $9,575 (14.9)
---------------------------------------------- --------------------------------------------
</TABLE>
Sales By Market Segment
($'s in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------------------------- --------------------------------------------
Apr 2, 1999 Mar 27, 1998 %Change Apr 2, 1999 Mar 27, 1998 %Change
---------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pro $2,518 $2,319 8.6 $4,448 $4,750 (6.4)
Retail 2,126 2,397 (11.3) 3,451 3,370 2.4
Contract --- 178 (100.0) --- 304 (100.0)
Outlet 85 111 (23.4) 249 300 (17.0)
Components --- 583 (100.0) --- 851 (100.0)
---------------------------------------------- --------------------------------------------
Total $4,729 $5,588 (15.4) $8,148 $9,575 (14.9)
---------------------------------------------- --------------------------------------------
</TABLE>
Net sales for the quarter ending April 2, 1999 were $4.7 million compared to
$5.6 million for the comparable prior year period, a decrease of 15.4%. Sales
for the six month period decreased 14.9% to $8.1 million, from $9.6 million in
the prior year same six month period. The Company's prior year sales include
component sales generated by its component division (National Golf Suppliers),
which the Company sold in September 1998. Excluding these sales from prior year,
the Company's decrease in sales were 5.5% and 6.6% for its second quarter and
six months ending April 2, 1999. The decrease in sales is due to the continued
softness in the market place.
The Company's gross profit as a percentage of net sales for the second quarter
and six month period ending April 2, 1999, was 24.4% and 21.9% respectively.
Gross profit for the comparable prior year periods was 19.6% and 16.8%. The
increase in gross profit was partially attributable to a better product mix in
the current year. Pro line product sales, which yields the highest margin
contribution, was 54.5% of total sales for the six months ending April 2, 1999
compared to 49.6% for the same prior year period. Gross profit also improved due
to benefits resulting from consolidation of the Company's manufacturing
facilities in its fiscal year ending September 30, 1998.
<PAGE> 13
Page 11 Form 10-Q
Selling and marketing expenses decreased $0.7 million and $1.5 million for the
three months and six months ending April 2, 1999. During the six month period
ending April 2, 1999, the most significant decreases were in salaries - $0.5
million, travel and living - $0.3 million, advertising and promotion - $0.2
million, royalties - $0.3 million and research and development - $0.2 million.
Royalty expenses decreased due to the waiver of royalty payments required under
a licensing agreement with a licensor. Marketing expenses related to the
Company's component division (National Golf Suppliers) accounted for $0.1
million of the decrease as the Company sold its component division in September
1998.
General and administrative expenses decreased $0.7 million and $1.3 million for
the quarter and year to date periods ending April 2, 1999 over the same prior
year periods. For the six months ending April 2, 1999, salaries and related
payroll costs decreased $0.1 million, legal and other professional services $0.1
million and occupancy costs, including rent and lease payments decreased $0.1
million. General and administrative expenses related to the Company's component
division were $0.2 million for the prior year six month period ending March 27,
1998, and expenses related to the Company's management change and reorganization
during the prior year six month period were $0.7 million for which there were no
recurring expenses during the Company's current year six month period ending
April 2, 1999.
Other income for the six months ending April 2, 1999 decreased $0.4 million from
the prior year six month period. The decrease was primarily due to a licensing
agreement held by the Company which provided for annual royalty income of $1.0
million through September 30, 1998. Beginning October 1, 1998, the maximum
annual royalty per the agreement is $50,000.
Interest expense for the six months ending April 2, 1999 was $1.7 million
compared to $1.3 million for six month period ending March 27, 1998. The
increase was due to higher debt balances during the Company's current six month
period compared to the same prior year period. Average short-term and long-term
debt for the six months ending April 2, 1999 was $31.4 million compared to an
average debt balance of $25.2 million for the same prior year period. Cash paid
for interest expense during the six months ending April 2, 1999 was $327,000
compared to $1.1 million during the same prior year period. The decrease in cash
interest payments was due to the suspension of interest payments to the Trust as
described above.
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
<PAGE> 14
Page 12 Form 10-Q
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) has been upgraded to a Year 2000 Compliance level. The Company's
software applications operating on the AS/400, is a 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 primarily involves Lotus Smart Suite and cc: Mail, have been in the
process of upgrading to a Year 2000 Compliant level with an anticipated
completion date no later than mid calendar year 1999. The cost for completing
the PC based applications upgrade is expected to be minimal.
The Company does not feel 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.
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations may contain "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, which are based on
management's beliefs and assumptions about
<PAGE> 15
Page 13 Form 10-Q
expectations, estimates, strategies and projections for the Company. These
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward looking statements. The Company undertakes no obligation to
update publicly any forward looking statements whether as a result of new
information, future events or otherwise.
The risks, uncertainties and assumptions regarding forward looking statements
include, but are not limited to, the Company's operations, performance,
financial condition and discussions with holders of the Company's long-term debt
and subordinated notes, product demand and market acceptance risks, product
development risks, such as delays or difficulties in developing, producing and
marketing new products, the impact of competitive products, pricing and
advertising, constraints resulting from the financial condition of the Company,
including the degree to which the Company is leveraged, debt service
requirements and the ability of the Company to meet its obligations and other
risks described in the Company's Securities and Exchange Commission filings.
<PAGE> 16
Page 14 Form 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
See Exhibit Index on page 16 of this Form 10-Q.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the
quarter ending April 2, 1999. Subsequent to the end of the
quarter, the Registrant filed a Form 8-K on April 30, 1999,
announcing the receipt of the buy-out proposal from APGC Holdings
Company, LLC.
<PAGE> 17
Page 15 Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ARNOLD PALMER GOLF COMPANY
-------------------------------------------
(Registrant)
/s/ Cynthia L. Davis
-------------------------------------------
Cynthia L. Davis
President and Chief Executive Officer
/s/ David J. Kirby
-------------------------------------------
David J. Kirby
Vice President Finance (Chief
Accounting Officer)
Date May 14, 1999
------------------
<PAGE> 18
Page 16 Form 10-Q
Exhibit Index
Exhibit
Number Description
-------- -----------
2.1 Proposal for Acquisition from APGC Holdings Company, LLC,
dated April 29, 1999.
3.1* Amended and Restated Charter of The Arnold Palmer Golf
Company.
3.2** Amended and Restated Bylaws of ProGroup, Inc.
10.1 Letter of Agreement between the Company and The John T. Lupton
Trust dated January 19, 1999.
10.2 Letter of Agreement between the Company and The John T. Lupton
Trust dated March 31, 1999.
27 Financial Data Schedule.
* 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.
<PAGE> 1
EXHIBIT 2.1
APGC HOLDINGS COMPANY, LLC
THE LUPTON COMPANY, LLC
702 TALLAN BUILDING
CHATTANOOGA, TN 37402
April 29, 1999
Board of Directors
The Arnold Palmer Golf Company
6201 Mountain View Road
Ooltewah, Tennessee 37363
Re: Proposal for Acquisition
Dear Board of Directors:
APGC Holdings Company, LLC, ("Holdings") is pleased to submit a proposal to
acquire The Arnold Palmer Golf Company (the "Company") in a cash-out merger
transaction in which the Company will merge with Holdings or a wholly-owned
subsidiary of Holdings (the "Merger"). The President and Chief Executive Officer
of the Company, Ms. Cindy L. Davis, and certain shareholders and directors of
the Company, including Messrs. John T. Lupton and Arnold D. Palmer, have formed
Holdings for the purpose of acquiring the Company. These individuals or their
affiliates have agreed to contribute approximately 41 percent of the issued and
outstanding shares of common stock of the Company to Holdings.
Holdings hereby proposes to pay, upon the consummation of the Merger, $1.20
per share to the holders of the issued and outstanding shares of the Company
which are not then owned by Holdings. All such shares shall be canceled in the
Merger. Upon the consummation of the Merger, the registration of the Company as
a publicly-traded reporting company under the Securities Exchange Act of 1934,
as amended, shall be terminated.
This proposal is subject to the negotiation of a definitive merger
agreement and other documentation of the Merger which are, in form and
substance, satisfactory to Holdings and which include customary representations,
warranties, covenants and conditions. Moreover, this proposal is subject to the
following additional conditions:
<PAGE> 2
1. Holdings shall have made arrangements for the satisfactory
restructuring of the Company's outstanding indebtedness on terms
acceptable to Holdings including the Company's short- and long-term
debt and the Company's outstanding subordinated debentures whether held
by affiliates of Holdings or others.
2. No litigation or other challenge to the proposal shall have been
commenced or threatened whether by the existing shareholders of the
Company or others.
3. The Company shall not have entertained proposals or entered discussions
with any other persons regarding the acquisition of all of the stock or
substantially all of the assets of the Company.
4. The Company shall not have suffered, or expect to suffer, a material
adverse change in its business, operations, properties or financial
condition arising from any cause whatsoever.
5. The Company shall have received no indication that it will be unable to
obtain any necessary consents or approvals from third parties
necessary for the consummation of the Merger including consents from
third-parties that have existing contractual relationships with the
Company or governmental approvals or authorizations for the form or
substance of the transaction.
6. The Merger can be structured in a fashion to obtain the most favorable
tax treatment possible for Holdings and the Company including fully
utilizing the net operating loss carry forwards of the Company to
offset income of the Company to the extent permitted under the Internal
Revenue Code of 1986, as amended.
7. There shall be no indication that the execution of a definition merger
agreement shall be delayed beyond June 30, 1999, or that closing of the
Merger shall be delayed beyond September 30, 1999.
Please note that this proposal is preliminary in nature and may be
withdrawn by Holdings by notice provided to the Company at any time prior to the
execution of a definitive merger agreement notwithstanding the continued
satisfaction of the conditions enumerated above.
Please note as well that this proposal is being made solely to you in
your capacity as representatives of the Company
<PAGE> 3
and is not to be construed as a proposal to purchase on any terms other than as
specifically set forth herein or as a proposal to anyone other than the
Company. This proposal is further to be treated as confidential pending
agreement by the Company and Holdings of an appropriate public announcement.
Very truly yours,
APGC HOLDINGS COMPANY, LLC
/s/ Cindy L. Davis
-------------------------------------
Cindy L. Davis
President and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.1
THE LUPTON COMPANY, LLC
702 TALLAN BUILDING
TWO UNION SQUARE
CHATTANOOGA, TENNESSEE 37402
January 19, 1999
PERSONAL AND CONFIDENTIAL
Ms. Cindy L. Davis
The Arnold Palmer Golf Company
6201 Mountain View Road
Ooltowah, TN 37363
Re: Arnold Palmer Golf Company - Term Loans and
Revolving Credit Loan of Northern Trust Company
Dear Cindy:
The John T. Lupton Trust U/W Thomas Cartter Lupton ("Trust") acquired
the following loans of Northern Trust Company to the Arnold Palmer Golf Company
("APGC") on October 30, 1998.
1. The term loan to APGC (the "Borrower") evidenced by that certain
Term Note dated as of December 30, 1996 of the Borrower payable to the order of
the Bank in the original amount of $12,000,000.
2. The term loan to APGC evidenced by that certain Term Note dated
as of December 29, 1997 of the Borrower payable to the order of the Bank in the
original amount of $10,000,000.
3. The revolving credit loan to APGC evidenced by that certain
$12,000,000 face amount Master Note dated as of December 29, 1997.
The purpose of this letter is to confirm to you that the Trust has
agreed to place the notes representing such loans on a non-accrual basis for
the period from the date of such acquisition through December 31, 1998. As a
result, there will be no obligation on the part of APGC
<PAGE> 2
January 19, 1999
Page 2
to pay interest on such Notes for such period.
Yours very truly,
JOHN T. LUPTON TRUST
U/W THOMAS CARTER
/s/ David S. Gonzenbach
--------------------------------
David S. Gonzenbach Trustee
/s/ John T. Lupton
--------------------------------
John T. Lupton Trustee
/s/ Joel W. Richardson, Jr.
--------------------------------
Joel W. Richardson, Jr., Trustee
<PAGE> 1
Exhibit 10.2
THE LUPTON COMPANY, LLC
702 TALLAN BUILDING
TWO UNION SQUARE
CHATTANOOGA, TENNESSEE 37402
March 31, 1999
PERSONAL AND CONFIDENTIAL
Ms. Cindy L. Davis, President
The Arnold Palmer Golf Company
6201 Mountain View Road
Ooltewah, TN 37363
Re: Arnold Palmer Golf Company - Regarding Term Loans and
Revolving Credit Loan of Northern Trust Company
Dear Cindy:
The Trustees of the John T. Lupton Trust have written to you two letters
concerning the waiver of interest on the loans set and described below by
letters dated January 19, 1999 and March 29, 1999.
1. The term loan to APGC (the "Borrower") evidenced by that certain Term
Note dated as of December 30, 1996 of Borrower payable to the order of the Bank
in the original amount of $12,000,000.
2. The term loan to APGC evidenced by that certain Term Note dated as of
December 29, 1997 of the Borrower payable to the order of the Bank in the
original amount of $10,000,000.
3. The revolving credit loan to APGC evidenced by that certain $12,000,000
face amount Master Note dated as of December 29, 1997.
Although it was not so stated in such letters, this is to request that the
interest so waived be treated as a contribution to the capital of the Arnold
Palmer Golf Company by the John T. Lupton Trust.
Yours very truly,
<PAGE> 2
John T. Lupton Trust
U/W Thomas Cartter Lupton
/s/ David S. Gonzenbach
--------------------------------
David S. Gonzenbach, Trustee
/s/ John T. Lupton
--------------------------------
John T. Lupton, Trustee
/s/ Joel W. Richardson, Jr.
--------------------------------
Joel W. Richardson, Jr., Trustee
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