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 December 31, 1996 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 January 24, 1997, 833,333 shares of Series NB Preferred Stock and
2,962,805 shares of Common Stock were outstanding.
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INDEX
Pages
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Part I. Financial Information
Balance Sheets - December 31, 1996 and
September 30, 1996 1
Statements of Operations - Three Months Ended
December 31, 1996 and December 30, 1995 2
Statements of Cash Flows - Three Months Ended
December 31, 1996 and December 30, 1995 3
Notes to Financial Statements 4 - 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 - 10
Part II. Other Information 11
Signature Page 12
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Page 1 Form 10-Q
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BALANCE SHEETS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1996
($ in thousands)
ASSETS
Dec 31, 1996 Sept 30, 1996
------------ -------------
(Unaudited)
Current assets:
Cash $ 195 $ 47
Trade receivables 6,979 6,350
less: allowance for doubtful accounts (762) (720)
----------- --------
Net receivables 6,217 5,630
Inventories, net 11,765 9,491
Prepaid expenses and other 958 913
----------- --------
Total current assets 19,135 16,081
Property, plant and equipment 4,320 4,195
less: accumulated depreciation (2,778) (2,750)
----------- --------
Net property, plant and equipment 1,542 1,445
Other assets:
Investment in NBHI 5,000 5,000
Property held for sale 271 271
Goodwill 525 532
Other 1,499 1,605
----------- --------
7,295 7,408
----------- --------
TOTAL ASSETS $ 27,972 $ 24,934
=========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Dec 31, 1996 Sept 30, 1996
------------ -------------
(Unaudited)
Current liabilities:
Current maturities of long-term
obligations $ 108 $ 112
Short-term borrowings 3,650 796
Accounts payable 3,483 2,139
Accrued liabilities 1,891 2,288
----------- ---------
Total current liabilities 9,132 5,335
Long-term obligations, net of
current maturities 15,956 15,884
Redeemable preferred stock 5,000 5,000
Stockholders' equity (deficit):
Common stock, $.50 par value,
10,000,000 shares authorized,
2,926,805 shares issued and
outstanding at December 31, 1996
and September 30, 1996 1,463 1,463
Additional paid-in capital 5,991 5,991
Accumulated deficit (9,570) (8,739)
----------- ---------
Total stockholders' equity (deficit) (2,116) (1,285)
----------- ---------
TOTAL LIABILITIES & STOCK-
HOLDERS' EQUITY (DEFICIT) $ 27,972 $ 24,934
=========== =========
The accompanying notes are an integral part of these financial statements.
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Page 2 Form 10-Q
THE ARNOLD PALMER GOLF COMPANY
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 AND DECEMBER 30, 1995
(Unaudited)
($ in thousands except per share amounts)
THREE MONTHS ENDED
Dec 31, 1996 Dec 30, 1995
------------ ------------
Net sales $ 4,928 $ 4,121
Cost of sales 3,664 3,474
---------- ----------
Gross profit 1,264 647
Selling and marketing expenses 1,350 929
General and administrative expenses 850 515
---------- ----------
Loss from operations (936) (797)
Other income:
Royalty and sub-license income, net 483 168
Other, net 55 82
---------- ----------
538 250
Loss before interest and income taxes (398) (547)
Interest expense 433 712
---------- ----------
Loss before income taxes (831) (1,259)
Provision for income taxes - -
---------- ----------
Net loss $ (831) $ (1,259)
========== ==========
Net loss per share $ (0.28) $ (0.48)
========== ==========
The accompanying notes are an integral part of these financial statements.
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Page 3 Form 10-Q
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1996 AND DECEMBER 30, 1995
(Unaudited)
($ in thousands)
Dec. 31, 1996 Dec. 30, 1995
------------- -------------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss $ (831) $ (1,259)
Adjustments to reconcile net income to net cash
used for operating activities -
Depreciation 59 89
Amortization 120 476
(Gain) loss on sale of assets (1) 35
Changes in operating assets and liabilities -
Receivables (587) 35
Inventories (2,274) 12
Prepaid expenses and other (45) (30)
Accounts payable 1,344 296
Accrued liabilities (329) (17)
-------- --------
Net cash used for operating activities (2,544) (363)
-------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property, plant and equipment (146) (52)
Proceeds from sale of property, plant & equipment 2 1,915
Payments received on note receivable - 1,400
-------- --------
Net cash provided by (used for)
investing activities (144) 3,263
-------- --------
Dec. 31, 1996 Dec. 30, 1995
------------- -------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net increase (decrease) in short-term
borrowings from bank 1,754 $ (800)
Advance from shareholder 1,100 -
Principal payments on long-term obligations (18) (1,879)
--------- ---------
Net cash provided by (used) for
financing activities 2,836 (2,679)
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NET CHANGE IN CASH 148 221
CASH, beginning of period 47 7
--------- ---------
CASH, end of period $ 195 $ 228
========= =========
Supplemental disclosures of
cash flow information:
Cash paid during the period for:
Interest $ 322 $ 172
========= =========
Income taxes $ - $ -
========= =========
The accompanying notes are an integral part of these financial statements.
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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 December 31, 1996; and (2) the results of its
operations and its cash flows for the three months ended December 31, 1996 and
December 30, 1995, have been included. The results of operations for the
interim periods are not necessarily indicative of the results for the full
year.
Reference is also made to the Company's annual report on Form 10-K for the
seven month transition period ended September 30, 1996, for a discussion of the
Company's significant accounting policies.
NOTE 2
INCOME TAXES:
The Company has federal tax loss carryforwards of approximately $24.0 million
at September 30, 1996. There was no current income tax provision or benefit
recorded during the three months ending December 31, 1996 due to the losses
sustained by the Company.
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Page 5 Form 10-Q
NOTE 3
SHORT-TERM BORROWINGS:
Short-term borrowings consist of advances under a $12.0 million line of credit
agreement with a bank. There are no financial covenants under the line of
credit, which is unconditionally guaranteed by a significant shareholder and
director of the Company (the "Guarantor").
Advances under the line of credit bear interest at the lesser of prime minus
0.50% or one, two or three month LIBOR plus 2 points. As of December 31, 1996,
total advances outstanding under the line of credit were $3.6 million and bear
interest at the prime rate less 0.50% (7.75% at December 31, 1996).
The Company#s previous $15.0 million bank line of credit was scheduled to
mature in July 1997. In December 1996, the Company and the bank agreed to
convert $12.0 million of the line of credit to term debt due December 1999 and
enter a new line of credit agreement for $12.0 million due December 1997,
providing a total of $24.0 million in financing, which is guaranteed by the
Guarantor. As a result of these new agreements, $12.0 million of the amount
outstanding under the line of credit at September 30, 1996 has been classified
as long-term debt in the accompanying balance sheet. The unsecured term loan
bears interest at the fixed rate of 8.25% with interest payable monthly in
arrears. During the quarter ended December 31, 1996, the Company borrowed $1.1
million from the Guarantor, which amount plus accrued interest was repaid on
January 9, 1997. The Company#s Board of Directors is considering appropriate
compensation to be paid to the Guarantor in consideration of his guarantee of
the new credit facility.
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Page 6 Form 10-Q
NOTE 4
NET INCOME (LOSS) PER COMMON SHARE:
The computation of net income (loss) per common share and common equivalent
share is based on the monthly weighted average number of common shares
outstanding during the period after adding common stock equivalents (stock
options) having a dilutive effect.
THREE MONTHS ENDED
-----------------------------------
DEC 31, 1996 DEC 30, 1995
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Weighted average
number of common
shares outstanding 2,926,805 2,624,991
Effect of assumed
exercise of stock
options (where dilutive) -- --
--------- ---------
Weighted average
common and common
equivalent shares
outstanding 2,926,805 2,624,991
========= =========
NOTE 5
INVENTORIES:
Inventories as of December 31, 1996 and September 30, 1996, were as follows (in
thousands):
Dec. 31, 1996 Sept. 30, 1996
------------------ ---------------
Inventories:
Raw materials $ 5,025 $ 4,344
Work-in-process 215 221
Finished goods 6,525 4,926
------------------ ---------------
$ 11,765 $ 9,491
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Page 7 Form 10-Q
NOTE 6
MATERIAL CONTINGENCIES:
On March 25, 1996, Richard E. Wenz, the former CEO of the Company, filed a
lawsuit against Arthur P. Becker, formerly Chairman of the Board and currently
a Board member, in the United States District Court for the Southern District
of New York. The lawsuit arises out of the publication in the June 12, 1995
edition of Fortune magazine of certain statements relating to Mr. Wenz's
relationship with the Company which were attributed to Mr. Becker.
The complaint alleges a cause of action against Mr. Becker for defamation per
se and seeks compensatory damages of at least $10 million, plus punitive
damages in an unspecified amount. Pursuant to the provisions of the Amended
and Restated By-Laws of the Company and the applicable provisions of the
Tennessee Business Corporation Act, the Company has agreed to indemnify Mr.
Becker from liability which he may incur as a result of the lawsuit. The
Company has also agreed to advance certain costs of defense of the lawsuit to
Mr. Becker.
On May 21, 1996, Mr. Wenz amended his complaint by adding Time, Inc., the
publisher of Fortune magazine, as an additional defendant in the lawsuit. The
cause of action alleged against Time, Inc. is also for defamation per se,
arises out of the same June 12, 1995 article, and also seeks compensatory
damages of at least $10 million.
On April 15, 1996, Mr. Becker filed his answer to the original complaint. The
answer denied all allegations of wrongdoing and set forth 15 affirmative
defenses. On June 11, 1996, Mr. Becker filed his answer to the amended
complaint, repeating his denials of all wrongdoing and repeating the 15
affirmative defenses. On or about June 12, 1996, Time, Inc. filed its answer,
also denying all wrongdoing, and setting forth nine affirmative defenses.
As of this date, only limited discovery has taken place and no trial date has
been set. Accordingly, it is premature to speculate upon the ultimate
resolution or outcome of the lawsuit. Mr. Becker intends to defend the suit
vigorously.
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Page 8 Form 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
As of December 31, 1996, the Company had working capital of $10.0 million and a
current ratio of 2.1 to one. As of September 30, 1996, the Company's working
capital was $10.7 million and its current ratio was 3.0 to one. Major
components of the change in working capital were increases in accounts
receivable and inventories of $0.6 million and $2.3 million, respectively. The
increase in receivables and inventories was funded by a $1.8 million increase
in borrowings under the Company's line of credit, a $1.1 million advance from a
shareholder, and an increase in accounts payable and accrued liabilities of
$0.9 million. The change in working capital components was in line with
management's expectations for the first quarter. Due to sales terms offered by
the Company and the seasonality of the golf industry, receivable collections
are historically slower during the Company's first two quarters, which consist
of the period from October through March. Inventories also increase during the
Company's first and second quarter, as the Company builds inventory levels to
support the spring shipping season, which usually begins in mid February.
Therefore, working capital requirements will be met primarily through increased
borrowings under the Company's line of credit facility through May 1977. Due
to the Company's terms of sale, collections of accounts receivable should
accelerate throughout the third and fourth quarters, while inventory levels
should substantially decline during the same period. It is therefore
anticipated that cash generated during the third and fourth quarters will be
sufficient to meet working capital needs and reduce the amount outstanding on
the Company's line of credit. Capital expenditures during the Company's first
quarter were $0.1 million, and are expected to total approximately $0.6 million
for the fiscal year ending September 30, 1997.
RESULTS OF OPERATIONS
The table below compares net sales by market segment and product line for the
quarters ending December 31, 1996, and December 30, 1995.
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Page 9 Form 10-Q
Sales By Market Segment and Product Line
Quarter Ending December
($000's)
1996 1995 % +/-
------- -------- ---------
Pro
Clubs $ 1,515 $ 251 + 503.6%
Bags 1,451 1,239 + 17.1%
------- -------- --------
Total Pro $ 2,966 $ 1,490 + 99.1%
------- -------- --------
Retail
Clubs $ 1,182 $ 1,611 - 26.6%
Bags 370 796 - 53.5%
------- -------- --------
Total Retail $ 1,552 $ 2,407 - 35.5%
------- -------- --------
Other Bag Sales $ 90 --- ---
Outlet $ 183 $ 224 - 18.3%
Components $ 137 --- ---
------- -------- --------
Total $ 4,928 $ 4,121 + 19.6%
======= ======== ========
Total net sales for the quarter ending December 31, 1996, were $4.9 million
compared to $4.1 million for the comparable 1995 period, or a 19.6% increase.
Excluding component sales of $137,000 and other bag sales of $90,000 in the
Company's current quarter, for which there were no comparable sales in 1995,
the Company's sales increased 14.1%. Component sales were generated by the
Company's golf club component division, National Golf Suppliers, which the
Company acquired in June 1996. Other bag sales were comprised of sales to
collegiate accounts and bags manufactured for other golf companies.
The Company's focus on shifting its product mix to the more profitable pro line
business continues to yield benefits as reflected in the Company's first
quarter performance. Pro sales as a percentage of total net sales were 60.2%
for the quarter ending December 1996, compared to 36.2% for the same quarter in
1995. The decline in sales to mass merchandisers (retail sales) resulted from
the continued sluggish sales and inventory reduction programs in this market
segment.
The Company realized gross profit of $1.3 million or 25.6% of net sales for the
quarter ending December 31, 1996, compared to $0.6 million or 15.7% of net
sales for the quarter ending December 30, 1995. The increase was due to the
Company's increased sales percentage in the
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Page 10 Form 10-Q
higher margin pro segment and improvements in both manufacturing facilities,
resulting in a reduction of other cost of sales. Other cost of sales, which
includes manufacturing variances, inventory adjustments and purchase price
variances, was 3.0% of total net sales for the quarter ending December 1996,
compared to 7.8% for the quarter ending December 1995.
Selling and marketing expenses increased $0.4 million for the quarter ending
December 1996 over the comparable 1995 period. Sales commissions accounted for
approximately $0.1 million of the increase, due to higher commission rates on
pro sales. Pro commission rates average 8.5% of net pro sales compared to an
average commission rate of 3.5% on net retail sales. The remainder of the
increase was in marketing expenses, as the Company continues to invest in
advertising and promotional programs in order to generate the desired growth in
its pro line business.
General and administrative expenses increased $0.3 million during the quarter
ending December 1996 compared to the same period in 1995. Approximately $0.1
million of the increase was in salaries and related expenses resulting from
positions being filled in executive management positions that were vacant in
1995. Other components of the increase in administrative expenses were in
legal expenses relative to litigation with the Company's former CEO, and rent
expense for the Company's corporate offices. The Company owned its corporate
office facility until the end of December 1995, at which time the facility was
sold in order to retire long term debt and reduce interest expense. The
Company entered into a lease agreement with the new owners to lease back only a
portion of the facility for its corporate offices, thus improving cash flow.
Other income increased $288,000 for the quarter ending December 1996 over the
same quarter in 1995. Substantially all of the increase was due to royalty
income related to the Company's licensing agreement with Cobra Golf, which
gives Cobra certain rights to the Company's Patented Hosel Design (PHD)
technology.
Interest expense decreased approximately $0.3 million in the quarter ending
December 1996, compared to total interest expense for the quarter ending
December 1995. Cash interest expense in the current quarter was approximately
$0.1 million greater than in the quarter ending December 1995, due primarily to
higher borrowings. Non-cash interest expense however, was approximately $0.4
million less in the current quarter due to a decrease relating to amortization
of the Company's subordinated debt discount and subordinated notes.
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Page 11 Form 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
See Exhibit Index on page 13 of this Form 10-Q.
(b) Reports on Form 8-K -
The Registrant did not file any reports on Form 8-K
during the quarter ending December 31, 1996.
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Page 12 Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ARNOLD PALMER GOLF COMPANY
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(Registrant)
/s/ George H. Nichols
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George H. Nichols
President and Chief Operating Officer
/s/ David J. Kirby
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David J. Kirby
Vice President Finance (Chief Accounting Officer)
Date January 31, 1997
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Page 13 Form 10-Q
Exhibit Index
Exhibit
Number Description
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3.1* Amended and Restated Charter of The Arnold Palmer
Golf Company.
3.2** Amended and Restated Bylaws of ProGroup, Inc.
27 Financial Data Schedule. (for SEC use only)
* 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.