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 June 30, 1997 Commission File Number 0-921
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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 July 26, 1997, 833,333 shares of Series NB Preferred Stock and 3,004,367
shares of Common Stock were outstanding.
2
INDEX
Pages
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Part I. Financial Information
Balance Sheets - June 30, 1997 and
September 30, 1996 1
Statements of Operations - Three and Nine Months
Ended June 30, 1997 and July 6, 1996 2
Statements of Cash Flows - Nine Months Ended
June 30, 1997 and July 6, 1996 3
Notes to Financial Statements 4 - 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 -11
Part II. Other Information 12
Signature Page 13
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Page 1 Form 10-Q
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BALANCE SHEETS
JUNE 30, 1997 AND SEPTEMBER 30, 1996
($ in thousands)
ASSETS
June 30, 1997 Sept 30, 1996
------------- -------------
(Unaudited)
Current assets:
Cash $ 263 $ 47
Trade receivables 11,291 6,350
less: allowance for doubtful accounts (618) (720)
----------- -----------
Net receivables 10,673 5,630
Inventories, net 11,238 9,491
Prepaid expenses and other 655 913
----------- -----------
Total current assets 22,829 16,081
Property, plant and equipment 5,130 4,195
less: accumulated depreciation (2,951) (2,750)
----------- -----------
Net property, plant and equipment 2,179 1,445
Other assets:
Investment in NBHI 5,000 5,000
Property held for sale 271 271
Goodwill 510 532
Other 1,208 1,605
----------- -----------
6,989 7,408
----------- -----------
TOTAL ASSETS $ 31,997 $ 24,934
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
June 30, 1997 Sept 30, 1996
------------- -------------
(Unaudited)
Current liabilities:
Current maturities of long-term
obligations $ 101 $ 112
Short-term borrowings 10,150 796
Accounts payable 3,281 2,139
Accrued liabilities 1,264 2,288
----------- -----------
Total current liabilities 14,796 5,335
Long-term obligations, net of
current maturities 16,091 15,884
Redeemable preferred stock 5,000 5,000
Stockholders' equity (deficit):
Common stock, $.50 par value,
10,000,000 shares authorized,
3,004,367 and 2,926,805 shares
issued and outstanding at June 30, 1997
and September 30, 1996, respectively 1,502 1,463
Additional paid-in capital 6,313 5,991
Accumulated deficit (11,705) (8,739
----------- -----------
Total stockholders' equity (deficit) (3,890) (1,285)
----------- -----------
TOTAL LIABILITIES & STOCK-
HOLDERS' EQUITY $ 31,997 $ 24,934
=========== ===========
The accompanying notes are an integral part of these financial statements.
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Page 2 Form 10-Q
STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED JUNE 30, 1997 AND JULY 6, 1996
(Unaudited)
($ in thousands except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
June 30, 1997 July 6, 1996 June 30, 1997 July 6, 1996
--------------- ------------- -------------- --------------
Net sales $ 11,172 $ 9,531 $ 24,019 $ 20,157
Cost of sales 8,413 6,590 18,063 16,430
------------ ------------ ----------- -------------
Gross profit 2,759 2,941 5,956 3,727
Selling and marketing expenses 2,054 1,892 5,378 4,340
General and administrative expenses 1,393 919 3,332 2,556
------------ ------------ ----------- -------------
Income (Loss) from operations (688) 130 (2,754) (3,169)
Other income (expense):
Royalty and sub-license income, net 426 434 1,310 1,202
Other, net 11 70 66 294
------------ ------------ ----------- -------------
437 504 1,376 1,496
Income (Loss) before interest and income taxes (251) 634 (1,378) (1,673)
Interest expense 614 527 1,588 2,032
------------ ------------ ----------- -------------
Income (Loss) before income taxes (865) 107 (2,966) (3,705)
Provision for income taxes - - - -
------------ ------------ ----------- -------------
Net income (loss) $ (865) $ 107 $ (2,966) $ (3,705)
============ ============ =========== =============
Net income (loss) per share $ (0.29) $ 0.04 $ (1.00) $ (1.37)
============ ============ =========== =============
The accompanying notes are an integral part of these financial statements.
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Page 3 Form 10-Q
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1997 AND JULY 6, 1996
(Unaudited)
($ in thousands)
June 30, 1997 July 6, 1996
------------- ------------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss $ (2,966) $ (3,705)
Adjustments to reconcile net loss to net cash
used for operating activities -
Depreciation 281 132
Amortization 267 1,260
Gain on sale of assets (1) (74)
Changes in operating assets and liabilities -
Receivables (5,043) (4,402)
Inventories (1,747) 1,088
Prepaid expenses and other 258 (620)
Accounts payable 1,142 876
Accrued liabilities (575) 559
---------- ----------
Net cash used for operating activities (8,384) (4,886)
---------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property, plant and equipment (709) (104)
Proceeds from sale of property, plant & equipment 3 2,209
Payments received on note receivable - 1,600
---------- ----------
Net cash provided by (used for)
investing activities (706) 3,705
---------- ----------
June 30, 1997 July 6, 1996
------------- ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net increase in short-term borrowings
from bank $ 9,354 $ 3,100
Principal payments on long-term obligations (48) (1,908)
---------- ----------
Net cash provided by financing
activities 9,306 1,192
---------- ----------
NET CHANGE IN CASH 216 11
CASH, beginning of period 47 7
---------- ----------
CASH, end of period $ 263 $ 18
========== ==========
Supplemental disclosures of
cash flow information:
Cash paid during the period for:
Interest $ 1,163 $ 745
========== ==========
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 June 30, 1997; (2) the results of its
operations and its cash flows for the nine months ended June 30, 1997 and July
6, 1996; and (3) the results of its operations for the three months ended June
30, 1997 and July 6, 1996, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the full
year.
Reference is also made to the Company's annual report on Form 10-K for the
seven month transition period ended September 30, 1996, for a discussion of the
Company's significant accounting policies.
NOTE 2
INCOME TAXES:
The Company had 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 nine months ending June 30, 1997 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 the prime
rate minus 0.50% or one, two or three month LIBOR plus 2 points. As of June
30, 1997, total advances outstanding under the line of credit were $10.2
million and bear interest at the prime rate less 0.50% (8.00% at June 30,
1997).
NOTE 4
NET LOSS PER COMMON SHARE:
The computation of net loss per common share and common equivalent share is
based on the monthly weighted average number of common shares outstanding
during the period after adding common stock equivalents (stock options) having
a dilutive effect.
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ --------------------------------
JUNE 30, 1997 JULY 6, 1996 JUNE 30, 1997 JULY 6, 1996
------------- ------------- ------------- -------------
Weighted average
number of common
shares outstanding 3,004,367 2,865,267 2,969,247 2,705,581
Effect of assumed
exercise of stock
options (where dilutive) -- -- -- --
----------- ---------- ----------- -----------
Weighted average
common and common
equivalent shares
outstanding 3,004,367 2,865,267 2,969,247 2,705,581
=========== ========== =========== ===========
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Page 6 Form 10-Q
NOTE 5
INVENTORIES:
Inventories as of June 30, 1997 and September 30, 1996 were as follows (in
thousands):
June 30, 1997 Sept. 30, 1996
------------- --------------
Inventories:
Raw materials $ 5,157 $ 4,344
Work-in-process 215 221
Finished goods 5,866 4,926
----------- --------------
$ 11,238 $ 9,491
=========== ==============
NOTE 6
MATERIAL CONTINGENCIES:
On March 25, 1996, Richard E. Wenz, the former CEO of the Company, filed a
lawsuit against Arthur P. Becker, formerly Chairman of the Board, in the United
States District Court for the Southern District of New York. The lawsuit arose
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 alleged a cause of action against Mr. Becker for defamation per
se and sought 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 agreed to indemnify Mr. Becker
from liability which he might incur as a result of the lawsuit. The Company
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.
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Page 7 Form 10-Q
Subsequent to the third quarter ending June 30, 1997, the lawsuit filed by Mr.
Wenz was settled and the complaint dismissed in exchange for a payment by the
Company to Mr. Wenz of $75,000.
NOTE 7
RECENT ACCOUNTING PRONOUNCEMENTS:
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128
changes the criteria for reporting earnings per share ("EPS") by replacing
primary EPS with basic EPS and fully diluted EPS with diluted EPS. Due to the
losses sustained by the Company (which make common stock equivalents
anti-dilutive), SFAS 128 will not have any impact on current year or
retroactive EPS calculations.
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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 June 30, 1997, the Company had working capital of $8.0 million and a
current ratio of 1.5 to one. This compares to working capital of $10.7 million
and a current ratio of 3.0 to one as of September 30, 1996. As of June 30,
1997, current borrowings under the Company's line of credit had increased $9.4
million from the period ending September 30, 1996. The increase in borrowings
was used to fund an increase in trade receivables of $5.0 million and an
increase in inventory of $1.7 million. Borrowings were also used to fund the
Company's nine month operating loss of $3.0 million as of June 30, 1997. Due to
the seasonality of the golf industry, sales are strongest during the Company's
third quarter, April through June. Therefore, the increase in trade receivables
during the third quarter was within management's expectations. Net property,
plant and equipment increased approximately $700,000 for the nine month period
ending June 30, 1997. Capital expenditures are expected to be approximately
$900,000 for the fiscal year ending September 30, 1997.
RESULTS OF OPERATIONS
The tables below compares net sales by product line and market segment for the
Company's third quarter and nine months ending June 30, 1997, to comparable
prior year periods.
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Page 9 Form 10-Q
Sales By Product Line
($'s in thousands)
3rd Quarter Year to Date
-----------------------------------------------------------
1997 1996 % Change 1997 1996 % Change
-----------------------------------------------------------
Clubs 5,841 5,742 1.7 12,134 11,343 7.0
Bags 3,737 3,654 2.3 9,088 8,427 7.8
Outlet 361 135 167.4 673 387 73.9
Components 1,078 -- -- 1,784 -- --
Apparel 113 -- -- 127 -- --
Gloves/Balls 42 -- -- 213 -- --
-----------------------------------------------------------
Total 11,172 9,531 17.2 24,019 20,157 19.2
-----------------------------------------------------------
Sales By Market Segment
($'s in thousands)
3rd Quarter Year to Date
-----------------------------------------------------------
1997 1996 % Change 1997 1996 % Change
-----------------------------------------------------------
Pro 5,732 5,357 7.0 12,290 9,655 27.3
Retail 3,649 4,001 (8.8) 8,211 10,077 (18.5)
Contract 244 -- -- 716 -- --
Outlet 361 135 167.4 673 387 73.9
Components 1,078 -- -- 1,784 -- --
Export 103 38 171.1 307 38 707.9
Other 5 -- -- 38 -- --
-----------------------------------------------------------
Total 11,172 9,531 17.2 24,019 20,157 19.2
-----------------------------------------------------------
Sales by Product Line
Total net sales for the third quarter ending June 30, 1997 increased $1.6
million to $11.2 million, a 17.2% increase over third quarter 1996 sales of
$9.5 million. Net sales for the nine month period ending June 30, 1997 were
$3.9 million above the prior year nine month period, an increase of 19.2%.
Sales of the Company's core product line, clubs and bags, increased $1.5
million during the current year's nine month period, a 7.3% increase over the
prior year nine month period. Sales for the Company's component division,
National Golf Suppliers, were $1.1 million and $1.8 million for the third
quarter and nine months ending June 30, 1997, respectively. The component
division was acquired as of June 30, 1996, therefore prior year sales are not
included in the Company's results of operations. Export sales represent sales
of golf bags, finished clubs and club components to the Company's foreign
sub-licensees in Canada, Europe, Australia and the Far East.
Sales by Market Segment
Sales growth continued strong in the Company's pro line products for the third
quarter and nine month period ending June 30, 1997, compared to the same prior
year periods. Pro line product sales increased $2.6 million during the nine
month period to $12.3 million, a 27.3% increase over the comparable prior year
period and represented 59.9% of combined pro and retail sales,
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Page 10 Form 10-Q
compared to 48.9% during the comparable prior year nine month period. The most
significant growth in pro line merchandise sales for the nine month period
ending June 30, 1997 was in golf club sales which increased by 36.0% over the
prior year nine month period, to $6.5 million. Growth in the pro line business
is consistent with the Company's strategy to shift it's product mix to the more
profitable pro market, which includes on-course pro shops and off-course golf
equipment retailers.
Sales to mass merchandisers (retail) declined $362,000 and $1.9 million during
the Company's third quarter and nine months ending June 30, 1997 from the
respective prior year periods. The decline in this market segment was due to
overstocked inventories at retailers going into the golf season, resulting in
fewer orders for initial shipments than in the prior year. Contract sales of
$716,000 consist of bags manufactured for other golf companies.
The Company's gross profit as a percentage of net sales for the third quarter
and nine month period ending June 30, 1997, was 24.7% and 24.8%, respectively.
Gross profit for the comparable prior year periods was 30.9% and 18.5%,
respectively. Gross profits during the third quarter and nine months ending
June 30, 1997 were diluted by sales of closeout and discontinued merchandise,
particularly in the Company's golf bag division. Closeout sales during the
current year nine month period were approximately $1.3 million. The Company's
objective is to dispose of closeout merchandise in season, thereby avoiding
further margin erosion due to inventory write-downs during off season periods.
Selling and marketing expenses increased $162,000 or 8.6% for the third quarter
ending June 30, 1997 over the prior year third quarter, and was $1.0 million or
23.9% greater in the current year nine month period compared to prior year.
Advertising and promotional expenses for the nine month period ending June 30,
1997 accounted for approximately $500,000 of the increase. Commission expenses
were $200,000 greater in the nine month period due to the growth in pro line
business. Selling and operating expenses for the Company's retail outlet stores
accounted for $150,000 of the increase, most of which related to the Company's
outlet store in Branson, Missouri which opened in July 1996.
General and administrative expenses increased $776,000 during the nine months
ending June 30, 1997 from the comparable nine month period in the prior year,
most of which occurred during the Company's third quarter. General and
administrative expenses for the Company's component division were $270,000 for
the nine month period, for which there were no comparable expenses in the prior
year, as the Company acquired it's component division in June 1996. Legal
expenses relating primarily to the litigation between the Company's former CEO
and the Company, were $383,000 for the nine month period, an increase of
$170,000 over the nine month period in the prior year. Other increases in
general and administrative expenses related to the ongoing implementation of a
fully integrated management information software system and personnel expenses
for key management positions vacant during the prior year nine month period.
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Page 11 Form 10-Q
Total other income decreased $120,000 during the nine month period ending June
30, 1997 from the prior year nine month reporting period. Royalty income from
the Company's sub-licensees increased $108,000 during the current year nine
month period, offset by a decrease in other income items of $228,000. Prior
year other income included a gain on the sale of the Company's East Pocahontas,
Arkansas facility.
Interest expense for the nine month period ending June 30,1997 decreased 21.9%,
or $444,000 from the comparable prior year nine month period. Cash interest
expense during the current year nine month period increased $418,000 above the
same prior year nine month period, while non-cash interest decreased by
$862,000. The decrease in non-cash interest was due to amortization of the
Company's subordinated notes during the prior year nine month period ending
July 6, 1996, not recurring during the current year as those notes were
converted into common stock.
The Company's net loss for third quarter ending June 30, 1997 was $865,000,
compared to net income of $107,000 in the comparable prior year period. Losses
for the nine month period were reduced by $739,000 from the prior year's nine
month loss of $3.7 million, a 19.9% improvement. The most significant factors
contributing to third quarter losses were low margins on closeout and
discontinued merchandise and the increase in general and administrative
expenses from the prior year three month period.
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Page 12 Form 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On March 25, 1996, Richard E. Wenz, the former CEO of the Company, filed a
lawsuit against Arthur P. Becker, formerly Chairman of the Board, in the United
States District Court for the Southern District of New York. The lawsuit arose
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 alleged a cause of action against Mr. Becker for defamation per
se and sought 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 agreed to indemnify Mr. Becker
from liability which he might incur as a result of the lawsuit. The Company
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 sought 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.
Subsequent to the third quarter ending June 30, 1997, the lawsuit filed by Mr.
Wenz was settled and the complaint dismissed in exchange for a payment by the
Company to Mr. Wenz of $75,000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
See Exhibit Index on page 14 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 June 30, 1997.
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Page 13 Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ARNOLD PALMER GOLF COMPANY
----------------------------------------------
(Registrant)
/s/ Roger M. Helms
-----------------------------------------------
Roger M. Helms
President and Chief Operating Officer
/s/ David J. Kirby
------------------------------------------------
David J. Kirby
Vice President Finance (Chief Financial Officer)
Date August 12, 1997
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Page 14 Form 10-Q
Exhibit Index
Exhibit
Number Description
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.