<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 August 26, 1995 Commission File Number 0-921
------------------------ ------------
PROGROUP, INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-0331019
- - --------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
6201 Mountain View Road, Ooltewah, Tennessee 37363
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number 423-238-5890
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes x . No .
------------ ----------
As of October 6, 1995, the number of shares outstanding of the issuer's common
stock was 2,624,991.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Pages
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<S> <C> <C>
Part I. Financial Information
Balance Sheets - August 26, 1995 and
February 25, 1995 1
Statements of Operations - Three Months and Six Months
Ended August 26, 1995 and August 27, 1994 2
Statements of Cash Flows - Six Months
Ended August 26, 1995 and August 27, 1994 3
Notes to Financial Statements 4 - 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 - 9
Part II. Other Information 10
Signature Page 11
</TABLE>
<PAGE> 3
Page 1 Form 10Q
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BALANCE SHEETS
AUGUST 26, 1995 AND FEBRUARY 25, 1995
($ in thousands)
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY
Aug 26, 1995 Feb. 25, 1995 Aug 26, 1995 Feb. 25, 1995
------------ ------------- ------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Current assets: Current liabilities:
Cash $ 9 $ 34 Current maturities of long-term
obligations $ 266 $ 407
Trade receivables 5,043 8,233 Short-term borrowings from bank 9,283 11,829
less: allowance for
doubtful accounts (601) (1,049) Accounts payable 1,326 4,120
-------- -------
Net receivables 4,442 7,184 Accrued liabilities 2,457 3,629
------- -------
Inventories, net 9,890 15,101 Total current liabilities 13,332 19,985
Current portion of note
receivable 1,600 -
Prepaid expenses and other 612 478 Long-term obligations, net of
-------- ------- current maturities 6,150 7,066
Total current assets 16,553 22,797
Stockholders' equity:
Property, plant and equipment 9,009 9,003 Common stock, $.50 par value,
less: accumulated
depreciation (5,373) (5,225) 10,000,000 shares authorized,
-------- -------
Net property, plant 3,636 3,778 2,624,991 and 2,539,366 shares
and equipment issued and outstanding at August
26, 1995 and February 25, 1995,
Other assets: respectively 1,310 1,270
Non-current assets of discontinued Additional paid-in capital 4,583 4,118
operations 314 2,423 Retained deficit (1,847) (1,168)
Goodwill 85 85 ------- -------
Long-term note receivable 1,126 - Total stockholders' equity 4,046 4,220
Other 1,814 2,188 ------- -------
-------- -------
3,339 4,696 TOTAL LIABILITIES & STOCK-
-------- ------- HOLDERS' EQUITY $23,528 $31,271
TOTAL ASSETS $ 23,528 $31,271 ======= =======
======== =======
</TABLE>
(The accompanying notes are an integral part of these financial statements.)
<PAGE> 4
Page 2 Form 10Q
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED AUGUST 26, 1995 AND AUGUST 27, 1994
(Unaudited)
($ in thousands except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ----------------------------
Aug 26, 1995 Aug 27, 1994 Aug 26, 1995 Aug 27, 1994
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 4,837 $ 6,218 $ 13,089 $ 14,981
Cost of sales 3,909 5,400 9,632 11,816
------------ ------------ ----------- ----------
Gross profit 928 818 3,457 3,165
Selling and marketing expenses 1,083 1,833 2,399 4,176
General and administrative expenses 523 669 1,042 1,200
------------ ------------ ----------- ----------
Income (loss) from operations (678) (1,684) 16 (2,211)
Other income, net 416 67 563 218
------------ ------------ ----------- ----------
Income (loss) before interest
and income taxes (262) (1,617) 579 (1,993)
Interest expense 723 300 1,606 513
------------ ------------ ----------- ----------
Loss from continuing operations before
income taxes (985) (1,917) (1,027) (2,506)
Provision (benefit) for income taxes - 569 - 357
------------ ------------ ----------- ----------
Loss from continuing operations (985) (2,486) (1,027) (2,863)
Discontinued operations - (2,682) 348 (3,031)
------------ ------------ ----------- ----------
Net income (loss) $ (985) $ (5,168) $ (679) $ (5,894)
============ ============ =========== ==========
Net income (loss) per share from:
Continuing operations $ (0.38) $ (0.98) $ (0.39) $ (1.13)
Discontinued operations - (1.06) 0.13 (1.19)
------------ ------------ ----------- ----------
$ (0.38) $ (2.04) $ (0.26) $ (2.32)
============ ============ =========== ==========
</TABLE>
(The accompanying notes are an integral part of these financial statements.)
<PAGE> 5
Page 3 Form 10Q
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED AUGUST 26, 1995 AND AUGUST 27, 1994
(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Aug 26, 1995 Aug 27, 1994 Aug 26, 1995 Aug 27, 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM CASH FLOWS FROM
OPERATING ACTIVITIES: FINANCING ACTIVITIES:
Net loss $ (679) $ (5,894) Net increase (decrease) in
Adjustments to reconcile net loss short-term borrowings from bank $ (2,546) $ 1,054
to net cash provided by (used for)
operating activities - Principal payments on
long-term obligations (617) (212)
--------- -------
Depreciation and amortization 482 394
Deferred income tax - 735
Writedown of property, plant and equipment - 107 Net cash provided by (used for)
financing activities (3,163) 842
Changes in current assets and liabilities - --------- -------
Receivables and deferred
income taxes 2,742 831 NET CHANGE IN CASH (25) 21
Inventories 870 2,994
Prepaid expenses and other 112 593
Accounts payable (2,794) (88)
Accrued liabilities (972) (417) CASH, beginning of period 34 50
(Gain) Loss on sale of asset (30) - --------- -------
-------- ---------
Net cash used for CASH, end of period $ 9 $ 71
operating activities (269) (745) ========= =======
-------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Supplemental disclosures of
Additions to property, plant and equipment (89) (45) cash flow information:
Proceeds from sale of property, plant and
equipment 1,761 -
Payment received on note receivable 1,400 - Cash paid (received) during the
Other 335 (31) period for:
-------- --------- Interest $ 645 $ 483
Net cash provided by (used for) ========= =======
investing activities 3,407 (76) Income taxes $ - $ (328)
-------- --------- ========= =======
</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
ProGroup, Inc. as of August 26, 1995; (2) the results of its operations and its
cash flows for the six months ended August 26, 1995 and August 27, 1994; and
(3) the results of its operations for the three months ended August 26, 1995,
and August 27, 1994, 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
fiscal year ended February 25, 1995, for a discussion of the Company's
significant accounting policies. Certain prior period amounts have been
reclassified to conform with the August 26, 1995 financial statement
presentation.
NOTE 2
INCOME TAXES:
As of the beginning of fiscal 1994, the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109), which
requires a change from the deferred method to the liability method of
accounting for income taxes. Under the new method, deferred income tax assets
and liabilities arise from differences between the tax basis of an asset or
liability and its reported amount in the financial statements. Deferred tax
balances are calculated by applying the provisions of enacted tax law to
determine the amount of taxes payable or refundable currently or in future
years. There was no cumulative effect on prior years of this change in
accounting principle. Prior periods' financial statements were not restated
to apply the provisions of SFAS 109.
During the six months ended August 26, 1995, the Company did not record an
income tax provision as the Company has net operating loss carryforwards, and
the realization of the benefits related thereto is uncertain.
<PAGE> 7
Page 5 Form 10-Q
NOTE 3
SHORT-TERM BORROWINGS:
Short-term borrowings consist of advances under a line of credit with a bank.
At the end of the first two quarters of fiscal 1995, the Company was in
violation of substantially all the financial covenants under the line of credit
agreement. In October 1994, the Company executed a loan modification agreement
with the bank, whereby the maturity date of the line of credit was accelerated
to January 31, 1995 and interest rates were increased substantially.
In connection with a guarantee of the line of credit in January 1995, by a
significant shareholder and director (the "Guarantor"), the line of credit was
amended to extend the maturity date to August 30, 1996 and establish the terms
discussed below.
As consideration to the Guarantor for the guarantee, the Company issued an
$850,000 convertible note and a warrant to purchase up to 390,000 common shares
of the Company (Note 4). Additionally, the Guarantor was given preemptive
rights through January 27, 2000 with respect to future issuance by the Company
sufficient to enable the Guarantor to maintain his fully diluted common stock
ownership percentage.
The short-term borrowing arrangement with the bank permits borrowings of the
lesser of $16 million or the borrowing base, as defined in the agreement. The
borrowing base is generally equal to the sum of 70% of eligible accounts
receivable, 35% of eligible finished goods, 25% of eligible raw materials, 70%
of the note receivable from the sale of the Duckster division, and $2 million.
Advances under this line of credit bear interest at the bank's base rate less
.50% (8.25% at August 26, 1995). At August 26, 1995, $9.3 million was
outstanding under this line of credit and $226,250 was reserved for outstanding
letters of credit. The remaining amount available under this line was $2.8
million.
The Company may also borrow from the bank, subject to consent from the
Guarantor, an additional $3 million over the borrowing base (total borrowings
from the bank not to exceed $16 million) which bears interest at the bank's
base rate less .25% (8.5% at August 26, 1995). The unused amount available
under the overline advance account, subject to consent from the Guarantor, was
$3 million. Short-term borrowings and the term loan with the bank (Note 4) are
secured by accounts receivable, inventories, machinery and equipment, and
certain real property.
In March 1995, the Company entered into an additional $4 million line of credit
agreement with a bank which is guaranteed by the Guarantor. The line of credit
bears interest at the prime rate and matures on March 15, 1996. As of August
26, 1995, there were no amounts outstanding under this line of credit.
<PAGE> 8
Page 6 Form 10-Q
NOTE 4
LONG-TERM OBLIGATIONS:
During November 1993, the Company established a $3 million fixed rate term
loan. This loan is payable in monthly installments of $45,000 (including
interest at 9.5%) through October, 2000. The balance outstanding under the
term loan at August 26, 1995 was $1.9 million (after applying $541,000 of
proceeds from the sale of the Duckster division against principal). In November
1994, the Company completed a private placement of $5 million in subordinated
notes. The holders of the subordinated notes (which include certain officers
and directors 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.
The $850,000 subordinated note (Note 3) is convertible to common stock at the
Guarantor's option. The note, plus accrued interest, may be converted during
the life of the note at a conversion price of $6.25.
NOTE 5
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ -----------------
August 26, 1995 August 27, 1994 August 26, 1995 August 27, 1994
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Weighted average
number of common
shares outstanding 2,624,991 2,536,866 2,603,963 2,536,866
Effect of assumed
exercise of stock
options (where dilutive) -- -- -- --
----------- ---------- ----------- ---------
Weighted average
common and common
equivalent shares outstanding 2,624,991 2,536,866 2,603,963 2,536,866
=========== ========== =========== =========
</TABLE>
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Page 7
Form 10-Q
NOTE 6
INVENTORIES:
Inventories as of August 26, 1995 and February 25, 1995, were as follows:
<TABLE>
<CAPTION>
August 26, 1995 Feb. 25, 1995
--------------- ---------------
<S> <C> <C>
Inventories:
Raw materials $ 5,054 $ 4,521
Work-in-process 619 1,474
Finished goods 4,217 9,106
-------------- ---------------
$ 9,890 $ 15,101
============== ===============
</TABLE>
NOTE 7
STOCKHOLDERS' EQUITY:
In July, 1994, the Company approved an increase in its total number of
authorized shares of common stock from 4,000,000 to 10,000,000. During its
July 18, 1995 Shareholders meeting, the Company approved an amendment to its
charter in order to authorize one million shares of preferred stock. Through
August 26, 1995, no preferred stock had been issued.
NOTE 8
SUBORDINATED NOTES AND COMMON STOCK WARRANTS:
On November 3, 1994, the Company completed a private placement of $5,000,000
aggregate principal amount of 6% subordinated notes (the "Notes") due 1999, and
warrants to purchase up to 1,000,000 shares of common stock of the Company at a
price of $5.50 per share (the "Warrants"). The Notes were recorded net of the
aggregate discount of $1,662,000 which gives effect to the original issue
discount attributed to the Notes and the assigned value of the Warrants. The
Notes and Warrants were issued to certain members of the Board of Directors, an
officer of the Company, and certain shareholders of the Company. The
securities are restricted.
The Notes have a stated interest rate of 6% and all principal and accrued
interest is due November 3, 1999. Interest through December 31, 1995 can be
deferred at the option of the Company provided the deferred amount is repaid
ratably during the 1996 calendar year. Beginning on December 31, 1994,
interest is payable quarterly, and interest will be payable monthly beginning
January 1, 1996. The Notes are subordinated to all senior indebtedness and are
included in long-term obligations in the accompanying balance sheet at August
26, 1995.
The Warrants are exercisable for five years and vest 70% upon funding of the
Notes, 90% after one year, and 100% after two years. The value assigned to the
Warrants was $1,662,000, or $1.662 per share. The holders of the Warrants will
have one demand registration right for the purpose of registering the stock
underlying the Warrants for resale pursuant to the Securities Act of 1933. The
value assigned to the Warrants was credited to additional paid-in capital.
<PAGE> 10
Page 8 Form 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
As of August 26, 1995, the Company had working capital of approximately $3.2
million and a current ratio of 1.2 to 1. The Company generally relies upon
internally generated cash and short-term borrowings to satisfy working capital
requirements and normal capital expenditure needs. The Company maintains a $16
million revolving credit facility which is utilized as needed. Outstanding
borrowings under the revolving credit facility as of August 26, 1995 were $9.3
million. Advances under this line bear interest at a variable rate based on
the prime rate less .50% (8.25% at August 26, 1995). The line of credit
matures on August 30, 1996.
At the end of the first two quarters of fiscal 1995, the Company was in
violation of certain of the loan covenants related to its short-term line of
credit and term loan with a bank. In October, 1994, the Company executed a
loan modification agreement with the bank, whereby the Company was no longer in
violation of any of the covenants, and the maturity date of the line of credit
was accelerated to January 31, 1995. Additionally, the October loan
modification agreement increased interest rates substantially and the Company
agreed to assign certain intellectual property to the bank if the Company could
not secure additional capital investment. The Company was able to secure
additional capital through a November 3, 1994 private placement of $5.0 million
in subordinated notes with detachable stock purchase warrants. In the fourth
quarter of fiscal 1995, the Company renegotiated the loan agreement with the
bank, resulting in an extension of the loan's maturity date to August 30, 1996.
The Company's obligations to the bank under the line of credit have been
guaranteed by the Company's Chairman and Chief Executive Officer (the
Guarantor). The Company obtained an additional $4.0 million revolving credit
facility, which expires on March 15, 1996, and which is also guaranteed by the
Guarantor.
During the first six months of fiscal 1996, cash was provided primarily by the
proceeds from the collection of dated receivables, the proceeds from the sale
of Duckster fixed assets and inventories, and the reduction in inventories.
Cash was used primarily to reduce accounts payable and short-term borrowings.
RESULTS OF OPERATIONS
Net sales for the second quarter of fiscal 1996 decreased $1.4 million, or
22.2% compared with the second quarter of fiscal year 1995. Overall, club
sales decreased $0.4 million, or 16%, during the second quarter of fiscal 1996,
and bag sales decreased $1.0 million, or 28%. The golf club sales decrease was
primarily in low-end retail sales. Pro bag sales were very soft during the
second quarter and the primary cause of the comparative decreased bag sales
from second quarters of 1995 to 1996.
In spite of the sales declines, Gross Profit for the second quarter of fiscal
1996 actually increased $110,000, or 13.4%, over the second quarter of fiscal
1995. The improvement in margin for the period is due primarily to i) a
reduction in inventory reserve provisions, and, ii) an improved sales level of
higher margin pro club sales.
<PAGE> 11
Page 9 Form 10-Q
Selling and marketing expenses decreased $.8 million, or 41%, for the second
quarter of fiscal 1996 compared with the same period last year. Decreased
advertising and promotional expenses accounted for more than half of the
change. Reduced commissions, salaries, and related costs were other factors in
the decrease.
Interest expense increased $423,000 for the three months ended August 26, 1995
as compared to the same period a year ago. Increased long-term borrowings from
the issuance of $5.0 million of subordinated debt and higher costs associated
with the Company's short-term borrowings caused the increase.
The Company has not recorded an income tax provision for the second quarter of
fiscal 1996, as the Company has net operating loss carryforwards, and the
realization of the benefits related thereto is uncertain. The benefit for
income taxes as a percent of pretax income was 36% for the second quarter of
fiscal 1995.
<PAGE> 12
Page 10 Form 10-Q
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Statement regarding computation of per share earnings (Exhibit 11)
Financial Data Schedule (for SEC use only)
(b) There were no 8-K filings during the second quarter of 1996.
<PAGE> 13
Page 11 Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROGROUP, INC.
---------------------------------
(Registrant)
/s/ Jeff W. Wells
----------------------------------
Jeff W. Wells
Vice President Finance and
Administration and Chief Financial
Officer
Date October 9, 1995
--------------------------
<PAGE> 14
Form 10-Q
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
This statement is included in Note 5.
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-02-1996
<PERIOD-START> FEB-26-1995
<PERIOD-END> AUG-26-1995
<CASH> 9
<SECURITIES> 0
<RECEIVABLES> 5,043
<ALLOWANCES> 601
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<PP&E> 9,009
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<COMMON> 1,310
0
0
<OTHER-SE> 2,736
<TOTAL-LIABILITY-AND-EQUITY> 23,528
<SALES> 13,089
<TOTAL-REVENUES> 13,089
<CGS> 9,632
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<INTEREST-EXPENSE> 1,606
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<EPS-PRIMARY> (.26)
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