PROGROUP INC
10-Q, 1996-06-26
SPORTING & ATHLETIC GOODS, NEC
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<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    June 1, 1996     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 June 20, 1996, the number of shares outstanding of the issuer's common
stock was 2,826,805.




<PAGE>   2









                                     INDEX

                                                        Pages
                                                        -----

Part I.  Financial Information

         Balance Sheets - June 1, 1996 and
          March 2, 1996                                      1

         Statements of Operations - Three Months 
          Ended June 1, 1996 and May 27, 1995                2


         Statements of Cash Flows - Three Months Ended
          June 1, 1996 and May 27, 1995                      3

         Notes to Financial Statements                   4 - 6

         Management's Discussion and Analysis of
          Financial Condition and Results of
          Operations                                     7 - 9


Part II. Other Information                                  10

         Signature Page                                     11



<PAGE>   3
    Page 1
                                                                      Form 10-Q

    PART I.  FINANCIAL INFORMATION

    ITEM I.  FINANCIAL STATEMENTS

                                 BALANCE SHEETS
                         JUNE 1, 1996 AND MARCH 2, 1996
                                ($ in thousands)



<TABLE>
<CAPTION>
 ASSETS                                                                                                     
                                                June 1, 1996  March 2, 1996                               
                                                ------------  -------------           
                                                  (Unaudited)                                               
<S>                                             <C>           <C>                                          
Current assets:                                                                                            
   Cash                                         $        13   $         10                                 
                                                                                                           
   Trade receivables                                 10,578          4,534                                 
        less: allowance for doubtful accounts          (878)          (758)                                
                                                -----------   ------------            
            Net receivables                           9,700          3,776                                 
                                                                                                           
   Inventories, net                                   8,688          9,896                                 
   Current portion of note receivable                 1,126          1,126                                 
   Prepaid expenses and other                           657            759                                 
                                                -----------   ------------                                 
      Total current assets                           20,184         15,567                                 
                                                                                                           
Property, plant and equipment                         3,856          3,931                                 
        less: accumulated depreciation               (2,650)        (2,743)                                
                                                -----------   ------------    
            Net property, plant and equipment         1,206          1,188                                 
                                                                                                           
Other assets:                                                                                              
   Non-current assets of discontinued                                                                      
       operations                                       265            265                                 
   Goodwill                                              85             85                                 
   Other                                              1,451          1,455                                 
                                                -----------   ------------    
                                                      1,801          1,805                                 
                                                -----------   ------------    
TOTAL ASSETS                                    $    23,191   $     18,560                                 
                                                ===========   ============



<CAPTION>

LIABILITIES AND STOCKHOLDERS' EQUITY

                                                June 1, 1996  March 2, 1996      
                                                ------------  -------------      
                                                (Unaudited)                      
<S>                                             <C>             <C>              
Current liabilities:                                                             
   Current maturities of long-term                                               
     obligations                                $        65     $      71        
   Short-term borrowings from bank                   13,396        10,096        
   Accounts payable                                   2,369         1,718        
   Accrued liabilities                                2,237         2,409        
                                                -----------     ---------        
      Total current liabilities                      18,067        14,294        
                                                                                 
Long-term obligations, net of                                                    
   current maturities                                 3,808         4,600        
                                                                                 
Stockholders' equity (deficit):                                                            
   Common stock, $.50 par value,                                                 
      10,000,000 shares authorized,                                              
      2,826,805 and 2,634,991 shares issued                                      
      and outstanding at June 1, 1996                                            
      and March 2, 1996, respectively                 1,413         1,317        
   Additional paid-in capital                         5,657         4,794        
   Accumulated deficit                               (5,754)       (6,445)       
                                                -----------     ---------        
      Total stockholders' equity (deficit)            1,316          (334)       
                                                -----------     ---------        
TOTAL LIABILITIES & STOCK-                                                       
   HOLDERS' EQUITY (DEFICIT)                    $    23,191     $  18,560        
                                                ===========     =========
</TABLE>  



(The accompanying notes are an integral part of these financial statements.)




<PAGE>   4





Page 2
                                                                       Form 10-Q



                            STATEMENTS OF OPERATIONS
                THREE MONTHS ENDED JUNE 1, 1996 AND MAY 27, 1995
                                  (Unaudited)
                   ($ in thousands except per share amounts)


<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED          
                                                   ----------------------------     
                                                    June 1, 1996   May 27, 1995     
                                                   ----------------------------     
<S>                                                 <C>            <C>               
Net sales                                           $     11,230   $      8,252      
Cost of sales                                              7,691          5,723      
                                                    ------------   ------------      
   Gross profit                                            3,539          2,529      
                                                                                     
Selling and marketing expenses                             1,975          1,316      
                                                                                     
General and administrative expenses                          888            519      
                                                    ------------   ------------      
   Income from operations                                    676            694      
                                                                                     
Other income, net                                            537            147      
                                                    ------------   ------------      
                                                                                     
Income before interest and income taxes                    1,213            841      
                                                                                     
Interest expense                                             522            883      
                                                    ------------   ------------      

Income (loss) from continuing operations before           
  income taxes                                               691            (42)
                                                                                     
Provision for income taxes                                     -              -      
                                                    ------------   ------------      
Income (loss) from continuing operations                     691            (42)     
                                                                                     
Discontinued operations                                        -            348      
                                                    ------------   ------------      
Net income                                          $        691   $        306      
                                                    ============   ============      
Net income (loss) per share from:                                                    
                                                                                     
         Continuing operations                      $       0.25   $      (0.01)     
         Discontinued operations                               -           0.13      
                                                    ------------   ------------      
                                                    $       0.25   $       0.12      
                                                    ============   ============
</TABLE>



(The accompanying notes are an integral part of these financial statements.)




<PAGE>   5



Page 3
                                                                       Form 10-Q
                            STATEMENTS OF CASH FLOWS
                THREE MONTHS ENDED JUNE 1, 1996 AND MAY 27, 1995
                                  (Unaudited)
                                ($ in thousands)

<TABLE>
<CAPTION>
                                                           June 1, 1996  May 27, 1995                 
                                                           ------------  ------------                 
<S>                                                        <C>           <C>                           
CASH FLOWS FROM                                                                                        
   OPERATING ACTIVITIES:                                                                               
                                                                                                       
Net income                                                 $       691   $        306                  
Adjustments to reconcile net income to net cash                                                        
   used for operating activities -                                                                     
                                                                                                       
      Depreciation and amortization                                127            275                  
      Gain on sale of assets                                      (100)             -                  
                                                                                                       
      Changes in operating assets and liabilities -                                 
                                                                                                       
           Receivables                                          (5,924)        (2,801)                 
           Inventories                                           1,208          1,266                  
           Prepaid expenses and other                              102             27                  
           Accounts payable                                        651         (1,720)                 
           Accrued liabilities                                     (63)          (924)                 
                                                           -----------   ------------                  
                                                                                                       
Net cash used for operating activities                          (3,308)        (3,571)                 
                                                           -----------   ------------                  
                                                                                                       
CASH FLOWS FROM                                                                                        
   INVESTING ACTIVITIES:                                                                               
                                                                                                       
   Additions to property, plant and equipment                      (91)           (65)                 
   Proceeds from sale of property, plant and equipment             115          1,554  
   Payments received on note receivable                              -          1,400                  
   Other                                                             4            192                  
                                                           -----------   ------------                  
                                                                                                       
         Net cash provided by investing activities                  28          3,081                  
                                                           -----------   ------------       
<CAPTION>                                                                        

                                                           June 1, 1996   May 27, 1995  
                                                           ------------   ------------  
<C>                                                        <C>            <C>           
CASH FLOWS FROM                                                                         
  FINANCING ACTIVITIES:                                                                 
                                                                                        
Net increase in short-term                                                              
  borrowings from bank                                     $      3,300   $      1,081  
                                                                                        
Principal payments on long-term obligations                         (17)          (582) 
                                                           ------------   ------------  
  Net cash provided by financing                                                        
     activities                                                   3,283            499  
                                                           ------------   ------------  
                                                                                        
NET CHANGE IN CASH                                                    3              9  
                                                                                        
CASH, beginning of period                                            10             34  
                                                           ------------   ------------  
                                                                                        
CASH, end of period                                        $         13   $         43  
                                                           ============   ============  
                                                                                        
Supplemental disclosures of                                                             
  cash flow information:                                                                
                                                                                        
Cash paid during the period for:                                                        
                                                                                        
     Interest                                              $        223   $        341  
                                                           ============   ============  
</TABLE>
       



<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 June 1, 1996;  and (2) the results of its operations and
its cash flows for the three months ended June 1, 1996 and May 27, 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
fiscal year ended March 2, 1996, for a discussion of the Company's significant
accounting policies.


                                     NOTE 2
INCOME TAXES:

The Company has federal tax loss carryforwards of approximately $23.8 million
at March 2, 1996, therefore, no income tax provision was recorded during the
three months ended June 1, 1996.






<PAGE>   7





Page 5                                                                Form 10-Q

                                     NOTE 3

SHORT-TERM BORROWINGS:
Short-term borrowings consist of advances under a $15.0 million line of credit
with a bank which matures on February 28, 1997.  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 LIBOR plus 2 points (7.8125% at June
1, 1996) on the first $6 million outstanding and 7.1562% on the next $3.7
million outstanding. Outstanding amounts in excess of $9.7 million bear interest
at the prime rate less .50% (7.75% at June 1, 1996).  At June 1, 1996, $13.4
million was outstanding under the line of credit.

As consideration to the Guarantor for the January 1995 guarantee of the
Company's previous line of credit, the Company issued an $850,000 subordinated
convertible note and a warrant to purchase up to 390,000 common shares of the
Company.  Additionally, the Guarantor was given preemptive rights through
January 27, 2000, with respect to future issuances by the Company sufficient to
enable the Guarantor to maintain his fully diluted common stock ownership
percentage.  The $850,000 subordinated note plus accrued interest was converted
to 191,814 shares of common stock in April 1996.

                                     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.


<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED        
                                     -----------------------------  
                                     JUNE 1, 1996     MAY 27, 1995  
                                     -----------------------------  
<S>                                  <C>               <C>
Weighted average
 number of common
 shares outstanding                   2,753,030        2,619,991
                                                 
Effect of assumed                                
 exercise of stock                               
 options (where dilutive)                58,440               --
                                     ----------        ---------
                                                 
Weighted average                                 
 common and common                               
 equivalent shares                               
 outstanding                          2,811,470        2,619,991
                                     ==========        =========
</TABLE>





<PAGE>   8





Page 6                                                                Form 10-Q


                                     NOTE 5
INVENTORIES:

Inventories as of June 1, 1996 and March 2, 1996, were as follows (in 
thousands):


<TABLE>
<CAPTION>
                                 June 1, 1996   March 2, 1996
                                 ------------  --------------
<S>                               <C>          <C>
Inventories:
  Raw materials                   $     4,474  $        4,270
  Work-in-process                         372             372
  Finished goods                        3,842           5,254
                                  -----------  --------------
                                  $     8,688  $        9,896
                                  ===========  ==============
</TABLE>





                                     NOTE 6


SUBORDINATED NOTES AND COMMON STOCK WARRANTS:


On November 3, 1994, the Company completed a private placement of $5.0 million
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 unpaid
interest is due November  3, 1999.  Interest payments through December 31, 1995
were deferred at the option of the Company.  Certain interest payments continue
to be deferred at the option of the Note holders.  The Notes are subordinated
to all senior indebtedness and are included in long-term obligations in the
accompanying balance sheet at June 1, 1996.

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>   9





Page 7                                                                 Form 10-Q


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                          AND RESULTS OF OPERATIONS

FINANCIAL CONDITION
For purposes of this Form 10-Q, first quarter 1996 relates to the quarter ended
June 1, 1996, while first quarter of 1995 relates to the quarter ended May 27,
1995.

As of June 1, 1996, the Company had working capital of $2,117,000 and a current
ratio of 1.1 to one.  The Company generally relies upon internally generated
funds and short-term borrowings to meet working capital and capital expenditure
requirements.  The Company maintains a $15.0 million short-term line of credit
which is utilized as needed throughout the year.  Due to the seasonality of the
golf industry and the Company's terms of sale, the Company's borrowings under
its line of credit increased $3.3 million during first quarter 1996.  Cash was
also provided through the reduction of inventories of $1.2 million, increase in
accounts payable of $650,000 and net income of $691,000 for quarter ending June
1, 1996.  Cash provided was used primarily to finance receivables which
increased $5.9 million during first quarter 1996.  Due to the Company's terms
of sale, receivable collections are significantly higher during its second
fiscal quarter, compared to collections during the first fiscal quarter.  The
increase in receivable collections combined with reduction in inventory
purchases, usually allows the Company to reduce the amount outstanding on its
short-term line of credit during the Company's second quarter.

The Company believes that internally generated funds and availability under the
current line of credit, should be sufficient to support normal working capital
requirements for the remainder of the fiscal year.

RESULTS OF OPERATIONS
Net sales for the first quarter of 1996 increased 35% over first quarter 1995.
While first quarter 1996 bag sales remained fairly constant with first quarter
1995 at $4.4 million, sales of golf clubs increased 79% to $6.8 million in
first quarter 1996, from $3.8 million in first quarter 1995.

The table below compares net sales for first quarter 1996 to first quarter
1995, by product line and market segment.

                               ($'s in millions)


<TABLE>
<CAPTION>
                     Clubs                         Bags                          Total
        ----------------------------  ----------------------------  --------------------------     
        Q1 '96    Q1 '95    % Change  Q1 '96    Q1 '95    % Change  Q1 '96    Q1'95   % Change
        --------  --------  --------  --------  --------  --------  ------   ------   --------
<S>     <C>       <C>       <C>         <C>      <C>      <C>       <C>      <C>      <C>
Pro      3.1       1.1      + 181.8%    2.5      2.5        ---      5.6     3.6      + 55.6%
Retail   3.4       2.5      +  36.0%    1.8      2.0      - 10.0%    5.2     4.5      + 15.6%
Other     .3        .2      +  50.0%     .1      ---        ---       .4      .2      +100.0%
        ----      ----      --------    ---     ----      -------   ----     ---      -------
 Total   6.8       3.8      +  78.9%    4.4      4.5      -  2.2%   11.2     8.3      + 34.9%  
</TABLE>




<PAGE>   10








Page 8                                                                Form 10-Q



The Company has changed its focus from the mass merchandise market (retail), to
on-course pro shops and off-course golf equipment stores, where its pro line of
golf equipment yields higher margins than retail products sold to mass
merchandisers.  While the Company intends to maintain its share of the retail
market, the shift in product mix is planned to result from growth in the pro
line of golf products.  The shift in product mix was particularly favorable in
the first quarter of 1996.  Pro product sales improved to 50% of total sales in
1996 compared to 43.3% of total sales in first quarter 1995.  The most
significant improvement was in club sales, where pro clubs comprised 45.6% of
total club sales in first quarter 1996 compared to 28.9% in first quarter 1995.
Gross profit for first quarter 1996 was $3.5 million on total net sales of
$11.2 million compared to gross profit of $2.5 million on $8.3 million net
sales in first quarter 1995.  Gross profit as a percent of net sales improved
to 31.5% in the first quarter of 1996 compared to 30.6% for the comparable
period in 1995.  Actual gross profit of 31.5% was reduced by unfavorable
manufacturing variances in club operations of approximately $.3 million.  Due
to the strength of pro club sales during the first quarter above planned
volume, it was necessary to air freight  some raw material components and to
incur additional costs in club manufacturing in order to satisfy customer
demand.  Had it not become necessary to incur the additional manufacturing
costs, gross profit for the first quarter would have been approximately 34% of
net sales.

Due to the seasonality of the golf industry, the Company's first fiscal quarter
sales volume normally represents approximately 35% of its total annualized
revenues.

Selling and marketing expenses increased $659,000 in the first quarter of 1996
compared to 1995.  Increased expenditures for product promotion and advertising
accounted for $350,000 of the increase and commissions on increased sales
volume accounted for $270,000 of the increase.  General and administrative
expenses increased approximately $370,000 during the first quarter of 1996.
Major components of the increase were in corporate promotion and public
relations.  Data processing costs also increased as the Company embarked on the
installation of a new fully integrated computer software system including
hardware upgrade.  The total project, estimated at approximately $800,000, will
be implemented over the next twelve months.

Other income increased $390,000 in first quarter 1996.  Accrued royalty income
of $250,000 based on the Cobra licensing agreement was the major component of
the increase.  The other major component of the increase is a $100,000 gain on
the sale of the East Pocahontas, Arkansas property.

Interest expense decreased $361,000 in first quarter 1996.  Cash interest
payments decreased by $137,000 due to lower interest rates charged on the
Company's advances under its line of credit, and lower average advance balances
during the first quarter of 1996 compared to 1995. Currently interest rates on 
the line of credit are LIBOR plus two points (7.8125%) on the first $6.0 
million, 7.1562% on the next $3.7 million and prime less .5% on advances in 
excess of $9.7 million.


<PAGE>   11






Page 9                                                                Form 10-Q

Prime rate throughout the first quarter of 1996 was 8.25%.  The interest rate 
on line of credit advances in first quarter 1995 was prime less .5%.  Prime
rate throughout first quarter of 1995 was 9%.  Cash interest expense was also
reduced for quarter ending June 1, 1996 due to the retirement of a $3.0 million
term note in December 1995, on which approximately $65,000 interest was paid
during first quarter 1995.  Also, non-cash interest expense related to the
amortization of subordinated notes and discounts thereon, decreased $224,000 in
first quarter 1996.








<PAGE>   12











Page 10                                          Form 10-Q


                       PART II.  OTHER INFORMATION



Item 6.  Exhibits and Reports on Form 8-K

     (a)  Exhibits -

          1.  Financial data schedule (Exhibit 27, SEC Use Only)


     (b)  Reports on Form 8-K -

          The Registrant did not file any reports on Form 8-K during the quarter
          ending June 1, 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/         George H. Nichols                    
                          ------------------------------------------------ 
                                      George H. Nichols                    
                          President and Chief Operating Officer            
                                                                           
                                                                           
                          /s/         David J. Kirby                       
                          ------------------------------------------------ 
                                      David J. Kirby                       
                          Vice President Finance (Chief Accounting Officer)



Date  June 25, 1996
    ---------------







<TABLE> <S> <C>

<ARTICLE> 5
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          SEP-30-1996
<PERIOD-START>                             MAR-03-1996
<PERIOD-END>                               JUN-01-1996
<CASH>                                              13
<SECURITIES>                                         0
<RECEIVABLES>                                   10,578
<ALLOWANCES>                                       878
<INVENTORY>                                      8,688
<CURRENT-ASSETS>                                20,184
<PP&E>                                           3,856
<DEPRECIATION>                                   2,650
<TOTAL-ASSETS>                                  23,191
<CURRENT-LIABILITIES>                           18,067
<BONDS>                                              0
                                0
                                          0
<COMMON>                                         1,413
<OTHER-SE>                                         (97)
<TOTAL-LIABILITY-AND-EQUITY>                    23,191
<SALES>                                         11,230
<TOTAL-REVENUES>                                11,230
<CGS>                                            7,691
<TOTAL-COSTS>                                    7,691
<OTHER-EXPENSES>                                 2,863
<LOSS-PROVISION>                                   101
<INTEREST-EXPENSE>                                 522
<INCOME-PRETAX>                                    691
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                                691
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                       691
<EPS-PRIMARY>                                      .25
<EPS-DILUTED>                                      .25
        

</TABLE>


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