<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 November 25, 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 January 2, 1996, 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 - November 25, 1995 and
February 25, 1995 1
Statements of Operations - Three Months and Nine Months
Ended November 25, 1995 and November 26, 1994 2
Statements of Cash Flows - Nine Months Ended
November 25, 1995 and November 26, 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 10-Q
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BALANCE SHEETS
NOVEMBER 25, 1995 AND FEBRUARY 25, 1995
($ in thousands)
<TABLE>
<CAPTION>
ASSETS
Nov. 25, 1995 Feb. 25, 1995
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 233 $ 34
Trade receivables 4,859 8,233
less: allowance for doubtful accounts (567) (1,049)
----------- --------
Net receivables 4,292 7,184
Inventories, net 9,328 15,101
Current portion of note receivable 1,976 -
Prepaid expenses and other 568 478
----------- --------
Total current assets 16,397 22,797
Property, plant and equipment 8,485 9,003
less: accumulated depreciation (5,063) (5,225)
----------- --------
Net property, plant and equipment 3,422 3,778
Other assets:
Non-current assets of discontinued
operations 281 2,423
Goodwill 85 85
Other 1,596 2,188
----------- --------
1,962 4,696
----------- --------
TOTAL ASSETS $ 21,781 $ 31,271
=========== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Nov. 25, 1995 Feb. 25, 1995
------------- -------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Current maturities of long-term
obligations $ 201 $ 407
Short-term borrowings from bank 8,996 11,829
Accounts payable 1,199 4,120
Accrued liabilities 2,189 3,629
----------- ---------
Total current liabilities 12,585 19,985
Long-term obligations, net of
current maturities 6,219 7,066
Stockholders' equity:
Common stock, $.50 par value,
10,000,000 shares authorized,
2,624,991 and 2,539,366 shares issued
and outstanding at November 25, 1995
and February 25, 1995, respectively 1,312 1,270
Additional paid-in capital 4,606 4,118
Retained deficit (2,941) (1,168)
----------- ---------
Total stockholders' equity 2,977 4,220
----------- ---------
TOTAL LIABILITIES & STOCK-
HOLDERS' EQUITY $ 21,781 $ 31,271
=========== =========
</TABLE>
(The accompanying notes are an integral part of these financial statements.)
<PAGE> 4
Page 2 Form 10-Q
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED NOVEMBER 25, 1995 AND NOVEMBER 26, 1994
(Unaudited)
($ in thousands except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
Nov. 25, 1995 Nov. 26, 1994 Nov. 25, 1995 Nov. 26, 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 4,758 $ 5,393 $ 17,847 $ 20,374
Cost of sales 3,967 4,194 13,599 16,010
-------- -------- -------- ---------
Gross profit 791 1,199 4,248 4,364
Selling and marketing expenses 1,031 1,546 3,430 5,722
General and administrative expenses 480 704 1,522 1,904
-------- -------- -------- ---------
Loss from operations (720) (1,051) (704) (3,262)
Other income, net 330 100 893 318
-------- -------- -------- ---------
Income (loss) before interest
and income taxes (390) (951) 189 (2,944)
Interest expense 704 326 2,310 839
-------- -------- -------- ---------
Loss from continuing operations before income taxes (1,094) (1,277) (2,121) (3,783)
Provision for income taxes - 20 - 377
-------- -------- -------- ---------
Loss from continuing operations (1,094) (1,297) (2,121) (4,160)
Discontinued operations - (931) 348 (3,962)
-------- -------- -------- ---------
Net loss $ (1,094) $ (2,228) $ (1,773) $ (8,122)
======== ======== ======== =========
Net income (loss) per share from:
Continuing operations $ (0.42) $ (0.51) $ (0.81) $ (1.64)
Discontinued operations - (0.37) 0.13 (1.56)
-------- -------- -------- ---------
$ (0.42) $ (0.88) $ (0.68) $ (3.20)
======== ======== ======== =========
</TABLE>
(The accompanying notes are an integral part of these financial statements.)
<PAGE> 5
Page 3 Form 10-Q
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED NOVEMBER 25, 1995 AND NOVEMBER 26, 1994
(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Nov. 25, 1995 Nov. 26, 1994
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<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss $ (1,773) $ (8,122)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities -
Depreciation and amortization 1,463 568
Gain on sale of assets (122) -
Deferred income tax - 735
Writedown of property, plant and equipment - 107
Changes in operating assets and liabilities -
Receivables and deferred
income taxes 2,892 2,797
Inventories 1,432 2,485
Prepaid expenses and other (1,034) 683
Accounts payable (2,921) 522
Accrued liabilities 223 (484)
-------------- -------------
Net cash provided by (used for)
operating activities 160 (709)
-------------- -------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property, plant and equipment (198) (174)
Proceeds from sale of property, plant & equipment 1,761 -
Payments received on note receivable 2,150 -
Other - (50)
-------------- -------------
Net cash provided by (used for)
investing activities 3,713 (224)
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<CAPTION>
Nov. 25, 1995 Nov. 26, 1994
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<S> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net increase (decrease) in
short-term borrowings from bank $ (2,833) $ 465
Issuance of common stock - 19
Issuance of subordinated debt - 3,338
Issuance of warrants - 1,662
Principal payments on long-term obligations (841) (314)
------------- --------------
Net cash provided by (used for)
financing activities (3,674) 5,170
------------- --------------
NET CHANGE IN CASH 199 4,237
CASH, beginning of period 34 50
------------- --------------
CASH, end of period $ 233 $ 4,287
============= ==============
Supplemental disclosures of
cash flow information:
Cash paid (received) during the
period for:
Interest $ 845 $ 794
============= ==============
Income taxes $ (5) $ (331)
============= ==============
</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 November 25, 1995; (2) the results of its operations and
its cash flows for the nine months ended November 25, 1995 and November 26,
1994; and (3) the results of its operations for the three months ended November
25, 1995 and November 26, 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 November 25, 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 nine months ended November 25, 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 the
Company's Chairman and Chief Executive Officer (the "Guarantor"), the line of
credit was amended to extend the maturity date to August 30, 1996.
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 issuances by the Company
sufficient to enable the Guarantor to maintain his fully diluted common stock
ownership percentage. In March 1995, the Company entered into an additional $4
million line of credit agreement with a bank which was guaranteed by the
Guarantor.
In September 1995, the Company executed a $15 million line of credit agreement
with a new bank, which matures on July 15, 1996. The new line of credit
replaced the Company's previous line of credit under which the Company had been
in violation of financial covenants. There are no required financial covenants
under the new line of credit, which is unconditionally guaranteed by the
Guarantor. Advances under the new line of credit bear interest at LIBOR plus 2
points (7.8125% at November 25, 1995) on the first $6 million outstanding.
Outstanding amounts in excess of $6 million bear interest at the prime rate
less .50% (8.25% at November 25, 1995). At November 25, 1995, $9.0 million was
outstanding under this new 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 November 25, 1995 was $1.8 million (after applying $541,000 of
proceeds from the sale of the Duckster division against principal). This loan
was repaid on December 21, 1995 from the proceeds of the sale of the Company's
facility in Ooltewah, Tennessee. 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 NINE MONTHS ENDED
--------------------------------------------------------------------
NOV 25, 1995 NOV 26, 1994 NOV 25, 1995 NOV 26, 1994
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average
number of common
shares outstanding 2,624,991 2,537,635 2,610,972 2,537,122
Effect of assumed
exercise of stock
options (where dilutive) -- -- -- --
--------- --------- --------- ---------
Weighted average
common and common
equivalent shares
outstanding 2,624,991 2,537,635 2,610,972 2,537,122
========= ========= ========= =========
</TABLE>
<PAGE> 9
Page 7 Form 10-Q
NOTE 6
INVENTORIES:
Inventories as of November 25, 1995 and February 25, 1995, were as follows:
<TABLE>
<CAPTION>
Nov. 25, 1995 Feb. 25, 1995
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<S> <C> <C>
Inventories:
Raw materials $ 4,229 $ 4,521
Work-in-process 426 1,474
Finished goods 4,673 9,106
----------- ----------
$ 9,328 $ 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
November 25, 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 November
25, 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 November 25, 1995, the Company had working capital of approximately $3.8
million and a current ratio of 1.3 to 1. The Company generally relies upon
internally generated cash and short-term borrowings to satisfy working capital
requirements and normal capital expenditure needs. In September 1995, the
Company executed a $15 million line of credit agreement with a new bank, which
matures on July 15, 1996. Outstanding borrowings under the revolving credit
facility as of November 25, 1995 were $9.0 million. Advances under this line
bear interest at LIBOR plus 2 points (7.8125% at November 25, 1995) on the
first $6 million outstanding. Outstanding amounts in excess of $6 million bear
interest at the prime rate less .50% (8.25% at November 25, 1995). There are
no required financial covenants under the new line of credit which is
unconditionally guaranteed by the Company's Chairman and Chief Executive
Officer (the "Guarantor").
During the first nine 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 payments received on the note
receivable related to the Duckster sale. Cash was used primarily to reduce
accounts payable and short-term borrowings.
After the end of the quarter, on December 21, 1995, the Company sold its
facility in Ooltewah, Tennessee for a sale price of $2.1 million with the
purchaser leasing office and retail space back to the Company. The proceeds of
this sale were used, in part, to repay a fixed rate term loan made to the
Company in November, 1993.
RESULTS OF OPERATIONS
Net sales for the third quarter of fiscal 1996 decreased $0.6 million, or 11.8%
compared with the third quarter of fiscal year 1995. Net sales for the nine
months ended November 25, 1995, decreased $2.5 million, or 12.4%, compared to
the nine months ended November 26, 1994. Sales of pro products to on-course
pro shops and off-course golf equipment stores were down $1.2 million, of which
$0.9 million of the decrease was attributable to golf bags. Retail sales to
major retailers such as K-Mart, Wal-Mart and Sears, were down $1.3 million.
Approximately one-half of the decrease in retail sales occurred during the
third quarter ending November 25, 1995.
Gross profit for the third quarter of fiscal 1996 was $0.8 million, or 16.6%,
of net sales as compared to $1.2 million, or 22.2%, of net sales a year ago.
Gross profit for the nine months ended November 25, 1995 was $4.2 million, or
23.8% of net sales, compared to $4.4 million, or 21.4% of net sales for the
nine months ended November 26, 1994. Decreased sales, particularly during the
third quarter ending November 25, 1995, necessitated a cut back in production
resulting in underabsorption of factory overhead at both manufacturing
facilities. Additional provisions for inventory write- downs were recorded in
the third quarter, relating primarily to the discontinuance of pro products
being marketed under the "Peerless" tradename, and the replacement of such
products with the "Palmer" tradename.
<PAGE> 11
Page 9 Form 10-Q
Selling and marketing expenses decreased $0.5 million, or 33.3%, for the third
quarter of fiscal 1996 compared with the same period last year. For the nine
months ended November 25, 1995, selling and marketing expenses decreased $2.3
million, or 40.1%, compared with the nine months ended November 26, 1994.
Decreased advertising and promotional expenses, and reduced commissions,
salaries, and related costs were factors in the decrease.
General and administrative expenses for the quarter ended November 25, 1995
decreased $224,000, or 31.8% compared to last year's third quarter. For the
nine months ended November 25, 1995, general and administrative expenses
decreased $382,000, or 20.1%, compared to the nine months ended November 26,
1994. These decreases were primarily a result of reduced salaries and related
payroll costs, and reductions in other professional services.
Other income for the nine months ended November 25, 1995 increased $575,000
compared to the same period last year. This was primarily due to increased
rental income, interest income, and gains on asset dispositions.
Interest expense increased $378,000 for the three months ended November 25,
1995 as compared to the same period a year ago. For the nine months ended
November 25, 1995, interest expense increased $1.5 million compared to the nine
months ended November 26, 1994. The $1.5 million year-to-date increase was
related to non-cash interest expense composed of the following: (i) $295,000
interest expense on the $5.0 million subordinated debt; (ii) $185,000 of
amortization of the related subordinated debt discount; and (iii) amortization
of $925,000 of debt issuance costs.
The Company has not recorded an income tax provision for the third quarter or
the nine months ended November 25, 1995, as the Company has net operating loss
carryforwards, and the realization of the benefits related thereto is
uncertain. During the nine months ended November 26, 1994, the Company
recorded an income tax provision of $377,000 for continuing operations. The
income tax provision was the result of recording a valuation allowance against
previously recognized deferred tax assets due to the uncertainty of the
realization of the related benefits.
For the first nine months of fiscal 1996, the Company reported income from
discontinued operations of $348,000. This relates to the operating results of
the Duckster business through the date of the sale on May 5, 1995. In the
first nine months of fiscal 1995, the Company reported a loss from discontinued
operations of $4.0 million. For the third quarter ended November 26, 1994, the
Company reported a loss from discontinued operations of $931,000.
<PAGE> 12
Page 10 Form 10-Q
PART II. OTHER INFORMATION
Item 5. Other Information
Effective December 7, 1995, the listing for the Company's common stock
was changed from the NASDAQ National Market System to the NASDAQ Small Cap
Market. The common stock of the Company will continue to trade under the
symbol PRGR.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
1. Financial data schedule (Exhibit 27) (For SEC use only.)
(b) Reports on Form 8-K -
The Registrant filed a Form 8-K dated November 9, 1995
regarding the appointment of a new President and Chief
Operating Officer.
<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
Date January 8, 1996
--------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-02-1996
<PERIOD-START> FEB-26-1995
<PERIOD-END> NOV-25-1995
<CASH> 233
<SECURITIES> 0
<RECEIVABLES> 4,859
<ALLOWANCES> 567
<INVENTORY> 9,328
<CURRENT-ASSETS> 16,397
<PP&E> 8,485
<DEPRECIATION> 5,063
<TOTAL-ASSETS> 21,781
<CURRENT-LIABILITIES> 12,585
<BONDS> 0
0
0
<COMMON> 1,312
<OTHER-SE> 1,665
<TOTAL-LIABILITY-AND-EQUITY> 21,781
<SALES> 17,847
<TOTAL-REVENUES> 17,847
<CGS> 13,599
<TOTAL-COSTS> 13,599
<OTHER-EXPENSES> 4,952
<LOSS-PROVISION> 191
<INTEREST-EXPENSE> 2,310
<INCOME-PRETAX> (2,121)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,121)
<DISCONTINUED> 348
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,773)
<EPS-PRIMARY> (.68)
<EPS-DILUTED> (.68)
</TABLE>
