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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
PROGROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(j)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
(4) Proposed maximum aggregate value of transaction:
Set forth the amount on which the filing fee is calculated and state how it
was determined.
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$125
(2) Form, Schedule or Registration Statement No.:
000-00921
(3) Filing Party:
PROGROUP, INC
(4) Date Filed:
June 6, 1995
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(PROGROUP, INC. Logo)
PROGROUP, INC.
6201 MOUNTAIN VIEW ROAD
OOLTEWAH, TENNESSEE 37363
June 19, 1995
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
ProGroup, Inc. to be held at 10:00 a.m., Tuesday, July 18, 1995, at the offices
of the Company, 6201 Mountain View Road, Ooltewah, Tennessee 37363. At the
meeting, you will be asked to elect eight directors to serve on the Board of
Directors for the ensuing year, to approve an amendment to the Company's Charter
creating and authorizing the issuance of preferred stock, to ratify the
appointment of Arthur Andersen LLP as independent public accountants for fiscal
1996 and to transact such other business as may properly come before the meeting
or any adjournment thereof.
YOU WILL NOTE THAT THE COMPANY'S AUDITED FINANCIAL STATEMENTS, WHICH IN
PRIOR YEARS HAVE BEEN INCLUDED IN A SEPARATE ANNUAL REPORT TO SHAREHOLDERS, ARE
CONTAINED IN APPENDIX A TO THE PROXY STATEMENT. A SEPARATE ANNUAL REPORT TO
SHAREHOLDERS WILL NOT BE ISSUED BY THE COMPANY. We believe that the enclosed
proxy statement with attached financial statements will provide shareholders
with comprehensive information about the Company in a streamlined fashion
without the added expense involved in preparing an annual report.
Your vote is very important, regardless of the number of shares you own.
Whether or not you plan to attend the meeting in person, we urge you to sign,
date and mail the enclosed proxy card promptly in the accompanying postage
prepaid envelope. If you attend the meeting, you may vote your shares in person,
even though you have previously signed and returned your proxy.
Sincerely,
/s/ John T. Lipton
-----------------------------
JOHN T. LUPTON
Chairman and Chief Executive Officer
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PROGROUP, INC.
6201 MOUNTAIN VIEW ROAD
OOLTEWAH, TENNESSEE 37363
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JULY 18, 1995
---------------------
To the Shareholders of ProGroup, Inc.:
The Annual Meeting of Shareholders of ProGroup, Inc. (the "Company") will
be held at 10:00 a.m., Tuesday, July 18, 1995, at the offices of the Company,
6201 Mountain View Road, Ooltewah, Tennessee 37363, for the following purposes:
1. To elect eight Directors for the ensuing year;
2. To approve an amendment to the Company's Charter to create and
authorize the issuance of up to 1,000,000 shares of preferred stock;
3. To ratify the appointment of Arthur Andersen LLP as independent
public accountants for fiscal 1996; and
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The close of business on May 25, 1995 has been fixed as the record date for
the determination of shareholders entitled to notice of and to vote at the
meeting and any adjournment thereof.
A copy of the ProGroup, Inc. Annual Report on Form 10-K for the 1995 fiscal
year will be furnished without charge to any shareholder upon written request.
Part II of the Annual Report on Form 10-K, containing the Company's audited
financial statements for fiscal 1995 and Management's Discussion and Analysis of
Financial Condition and Results of Operations, is attached to this proxy
statement as Appendix A.
Whether or not you plan to attend the meeting, please mark, date and sign
the accompanying proxy and promptly return it in the enclosed envelope. If you
attend the meeting, you may vote your shares in person, even though you have
previously signed and returned your proxy.
By Order of the Board of Directors
W. RYLAND DOOLEY, III
Chief Operating Officer
June 19, 1995
Ooltewah, Tennessee
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PROGROUP, INC.
6201 MOUNTAIN VIEW ROAD
OOLTEWAH, TENNESSEE 37363
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PROXY STATEMENT
---------------------
This proxy statement is being mailed to shareholders of ProGroup, Inc., a
Tennessee corporation (the "Company" or "ProGroup"), on or about June 19, 1995
in connection with the solicitation of proxies by the Board of Directors of the
Company for use at the Annual Meeting of Shareholders (the "Annual Meeting") of
the Company to be held at 10:00 a.m. on Tuesday, July 18, 1995, at the offices
of the Company, 6201 Mountain View Road, Ooltewah, Tennessee 37363.
A copy of the ProGroup, Inc. Annual Report on Form 10-K for the 1995 fiscal
year will be furnished without charge to any shareholder upon written request.
Part II of the Annual Report on Form 10-K, containing the Company's audited
financial statements for fiscal 1995 and Management's Discussion and Analysis of
Financial Condition and Results of Operations, is attached to this proxy
statement as Appendix A.
SOLICITATION OF PROXIES
The Company will bear the cost of solicitation of proxies and will
reimburse brokers, custodians, nominees and fiduciaries for their reasonable
expenses in sending solicitation material to the beneficial owners of the
Company's shares. In addition to soliciting proxies through the mail, proxies
may also be solicited by officers and employees of the Company by telephone or
otherwise.
Granting a proxy does not preclude the right of the person giving the proxy
to vote in person, and a person may revoke his or her proxy at any time before
it has been exercised, by giving written notice to the Company, by delivering a
later dated proxy or by voting in person at the Annual Meeting.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of common stock, $.50 par value (the "Common Stock") which
are entitled to vote is necessary to constitute a quorum at the Annual Meeting.
If a quorum is not present or represented at the Annual Meeting, the
shareholders entitled to vote, whether present in person or represented by
proxy, have the power to adjourn the Annual Meeting from time to time, without
notice other than announcement at the Annual Meeting, until a quorum is present
or represented. At any such adjourned Annual Meeting at which a quorum is
present or represented, any business may be transacted that might have been
transacted at the Annual Meeting as originally noticed.
On all matters submitted to a vote of the shareholders at the Annual
Meeting or any adjournment(s) thereof, each shareholder will be entitled to one
vote for each share of Common Stock owned of record at the close of business on
May 25, 1995.
Proxies in the accompanying form that are properly executed and returned
will be voted at the Annual Meeting and any adjournment(s) thereof in accordance
with the directions on such proxies. If no directions are specified, such
proxies will be voted according to the recommendations of the Board of Directors
as stated in the proxy.
Management knows of no other matters or business to be presented for
consideration at the Annual Meeting. If, however, any other matters properly
come before the Annual Meeting or any adjournment(s) thereof, it is the
intention of the persons named in the enclosed proxy to vote such proxy in
accordance with their best judgment on any such matters. The persons named in
the enclosed proxy may also, if they deem it advisable, vote such proxy to
adjourn the Annual Meeting from time to time.
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VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
On May 25, 1995, the record date for determining shareholders entitled to
notice of, and to vote at, the Annual Meeting, the Company had issued and
outstanding and entitled to vote 2,619,991 shares of Common Stock. The following
table sets forth information regarding beneficial ownership of the Company's
Common Stock as of May 25, 1995, except as otherwise noted, with respect to (i)
each person known by the Company to own beneficially more than five percent of
the outstanding Common Stock, (ii) each director and nominee, (iii) the Chief
Executive Officer and the two other most highly compensated executive officers
who earned in excess of $100,000 during the 1995 fiscal year, (iv) the former
Chief Executive Officer of the Company, and (v) all directors and executive
officers as a group:
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) CLASS(2)
- ---------------------------------------------------------- ----------------------- ----------
DIRECTORS AND NOMINEES
Arthur P. Becker(3)....................................... 235,013 8.5
Robert H. Caldwell........................................ 45,483(4) 1.7
David S. Gonzenbach....................................... 0 *
James L. E. Hill.......................................... 0 *
John T. Lupton(5)......................................... 1,063,125 30.5
John P. Murray, Jr........................................ 20,000 *
Russell B. Newton, III.................................... 115,000(6) 4.4
Arnold D. Palmer(7)....................................... 324,445(8) 12.1
EXECUTIVE OFFICERS
W. Ryland Dooley, III(9).................................. 14,000(10) *
D. Scudder Graybeal....................................... 29,862 1.1
5% OR MORE SHAREHOLDERS
Dawson-Samberg Capital Management, Inc.(11)............... 234,353(12) 8.9
C. C. Wang(13)............................................ 418,500(14) 14.4
FORMER EXECUTIVE OFFICER
Richard E. Wenz(15)....................................... 264,019 9.4
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP (13
PERSONS)................................................ 1,851,928 49.7
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* Less than 1% of the Common Stock.
(1) Includes the following number of shares subject to purchase pursuant to
options that are exercisable within 60 days of February 25, 1995 under the
Company's Amended and Restated Employee Incentive Stock Option Plan or the
1992 Stock Option Plan: Mr. Becker -- 135,013 shares; Mr. Graybeal --
10,000 shares; Mr. Murray -- 10,000 shares; Mr. Wenz -- 189,019 shares; and
all executive officers and directors as a group -- 160,103 shares. Also
includes the following numbers of shares subject to purchase pursuant to
the exercise of warrants or convertible securities that are exercisable
within 60 days of February 25, 1995: Mr. Lupton -- 862,000 shares; Mr.
Dooley -- 14,000 shares; Mr. Palmer -- 70,000 shares; and all executive
officers and directors as a group -- 946,000 shares.
(2) For the purpose of computing the percentage of outstanding shares owned by
each beneficial owner, the shares issuable pursuant to presently
exercisable stock options or warrants held by such beneficial owner are
deemed to be outstanding. Such options are not deemed to be outstanding for
the purpose of computing the percentage owned by any other person.
(3) The address of this beneficial owner is 345 Park Avenue South, New York,
New York 10010.
(4) Does not include 16,388 shares held by Mr. Caldwell's wife, as to which
shares Mr. Caldwell disclaims beneficial ownership.
(5) The address for this beneficial owner is 702 Tallan Building, Two Union
Square, Chattanooga, Tennessee 37402.
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(6) Includes 100,000 shares owned by Russell B. Newton, Jr. Irrevocable Trust,
as to which shares Mr. Newton, III has investment authority as president of
Timucuan Asset Management. Mr. Newton, III disclaims beneficial ownership
of these shares.
(7) The address of this beneficial owner is P.O. Box 52, Youngstown,
Pennsylvania 15696.
(8) Includes 70,000 warrants exercisable within 60 days of February 25, 1995
held by Arnold Palmer Enterprises, Inc., a company in which Mr. Palmer is
the majority shareholder.
(9) Mr. Dooley resigned as Chief Operating Officer of the Company on June 5,
1995. Mr. Dooley has agreed to continue to serve in such capacity until his
successor is named.
(10) In connection with Mr. Dooley's resignation, Mr. Lupton has agreed to
purchase the warrants currently held by Mr. Dooley.
(11) The address of this beneficial owner is 354 Pequot Avenue, Southport,
Connecticut 06490.
(12) Includes 33,200 shares held in managed accounts for which this beneficial
owner acts as investment advisor. Also includes 138,453 shares held by
Pequot Partners Fund, L.P., and 62,700 shares held by Pequot International
Fund, entities related to the principals of Dawson-Samberg Capital
Management, Inc. This information is based solely on a Schedule 13D filed
by Dawson-Samberg Capital Management, Inc. with the Securities and Exchange
Commission on May 14, 1993.
(13) The address for this beneficial owner is 600 Third Avenue, New York, New
York 10016.
(14) Includes 118,500 shares and 280,000 warrants exercisable within 60 days of
February 25, 1995, held by the Wang Group, Inc., an investment company
wholly-owned by Mr. Wang, and 20,000 shares held by U.S. Summit
Corporation, an investment company controlled by Mr. Wang. This information
is based upon a Schedule 13D filed by Mr. Wang on July 29, 1994, and an
Amendment No. 1 to Schedule 13D filed on November 14, 1994, and an
Amendment No. 2 to Schedule 13D filed on December 29, 1994.
(15) Mr. Wenz resigned as Chief Executive Officer and a Director of the Company
on September 26, 1994. The address for this beneficial owner is 1293 Old
Mill Lane, Elk Grove Village, Illinois 60007.
PROPOSAL 1: ELECTION OF DIRECTORS
The Board of Directors currently consists of eight members. Richard E.
Wenz, formerly Chief Executive Officer and a director of the Company, resigned
from such positions with the Company on September 26, 1994. Messrs. Lupton, Hill
and Gonzenbach were each elected to the Board of Directors by the directors
since the date of the 1994 Annual Meeting of Shareholders. All directors hold
their positions until the next annual meeting of shareholders or until their
successors are elected and duly qualified. Executive officers of the Company are
appointed annually by the Board of Directors and serve at the Board's
discretion.
If any nominee for election as director is unable to serve, which the Board
of Directors does not anticipate, the persons named in the proxy may vote for
another person in accordance with their judgment. All of the nominees have
previously served as directors of the Company.
The names and ages of the nominees, their principal occupations or
employment during the past five years and other data regarding them, based upon
information received from them, are as follows:
NOMINEES FOR DIRECTORSHIPS
NAME AGE PRINCIPAL OCCUPATION
- -------------------------- --- ----------------------------------------------------
Arthur P. Becker.......... 44 From 1993 to present, Chairman and Chief Executive
Officer of BNOX, Inc., a sports accessory company,
and from 1988 to 1993, Associate Director of Bear
Stearns & Co., Inc., an investment bank, and a
private investor; Chairman of the Board of the
Company from February 1992 to March 1995, Chief
Executive Officer of the Company from September
1994 to March 1995 and a Director of the Company
since February 1992.
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NAME AGE PRINCIPAL OCCUPATION
- -------------------------- --- ----------------------------------------------------
Robert H. Caldwell........ 70 Self-employed investment counselor; Member of the
Board of Trustees of the University of Chattanooga
Foundation since 1970; Member, National Executive
Committee of the Alexis de Tocqueville Society of
the United Way since 1986; Director of Siskin
Hospital for Rehabilitation; Director of the
Company since 1964.
David S. Gonzenbach....... 41 From 1988 to present, executive officer, and from
1994 to present, Chief Financial Executive of The
Lupton Company, a private investment company; a
Director of the Company since January 1995.
James L. E. Hill.......... 59 From March 1995 to present, President and Chief
Executive Officer of the Lupton Company, a private
investment company; from 1993 to 1995, President,
and from 1992 to 1993, Executive Vice President,
of the Tennessee Aquarium, a non-profit charitable
and educational organization; from 1991 to 1992,
an executive officer with Dixie Yarns, Inc.; and
from 1987 to 1991, a manager with Du Pont de
Nemours & Co.; a Director of the Company since
March 1995.
John T. Lupton............ 68 Private investor; from 1977 to 1986, Chairman of JTL
Corp., a soft-drink bottling company; a Director of
the Company since January 1995, and Chairman and
Chief Executive Officer since March 1995.
John P. Murray, Jr........ 67 From 1985 through 1987, Chief Executive Officer of
Wilson Sporting Goods Co.; from 1985 to 1989,
Chairman of Wilson Sporting Goods Co.; Director of
the Company since February 1992.
Russell B. Newton, III.... 41 From 1982 to present, Chairman and, since 1985,
President of Gulf Utility Company; President of RBN
Company, a consulting service company; from 1990
to present, President of Timucuan Asset
Management, a registered investment adviser;
Director of the Company since February 1992.
Arnold D. Palmer.......... 65 Professional golfer; President of Arnold Palmer
Enterprises, Inc.; Director of the Company from 1972
to 1990 and since February 1992.
DIRECTORS' MEETINGS
The Board of Directors held eleven meetings during the fiscal year ended
February 25, 1995. Except for Mr. Palmer, each director attended in person or by
telephone during his tenure more than 75% of the total of meetings of the Board.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee, a Compensation
Committee, an Executive Committee and a Nominating Committee.
The functions of the Audit Committee are to meet with the independent
public accountants of the Company, to review the audit plan for the Company, to
review the annual audit of the Company with the accountants, together with any
other reports or recommendations made by the accountants, to recommend
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whether the auditors should be continued as auditors for the Company and, if
other auditors are to be selected, to recommend the auditors to be selected. The
Audit Committee is also to review with the auditors for the Company the adequacy
of the Company's internal controls and to perform such other duties as shall be
delegated to the Committee by the Board of Directors. Messrs. Caldwell and
Newton serve as the members of the Audit Committee. The Audit Committee met one
time during the 1995 fiscal year.
The functions of the Compensation Committee are to recommend to the Board
of Directors policies and plans concerning the salaries, bonuses and other
compensation of the senior executives of the Company, including reviewing the
salaries of the senior executives; recommending bonuses, stock options and other
forms of additional compensation for them; establishing and reviewing policies
regarding management perquisites and performing such other duties as shall be
delegated to the Committee by the Board. Messrs. Becker, Murray and Newton serve
as the members of the Compensation Committee. The Compensation Committee met one
time during the 1995 fiscal year.
The Board of Directors established an Executive Committee in March 1995.
The functions of the Executive Committee are to exercise the powers of the Board
of Directors, to the extent legally permissible, between meetings of the full
Board of Directors. Messrs. Lupton, Hill and Gonzenbach serve as the members of
the Executive Committee. The Executive Committee meets periodically.
The functions of the Nominating Committee are to recommend nominees for
election as directors to the Company's Board of Directors; to make
recommendations to the Board with regard to qualified nominees for election as
directors; to consider other matters pertaining to the size and composition of
the Board and designate members of the Board's committees and to give
appropriate consideration to qualified persons recommended by shareholders for
nomination as director, provided that such recommendations are accompanied by
sufficient information to permit the Committee to evaluate the qualifications
and experience of the nominee. Messrs. Palmer and Becker serve as the members of
the Nominating Committee. The Nominating Committee did not meet during the 1995
fiscal year.
DIRECTOR COMPENSATION
Directors currently receive no compensation from the Company for service on
the Board of Directors.
CERTAIN TRANSACTIONS
As of March 1, 1992, the Company entered into a license agreement (the
"License Agreement") with Arnold Palmer Enterprises, Inc. ("Enterprises"),
pursuant to which the Company obtained a license to use the name, likeness and
endorsement of Arnold Palmer ("Palmer") in connection with the advertisement,
promotion and sale of golf clubs, bags, balls, gloves and other products. The
License Agreement expands the scope of the Palmer license previously utilized by
the Company. In exchange for the grant of the license, the Company pays
Enterprises as a royalty a specified percentage of net sales of each different
product category. The Company also pays a minimum annual royalty regardless of
the royalty amount determined as a percentage of product sales. The License
Agreement also sets forth the manner in which the Company and Enterprises divide
sub-licensing royalties. The Company believes the License Agreement
significantly enhances its advertisement, promotion and sale of golf equipment
and apparel. The License Agreement expires March 1, 2002, but may be extended
for successive five-year periods.
On November 3, 1994, the Company completed a private placement of
$5,000,000 aggregate principal amount of 6% Subordinated Notes due November 3,
1999 (the "Notes") with detachable warrants to purchase 1,000,000 shares of the
Company's common stock at a price of $5.50 per share (the "Warrants"). The
Warrants are exercisable for five years and vest 70% upon funding, 90% after one
year and 100% after two years. The exercise price of the Warrants represents the
closing sales price of the Company's common stock on October 21, 1994, when an
agreement in principle was reached for the private placement of the Notes and
Warrants. The purchasers of the Notes and Warrants were as follows: Mr.
Lupton -- $2,400,000 in Notes and 480,000 Warrants; Enterprises -- $500,000 in
Notes and 100,000 Warrants; U.S. Summit Company -- $2,000,000 in Notes and
400,000 Warrants; Mr. Dooley -- $100,000 in Notes and 20,000 Warrants. The
Company's Board of Directors received an opinion from an investment banking firm
that the terms of the
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placement were fair to the shareholders from a financial point of view and the
disinterested directors approved the transaction.
On January 27, 1995, the Company completed an extension of its existing
secured revolving credit facility until August 30, 1996. Mr. Lupton guaranteed
payment of the credit facility. In consideration for this guaranty, Mr. Lupton
received an $850,000 Convertible Subordinated Promissory Note due August 30,
1996, which bears interest at the prime rate plus 2% (the "Convertible Note").
The Convertible Note is convertible into the Company's common stock based on a
conversion price of $6.25 per share. Mr. Lupton also received warrants to
purchase 390,000 shares of the Company's common stock exercisable for up to five
years at a price of $6.25 per share. The number of warrants can be reduced to
158,000 if the Company refinances its bank indebtedness by January 30, 1996 and
the guarantee is released as a part of that refinancing. The Company's Board of
Directors received an opinion from an investment banking firm that the
consideration paid for the guaranty was fair to the shareholders from a
financial point of view. In conjunction with this transaction, Mr. Lupton and
Mr. Gonzenbach were elected to the Company's Board of Directors. In addition,
Mr. Hill was subsequently elected to the Company's Board of Directors in March
1995.
On March 17, 1995, the Company entered a $4,000,000 revolving credit
facility with Mr. Lupton (the "Facility"), secured by a second lien on all of
the Company's assets. The Facility bore interest at a floating rate equal to the
prime rate plus 2%, and matured on December 31, 1995. At Mr. Lupton's election,
the loan could be repaid in whole or in part in the Company's shares, based on a
conversion price of $7.75 per share, which was the Company's closing price on
March 15, 1995. For each incremental $100,000 in principal outstanding under the
Facility, Mr. Lupton was to be issued 3,750 shares of the Company's common
stock, up to a maximum of 150,000 shares. The Facility was replaced on April 10,
1995 by a $4,000,000 line of credit issued by a commercial bank which was
guaranteed by Mr. Lupton.
As additional consideration for the Facility, all 390,000 stock purchase
warrants granted to Mr. Lupton in January 1995 were deemed immediately vested.
The exercise price of these warrants will be subject to downward adjustment
based on fluctuations in the trading price of the common stock of the Company on
a day-to-day basis between March 15, 1995 and December 31, 1995 or the date of
repayment of the Facility. Under the reset provision, the reset price on the
warrants shall be the greater of $5.00 per share or the average trading price of
the Company's common stock for any successive period of four calendar weeks
commencing on March 13, 1995 until the date of exercise. The Company received an
opinion from an investment banking firm that the terms of the transaction with
Mr. Lupton were fair to the shareholders from a financial point of view.
REPORTING SECURITIES TRANSACTIONS
Under the federal securities laws, the Company's directors, officers and
persons holding more than 10% of the Company's Common Stock are required to
report, within specified monthly and annual due dates, their initial ownership
of Common Stock and all subsequent acquisitions, dispositions or other transfers
of beneficial interest therein, if and to the extent reportable events occur
which require reporting by such due dates. The Company is required to describe
in this proxy statement whether, to its knowledge, any person required to file
such a report may have failed to do so in a timely manner. In this regard, all
of the Company's directors and officers are believed to have satisfied such
filing requirements in full, except for certain gifts of shares by Mr. Caldwell
during the 1994 and 1995 fiscal years.
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EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table sets forth information concerning compensation paid or
accrued for the past three fiscal years to the Chief Executive Officer, the two
other most highly compensated executive officers of the Company during the last
fiscal year, and the former Chief Executive Officer of the Company.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION OTHER ------------ ALL
FISCAL ------------------- ANNUAL OPTIONS/ OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION SARS(#) COMPENSATION
- ------------------------------- ------ -------- -------- ------------ ------------ ------------
Arthur P. Becker(2) 1995 $ 0 $ 0 $ 0 -- $ 47,917(3)
Chairman and Chief Executive
Officer
W. Ryland Dooley, III(4) 1995 86,410 0 0 -- --
Chief Operating Officer
Richard E. Wenz(5) 1995 152,173 0 85,000(6) -- --
Former Chief Executive 1994 252,500 0 0 -- --
Officer 1993 240,000 120,000 0 189,019 --
D. Scudder Graybeal 1995 94,941 0 0 -- --
Vice President -- Arnold 1994 94,400 0 0 -- --
Palmer Golf Company 1993 86,046 25,800 0 -- --
- ---------------
(1) Bonuses are accrued at the end of the fiscal year based on predetermined
Company performance objectives and paid, after recommendation by the
Compensation Committee and approval by the Board of Directors, in the
following fiscal year.
(2) Mr. Becker was appointed Chief Executive Officer of the Company on September
26, 1994. Mr. Becker resigned as Chairman and Chief Executive Officer of
the Company on March 9, 1995. Mr. Becker remains a Director of the Company.
(3) Represents payments to Mr. Becker under the terms of an agreement under
which the Company agreed to pay an annual retainer of $50,000 in monthly
installments for so long as Mr. Becker served as Chairman of the Board. The
retainer was also in consideration of Mr. Becker's services in negotiating
the Company's License Agreement with Enterprises.
(4) Mr. Dooley was appointed Chief Operating Officer of the Company on September
26, 1994. Mr. Dooley resigned as Chief Operating Officer of the Company on
June 5, 1995. Mr. Dooley has agreed to continue to serve in such capacity
until his successor is named.
(5) Mr. Wenz resigned as Chief Executive Officer of the Company on September 26,
1994.
(6) Includes reimbursed relocation expenses of $85,000.
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OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the named
executives concerning the exercise of options during the last fiscal year and
unexercised options held as of February 25, 1995:
AGGREGATED EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FY-END(#) FY-END($)
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------------ -------------- ----------- -------------- --------------------
Arthur P. Becker.................... 0 -- 135,013/0 --/--
W. Ryland Dooley, III............... 0 -- 0/0 --/--
Richard E. Wenz..................... 0 -- 189,019/0 --/--
D. Scudder Graybeal................. 0 -- 5,000/0 --/--
5,000/0 --/--
RETIREMENT PLAN
Prior to December 31, 1993, substantially all full-time salaried employees
of the Company who had completed one credited year of service were eligible to
receive benefits under the Company's Salaried Retirement Plan (the "Plan"). A
participant receives a full year of credited service for each plan year in which
1,000 or more hours of service are earned. The normal retirement benefit is 1.5%
of final-average earnings multiplied by years of benefit accrual service minus
1.42857% of Primary Social Security Benefit multiplied by years of benefit
accrual service not in excess of 35. Final-average earnings is the greater of
earnings in the last 12 months of employment and average earnings during the
last 60 months of employment. The cash and bonus compensation shown in the
Summary Compensation Table above are earnings covered by the Plan. The normal
form of retirement benefit is a life annuity.
During fiscal 1994, the Company curtailed the benefits under the Plan.
Under this curtailment, nonunion employees that are not at least age 50 with at
least five years of service will accrue no further benefits under the Plan.
During fiscal 1994, the Company established a 401(k) profit-sharing plan
covering substantially all employees at least 21 years of age with six months of
service. The 401(k) plan allows for employees to contribute a portion of their
compensation subject to certain limitations. The Company may make discretionary
contributions to the 401(k) plan.
As of February 25, 1995, the number of years of credited service for Mr.
Graybeal was 21. Messrs. Becker and Dooley are not eligible to receive benefits
under the Plan. Mr. Wenz, at the time of his resignation from positions with the
Company, had two years of credited service.
8
12
The table below shows the estimated annual pension payable under the
Retirement Plan to an employee, including an employee who is a Director or
executive officer, upon retirement in 1994 at age 65 after selected periods of
service.
YEARS OF SERVICE
-------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------ ------- ------- ------- ------- -------
$ 75,000 13,900 18,600 23,200 27,900 32,600
90,000 17,300 23,100 28,900 34,600 40,400
120,000 24,000 32,100 40,100 48,100 56,200
250,000 50,100 66,800 83,600 100,300 115,600
450,000 115,641* 115,641* 115,641* 115,641* 115,641*
- ---------------
* Federal law requires that compensation in excess of $150,000 per year be
excluded for purposes of determining pension benefits in qualified retirement
plans, effective January 1, 1994. However, for those employees whose
compensation exceeded $150,000 prior to 1994, additional benefits may be paid
as a result of benefits accrued prior to 1994.
AGREEMENTS WITH CERTAIN EXECUTIVE OFFICERS
Mr. Dooley resigned as Chief Operating Officer of the Company on June 5,
1995. Mr. Dooley has agreed to continue to serve in such capacity until his
successor is named. The Company has agreed to pay Mr. Dooley at the time of his
departure a severance payment equal to 30 days of his base salary. In connection
with Mr. Dooley's resignation, Mr. Lupton has agreed to purchase the $100,000 in
Notes and 20,000 Warrants purchased by Mr. Dooley from the Company on November
3, 1994.
REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board of Directors establishes the
general compensation policies of the Company and the compensation plans and
specific compensation levels for executive officers, and administers the various
stock option, management incentive and retirement plans maintained by the
Company. The Compensation Committee is composed of three independent,
non-employee directors who have no interlocking relationships as defined by the
Securities and Exchange Commission.
EMPLOYEE INCENTIVE STOCK OPTION PLAN
The Company maintains an Amended and Restated ProGroup Employee Incentive
Stock Option Plan ("Incentive Option Plan"), pursuant to which key executive
employees are eligible for the grant of incentive options in Common Stock, as an
incentive and reward, such grants being determined by the Compensation
Committee. The aggregate number of shares that may be issued under the Incentive
Option Plan is 500,000. As of February 25, 1995, 244,700 shares remained
available for future issuance. The option price per share under the Incentive
Option Plan cannot be less than the fair market value of the Common Stock at the
date of grant and the term of the option cannot exceed 10 years.
INCENTIVE COMPENSATION PLAN
The Board of Directors has adopted the ProGroup, Inc. Incentive
Compensation Plan ("Incentive Plan"). The purpose of the Incentive Plan is to
attract, retain and reward executive officers and key employees by offering
performance based incentives payable in cash and/or stock options.
Executive officers and other key employees are eligible to participate in
the Incentive Plan, which is administered by the Compensation Committee. Awards
under the Incentive Plan are granted to participants on an annual basis to the
extent the Company has achieved certain target levels of earnings before taxes
and
9
13
return on net assets set by management and approved by the Board of Directors at
the beginning of such year. No awards were granted under the Incentive Plan for
fiscal 1995.
EXECUTIVE OFFICER COMPENSATION
The current Chief Executive Officer of the Company is not an employee of
the Company and serves without compensation. The base salary of the Chief
Operating Officer (COO) is based upon the salaries for persons holding a similar
position at comparable companies. Awards to the COO under the Incentive Plan are
granted on an annual basis to the extent the Company has achieved certain target
levels of earnings before taxes and return on net assets set by management and
approved by the Board of Directors at the beginning of such year.
The Compensation Committee has adopted similar policies with respect to
compensation of other executive officers of the Company. Using salary survey
data from various sources, the committee establishes base salaries that are
within the range of salaries for persons holding similarly-responsible positions
at other companies. In addition, the committee considers factors such as
relative Company performance, the individual's past performance and future
potential in establishing the base salaries of executive officers.
The committee's policy regarding other elements of the compensation package
for senior executive officers is similar to that of the COO's in that the annual
bonus is tied to achievement of performance targets. In addition to the
Company's achievement of targeted earnings before taxes and return on net assets
levels as described above, the Compensation Committee also considers the
executive officer's achievement of individual performance objectives relating to
the overall success of the Company, such as increased sales, improved
productivity, enhanced operational efficiencies, and other factors which lead to
greater overall profitability.
Submitted by the Compensation Committee of the Company's Board of Directors
Arthur P. Becker, Member
John P. Murray, Jr., Member
Russell B. Newton, III, Member
10
14
COMPANY PERFORMANCE
The following graph shows a comparison of cumulative total returns to
shareholders of the Company, assuming reinvestment of dividends, for the
five-year period ending at the end of the 1995 fiscal year, with the return
from: (i) the NASDAQ Stock Market Total Return Index and (ii) an Index for
NASDAQ stocks in Standard Industrial Classification 394 (Toys and Sporting Goods
Companies).
CRSP Total Returns Index for: 02/23/90 02/25/91 02/25/92 02/25/93 02/25/94 02/24/95
- ---------------------------- -------- -------- -------- -------- -------- --------
PROGROUP, INC. 100.0 58.3 84.0 91.2 132.0 67.2
Nasdaq Stock Market (US Companies) 100.0 111.4 156.8 169.1 199.1 203.3
NASDAQ Stocks (SIC 3940-3949 US Companies) 100.0 100.2 132.0 124.2 153.8 117.5
Dolls, Toys, Games and Sporting and Athletic Goods
Notes:
A. The lines represent monthly index levels derived from compounded daily returns that include all dividends.
B. The indexes are reweighted daily, using the market cpaitalization on the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 02/23/90.
11
15
PROPOSAL 2: AUTHORIZATION OF PREFERRED STOCK
On April 12, 1995, the Board of Directors unanimously approved and
recommended that the shareholders approve an amendment to Part I, Paragraph 6.A.
of the Company's Restated Charter (the "Charter") that would create and
authorize the issuance of up to 1,000,000 shares of preferred stock in one or
more series having such terms and preferences as may be designated from time to
time by the Board of Directors. To be adopted, the proposal requires the
affirmative vote of the holders of a majority of all of the outstanding shares
of Common Stock of the Company entitled to vote thereon at the meeting. The
Board of Directors believes that it is in the best interests of the Company and
its shareholders to amend the Charter to give effect to the proposed amendment.
Part I, Paragraph 6.A. of the Charter, as amended by the proposed
amendment, would read as follows:
AUTHORIZED SHARES. The maximum number of shares that the corporation
is authorized to issue is ten million (10,000,000) shares of common stock,
having a par value of Fifty Cents ($.50) per share and one million
(1,000,000) shares of preferred stock, having a par value of Fifty Cents
($.50) per share. The Board of Directors is authorized, subject to any
limitations prescribed by law, to provide for the issuance from time to
time of the shares of preferred stock in one or more additional series, and
by adopting resolutions to establish from time to time the number of shares
to be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of such series and any
qualifications, limitations or restrictions thereof. Upon adopting such
resolution or resolutions, the Board of Directors shall cause a certificate
of designation setting forth such resolution or resolutions and the number
of shares of stock of such class or series as to which such resolution or
resolutions shall apply to be executed and filed in accordance with
applicable Tennessee law.
The Board of Directors considers the proposed creation and authorization of
the issuance of preferred shares desirable because it would give the Company the
necessary flexibility to issue preferred stock in connection with offerings,
financing, acquisitions and for other general corporate purposes without the
expense and delay incidental to obtaining shareholder approval of a charter
amendment at the time of such action. The Company has no present plans,
arrangements or understandings to issue preferred stock pursuant to an offering
or otherwise.
Although the Board of Directors has no present intention of issuing
additional shares for such purposes, the proposed creation and authorization of
the issuance of such preferred stock could enable the Board of Directors to
render more difficult or discourage an attempt by another person or entity to
obtain control of the Company. Such preferred shares could be issued by the
Board of Directors in a public or private sale, merger or similar transaction,
increasing the number of outstanding shares and thereby diluting the equity
interest and voting power of a party attempting to obtain control of the
Company. The amendment of the Charter is not being proposed in response to any
known effort to acquire control of the Company.
The Board of Directors unanimously recommends a vote "FOR" the approval of
the amendment to Part I, Paragraph 6.A. of the Company's Charter to create and
authorize the issuance of preferred stock.
PROPOSAL 3: RATIFICATION OF APPOINTMENT OF AUDITORS
Upon the recommendation of the Audit Committee, the Board of Directors
appointed Arthur Andersen LLP, independent public accountants, to serve for the
fiscal year ending February 24, 1996. Although shareholder ratification is not
required by the Company's charter or by-laws, or under applicable law, the Board
of Directors requests your ratification.
Representatives of Arthur Andersen LLP will be present at the annual
meeting and will be given an opportunity to make a statement, if they desire,
and to respond to questions.
12
16
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the 1996 Annual
Meeting must be received by the Company not later than February 18, 1996 for
inclusion in its Proxy Statement and form of proxy relating to that meeting. Any
such proposals, as well as any questions relating thereto, should be directed to
ProGroup, Inc., 6201 Mountain View Road, Ooltewah, Tennessee 37363.
June 19, 1995
13
17
APPENDIX A
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.
MARKET PRICES
The Company's common shares trade on The Nasdaq Stock Market under the
symbol "PRGR." Based upon transfer agent records, the Company's common shares
were held by approximately 1,200 shareholders as of May 19, 1995. A quarterly
summary of the high and low market prices per common share for fiscal 1995 and
1994 as reported by Nasdaq is shown below:
1995 1994
---------------- -----------------
HIGH LOW HIGH LOW
------ ----- ------ ------
Quarter ended:
May.......................................... $13.75 $9.50 $14.50 $10.00
August....................................... 10.25 5.75 16.00 12.25
November..................................... 10.25 5.50 14.75 12.50
February..................................... 9.00 5.75 16.50 12.00
DIVIDENDS
Payment of dividends is at the discretion of the Company's Board of
Directors and depends, among other factors, on earnings, capital requirements
for planned growth, and the operating and fiscal condition of the Company. The
Company's loan agreements currently prohibit the payment of dividends. No
dividends were paid during fiscal 1995 and 1994.
SELECTED FINANCIAL DATA.
FISCAL YEAR ENDED 1992
----------------------------------------------- TRANSITION
1995 1994 1993 1991 1990 PERIOD
------- ------- ------- ------- ------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Operations Information:
Net sales from continuing operations.... $24,621 $24,726 $18,697 $18,623 $22,648 $ 4,425
Income (loss) from continuing
operations............................ $(9,460) $(1,054) $(1,016) $ (702) $ (691) $ (2,617)
Balance Sheet Information:
Total assets............................ $31,271 $40,258 $36,435 $27,275 $28,039 $ 25,060
Long-term obligations outstanding....... $ 7,473 $ 3,621 $ 572 $ 2,409 $ 1,859 $ 651
Per Common Share Data:
Income (loss) per share from continuing
operations............................ $ (3.73) $ (.42) $ (.42) $ (.30) $ (.28) $ (1.11)
Dividends per share..................... $ 0 $ 0 $ 0 $ .10 $ .20 $ 0
Common shares outstanding at end of
period................................ 2,539 2,537 2,517 2,353 2,372 2,353
In February 1992, the Board of Directors of the Company approved a change
in fiscal year end from one ending on the Saturday closest to the end of
September to one ending on the Saturday closest to the end of February. Selected
financial data for fiscal 1995, 1994 and 1993 relates to the years ended
February 25, 1995, February 26, 1994, and February 27, 1993, while fiscal 1991
and 1990 relate to the years ended September 28, 1991, and September 29, 1990,
respectively. The 1992 transition period relates to the five-month period ended
February 22, 1992.
Effective February 28, 1993, the Company elected to change its method of
inventory valuation from the last-in, first-out ("LIFO") method to the first-in,
first-out ("FIFO") method. As required by generally accepted accounting
principles, the Company has retroactively restated the prior period financial
statements for this change.
In May, 1995, the Company sold its Duckster line of business. The results
of discontinued operations have been reported separately from the results of
continuing operations.
A-1
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
COMPARISON OF YEARS ENDED FEBRUARY 25, 1995, AND FEBRUARY 26, 1994
Financial Condition
As of February 25, 1995, the Company had working capital of $2.8 million
and a current ratio of 1.1 to 1. The Company generally relies upon internally
generated cash and short-term borrowings to satisfy working capital and normal
capital expenditure needs. The Company maintains a $16 million short-term line
of credit. Outstanding borrowings under the short-term line of credit as of
February 25, 1995, were $11.8 million. Advances under this line bear interest at
a variable rate based on the prime rate less .50% (8.5% at February 25, 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 fiscal year 1995, cash was provided primarily through the issuance
of subordinated debt and warrants of $5.0 million, the decrease in accounts
receivable of $4.9 million, the increase in accrued liabilities of $1.4 million
and the increase of $1.2 million in the revolving line of credit.
Cash, generated from the above sources, was used primarily to fund the
operating loss. The Company believes that available borrowings under its lines
of credit and internally generated funds are sufficient to support the current
working capital and capital expenditure requirements during fiscal 1996. The
Company expects capital expenditures to be approximately $700,000 in fiscal
1996.
Results of Operations
Net sales from continuing operations for fiscal year 1995 decreased
slightly by $105,000, to $24.6 million, compared with fiscal 1994. Retail sales
increased 38% resulting from a 48% increase in club sales and a 20% increase in
bag sales. Sales to golf courses and golf shops decreased 28% to $10.2 million
from $14.1 million in fiscal 1994. The decrease was primarily in club sales
while bag sales were relatively unchanged. Gross profit as a percent of net
sales decreased to 13.6% in fiscal 1995 from 29.5% in the prior year. Large
inventory write-downs and manufacturing inefficiencies, especially in the
Company's bag production facilities, were the primary reasons for this decrease.
The Company's new management has taken a more aggressive approach to
selling prior season inventories in order to turn them into cash more quickly
than in prior years. During fiscal 1995, the Company took steps to outsource a
portion of its bag production in order to decrease manufacturing variances.
Selling expenses increased by $1.4 million or 28.8% for fiscal 1995
compared to the previous year. Advertising expenses for clubs comprised the
majority of the increase along with increases in expenditures for playing pro
contracts and salesmen's commissions on retail sales.
General and administrative expenses increased $0.4 million or 9.8% in
fiscal 1995. Increased legal and professional services, employee relocation
costs and a full year of funding the Company's 401(k) plan were the major
factors in the increase.
A-2
19
Interest expense increased 127%, or $0.8 million, in fiscal 1995 compared
to fiscal 1994. Increased long-term borrowings from the issuance of $5.0 million
of subordinated debt and higher interest rates on the Company's short-term line
of credit and term loan caused the increase.
During fiscal year 1995, the Company recorded an income tax provision of
$735,000. The income tax provision was principally the result of recording a
valuation allowance against previously recognized deferred tax assets due to the
uncertainty of the realization of the related benefits.
Impact of Inflation and Changing Prices
Management believes that the impact of inflation and other changes in
prices during fiscal 1995 and 1994 had no material effect on the Company's
financial condition or operating results.
COMPARISON OF YEARS ENDED FEBRUARY 26, 1994, AND FEBRUARY 27, 1993
Financial Condition
As of February 26, 1994, the Company had working capital of $9.2 million
and a current ratio of 1.4 to 1. The Company maintained a $14.0 million
short-term line of credit which was utilized as needed in fiscal year 1994.
Outstanding borrowings under the short-term line of credit as of February 26,
1994, were $10.7 million. Additionally, during fiscal year 1994, the Company
obtained proceeds of $3.0 million from a seven-year term loan which bears
interest at 6.5%. These funds were used primarily for working capital purposes.
At February 26, 1994, 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.
The Company obtained a waiver from the bank for the year-end loan covenant
violations. Due to the loan covenant violations, the remaining balance of the
term loan was included in current maturities of long-term debt in the balance
sheet as of February 26, 1994.
During fiscal 1994, cash was provided primarily through long-term borrowing
of $3.2 million and a net increase in short-term borrowings of $2.3 million on
the line of credit.
Cash was used primarily to fund the operating loss and to finance
receivables, which increased $2.1 million, and prepaid expenses, which increased
$1.3 million compared with February 27, 1993. Additionally, $905,000 was spent
on capital additions.
Results of Operations
Net sales for fiscal 1994 increased by $6.0 million, or 32%, compared with
fiscal 1993. Retail sales increased by 79% resulting from nearly a quadrupling
of club sales offset by a slight decrease in bag sales. Sales to golf courses
and golf shops increased moderately by 13% compared with fiscal 1993. Gross
profit as a percent of net sales increased to 29.5% from 28.0%.
Selling expenses increased by $1.7 million, or 51.1%, for fiscal 1994
compared with fiscal 1993. Advertising expenses were the largest factor in this
change, while salesmen's salaries and commissions and related payroll taxes also
increased.
General and administrative expenses increased by $135,000, or 3.4%,
compared with fiscal 1993. Increases in salaries, other professional services,
rental and lease payments and stockholder transfer and relations expenses were
offset by decreased bonus expense and bad debt expense.
Other income increased $209,000, or 41%, in fiscal 1994 compared with the
prior year primarily due to recording a $394,000 curtailment gain on freezing
the Company's hourly and salaried defined benefit plans and replacing them with
a 401(k) savings plan.
Interest expense increased by $407,000, or 215%, in fiscal 1994 compared
with fiscal 1993. The increase was due to increased borrowings under the
Company's short-term line of credit and the additional borrowings from the $3.0
million term loan.
A-3
20
Effective February 28, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS 109") using
the cumulative catch-up method. The cumulative effect of adopting SFAS 109 was
not material. The income tax benefit recorded by the Company in fiscal 1994 was
based on the provisions of SFAS 109. The fiscal 1993 income tax position was
based on an effective tax rate of 40%.
A-4
21
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants
Balance Sheets as of February 25, 1995 and February 26, 1994
Statements of Operations for the Years Ended February 25, 1995, February
26, 1994 and February 27, 1993
Statements of Stockholders' Equity for the Years Ended February 25, 1995,
February 26, 1994 and February 27, 1993
Statements of Cash Flows for the Years Ended February 25, 1995, February
26, 1994 and February 27, 1993
Notes to Financial Statements
A-5
22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of ProGroup, Inc.:
We have audited the accompanying balance sheets of PROGROUP, INC. (a
Tennessee corporation) as of February 25, 1995 and February 26, 1994 and the
related statements of operations, stockholders' equity and cash flows for the
years ended February 25, 1995, February 26, 1994, and February 27, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ProGroup, Inc. as of
February 25, 1995 and February 26, 1994 and the results of its operations and
its cash flows for the years ended February 25, 1995, February 26, 1994, and
February 27, 1993 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
May 18, 1995
A-6
23
PROGROUP, INC.
BALANCE SHEETS
FEBRUARY 25, 1995 AND FEBRUARY 26, 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1995 1994
------- -------
ASSETS
CURRENT ASSETS:
Cash................................................................... $ 34 $ 50
Accounts receivable, less allowance for doubtful accounts of $1,049 in
1995 and $478 in 1994............................................... 7,184 12,093
Refundable income taxes and deferred income tax benefit................ 0 783
Inventories............................................................ 15,101 15,706
Prepaid expenses and other............................................. 478 1,059
------- -------
Total current assets........................................... 22,797 29,691
------- -------
PROPERTY, PLANT, AND EQUIPMENT, net...................................... 3,778 7,749
------- -------
OTHER ASSETS:
Non-current assets of discontinued operations.......................... 2,423 0
Goodwill............................................................... 85 793
Other.................................................................. 2,188 2,025
------- -------
Total other assets............................................. 4,696 2,818
------- -------
$31,271 $40,258
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations............................ $ 407 $ 3,025
Short-term borrowings from bank........................................ 11,829 10,661
Accounts payable....................................................... 4,120 4,160
Accrued liabilities.................................................... 3,629 2,635
------- -------
Total current liabilities...................................... 19,985 20,481
------- -------
LONG-TERM OBLIGATIONS, net of current maturities......................... 7,066 596
------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERS' EQUITY:
Common stock, $.50 par value, 10,000,000 and 4,000,000 shares
authorized in 1995 and 1994, respectively; 2,539,366 and 2,536,866
shares issued and outstanding in 1995 and 1994, respectively........ 1,270 1,268
Additional paid-in capital............................................. 4,118 2,295
Retained earnings (deficit)............................................ (1,168) 15,618
------- -------
Total stockholders' equity..................................... 4,220 19,181
------- -------
$31,271 $40,258
======= =======
The accompanying notes are an integral part of these statements.
A-7
24
PROGROUP, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 25, 1995, FEBRUARY 26, 1994, AND FEBRUARY 27, 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEARS
--------------------------------
1995 1994 1993
-------- ------- -------
NET SALES.................................................... $ 24,621 $24,726 $18,697
COST OF SALES................................................ 21,280 17,427 13,457
-------- ------- -------
Gross profit....................................... 3,341 7,299 5,240
SELLING EXPENSES............................................. 6,368 4,959 3,282
GENERAL AND ADMINISTRATIVE EXPENSES.......................... 4,520 4,105 3,970
-------- ------- -------
(7,547) (1,765) (2,012)
-------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense........................................... (1,354) (596) (189)
Gain on pension curtailment................................ 0 394 0
Other, net................................................. 176 323 508
-------- ------- -------
(1,178) 121 319
-------- ------- -------
Loss from continuing operations before income
taxes............................................ (8,725) (1,644) (1,693)
BENEFIT (PROVISION) FOR INCOME TAXES......................... (735) 590 677
-------- ------- -------
LOSS FROM CONTINUING OPERATIONS.............................. (9,460) (1,054) (1,016)
-------- ------- -------
DISCONTINUED OPERATIONS (NOTE 10):
Income (loss) from discontinued operations, net of tax
benefit (provision) of $0, $513, and $(1,233) in 1995,
1994 and 1993, respectively............................. (6,082) (920) 1,849
Loss on disposal of discontinued operations................ (1,244) 0 0
-------- ------- -------
(7,326) (920) 1,849
-------- ------- -------
NET INCOME (LOSS)............................................ $(16,786) $(1,974) $ 833
======== ======= =======
NET INCOME (LOSS) PER SHARE FROM:
Continuing operations...................................... $ (3.73) $ (.42) $ (.42)
Discontinued operations.................................... (2.88) (.36) .77
-------- ------- -------
$ (6.61) $ (.78) $ .35
======== ======= =======
The accompanying notes are an integral part of these statements.
A-8
25
PROGROUP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 25, 1995, FEBRUARY 26, 1994, AND FEBRUARY 27, 1993
(IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED
--------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ---------- -------- --------
BALANCE at February 22, 1992..................... 2,353 $1,176 $ 915 $ 16,759 $ 18,850
Net income..................................... 0 0 0 833 833
Exercise of stock options...................... 14 7 70 0 77
Issuance of common stock....................... 150 75 1,140 0 1,215
----- ------ ------ -------- --------
BALANCE at February 27, 1993..................... 2,517 1,258 2,125 17,592 20,975
Net loss....................................... 0 0 0 (1,974) (1,974)
Exercise of stock options...................... 20 10 170 0 180
----- ------ ------ -------- --------
BALANCE at February 26, 1994..................... 2,537 1,268 2,295 15,618 19,181
Net loss....................................... 0 0 0 (16,786) (16,786)
Exercise of stock options...................... 2 2 17 0 19
Issuance of warrants for 1,158 shares of
common stock................................ 0 0 1,806 0 1,806
----- ------ ------ -------- --------
BALANCE at February 25, 1995..................... 2,539 $1,270 $4,118 $ (1,168) $ 4,220
===== ====== ====== ======== ========
The accompanying notes are an integral part of these statements.
A-9
26
PROGROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 25, 1995, FEBRUARY 26, 1994, AND FEBRUARY 27, 1993
(IN THOUSANDS)
FISCAL YEARS
------------------------------
1995 1994 1993
-------- ------- -------
OPERATING ACTIVITIES:
Net income (loss)............................................ $(16,786) $(1,974) $ 833
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization............................. 832 791 721
Deferred income tax provision (benefit)................... 476 (1,103) 667
Gain on pension curtailment............................... 0 (394) 0
Loss on disposal of property, plant, and equipment........ 114 5 7
Loss on disposal of discontinued operations............... 1,244 0 0
Other..................................................... 348 0 0
Changes in operating assets and liabilities:
Accounts receivable..................................... 4,909 (2,078) (6,384)
Refundable income taxes and deferred income tax
benefit.............................................. 259 876 399
Inventories............................................. 605 (340) (5,154)
Prepaid expenses and other.............................. 1,117 (1,327) (459)
Accounts payable........................................ (40) 308 1,891
Accrued liabilities..................................... 1,420 924 (276)
-------- ------- -------
Net cash used in operating activities................ (5,502) (4,312) (7,755)
-------- ------- -------
INVESTING ACTIVITIES:
Additions to property, plant, and equipment.................. (400) (905) (1,058)
Proceeds from sale of property, plant, and equipment......... 117 0 0
Other........................................................ 0 (122) (6)
-------- ------- -------
Net cash used in investing activities................ (283) (1,027) (1,064)
-------- ------- -------
FINANCING ACTIVITIES:
Net increase in short-term borrowings from bank.............. 1,168 2,326 7,606
Proceeds from debt issuance and related warrants............. 5,000 0 0
Proceeds from term debt...................................... 0 3,000 0
Principal payments on long-term obligations.................. (418) (167) (79)
Issuance of common stock..................................... 19 180 1,292
-------- ------- -------
Net cash provided by financing activities............ 5,769 5,339 8,819
-------- ------- -------
NET DECREASE IN CASH........................................... (16) 0 0
CASH, beginning of period...................................... 50 50 50
-------- ------- -------
CASH, end of period............................................ $ 34 $ 50 $ 50
======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments (refunds) during the period for:
Interest.................................................. $ 1,088 $ 544 $ 174
======== ======= =======
Income taxes, net......................................... $ (534) $ (365) $ 52
======== ======= =======
The accompanying notes are an integral part of these statements.
A-10
27
PROGROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(For purposes of these financial statements, "fiscal years 1995, 1994, and
1993" relate to the years ended February 25, 1995, February 26, 1994, and
February 27, 1993, respectively. All monetary amounts are expressed in thousands
of dollars unless contrarily evident.)
1. COMPANY BACKGROUND
ProGroup, Inc. ("ProGroup" or the "Company") was incorporated in Tennessee
in 1931 and began operations as the Professional Golf Co., Inc. In 1966 it
merged with First Flight Co. and in 1975 changed its name to ProGroup, Inc.
ProGroup manufactures, markets and distributes a full line of golf products,
including Arnold Palmer, Peerless and First Flight golf equipment; Hot-Z golf
bags and luggage; and Duckster headwear, outerwear and shirts. ProGroup owns,
subject to certain exceptions, the exclusive worldwide right to the Arnold
Palmer trade name in connection with the Company's manufacture, sale and
distribution of golf products. The Company sells primarily to retailers and
grants credit to customers based on defined payment terms. Three large retail
customers accounted for 36%, 23%, and 19%, of net sales from continuing
operations for fiscal 1995, 1994, and 1993, respectively.
As discussed in Note 10, on May 5, 1995, the Company sold the Duckster line
of headwear, outerwear, and shirts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Discontinued Operations
Consistent with the provisions of Accounting Principles Board Opinion No.
30 ("APB 30"), the results of discontinued operations have been reported
separately from the results of continuing operations, and a provision has been
made for the estimated loss on the disposal of the Duckster line of business.
Inventories
Effective February 28, 1993, the Company retroactively changed its method
of valuing inventories from the last-in, first-out ("LIFO") method to the
first-in, first-out ("FIFO") method (Note 3). Inventories are valued at the
lower of cost or market. Cost includes material, labor and factory overhead.
Market is net realizable value for finished goods. For raw materials and work in
process, market is replacement cost.
Goodwill
The excess of cost over net book value of companies acquired ("goodwill")
relates to businesses acquired before November 1, 1970, and is not required to
be amortized. The Company continually evaluates whether later events and
circumstances have occurred which would indicate that goodwill is not
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the related businesses'
undiscounted net income in measuring whether goodwill is recoverable.
A-11
28
PROGROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost, less accumulated
depreciation and amortization. Expenditures for maintenance and repairs are
charged to expense as incurred. The property, plant, and equipment balances
consisted of the following at February 25, 1995 and February 26, 1994:
1995 1994
------- -------
Land............................................................. $ 479 $ 703
Buildings and improvements....................................... 4,351 6,124
Machinery and equipment.......................................... 1,859 5,852
Furniture, fixtures, and leasehold improvements.................. 829 920
Construction in progress......................................... 173 257
------- -------
7,691 13,856
Less accumulated depreciation and amortization................... (3,913) (6,107)
------- -------
$ 3,778 $ 7,749
======= =======
Included in non-current assets of discontinued operations is $2,111 of
property, plant, and equipment stated at the lower of cost or estimated net
realizable value.
Depreciable assets are depreciated principally using the straight-line
method for financial reporting purposes and accelerated methods for income tax
purposes over the estimated useful lives of the related assets. The estimated
useful lives used in computing annual depreciation provisions are as follows:
YEARS
-------
Buildings and improvements.................................................. 5 to 31
Machinery and equipment..................................................... 3 to 10
Furniture, fixtures and leasehold improvements.............................. 3 to 10
Fiscal Year
The Company's fiscal year is based on a 52-53-week period ending on the
Saturday closest to the end of February.
Net Income (Loss) Per Share
The computation of net income (loss) per share is based on the weighted
average number of common shares outstanding during the period after adding
common stock equivalents having a dilutive effect. The weighted average number
of shares and equivalents outstanding for fiscal 1995, 1994, and 1993 are
2,537,876, 2,521,674, and 2,394,747, respectively.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
fiscal 1995 financial statement presentation.
A-12
29
PROGROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventories as of February 25, 1995 and February 26, 1994, were as follows:
1995 1994
------- -------
Raw materials.................................................... $ 4,521 $ 6,352
Work-in-process.................................................. 1,474 1,605
Finished goods................................................... 9,106 7,749
------- -------
$15,101 $15,706
======= =======
4. SHORT-TERM BORROWINGS
Short-term borrowings during fiscal 1995 and 1994 consisted 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 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 convertible note and a warrant to purchase up to 390,000 common shares of
the Company (Notes 5 and 8). 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 short-term borrowing arrangement with the bank permits borrowings of
the lesser of $16,000 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, and
$2,000. Advances under this line of credit bear interest at the bank's base rate
less .50% (8.5% at February 25, 1995). At February 25, 1995, the Company had
borrowed up to the borrowing base ($11,460) on the line of credit.
The Company also may borrow from the bank, subject to consent from the
Guarantor, an additional $3,000 over the borrowing base which bears interest at
the bank's base rate less .25% (8.75% at February 25, 1995). At February 25,
1995, $369 was outstanding under this overline advance facility and $342 was
reserved for outstanding letters of credit. The unused amount available under
the overline advance account, subject to consent from the Guarantor, was $2,289.
The weighted average interest rate on short-term borrowings at February 25, 1995
and February 26, 1994 was 8.51% and 5.37%, respectively. Short-term borrowings
and the term loan with the bank (Note 5) are secured by accounts receivable,
inventories, machinery and equipment, and certain real property.
Subsequent to year end, the Company entered into an additional $4,000 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.
A-13
30
PROGROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following at February 25, 1995, and
February 26, 1994:
1995 1994
------ ------
Term loan with bank (Note 4), due in monthly installments of $45
(including interest at 9.5%) through November 2000............... $2,590 $2,912
Capital lease obligation, due in monthly installments of $9
(including interest at 10.0%) through December 2000.............. 456 511
Subordinated notes ($5,000 face amount) to related parties, net of
discount of $1,589, interest payable quarterly at 6.0% (effective
interest rate of 15.9%), due November 2, 1999.................... 3,411 0
Subordinated convertible note to Guarantor, interest payable
quarterly at the prime rate plus 2% (11.0% at February 25, 1995),
due August 30, 1996.............................................. 850 0
Other obligations.................................................. 166 198
------ ------
7,473 3,621
Less: current maturities........................................... (407) (3,025)
------ ------
$7,066 $ 596
====== ======
In November 1994, the Company completed a private placement of $5,000 in
subordinated notes. The holders of the $5,000 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 subordinated note (Note 4) 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.
Future minimum payments on long-term obligations as of February 25, 1995,
were as follows:
1996.......................................... $ 407
1997.......................................... 1,297
1998.......................................... 492
1999.......................................... 524
2000.......................................... 3,950
Thereafter.................................... 803
------
$7,473
======
6. INCOME TAXES
Income tax benefit (provision) from continuing operations consists of:
FISCAL YEARS
--------------------------------
1995 1994 1993
----- ---- -----
Current................................. $ 0 $ 0 $(136)
Deferred................................ (735) 590 813
----- ---- -----
$(735) $590 $ 677
===== ==== =====
A-14
31
PROGROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax assets and liabilities for fiscal 1995 and 1994,
reflect the impact of temporary differences between the amounts of assets and
liabilities for financial reporting and income tax reporting purposes. Temporary
differences and carryforwards which give rise to deferred tax assets and
liabilities at February 25, 1995, and February 26, 1994, are as follows:
1995 1994
------ ------
Deferred tax assets:
Tax loss carryforwards........................................... $5,299 $1,059
Inventory and receivables reserves............................... 1,274 629
Other accruals and reserves...................................... 1,356 559
------ ------
7,929 2,247
------ ------
Deferred tax assets valuation allowance............................ (6,726) 0
------ ------
Deferred tax liabilities:
LIFO to FIFO change.............................................. 627 786
Prepaid expenses................................................. 131 555
Excess tax depreciation.......................................... 141 155
Other............................................................ 304 275
------ ------
1,203 1,771
------ ------
Net deferred tax asset............................................. $ 0 $ 476
====== ======
The provision for income taxes in fiscal 1995 results principally from
recording a valuation allowance against previously recognized deferred tax
assets due to the uncertainty of the realization of the related benefits. At
February 25, 1995, the Company had federal tax loss carryforwards of
approximately $13,900 which expire in years 2007 through 2010 if not utilized
earlier.
The difference between the benefit (provision) for income taxes and the
amount computed by multiplying the loss from continuing operations before income
taxes by the statutory rate is summarized as follows:
FISCAL YEARS
------------------------
1995 1994 1993
------ ---- ----
Expected tax benefit........................................ $2,966 $559 $575
Increase in valuation allowance relating to continuing
operations................................................ (3,791) 0 0
State income taxes, net of federal income tax benefit....... 349 66 68
Other, net.................................................. (259) (35) 34
------ ---- ----
Benefit (provision) for income taxes from
continuing operations........................... $ (735) $590 $677
====== ==== ====
A valuation allowance was recorded related to the entire amount of losses
from discontinued operations in fiscal 1995; accordingly, no income tax
provision or benefit was recognized for discontinued operations in 1995.
7. EMPLOYEE BENEFIT PLANS
Pension Plans
The Company has noncontributory defined benefit pension plans covering
substantially all salaried and hourly employees. The plans provide benefits
based on years of service and compensation levels. The Company's funding policy
is consistent with the requirements of the Employee Retirement Income Security
Act of 1974. Plan assets are invested primarily in common stocks and corporate
debt securities.
A-15
32
PROGROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Pension income for fiscal 1995, 1994, and 1993 included the following
components:
FISCAL YEARS
-------------------------
1995 1994 1993
----- ----- -----
Service cost............................................... $ 97 $ 199 $ 225
Interest cost on projected benefit obligation.............. 376 371 404
Actual (return) loss on plan assets........................ 177 (456) (596)
Net amortization and deferral.............................. (932) (592) (45)
----- ----- -----
Net pension income......................................... $(282) $(478) $ (12)
===== ===== =====
The following table sets forth the funded status of the plans as of
February 25, 1995 and February 26, 1994:
1995 1994
------ ------
Actuarial present value of benefit obligation:
Vested benefit obligation........................................ $4,104 $4,800
Nonvested benefit obligation..................................... 0 0
------ ------
Accumulated benefit obligation................................... $4,104 $4,800
====== ======
Projected benefit obligation....................................... $4,338 $5,073
Plan assets at fair value.......................................... 5,634 6,528
------ ------
Projected benefit obligation less than plan assets................. 1,296 1,455
Unrecognized net gain.............................................. (155) (305)
Unrecognized prior service cost.................................... 196 42
Unrecognized initial net asset..................................... (538) (675)
------ ------
Net pension asset recognized on the balance sheets................. $ 799 $ 517
====== ======
The following assumptions were used to measure the net periodic pension
income and the projected benefit obligation:
FISCAL YEARS
----------------------
1995 1994 1993
---- ---- ----
Discount rate used to determine the projected benefit
obligation.................................................... 8.0% 7.0% 8.0%
Rate of increase in future compensation levels used to determine
the projected benefit obligation.............................. 5.0% 5.0% 5.0%
Expected long-term rate of return on plan assets used to
determine net periodic pension income......................... 9.5% 9.5% 9.5%
During fiscal 1994, the Company curtailed the benefits under its defined
benefit plans. Under this curtailment, nonunion employees that are not at least
age 50 with at least five years of service will accrue no further benefits under
the plan. As a result of this partial curtailment, a gain of $394 has been
reflected in the net amortization and deferral component of pension income for
fiscal 1994. This gain is separately classified in other income in the
accompanying statement of operations.
401(k) Profit-Sharing Plan
During fiscal 1994, the Company established a 401(k) profit-sharing plan
covering substantially all employees at least 21 years of age with six months of
service. The Plan allows for employees to contribute a portion of their
compensation subject to certain limitations. The Company may make discretionary
contributions to the Plan. Total discretionary contributions during 1995 and
1994 were $91 and $7.
A-16
33
PROGROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTIONS AND WARRANTS
Stock Option Plans
The Company has incentive stock option plans which were adopted under a
1981 plan and a 1992 plan for its officers and key employees which provide for
issuance of options to purchase up to 500,000 and 324,032 common shares,
respectively. At February 25, 1995, the total number of shares available for
options was as follows:
1981 1992
PLAN PLAN
------- -------
Reserved for:
Outstanding stock options...................................... 101,700 324,032
Stock options authorized but not granted....................... 244,700 0
------- -------
346,400 324,032
======= =======
Stock option activity during the years ended February 25, 1995 and February
26, 1994, is as follows:
OPTION PRICE
SHARES PER SHARE
-------- ------------------
Outstanding at February 27, 1993....................... 502,032 $ 7.12 - $10.93
Granted.............................................. 56,200 10.13 - 14.25
Exercised............................................ (20,000) 7.12 - 10.93
Canceled or expired.................................. (5,000) 8.10
--------
Outstanding at February 26, 1994....................... 533,232 7.12 - 14.25
Granted.............................................. 40,000 7.75 - 11.00
Exercised............................................ (2,500) 7.12
Canceled or expired.................................. (145,000) 8.10 - 13.00
--------
Outstanding at February 25, 1995....................... 425,732 $ 7.12 - $14.25
========
Stock options under the 1981 plan are generally exercisable at the market
price on the date of grant and expire on various dates through 2004. Stock
options totaling 135,013 shares under the 1992 plan expire five years from the
date of grant, while options for 189,019 shares expire five years from the date
of vesting in such options, which occurs ratably over a three-year period from
the date of grant. All stock options have been granted at not less than fair
market value at the date of grant.
Stock Purchase Warrants
The Company, in conjunction with the issuance of the $5,000 subordinated
notes (Note 5), issued warrants to purchase 1,000,000 shares of common stock at
an exercise price of $5.50. Each warrant may be exercised with $5.50 in cash or
principal value of the notes at any time during the life of the warrants, which
expire on November 3, 1999.
In connection with the January 1995 guarantee of the Company's line of
credit (Note 4), the Guarantor was issued a warrant to purchase up to 390,000
common shares at $6.25 per share. These warrants expire January 27, 2000. If, on
or before January 31, 1996, the Company refinances its line of credit agreement
and the Guarantor is released from the guarantee and has not been required to
make any payments under the guarantee, the number of shares issuable upon
exercise of these warrants will be reduced to 158,000. Subsequent to year-end,
the provision for the reduction of shares issuable was eliminated.
A-17
34
PROGROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has entered into various operating leases for buildings and
office equipment. Rent expense aggregated approximately $355, $301, and $218 for
fiscal years 1995, 1994 and 1993, respectively. Approximate future minimum
rental commitments for all noncancelable operating leases as of February 25,
1995, were as follows:
1996........................................... $138
1997........................................... 46
1998........................................... 27
1999........................................... 27
2000........................................... 18
Litigation
The Company is party to certain legal proceedings incidental to its
business. In the opinion of management, based in part on the advice of legal
counsel, the ultimate disposition of these matters will not have a material
adverse effect on the Company's financial position or results of operations.
Royalty Commitments
During fiscal year 1993, the Company renegotiated an existing license
agreement with a member of its board of directors which the Company believes
will significantly enhance its advertisement, promotion and sale of golf
equipment. The agreement expires March 1, 2002, but may be extended for
successive five-year periods. Under the terms of the agreement, the Company will
pay royalties of 1% to 5% of net sales of specified products. In exchange for
expanded product and territorial rights, the Company has committed to pay
minimum royalties ranging from $500 in 1996 to $750 in 2002. During 1995, 1994
and 1993, the Company incurred royalty expense under this agreement of
approximately $524, $340 and $250, respectively, relating to this license
agreement.
10. DISCONTINUED OPERATIONS
On May 5, 1995, the Company sold its Duckster line of headwear, outerwear,
and shirts for approximately $3,000 in cash and a $3,500 (subject to adjustment)
installment promissory note. The Company retained approximately $4,200 in
existing accounts receivable and will receive a royalty on sales of Duckster
products for a three year period beginning January 1, 1996. The sale resulted in
an estimated loss on disposal of $1,244, which has been included as a component
of discontinued operations. Duckster revenues for fiscal 1995, 1994, and 1993
were $15,485, $20,170, and $18,993, respectively.
A-18
35
DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No event described in Item 304 of Regulation S-K has occurred.
A-19
36
APPENDIX B
PROGROUP, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of PROGROUP, INC. appoints David S. Gonzenbach
and A. Alexander Taylor, II, or either of them, proxies, with full power of
substitution, to vote at the offices of the Company at 6201 Mountain View Road,
Ooltewah, Tennessee at 10:00 a.m., Tuesday, July 18, 1995, and any adjournment
or adjournments thereof, the shares of Common Stock of PROGROUP, INC. which the
undersigned is entitled to vote, on all matters that may properly come before
the Meeting.
1. The election of eight Directors for the ensuing year.
/ / FOR all nominees listed below / / WITHHOLD AUTHORITY to vote for all
(except as market to the contrary) nominees listed below.
Nominees: Arthur P. Becker, Robert H. Caldwell, David S. Gonzenbach, James L. E. Hill, John T. Lupton, John P.
Murray, Jr., Russell B. Newton, III, Arnold D. Palmer
(INSTRUCTION: TO WITHHOLD YOUR VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED
BELOW.)
- --------------------------------------------------------------------------------
2. To approve an amendment to the Company's Charter to create and authorize the
issuance of up to 1,000,000 shares of preferred stock.
/ / FOR / / AGAINST / / ABSTAIN
3. To ratify the appointment of Arthur Andersen LLP as independent public
accountants for the 1996 fiscal year.
/ / FOR / / AGAINST / / ABSTAIN
(Continued on Other Side)
(Continued from Other Side)
4. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
You are urged to cast your vote by marking the appropriate boxes. PLEASE
NOTE THAT UNLESS A CONTRARY DISPOSITION IS INDICATED, THIS PROXY WILL BE VOTED
FOR ITEMS 1, 2 AND 3.
--------------------------------
(Signature)
--------------------------------
(Signature)
Dated:
---------------------,1995
IMPORTANT: Please sign your name
or names exactly as shown hereon
and date your proxy in the blank
space provided above. For joint
accounts, each joint owner must
sign. When signing as attorney,
executor, administrator,
trustee, or guardian, please
give your full title as such. If
the signer is a corporation,
please sign full corporate name
by duly authorized officer.