1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended May 27, 1995 Commission File Number 0-921
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PROGROUP, INC.
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(Exact name of registrant as specified in its charter)
Tennessee 62-0331019
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(State of Incorporation) (I.R.S. Employer Identification No.)
6201 Mountain View Road, Ooltewah, Tennessee 37363
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number 615-238-5890
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes x . No .
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As of July 7, 1995, the number of shares outstanding of the issuer's common
stock was 2,619,991.
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INDEX
Pages
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Part I. Financial Information
Balance Sheets - May 27, 1995 and
February 25, 1995 1
Statements of Operations - Three Months
Ended May 27, 1995 and May 28, 1994 2
Statements of Cash Flows - Three Months
Ended May 27, 1995 and May 28, 1994 3
Notes to Financial Statements 4 - 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 - 9
Part II. Other Information 10
Signature Page 11
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Page 1 Form 10Q
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BALANCE SHEETS
MAY 27, 1995 AND FEBRUARY 25, 1995
($ in thousands)
ASSETS
May 27, 1995 Feb. 25, 1995
------------- -------------
(Unaudited)
Current assets:
Cash $ 43 $ 34
Trade receivables 10,981 8,233
less: allowance for doubtful accounts (966) (1,049)
Net receivables 9,985 7,184
Inventories, net 9,494 15,101
Current portion of note receivable 1,600 -
Prepaid expenses and other 2,420 478
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Total current assets 21,942 22,797
Property, plant and equipment 9,113 9,003
less: accumulated depreciation (5,353) (5,225)
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Net property, plant and equipment 3,760 3,778
Other assets:
Non-current assets of discontinued
operations 869 2,423
Goodwill 85 85
Long-term note receivable 1,126 -
Other 1,957 2,188
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4,037 4,696
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TOTAL ASSETS $ 29,739 $ 31,271
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
obligations $ 415 $ 407
Short-term borrowings from bank 12,910 11,829
Accounts payable 2,400 4,120
Accrued liabilities 2,505 3,629
------------ ------------
Total current liabilities 18,230 19,985
Long-term obligations, net of
current maturities 6,478 7,066
Stockholders' equity:
Common stock, $.50 par value,
10,000,000 shares authorized,
2,619,991 and 2,539,366 shares
issued and outstanding at May 27, 1995
and February 25, 1995,
respectively 1,310 1,270
Additional paid-in capital 4,583 4,118
Retained deficit (862) (1,168)
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Total stockholders' equity 5,031 4,220
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TOTAL LIABILITIES & STOCK-
HOLDERS' EQUITY $ 29,739 $ 31,271
============ ============
(The accompanying notes are an integral part of these financial statements.)
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Page 2 Form 10Q
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MAY 27, 1995 AND MAY 28, 1994
(Unaudited)
($ in thousands except per share amounts)
THREE MONTHS ENDED
------------------------------------
May 27, 1995 May 28, 1994
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Net sales $ 8,252 $ 8,763
Cost of sales 5,723 6,416
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Gross profit 2,529 2,347
Selling and marketing expenses 1,316 2,343
General and administrative expenses 519 531
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Income (loss) from operations 694 (527)
Other income, net 147 151
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Income (loss) before interest
and income taxes 841 (376)
Interest expense 883 213
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Loss from continuing operations before income taxes (42) (589)
Provision (benefit) for income taxes - (212)
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Loss from continuing operations (42) (377)
Discontinued operations 348 (349)
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Net income (loss) $ 306 $ (726)
============ ============
Net income (loss) per share from:
Continuing operations $ (0.01) $ (0.15)
Discontinued operations 0.13 (0.14)
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$ 0.12 $ (0.29)
============ ============
(The accompanying notes are an integral part of these financial statements.)
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Page 3 Form 10Q
PROGROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 27, 1995 AND MAY 28, 1994
($000's)
(Unaudited)
May 27, 1995 May 28, 1994
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CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss) $ 306 $ (726)
Adjustments to reconcile net income (loss)
to net cash provided by
(used for) operating
activities:
Depreciation and amortization 275 213
Deferred income tax - (409)
Changes in current assets
and liabilities -
Receivables and deferred
income taxes (2,801) (944)
Inventories 1,266 1,771
Prepaid expenses and other 27 323
Accounts payable (1,720) 979
Accrued liabilities (924) (725)
------------ ------------
Net cash provided by (used for)
operating activities (3,571) 482
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CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property, plant and equipment (212) (32)
Payment received on note receivable 1,400 -
Proceeds from sale of property, plant-equipmnet 1,554 -
Other 192 -
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Net cash provided by (used for)
investing activities 3,081 (32)
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CASH FLOWS FROM
FINANCING ACTIVITIES:
Net increase (decrease) in
short-term borrowings
from bank $ 1,081 $ (361)
Principal payments on
long-term obligations (582) (134)
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Net cash provided by (used for)
financing activities 499 (495)
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NET INCREASE (DECREASE) IN CASH 9 (45)
CASH, beginning of period 34 50
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CASH, end of period $ 43 $ 5
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SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid (received) during the
period for:
Interest $ 341 $ 212
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Income taxes $ - $ (15)
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(The accompanying notes are an integral part of these financial statements.)
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Page 4 Form 10-Q
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The quarterly financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission for interim financial information. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. These condensed financial statements should be read in conjunction
with the Company's latest annual report on Form 10-K. In the opinion of
management of the Company, all adjustments necessary, consisting only of normal
recurring adjustments, to present fairly (1) the financial position of
ProGroup, Inc. as of May 27, 1995, and (2) the results of its operations and
its cash flows for the three months ended May 27, 1995 and May 28, 1994, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the full year.
Reference is also made to the Company's annual report on Form 10-K for the
fiscal year ended February 25, 1995, for a discussion of the Company's
significant accounting policies. Certain prior period amounts have been
reclassified to conform with the May 27, 1995 financial statement presentation.
NOTE 2
INCOME TAXES:
As of the beginning of fiscal 1994, the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109), which
requires a change from the deferred method to the liability method of
accounting for income taxes. Under the new method, deferred income tax assets
and liabilities arise from differences between the tax basis of an asset or
liability and its reported amount in the financial statements. Deferred tax
balances are calculated by applying the provisions of enacted tax law to
determine the amount of taxes payable or refundable currently or in future
years. There was no cumulative effect on prior years of this change in
accounting principle. Prior periods' financial statements were not restated
to apply the provisions of SFAS 109.
During the three months ended May 27, 1995, the Company did not record an
income tax provision as the Company has net operating loss carryforwards, and
the realization of the benefits related thereto is uncertain.
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Page 5 Form 10-Q
NOTE 3
SHORT-TERM BORROWINGS:
Short-term borrowings consist of advances under a line of credit with a bank.
At the end of the first two quarters of fiscal 1995, the Company was in
violation of substantially all the financial covenants under the line of credit
agreement. In October 1994, the Company executed a loan modification agreement
with the bank, whereby the maturity date of the line of credit was accelerated
to January 31, 1995 and interest rates were increased substantially.
In connection with a guarantee of the line of credit in January 1995, by a
significant shareholder and director (the "Guarantor"), the line of credit was
amended to extend the maturity date to August 30, 1996 and establish the terms
discussed below.
As consideration to the Guarantor for the guarantee, the Company issued an
$850,000 convertible note and a warrant to purchase up to 390,000 common shares
of the Company (Note 4). Additionally, the Guarantor was given preemptive
rights through January 27, 2000 with respect to future 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 million or the borrowing base, as defined in the agreement. The
borrowing base is generally equal to the sum of 70% of eligible accounts
receivable, 35% of eligible finished goods, 25% of eligible raw materials, 70%
of the note receivable from the sale of the Duckster division, and $2 million.
Advances under this line of credit bear interest at the bank's base rate less
.50% (8.5% at May 27, 1995). At May 27, 1995, $12.9 million was outstanding
under this line of credit and $200,000 was reserved for outstanding letters of
credit; therefore, the remaining amount available under this line was $2.7
million.
The Company may also borrow from the bank, subject to consent from the
Guarantor, an additional $3 million over the borrowing base (total borrowings
from the bank not to exceed $16 million) which bears interest at the bank's
base rate less .25% (8.75% at May 27, 1995). The unused amount available under
the overline advance account, subject to consent from the Guarantor, was
$239,000. Short-term borrowings and the term loan with the bank (Note 4) are
secured by accounts receivable, inventories, machinery and equipment, and
certain real property.
In March 1995, the Company entered into an additional $4 million line of credit
agreement with a bank which is guaranteed by the Guarantor. The line of credit
bears interest at the prime rate and matures on March 15, 1996. As of May 27,
1995, there were no amounts outstanding under this line of credit.
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Page 6 Form 10-Q
NOTE 4
LONG-TERM OBLIGATIONS:
During November 1993, the Company established a $3 million fixed rate term
loan. This loan is payable in monthly installments of $45,000 (including
interest at 9.5%) through October, 2000. The balance outstanding under the
term loan at May 27, 1995 was $2.0 million (after applying $541,000 of proceeds
from the sale of the Duckster division against principal). Additionally, a
capital lease obligation exists for a manufacturing facility in the amount of
$443,000. The facility was sold in June 1995. In November 1994, the Company
completed a private placement of $5 million in subordinated notes. The holders
of the subordinated notes (which include certain officers and directors of the
Company) also received warrants to purchase up to 1,000,000 shares of common
stock of the Company at $5.50 per share. The estimated fair value of the
warrants was recorded as additional paid-in capital.
The $850,000 subordinated note (Note 3) is convertible to common stock at the
Guarantor's option. The note, plus accrued interest, may be converted during
the life of the note at a conversion price of $6.25.
NOTE 5
NET INCOME (LOSS) PER COMMON SHARE:
The computation of net income (loss) per common share and common equivalent
share is based on the monthly weighted average number of common shares
outstanding during the period after adding common stock equivalents (stock
options) having a dilutive effect.
THREE MONTHS ENDED
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MAY 27, 1995 MAY 28, 1994
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Weighted average number
of common shares
outstanding 2,619,991 2,536,866
Effect of assumed
exercise of stock
options (where dilutive) -- --
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Weighted average common
and common equivalent
shares outstanding 2,619,991 2,536,866
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Page 7 Form 10-Q
NOTE 6
INVENTORIES:
Inventories as of May 27, 1995 and February 25, 1995, were as follows:
May 27, 1995 Feb. 25, 1995
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Inventories:
Raw materials $ 4,135 $ 4,521
Work-in-process 1,550 1,474
Finished goods 4,809 9,106
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$ 9,494 $ 15,101
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NOTE 7
STOCKHOLDERS' EQUITY:
In July, 1994, the Company approved an increase in its total number of
authorized shares of common stock from 4,000,000 to 10,000,000.
NOTE 8
SUBORDINATED NOTES AND COMMON STOCK WARRANTS:
On November 3, 1994, the Company completed a private placement of $5,000,000
aggregate principal amount of 6% subordinated notes (the "Notes") due 1999, and
warrants to purchase up to 1,000,000 shares of common stock of the Company at a
price of $5.50 per share (the "Warrants"). The Notes were recorded net of the
aggregate discount of $1,662,000 which gives effect to the original issue
discount attributed to the Notes and the assigned value of the Warrants. The
Notes and Warrants were issued to certain members of the Board of Directors, an
officer of the Company, and certain shareholders of the Company. The
securities are restricted.
The Notes have a stated interest rate of 6% and all principal and accrued
interest is due November 3, 1999. Interest through December 31, 1995 can be
deferred at the option of the Company provided the deferred amount is repaid
ratably during the 1996 calendar year. Beginning on December 31, 1994,
interest is payable quarterly, and interest will be payable monthly beginning
January 1, 1996. The Notes are subordinated to all senior indebtedness and are
included in long-term obligations in the accompanying balance sheet at May 27,
1995.
The Warrants are exercisable for five years and vest 70% upon funding of the
Notes, 90% after one year, and 100% after two years. The value assigned to the
Warrants was $1,662,000, or $1.662 per share. The holders of the Warrants will
have one demand registration right for the purpose of registering the stock
underlying the Warrants for resale pursuant to the Securities Act of 1933. The
value assigned to the Warrants was credited to additional paid-in capital.
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Page 8 Form 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
As of May 27, 1995, the Company had working capital of approximately $3.7
million and a current ratio of 1.2 to 1. The Company generally relies upon
internally generated cash and short-term borrowings to satisfy working capital
requirements and normal capital expenditure needs. The Company maintains a $16
million revolving credit facility which is utilized as needed. Outstanding
borrowings under the revolving credit facility as of May 27, 1995 were $12.9
million. Advances under this line bear interest at a variable rate based on
the prime rate less .50% (8.5% at May 27, 1995). The line of credit matures
on August 30, 1996.
At the end of the first two quarters of fiscal 1995, the Company was in
violation of certain of the loan covenants related to its short-term line of
credit and term loan with a bank. In October, 1994, the Company executed a
loan modification agreement with the bank, whereby the Company was no longer in
violation of any of the covenants, and the maturity date of the line of credit
was accelerated to January 31, 1995. Additionally, the October loan
modification agreement increased interest rates substantially and the Company
agreed to assign certain intellectual property to the bank if the Company could
not secure additional capital investment. The Company was able to secure
additional capital through a November 3, 1994 private placement of $5.0 million
in subordinated notes with detachable stock purchase warrants. In the fourth
quarter of fiscal 1995, the Company renegotiated the loan agreement with the
bank, resulting in an extension of the loan's maturity date to August 30, 1996.
The Company's obligations to the bank under the line of credit have been
guaranteed by the Company's Chairman and Chief Executive Officer (the
Guarantor). The Company obtained an additional $4.0 million revolving credit
facility, which expires on March 15, 1996, and which is also guaranteed by the
Guarantor.
During the first quarter of fiscal 1996, cash was provided primarily by the
proceeds from the sale of Duckster fixed assets and inventories, the increase
in short-term borrowings, and the reduction in inventories. Cash was used
primarily to finance receivables and reduce accounts payable.
RESULTS OF OPERATIONS
Net sales for the first quarter of fiscal 1996 decreased $.6 million, or 6.8%
compared with the first quarter of fiscal year 1995. Overall, club sales
decreased $1.3 million, or 26%, during the first three months of fiscal 1996,
while bag sales increased $.7 million, or 20%. The club sales decrease
included a $.5 million, or 31%, decrease in sales to golf courses and golf
shops and a $.8 million, or 25%, decrease in sales of Arnold Palmer clubs. Pro
bag sales increased $.3 million, or 15%, from the prior year, while sales of
Arnold Palmer bags were up $.4 million, or 25%, in the current period.
Gross profit for the first quarter of fiscal 1996 was $2.5 million, or 30.6%,
of net sales as compared to $2.3 million, or 26.8%, of net sales a year ago.
The improvement in margin for the current period is due primarily to i) a
reduction in inventory reserve provisions, and, ii) a reduction in
manufacturing variances.
Selling and marketing expenses decreased $1.0 million, or 44%, for the first
quarter of fiscal 1996 compared with the same period last year. Decreased
advertising and promotional expenses accounted for more than half of the
change. Reduced commissions, salaries, and related costs were other factors in
the decrease.
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Page 9
Interest expense increased $700,000 for the three months ended May 27, 1995 as
compared to the same period a year ago. Increased long-term borrowings from
the issuance of $5.0 million of subordinated debt and higher costs associated
with the Company's short-term borrowings caused the increase.
The Company has not recorded an income tax provision for the first quarter of
fiscal 1996, as the Company has net operating loss carryforwards, and the
realization of the benefits related thereto is uncertain. The benefit for
income taxes as a percent of pretax income was 36% for the first quarter of
fiscal 1995.
For the first three months of fiscal 1996, the Company reported income from
discontinued operations of $348,000. This relates to the operating results of
the Duckster segment through the date of the sale on May 5, 1995. In the first
three months of fiscal 1995, the Company reported a loss from discontinued
operations of $349,000.
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Page 10 Form 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
1. Statement regarding computation of per share earnings
(Exhibit 11)
2. Financial data schedule (Exhibit 27)
(b) Reports on Form 8-K -
The Registrant filed the following reports on Form 8-K during the
first quarter of fiscal 1996:
Form 8-K dated March 9, 1995 regarding the appointment of a new
Chairman and Chief Executive Officer and the entering of a new
credit facility filed on April 3, 1995.
Form 8-K dated May 5, 1995 regarding the sale of the Company's
Duckster division filed on May 22, 1995.
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Page 11 Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROGROUP, INC.
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(Registrant)
/s/ W. Ryland Dooley, III
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Date: July 10, 1995 W. Ryland Dooley, III
President and Interim Principal Financial Officer
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Form 10-Q
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
This statement is included in Note 5.