1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 1, 1996 Commission File Number 0-921
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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 423-238-5890
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No .
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As of June 20, 1996, the number of shares outstanding of the issuer's common
stock was 2,826,805.
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INDEX
Pages
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Part I. Financial Information
Balance Sheets - June 1, 1996 and
March 2, 1996 1
Statements of Operations - Three Months
Ended June 1, 1996 and May 27, 1995 2
Statements of Cash Flows - Three Months Ended
June 1, 1996 and May 27, 1995 3
Notes to Financial Statements 4 - 6
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7 - 9
Part II. Other Information 10
Signature Page 11
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Page 1
Form 10-Q
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BALANCE SHEETS
JUNE 1, 1996 AND MARCH 2, 1996
($ in thousands)
ASSETS
June 1, 1996 March 2, 1996
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(Unaudited)
Current assets:
Cash $ 13 $ 10
Trade receivables 10,578 4,534
less: allowance for doubtful accounts (878) (758)
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Net receivables 9,700 3,776
Inventories, net 8,688 9,896
Current portion of note receivable 1,126 1,126
Prepaid expenses and other 657 759
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Total current assets 20,184 15,567
Property, plant and equipment 3,856 3,931
less: accumulated depreciation (2,650) (2,743)
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Net property, plant and equipment 1,206 1,188
Other assets:
Non-current assets of discontinued
operations 265 265
Goodwill 85 85
Other 1,451 1,455
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1,801 1,805
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TOTAL ASSETS $ 23,191 $ 18,560
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LIABILITIES AND STOCKHOLDERS' EQUITY
June 1, 1996 March 2, 1996
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(Unaudited)
Current liabilities:
Current maturities of long-term
obligations $ 65 $ 71
Short-term borrowings from bank 13,396 10,096
Accounts payable 2,369 1,718
Accrued liabilities 2,237 2,409
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Total current liabilities 18,067 14,294
Long-term obligations, net of
current maturities 3,808 4,600
Stockholders' equity (deficit):
Common stock, $.50 par value,
10,000,000 shares authorized,
2,826,805 and 2,634,991 shares issued
and outstanding at June 1, 1996
and March 2, 1996, respectively 1,413 1,317
Additional paid-in capital 5,657 4,794
Accumulated deficit (5,754) (6,445)
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Total stockholders' equity (deficit) 1,316 (334)
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TOTAL LIABILITIES & STOCK-
HOLDERS' EQUITY (DEFICIT) $ 23,191 $ 18,560
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(The accompanying notes are an integral part of these financial statements.)
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Page 2
Form 10-Q
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 1, 1996 AND MAY 27, 1995
(Unaudited)
($ in thousands except per share amounts)
THREE MONTHS ENDED
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June 1, 1996 May 27, 1995
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Net sales $ 11,230 $ 8,252
Cost of sales 7,691 5,723
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Gross profit 3,539 2,529
Selling and marketing expenses 1,975 1,316
General and administrative expenses 888 519
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Income from operations 676 694
Other income, net 537 147
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Income before interest and income taxes 1,213 841
Interest expense 522 883
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Income (loss) from continuing operations before
income taxes 691 (42)
Provision for income taxes - -
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Income (loss) from continuing operations 691 (42)
Discontinued operations - 348
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Net income $ 691 $ 306
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Net income (loss) per share from:
Continuing operations $ 0.25 $ (0.01)
Discontinued operations - 0.13
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$ 0.25 $ 0.12
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(The accompanying notes are an integral part of these financial statements.)
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Page 3
Form 10-Q
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 1, 1996 AND MAY 27, 1995
(Unaudited)
($ in thousands)
June 1, 1996 May 27, 1995
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CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 691 $ 306
Adjustments to reconcile net income to net cash
used for operating activities -
Depreciation and amortization 127 275
Gain on sale of assets (100) -
Changes in operating assets and liabilities -
Receivables (5,924) (2,801)
Inventories 1,208 1,266
Prepaid expenses and other 102 27
Accounts payable 651 (1,720)
Accrued liabilities (63) (924)
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Net cash used for operating activities (3,308) (3,571)
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CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property, plant and equipment (91) (65)
Proceeds from sale of property, plant and equipment 115 1,554
Payments received on note receivable - 1,400
Other 4 192
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Net cash provided by investing activities 28 3,081
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June 1, 1996 May 27, 1995
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CASH FLOWS FROM
FINANCING ACTIVITIES:
Net increase in short-term
borrowings from bank $ 3,300 $ 1,081
Principal payments on long-term obligations (17) (582)
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Net cash provided by financing
activities 3,283 499
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NET CHANGE IN CASH 3 9
CASH, beginning of period 10 34
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CASH, end of period $ 13 $ 43
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Supplemental disclosures of
cash flow information:
Cash paid during the period for:
Interest $ 223 $ 341
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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 June 1, 1996; and (2) the results of its operations and
its cash flows for the three months ended June 1, 1996 and May 27, 1995, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the full year.
Reference is also made to the Company's annual report on Form 10-K for the
fiscal year ended March 2, 1996, for a discussion of the Company's significant
accounting policies.
NOTE 2
INCOME TAXES:
The Company has federal tax loss carryforwards of approximately $23.8 million
at March 2, 1996, therefore, no income tax provision was recorded during the
three months ended June 1, 1996.
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Page 5 Form 10-Q
NOTE 3
SHORT-TERM BORROWINGS:
Short-term borrowings consist of advances under a $15.0 million line of credit
with a bank which matures on February 28, 1997. There are no financial
covenants under the line of credit, which is unconditionally guaranteed by a
significant shareholder and director of the Company (the "Guarantor"). Advances
under the line of credit bear interest at LIBOR plus 2 points (7.8125% at June
1, 1996) on the first $6 million outstanding and 7.1562% on the next $3.7
million outstanding. Outstanding amounts in excess of $9.7 million bear interest
at the prime rate less .50% (7.75% at June 1, 1996). At June 1, 1996, $13.4
million was outstanding under the line of credit.
As consideration to the Guarantor for the January 1995 guarantee of the
Company's previous line of credit, the Company issued an $850,000 subordinated
convertible note and a warrant to purchase up to 390,000 common shares of the
Company. Additionally, the Guarantor was given preemptive rights through
January 27, 2000, with respect to future issuances by the Company sufficient to
enable the Guarantor to maintain his fully diluted common stock ownership
percentage. The $850,000 subordinated note plus accrued interest was converted
to 191,814 shares of common stock in April 1996.
NOTE 4
NET INCOME (LOSS) PER COMMON SHARE:
The computation of net income (loss) per common share and common equivalent
share is based on the monthly weighted average number of common shares
outstanding during the period after adding common stock equivalents (stock
options) having a dilutive effect.
THREE MONTHS ENDED
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JUNE 1, 1996 MAY 27, 1995
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Weighted average
number of common
shares outstanding 2,753,030 2,619,991
Effect of assumed
exercise of stock
options (where dilutive) 58,440 --
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Weighted average
common and common
equivalent shares
outstanding 2,811,470 2,619,991
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Page 6 Form 10-Q
NOTE 5
INVENTORIES:
Inventories as of June 1, 1996 and March 2, 1996, were as follows (in
thousands):
June 1, 1996 March 2, 1996
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Inventories:
Raw materials $ 4,474 $ 4,270
Work-in-process 372 372
Finished goods 3,842 5,254
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$ 8,688 $ 9,896
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NOTE 6
SUBORDINATED NOTES AND COMMON STOCK WARRANTS:
On November 3, 1994, the Company completed a private placement of $5.0 million
aggregate principal amount of 6% subordinated notes (the "Notes") due 1999, and
warrants to purchase up to 1,000,000 shares of common stock of the Company at a
price of $5.50 per share (the "Warrants"). The Notes were recorded net of the
aggregate discount of $1,662,000 which gives effect to the original issue
discount attributed to the Notes and the assigned value of the Warrants. The
Notes and Warrants were issued to certain members of the Board of Directors, an
officer of the Company, and certain shareholders of the Company. The
securities are restricted.
The Notes have a stated interest rate of 6% and all principal and unpaid
interest is due November 3, 1999. Interest payments through December 31, 1995
were deferred at the option of the Company. Certain interest payments continue
to be deferred at the option of the Note holders. The Notes are subordinated
to all senior indebtedness and are included in long-term obligations in the
accompanying balance sheet at June 1, 1996.
The Warrants are exercisable for five years and vest 70% upon funding of the
Notes, 90% after one year, and 100% after two years. The value assigned to the
Warrants was $1,662,000 or $1.662 per share. The holders of the Warrants will
have one demand registration right for the purpose of registering the stock
underlying the Warrants for resale pursuant to the Securities Act of 1933. The
value assigned to the Warrants was credited to additional paid-in capital.
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Page 7 Form 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
For purposes of this Form 10-Q, first quarter 1996 relates to the quarter ended
June 1, 1996, while first quarter of 1995 relates to the quarter ended May 27,
1995.
As of June 1, 1996, the Company had working capital of $2,117,000 and a current
ratio of 1.1 to one. The Company generally relies upon internally generated
funds and short-term borrowings to meet working capital and capital expenditure
requirements. The Company maintains a $15.0 million short-term line of credit
which is utilized as needed throughout the year. Due to the seasonality of the
golf industry and the Company's terms of sale, the Company's borrowings under
its line of credit increased $3.3 million during first quarter 1996. Cash was
also provided through the reduction of inventories of $1.2 million, increase in
accounts payable of $650,000 and net income of $691,000 for quarter ending June
1, 1996. Cash provided was used primarily to finance receivables which
increased $5.9 million during first quarter 1996. Due to the Company's terms
of sale, receivable collections are significantly higher during its second
fiscal quarter, compared to collections during the first fiscal quarter. The
increase in receivable collections combined with reduction in inventory
purchases, usually allows the Company to reduce the amount outstanding on its
short-term line of credit during the Company's second quarter.
The Company believes that internally generated funds and availability under the
current line of credit, should be sufficient to support normal working capital
requirements for the remainder of the fiscal year.
RESULTS OF OPERATIONS
Net sales for the first quarter of 1996 increased 35% over first quarter 1995.
While first quarter 1996 bag sales remained fairly constant with first quarter
1995 at $4.4 million, sales of golf clubs increased 79% to $6.8 million in
first quarter 1996, from $3.8 million in first quarter 1995.
The table below compares net sales for first quarter 1996 to first quarter
1995, by product line and market segment.
($'s in millions)
Clubs Bags Total
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Q1 '96 Q1 '95 % Change Q1 '96 Q1 '95 % Change Q1 '96 Q1'95 % Change
-------- -------- -------- -------- -------- -------- ------ ------ --------
Pro 3.1 1.1 + 181.8% 2.5 2.5 --- 5.6 3.6 + 55.6%
Retail 3.4 2.5 + 36.0% 1.8 2.0 - 10.0% 5.2 4.5 + 15.6%
Other .3 .2 + 50.0% .1 --- --- .4 .2 +100.0%
---- ---- -------- --- ---- ------- ---- --- -------
Total 6.8 3.8 + 78.9% 4.4 4.5 - 2.2% 11.2 8.3 + 34.9%
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Page 8 Form 10-Q
The Company has changed its focus from the mass merchandise market (retail), to
on-course pro shops and off-course golf equipment stores, where its pro line of
golf equipment yields higher margins than retail products sold to mass
merchandisers. While the Company intends to maintain its share of the retail
market, the shift in product mix is planned to result from growth in the pro
line of golf products. The shift in product mix was particularly favorable in
the first quarter of 1996. Pro product sales improved to 50% of total sales in
1996 compared to 43.3% of total sales in first quarter 1995. The most
significant improvement was in club sales, where pro clubs comprised 45.6% of
total club sales in first quarter 1996 compared to 28.9% in first quarter 1995.
Gross profit for first quarter 1996 was $3.5 million on total net sales of
$11.2 million compared to gross profit of $2.5 million on $8.3 million net
sales in first quarter 1995. Gross profit as a percent of net sales improved
to 31.5% in the first quarter of 1996 compared to 30.6% for the comparable
period in 1995. Actual gross profit of 31.5% was reduced by unfavorable
manufacturing variances in club operations of approximately $.3 million. Due
to the strength of pro club sales during the first quarter above planned
volume, it was necessary to air freight some raw material components and to
incur additional costs in club manufacturing in order to satisfy customer
demand. Had it not become necessary to incur the additional manufacturing
costs, gross profit for the first quarter would have been approximately 34% of
net sales.
Due to the seasonality of the golf industry, the Company's first fiscal quarter
sales volume normally represents approximately 35% of its total annualized
revenues.
Selling and marketing expenses increased $659,000 in the first quarter of 1996
compared to 1995. Increased expenditures for product promotion and advertising
accounted for $350,000 of the increase and commissions on increased sales
volume accounted for $270,000 of the increase. General and administrative
expenses increased approximately $370,000 during the first quarter of 1996.
Major components of the increase were in corporate promotion and public
relations. Data processing costs also increased as the Company embarked on the
installation of a new fully integrated computer software system including
hardware upgrade. The total project, estimated at approximately $800,000, will
be implemented over the next twelve months.
Other income increased $390,000 in first quarter 1996. Accrued royalty income
of $250,000 based on the Cobra licensing agreement was the major component of
the increase. The other major component of the increase is a $100,000 gain on
the sale of the East Pocahontas, Arkansas property.
Interest expense decreased $361,000 in first quarter 1996. Cash interest
payments decreased by $137,000 due to lower interest rates charged on the
Company's advances under its line of credit, and lower average advance balances
during the first quarter of 1996 compared to 1995. Currently interest rates on
the line of credit are LIBOR plus two points (7.8125%) on the first $6.0
million, 7.1562% on the next $3.7 million and prime less .5% on advances in
excess of $9.7 million.
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Page 9 Form 10-Q
Prime rate throughout the first quarter of 1996 was 8.25%. The interest rate
on line of credit advances in first quarter 1995 was prime less .5%. Prime
rate throughout first quarter of 1995 was 9%. Cash interest expense was also
reduced for quarter ending June 1, 1996 due to the retirement of a $3.0 million
term note in December 1995, on which approximately $65,000 interest was paid
during first quarter 1995. Also, non-cash interest expense related to the
amortization of subordinated notes and discounts thereon, decreased $224,000 in
first quarter 1996.
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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. Financial data schedule (Exhibit 27, SEC Use Only)
(b) Reports on Form 8-K -
The Registrant did not file any reports on Form 8-K during the quarter
ending June 1, 1996.
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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/ George H. Nichols
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George H. Nichols
President and Chief Operating Officer
/s/ David J. Kirby
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David J. Kirby
Vice President Finance (Chief Accounting Officer)
Date June 25, 1996
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