<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 3, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________.
Commission File Number 1-10704
SPORT SUPPLY GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2241783
- ---------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1901 Diplomat Drive, Farmers Branch, Texas 75234
- ----------------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 484-9484
Not Applicable
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
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 12 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
--- ---
Indicated below is the number of shares outstanding of each class of the
registrant's common stock as of June 17, 1996.
Title of Each Class of Common Stock Number Outstanding
- --------------------------------------- -------------------------------
Common Stock, $0.01 par value 6,764,834 shares
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
</TABLE>
2
<PAGE> 3
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
May 3, October 31,
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS :
Cash $ 506,696 $ 570,467
------------ ------------
Accounts receivable --
Trade, less allowance for doubtful accounts of
$500,000 in 1996 and $204,000 in 1995 11,747,904 $ 12,866,238
Other 77,744 571,807
Income taxes receivable 1,392,866 209,931
Inventories 19,577,806 16,630,155
Other current assets 3,657,482 3,046,692
Net current assets of discontinued operations 8,815,118 17,018,455
------------ ------------
Total current assets 45,775,616 50,913,745
------------ ------------
DEFERRED CATALOG EXPENSES 3,333,559 1,944,244
PROPERTY, PLANT AND EQUIPMENT :
Land 8,663 8,663
Buildings 1,551,723 1,551,723
Machinery and equipment 6,000,501 5,784,678
Furniture and fixtures 3,486,753 3,338,119
Leasehold improvements 2,202,755 2,160,901
------------ ------------
13,250,395 12,844,084
Less -- Accumulated depreciation and amortization (6,853,299) (6,350,550)
------------ ------------
6,397,096 6,493,534
------------ ------------
COST IN EXCESS OF TANGIBLE NET ASSETS ACQUIRED,
less accumulated amortization of $984,000 in 1996 and
$918,000 in 1995 3,105,415 3,318,896
TRADEMARKS, less accumulated amortization of $645,000 in
1996 and $540,000 in 1995 3,654,092 3,759,846
OTHER ASSETS, less accumulated amortization of $1,303,000
in 1996 and $1,053,000 in 1995 963,917 1,267,023
NET NONCURRENT ASSETS OF DISCONTINUED OPERATIONS 18,180,852 17,794,413
------------ ------------
$ 81,410,547 $85,491,701
============ ===========
CURRENT LIABILITIES :
Accounts payable $10,777,620 $7,215,666
Accrued property taxes 205,429 505,082
Other accrued liabilities 2,175,525 407,086
Notes payable and capital lease obligations, current portion 682,144 555,358
------------ ------------
13,840,718 8,683,192
------------ ------------
DEFERRED GAIN 15,403 50,023
DEFERRED INCOME TAXES 236,798 263,005
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS, net of
current portion 29,904,499 28,885,516
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Preferred stock, par value $0.01, 100,000 shares
authorized, no shares outstanding in 1996 or 1995
Common stock, par value $0.01, 20,000,000 shares
authorized, 7,551,899 and 7,551,337 shares issued in
1996 and 1995, 6,764,834 and 6,721,673 shares
outstanding in 1996 and 1995 75,520 75,513
Paid-in capital 46,543,192 46,649,095
Retained earnings (deficit) (1,461,197) 9,025,140
------------ ------------
45,157,515 55,749,748
Treasury stock, at cost, 787,065 shares in 1996
and 829,664 shares in 1995 (7,744,386) (8,163,543)
Unrealized holding period gain -- 23,760
------------ ------------
37,413,129 47,609,965
------------ ------------
$ 81,410,547 $ 85,491,701
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
For The Three Months Ended For The Six Months Ended
------------------------------- --------------------------------
May 3, 1996 April 30, 1995 May 3, 1996 April 30, 1995
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Net revenues $25,521,321 $ 18,944,650 $ 38,737,315 $ 32,351,177
Cost of sales 16,070,395 11,394,668 24,174,165 19,535,199
------------ -------------- ------------- --------------
Gross profit 9,450,926 7,549,982 14,563,150 12,815,978
Selling, general and
administrative expenses 7,623,951 5,476,188 13,769,869 10,944,234
------------ -------------- ------------- --------------
Operating profit 1,826,975 2,073,794 793,281 1,871,744
Interest expense (313,863) (291,159) (771,676) (542,688)
Other income (expense), net 7,007 6,613 31,642 (12,539)
------------ -------------- ------------- --------------
Earnings from continuing operations
before provision for income taxes 1,520,119 1,789,248 53,247 1,316,517
Provision for income taxes 553,316 668,347 19,224 509,876
------------ -------------- ------------- --------------
Earnings from continuing
operations 966,803 1,120,901 34,023 806,641
------------ -------------- ------------- --------------
Discontinued operations:
Earnings (loss) from operations, net (1,930,908) 336,301 (2,082,143) 695,375
Loss on disposal, net (8,438,217) - (8,438,217) -
------------ -------------- ------------- --------------
Earnings (loss) from discontinued
operations (10,369,125) 336,301 (10,520,360) 695,375
------------ -------------- ------------- --------------
Net earnings (loss) $(9,402,322) $1,457,202 $(10,486,337) $ 1,502,016
============ ============== ============= ==============
Earnings (loss) per common and
common equivalent share:
Continuing operations $0.14 $ 0.16 $ 0.00 $ 0.12
Discontinued operations (1.53) 0.05 (1.56) 0.10
------------ -------------- ------------- --------------
Net earnings (loss) $ (1.39) $ 0.21 $ (1.56) $ 0.22
============ ============== ============= ==============
Weighted average number of
common and common
equivalent shares outstanding 6,748,769 6,934,483 6,742,721 6,881,742
============ ============== ============= ==============
Dividends declared per common share $ - $ 0.03 $ - $ 0.06
============ ============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
For The Six Months Ended
------------------------------------
May 3, 1996 April 30, 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES :
Net earnings (loss) $ (10,486,337) $ 1,502,016
Adjustments to reconcile net earnings (loss)
to net cash used in operating activities --
Loss on disposal of discontinued operations 8,438,217 --
Depreciation and amortization 854,021 534,125
Provision for allowances for accounts
receivable 416,700 1,777
Changes in assets and liabilities --
(Increase) decrease in receivables 12,762 (335,141)
Increase in inventories (2,947,651) (871,341)
(Increase) decrease in deferred catalogs and
other current assets (2,000,105) 597,409
Increase in payables 3,561,954 81,360
Increase in accrued liabilities 1,670,436 135,745
(Increase) decrease in other assets 253,601 (1,620,014)
Other (48,587) (6,025)
Discontinued operations - noncash charges and
working capital changes 1,779,339 (1,929,445)
Total adjustments 11,990,687 (3,411,550)
------------- -------------
Net cash (used in) provided by operating activities 1,504,350 (1,909,534)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES :
Acquisitions of property, plant & equipment (424,843) (1,653,552)
Investing activities of discontinued operations (516,400) (416,236)
------------- -------------
Net cash used in investing activities (941,243) (2,069,788)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES :
Proceeds from issuances of notes payable 2,818,946 6,060,464
Payments of notes payable and capital lease
obligations (1,673,177) (2,193,317)
Proceeds from common stock issuances 3,878 22,984
Dividends paid to stockholders (201,650) (407,033)
Financing activities of discontinued operations (1,574,875) --
------------ -------------
Net cash (used in) provided by financing activities (626,878) 3,483,098
------------- -------------
Net change in cash (63,771) (496,224)
Cash, beginning of period 570,467 908,213
------------- -------------
Cash, end of period $ 506,696 $ 411,989
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
UNAUDITED
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION :
<TABLE>
<CAPTION>
For The Six Months Ended
May 3, 1996 April 30, 1995
-------------- --------------
<S> <C> <C>
Cash paid during the period for interest $ 721,967 $ 693,925
============== ==============
Cash paid during the period for income taxes $ 106,000 $ 765,550
============== ==============
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES :
<TABLE>
<S> <C> <C>
During November 1994, the Company reissued
105,769 shares of its common stock
previously held in treasury in connection
with an Exchange Agreement with Aurora $ -- $ 1,375,000
============== =============
During April 1996, the Company reissued 42,599
shares of its common stock previously
held in treasury in connection with
an acquisition completed in 1994 $ 309,383 $ --
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
These consolidated financial statements reflect all normal and recurring
adjustments that are, in the opinion of management, necessary to present a fair
statement of Sport Supply Group, Inc.'s (the "Company" or "SSG") consolidated
financial position as of May 3, 1996 and the results of its operations for the
three and six month periods ended May 3, 1996 and April 30, 1995. In 1995, the
Company changed its financial reporting year-end from December 31 to October
31. The Company is currently operating on a 52/53 week year ending on the
Friday closest to October 31. Consequently, results of operations presented
for the three and six month periods ended April 30, 1995 represent periods that
are different than those historically reported by the Company. Any differences
in the number of days included in the twenty-six week period ended May 3, 1996
as compared to the six month period ended April 30, 1995 are not significant.
Operating results for the interim period ending May 3, 1996 are not necessarily
indicative of the results that may be expected for the fiscal year ending
October 31, 1996.
The consolidated financial statements include the accounts of SSG and its
wholly-owned subsidiary, Sport Supply Group International Holdings, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
During May 1996, the Company sold substantially all of the assets (other
than cash and accounts receivable) of its Gold Eagle Professional Golf Products
Division (the "Gold Eagle Division"). Subsequent to the sale of the Gold Eagle
Division, the Company adopted a formal plan to dispose of its remaining retail
segment operations (which previously included the Gold Eagle Division) through a
rights offering. As a result, the Company's retail segment is being reported as
a discontinued operation in the accompanying consolidated financial statements.
Accordingly, certain prior year amounts have been restated to conform to the
current presentation.
Note 1 - Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method for items manufactured by the Company and
weighted-average cost for items purchased for resale. As of May 3, 1996 and
October 31, 1995, inventories (excluding inventories related to discontinued
operations) consisted of the following:
<TABLE>
<CAPTION>
May 3, October 31,
1996 1995
----------- -----------
<S> <C> <C>
Raw Materials..................... $ 2,829,614 $ 2,455,453
Work-in-progress.................. 269,854 103,691
Finished and purchased goods...... 16,478,338 14,071,011
----------- -----------
$19,577,806 $16,630,155
=========== ===========
</TABLE>
Note 2 - Stockholders' Equity
The Company maintains a stock option plan that provides up to 1,325,000
shares of common stock for awards of incentive and non-qualified stock options
to directors and employees of the Company. Under the stock option plan, the
exercise price of options will not be less than the fair market value of the
common stock at the date of grant or not less than 110% of fair market value
for incentive stock options granted to certain employees, as more fully
described in the Stock Option Plan. Options expire 10 years from the grant
date, or 5 years from the grant date for incentive stock options granted to
certain employees, or such earlier date as determined by the Board of Directors
of the Company.
During the six months ended May 3, 1996, the Company granted a total of
11,125 options under the stock option plan. During this same six month period,
certain employees exercised 562 options at an exercise price of $6.90 per
share, resulting in proceeds of approximately $3,878 to the Company. The
following table summarizes transactions under the plan for the six months ended
May 3, 1996 and April 30, 1995:
7
<PAGE> 8
<TABLE>
<CAPTION>
Six Months Ended
----------------
May 3, 1996 April 30, 1995
-------------- --------------
<S> <C> <C>
Options outstanding- beginning of 811,772 603,546
period
Options granted 11,125 237,150
Options exercised (562) (2,875)
Options forfeited (33,250) --
-------------- --------------
Options outstanding - end of period 789,085 837,821
============== ==============
Range of exercise prices $4.80 - $14.25 $4.80 - $13.38
============== ==============
</TABLE>
As of May 3, 1996 there were 755,005 non-qualified options outstanding which
were issued outside the plan. Such options have exercise prices ranging from
$10.00 to $15.00 per share.
Note 3 - Notes Payable and Capital Lease Obligations
As of May 3, 1996 and October 31, 1995, notes payable and capital lease
obligations consisted of the following:
<TABLE>
<CAPTION>
May 3, October 31,
1996 1995
----------- -----------
<S> <C> <C>
Note payable under revolving line of credit,
interest at prime plus 3/4% (7.688% at
May 3, 1996) or LIBOR plus 2.0% (7.438% at
May 3, 1996), due October 1, 1998,
collateralized by substantially all assets 27,093,556 26,742,760
Term loan, interest at LIBOR plus 2-1/4% (7.688% at May
3, 1996), payable in quarterly installments plus accrued
interest of $125,000 with balance due October 1, 1998,
collateralized by substantially all assets 2,375,000 2,250,000
Term loan, interest at LIBOR plus 2-3/4% (8.188% at May
3, 1996), payable in monthly installments of $11,420
beginning July 1, 1996 with balance due October 1, 1998,
collateralized by substantially all assets
685,228 --
Capital lease obligation, interest at 7.4%, payable
in monthly installments of principal and
interest totaling $3,159 through December 1998 91,517 106,772
Capital lease obligation, interest at 9%, payable
in annual installments of principal and
interest totaling $55,000 through August 2005 341,342 341,342
----------- -----------
Total 30,586,643 29,440,874
Less - current portion (682,144) (555,358)
----------- -----------
Long-term debt and capital lease obligations, net $29,904,499 $28,885,516
=========== ===========
</TABLE>
8
<PAGE> 9
Effective December 20, 1995, the senior credit facility was increased from
a maximum of $40,000,000 to $50,000,000 and the term extended to October 1,
1998. This increase provides for additional loans to be made to SSG for the
cost of certain capital expenditures (up to a maximum of $1,000,000, of which
$685,228 has been borrowed as of May 3, 1996), the cost of acquiring outstanding
shares of SSG common stock (up to a maximum of $2,500,000), if any, and the
costs associated with future acquisitions (up to a maximum of $6,500,000), if
consummated. In order for additional loans to be made, the Company is required
to comply with the covenants contained in the loan agreement, as amended, and to
obtain the written approval of the senior and participating lenders under
certain circumstances.
The loan agreement contains financial and net worth covenants in addition
to limits on capital expenditures. At May 3, 1996, SSG was not in compliance
with certain of its financial covenants and has obtained waivers from its
senior lenders related to these defaults as of May 3, 1996. In addition, the
Company obtained an agreement from its senior lender to amend certain covenants
as a result of the discontinuation of the retail segment. In consideration for
the waivers and amendments, the Company agreed to an increase in the interest
rate of 50 basis points for borrowings under the revolving credit facility and
25 basis points for borrowings under the term loan. Amounts outstanding under
the senior credit facility are collateralized by substantially all assets of the
Company. The Company currently has the option of electing that its borrowings
under the senior credit facility bear interest at the prevailing LIBOR rate plus
2.5% for the revolving line of credit, 2.5% for the term loan and 2.75% for the
additional loans (if any) or the lender's prime rate plus 1.25% for the
revolving line of credit, 1.25% for the term loan and 1.25% for the additional
loans (if any). Historically, the Company has elected the lower of the interest
rates available under the facility.
As of May 3, 1996, SSG had borrowings of approximately $27,094,000
outstanding under the revolving line of credit and $3,060,000 under the term
loans, approximately $1,418,000 of letters of credit outstanding for foreign
purchases of inventory, and approximately $1,069,000 of standby letters of
credit outstanding, thereby leaving additional availability of approximately
$2,042,000 based upon the Company's borrowing base at such time.
Note 4 - Net Earnings Per Common Share
Net earnings per common share is based upon the weighted average number of
common and common equivalent shares outstanding during the six month periods
ended May 3, 1996 and April 30, 1995. Outstanding stock options and common
stock purchase warrants are considered common stock equivalents when dilution
results from their assumed exercise.
Note 5 - Acquisitions
During 1994, the Company acquired certain assets of X-Outs, Inc. (f/k/a
International Golf, Inc.) for cash, the assumption of certain liabilities and
126,235 shares of SSG common stock. The purchase agreement included provisions
that required the Company to pay additional consideration in the event the
gross proceeds (as defined in the purchase agreement) derived by the sellers
from the sale of the SSG common stock were less than a guaranteed amount.
During April 1996, SSG issued 42,599 shares of its treasury stock pursuant to
this guaranty.
Note 6 - Discontinued Operations
On May 20, 1996, SSG disposed of substantially all of the assets (other
than cash and accounts receivable) of the Gold Eagle Division to Morris
Rosenbloom & Co., Inc., a privately-held corporation. Pursuant to the Asset
Purchase Agreement, the total consideration paid to SSG was $5,078,190 in cash
and $313,114 in cash payable within five days after termination of a Transition
Agreement. The sale of the Gold Eagle Division resulted in a pretax loss of
approximately $750,000 which is included in the loss on disposal of discontinued
operations in the accompanying consolidated statements of operations.
Subsequent to the sale of the Gold Eagle Division, the Company adopted a
formal plan to dispose of the remaining operations of the Company's retail
segment (which previously included the Gold Eagle Division) through a rights
offering and therefore has classified these operations as discontinued. The
following represents net assets of discontinued operations as of May 3, 1996
and October 31, 1995 and the results of operations for the three and six month
periods ended May 3, 1996 and April 30, 1995:
9
<PAGE> 10
<TABLE>
<CAPTION>
May 3, October 31,
1996 1995
----------------------------------------------------
<S> <C> <C>
Current assets $20,363,834 $21,672,773
Current liabilities (11,548,716) (4,654,318)
----------------------------------------------------
Net current assets $ 8,815,118 $17,018,455
====================================================
Noncurrent assets $18,180,852 $17,794,413
Noncurrent liabilities -- --
====================================================
Net noncurrent assets $18,180,852 $17,794,413
====================================================
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
May 3, 1996 April 30, 1995 May 3, 1996 April 30, 1995
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 6,251,531 $ 6,782,228 $11,021,779 $12,416,665
Earnings (loss) before income taxes (2,991,240) 504,358 (3,232,498) 1,035,747
Provision (benefit) for income taxes (1,060,332) 168,057 (1,150,355) 340,372
Loss from operations, net of income taxes (1,930,908) 336,301 (2,082,143) 695,375
Loss on disposal, net of income taxes (8,438,217) -- (8,438,217) --
</TABLE>
The net loss from operations for the three and six month periods ended May
3, 1996 includes interest expense of approximately $308,000 and $516,000,
respectively, related to borrowings under the Company's senior credit facility.
Interest expense charged to discontinued operations is based upon the amount of
borrowings that management estimates will be repaid from the proceeds of the
disposal of the Company's retail segment operations. For the three and six
months ended April 30, 1995, interest expense charged to discontinued
operations totaled approximately $125,000 and $233,000, respectively.
The net loss on disposal includes a charge of approximately $9.3 million
($5.9 million after estimated income tax benefit) to record the net assets at
estimated realizable value and a charge of approximately $3.9 million ($2.5
million after estimated tax benefit) for anticipated operating losses during
the estimated twelve month disposal period, including interest expense. The
net loss on disposal is based upon current estimates made by management. There
can be no assurances that such estimates will not be materially different from
actual amounts.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital decreased approximately $10.3
million during the six months ended May 3, 1996, from $42.2 million at October
31, 1995 to $31.9 million at May 3, 1996. The decrease in working capital is
primarily a result of: (i) the after-tax charge of approximately $8.4 million
relating to the estimated loss on disposal of the Company's retail segment
operations; and (ii) an increase of approximately $3.6 million in trade
payables relating primarily to the seasonality of the Company's business.
These decreases in working capital were partially offset by a $2.9 million
increase in inventories of youth sports and team dealer products.
As of May 3, 1996, the Company had total borrowings under its senior credit
facility of approximately $30.2 million, outstanding letters of credit for
foreign purchases of inventory of approximately $1.4 million, outstanding
standby letters of credit of approximately $1.1 million, and availability of
approximately $2.0 million based upon the Company's borrowing base at such
time. SSG's cash requirements have typically been highest from January through
June. This trend continued in fiscal 1996 as evidenced by the $1.2 million
increase in borrowings under the senior credit facility since October 31, 1995,
primarily due to cash payments made for the Nitro acquisition and the increase
in inventories of youth sports and team dealer products. Subsequent to May 3,
1996, the Company repaid approximately $5.0 million of borrowings under the
revolving line of credit from the proceeds of the sale of the Gold Eagle
Division.
On February 2, 1996 and March 12, 1996, the Company's senior lender amended
certain provisions of the senior credit facility and granted short-term
overadvances to the Company to better facilitate the Company's seasonal cash
needs without increasing the total credit facility. The amendments to the
senior credit facility were required in order to meet projected short-term
liquidity requirements and to support the continued expansion of the Company's
revenue base. As required by the amendments, the short-term overadvances were
repaid from the proceeds of the sale of the Gold Eagle Division on May 20,
1996.
As discussed in Note 3 to the consolidated financial statements, the
Company's senior credit facility was amended in December 1995 and provides for
additional loans to be made to SSG for certain capital expenditures (up to a
maximum of $1,000,000, of which $685,228 has been borrowed as of May 3, 1996),
for the acquisition of outstanding shares of SSG common stock (up to a maximum
of $2,500,000), if any, and for the costs of future acquisitions (up to a
maximum of $6,500,000), if consummated. In order for these additional loans to
be made, the Company is required to comply with the covenants contained in the
loan agreement, as amended, and to obtain the written approval of the senior
and participating lenders under certain circumstances. At May 3, 1996, SSG was
not in compliance with certain of its financial covenants and has obtained
waivers from its senior lenders related to these defaults as of May 3, 1996. In
addition, the Company is negotiating with its senior lender to amend certain
covenants as a result of the discontinuation of the retail segment. Although
the senior lender has provided the Company with a commitment to amend such
covenants, the parameters of the covenants have not yet been agreed upon.
Although the Company anticipates mutually acceptable covenants with the lender,
no assurance can be given. In consideration for the waivers and the senior
lender's agreement to make the amendments requested by the Company, the Company
agreed to an increase in the interest rate of 50 basis points for borrowings
under the revolving credit facility and 25 basis points for borrowings under the
term loan.
The Company believes that it will be able to satisfy its short-term
liquidity needs from borrowings under its senior credit facility, cash flows
from operations, and estimated proceeds from the disposal of its remaining
retail segment operations, if consummated. In the event the Company continues
to expand its revenue base, is unable to effect its plan of disposal for
its remaining retail segment operations or the proceeds generated from such
disposal are less than anticipated, the Company will be required to seek
further amendments to its credit facility to provide additional borrowing
capability and/or arrange additional debt financing in order to support its
short-term and long-term liquidity requirements.
During November 1995 the Company approved the repurchase of up to 1,000,000
shares of its issued and outstanding common stock in the open market and/or
through privately negotiated transactions, subject to certain conditions. No
shares have been repurchased to date. Any material repurchase of shares will
require bank financing and/or debt issued by the Company in exchange for the
shares.
11
<PAGE> 12
RESULTS OF OPERATIONS
Subsequent to May 3, 1996, the Company sold substantially all of the assets of
its Gold Eagle Professional Golf Products Division (the "Gold Eagle Division")
and the Company approved a formal plan to dispose of its remaining retail
segment operations through a rights offering. As a result, the accompanying
consolidated financial statements present SSG's retail segment as a
discontinued operation. Due to the changes in the Company's fiscal year-end
from December 31 to October 31, operating results for the three and six months
ended April 30, 1995 are different from those historically reported by the
Company. The following discussion, unless otherwise indicated, relates to the
Company's continuing operations only.
Net Revenues. Net revenues increased approximately $6.6 million (34.7%) and
$6.4 million (19.7%) for the three and six month periods ended May 3, 1996 as
compared to the same periods of 1995. This increase in net revenues reflects
increased sales in substantially all operating divisions.
Gross Profit. Gross profit increased approximately $1.9 million (25.2%) and
$1.7 million (13.6%) for the three and six month periods ended May 3, 1996 as
compared to the same periods of 1995. As a percentage of net revenues, gross
profit decreased from 39.9% to 37.0% and from 39.6% to 37.6% for the three and
six month periods ended May 3, 1996 as compared to the same periods of 1995.
The dollar increase in gross profit reflects the continued acceleration of
SSG's net revenues as discussed above. The decreases in gross profit as a
percentage of net revenues were attributable to, among other factors, an
increase in sales related to youth sports leagues and local sporting goods team
dealers, as such sales have historically had lower margins than other sales
within SSG's institutional business. During the first six months of fiscal
1996, the Company intensified its marketing efforts relating to youth sports
leagues with new product offerings and aggressive pricing strategies designed
to increase its market penetration. As a result of these efforts, revenues
associated with youth sports league customers increased as a percentage of
total revenues which attributed to the decrease in gross profit as a percentage
of net revenues. In the event that revenues related to youth sports leagues
continue to represent a larger percentage of total revenues, the Company will
continue to experience a decrease in gross profit as a percentage of net
revenues in future periods.
Selling, General and Administrative Expenses. Operating expenses increased
approximately $2.1 million (39.2%) and $2.8 million (25.8%) for the three and
six month periods ended May 3, 1996 as compared to the same periods of 1995. As
a percentage of net revenues, operating expenses increased from 28.9% to 29.9%
and from 33.8% to 35.6% for the three and six month periods ended May 3, 1996
as compared to the same periods of 1995. The dollar increase in operating
expenses as well as the increase in operating expenses as a percentage of net
revenues was primarily a result of the following:
(i) An increase in expenses relating to the Company's primary distribution
facility for the three and six month periods ended May 3, 1996 as
compared to the same periods of fiscal 1995. This facility was opened
during April 1995 and therefore was not operational for the entire three
and six month periods of fiscal 1995. Such expenses include labor, rent
and depreciation. This unfavorable trend is expected to diminish in
future periods as prior year results of operations will include costs
associated with this facility.
(ii) An increase in the provision for receivables relating primarily the SSG's
youth league customers based upon on-going credit evaluations. Should
SSG's youth league division revenues continue to represent a larger
percentage of total revenues, the Company may experience an increase in
concentration of credit risk within this market. Management will
continue to perform on-going credit evaluations and provide provisions
for estimated losses.
(iii) An increase in advertising expenses due to the expansion of the Company's
marketing efforts, primarily expenses relating to catalogs mailed to
customers and additional advertising relating to the youth league
division. Although management is not aware of any pending increases in
paper costs or postal rates, any such increases could negatively
impact future operating results.
(iv) An increase in freight costs associated with the increase in net
revenues. As a percentage of net revenues, freight costs (net of freight
costs billed to customers) increased for the three and six month periods
ended May 3, 1996 as compared to the prior year. This increase was due
primarily to revenues associated with youth sports leagues. As
12
<PAGE> 13
a result of the Company's pricing strategy with respect to youth sports
leagues discussed above, freight costs billed to customers were lower than
SSG's historical institutional business.
(v) An increase in payroll costs associated with an increase in employees.
(vi) Expenses relating to the Company's participation in the 1996 Olympic
summer games. These expenses include royalties, travel, and miscellaneous
advertisements incurred during fiscal 1996 which are expected to be
partially offset by the sale of products used in the Olympic games.
Management believes these costs will continue through the fourth quarter
of fiscal year 1996.
Operating Profit. Operating profit for the three and six month periods ended
May 3, 1996 decreased approximately $247,000 (11.9%) and $1.1 million (57.6%)
as compared to the same periods of 1995, which reflects the impact of the
increase in operating costs as discussed above and the decrease in gross profit
percentages related to increased sales in the youth league division.
Interest Expense. Interest expense, net of amounts charged to discontinued
operations, increased approximately $23,000 (7.8%) and 229,000 (42.2%) for the
three and six month periods ended May 3, 1996 as compared to the same periods
of 1995. The increase in interest expense for the six months ended May 3, 1996
resulted from higher average borrowing levels associated with the Company's
senior credit facility as well as the overall interest rate increases. See
Item 2 "Liquidity and Capital Resources" for a discussion of the higher average
borrowing levels associated with the Company's senior credit facility.
Provision for Income Taxes. The provision for income taxes decreased
approximately $115,000 and $552,000 for the three and six month periods ended
May 3, 1996 as compared to the same period of 1995. The Company's effective tax
rate decreased from 37.4% to 36.4% and from 38.7% to 36.0% for the three and
six month periods ended May 3, 1996 as compared to the same periods of 1995.
This decrease in the effective tax rate reflects the decrease in pretax
earnings.
Earnings from Continuing Operations. Net earnings decreased approximately
$115,000 and $491,000 for the three and six month periods ended May 3, 1996 as
compared to the same periods of 1995. Net earnings per share from continuing
operations decreased from $0.16 to $0.14 and from $0.12 to $0.00 for the three
and six month periods ended May 3, 1996 as compared to the same periods of
1995. The three and six month periods ended May 3, 1996 include a decrease of
approximately 2.7% in weighted average shares outstanding.
"SAFE HARBOR " STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Future trends for revenues and profitability remain difficult to predict. The
Company continues to face many risks and uncertainties, including: general and
specific market economic conditions, competitive factors, United States
Government sales, risk of nonpayment of accounts receivable, and foreign
supplier related issues.
The general economic condition in the U.S. could affect pricing on raw
materials such as metals and other commodities used in the manufacturing of
certain products. The Company believes it will be able to pass any significant
price increases on to its customers; however, any price increases could have an
adverse effect on revenues and costs.
Approximately 9% of the Company's institutional sales are made to the U.S.
Government, a majority of which are military installations. Anticipated
reductions in U.S. Government spending could lessen funds available to various
government customers for sports related equipment, which could adversely affect
the Company's results of operations.
While the institutional portion of the Company continues to grow, the Company
may elect for strategic purposes to accept lower margins in order to gain
incremental market share in certain target market segments.
13
<PAGE> 14
Management continues to closely monitor orders and the creditworthiness of its
customers. The Company has not experienced abnormal increases in losses
associated with accounts receivable; however, credit risks associated with the
youth league division are considered by the Company to be greater than any
other division. The Company has made allowances for the amount it believes to
be adequate to properly reflect the risk to accounts receivable; however,
unforeseen market conditions may compel the Company to increase the allowances.
The sports related equipment market in which the Company participates is highly
competitive. SSG competes principally in the institutional market with local
sporting goods dealers, as well as other direct mail companies. While large
sporting goods companies dominate the market of sporting goods in the United
States, the Company does not compete with such companies.
The Company derives a significant portion of its revenues from sales of
products purchased directly from foreign suppliers located primarily in the Far
East. In addition, the Company believes many of the products it purchases from
domestic suppliers are produced by foreign manufacturers. The Company is
subject to risks of doing business abroad, including delays in shipments,
adverse fluctuations in currency exchange rates, increases in import duties,
decreases in quotas, changes in custom regulations and political turmoil. The
occurrence of any one or more of the foregoing could adversely affect the
Company's operations.
Sport Supply Group believes it has the product offerings and competitive
resources for continued success, but revenues, costs, margin, product mix, and
profits are all influenced by a number of factors, which are inherently
uncertain and therefore difficult to predict.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company from time to time becomes involved in various claims and
lawsuits incident to its business (primarily relating to product liability
issues). In the opinion of management of SSG, any ultimate liability arising
out of currently pending claims and lawsuits should not have a material effect
on the financial condition or the results of operations of SSG.
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable.
(b) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable.
(b) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
In November 1995, the Company received a notice from the United States
Securities and Exchange Commission (the "SEC") that the SEC is conducting a
non-public, informal inquiry concerning, among other things, trading in the
Company's securities and certain accounting issues raised by the Company's
October 24, 1995 press release. The Company is providing the SEC with its full
cooperation.
15
<PAGE> 16
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Item
----
<S> <C> <C>
(a)(1) Exhibit 3.1 -- Amended and Restated Certificate of Incorporation of the Company (incorporated by
reference from Exhibit 4.1 to the Company's Registration Statement on Form S-8
(Registration No. 33-80028)).
(a)(2) Exhibit 3.1.1 -- Certificate of Amendment of Amended and Restated Certificate of Incorporation to the
Company (incorporated by reference from Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (Registration No. 33-80028)).
(a)(3) Exhibit 3.2 -- Amended and Restated Bylaws of the Company (incorporated by reference from Exhibit 3.2 to
the Company's Report on Form 10-Q for the quarter ended September 30, 1995).
(a)(4) Exhibit 4.1 -- Specimen of Common Stock Certificate (incorporated by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (Registration No. 33-39218)).
(a)(5) Exhibit 4.2 -- Warrant Agreement entered into between the Company and Warrant Agent, including form of
Warrant, relating to the purchase of up to 1,300,000 shares of the Company's common stock
for $25.00 per share, which expires on December 15, 1998 (incorporated by reference from
Exhibit 4.2 to the Company's Registration Statement on Form S-3 (Registration No. 33-
71574)).
(a)(6) Exhibit 10 -- Amended and Restated Loan and Security Agreement between the Company and LaSalle Business
Credit, Inc. dated as of March 23, 1995 (incorporated by reference from Exhibit 10.20 to
the Company's Report on Form 10-K for the fiscal year ended October 31, 1995).
(a)(7) Exhibit 10.1 -- Amendment No. 1 to Amended and Restated Loan and Security Agreement between the
Company and LaSalle Business Credit, Inc. (incorporated by reference from Exhibit
10.20.1 to the Company's Report on Form 10-K for the fiscal year ended October 31,
1995).
(a)(8) Exhibit 10.2 -- Amendment No. 2 to Amended and Restated Loan and Security Agreement between the
Company and LaSalle Business Credit, Inc. (incorporated by reference from Exhibit
10 of the Company's Report on Form 10-Q for the quarter ended February 2, 1996).
(a)(9) Exhibit 11 -- Earnings per Common and Common Equivalent Share.
(a)(10) Exhibit 27 -- Financial Data Schedule
(a)(11) Exhibit 99 -- Press Release disseminated on June 18, 1996
</TABLE>
(b) A Report on Form 8-K was filed on June 4, 1996 to report the
disposal of the Company's Gold Eagle Division and report the press
release concerning (i) the sale of the Gold Eagle Division; (ii)
the resignations of the Company's Chief Executive Officer and
Chief Financial Officer; and (iii) a preliminary assessment of the
Company's results of operations for the quarterly period ended May
3, 1996. A Report on Form 8-K was filed on March 25, 1996 to
report the press release concerning (i) the Company's results of
operations for the quarterly period ended February 2, 1996; (ii)
dismissal of a shareholder lawsuit; and (iii) a possible rights
offering related to the Nitro Express Division.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPORT SUPPLY GROUP, INC.
June 21, 1996 By: /s/ James R. Crawford
-----------------------------
James R. Crawford,
Principal Financial and
Accounting Officer
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C> <C>
Exhibit 11 -- Earnings per Common and Common Equivalent Share 19
Exhibit 27 -- Financial Data Schedule 20
Exhibit 99.1 -- Press Release disseminated on June 18, 1996 21
</TABLE>
18
<PAGE> 1
EXHIBIT 11
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Adjusted net earnings and adjusted number of common shares used in the
computation of net earnings per common share were determined as follows:
<TABLE>
<CAPTION>
Three Months Ended May 3, 1996 Six Months Ended May 3, 1996
---------------------------------- ------------------------------------
Full Full
ADJUSTED NET EARNINGS Primary Dilution (1) Primary Dilution (1)
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net earnings $(9,402,322) $(9,402,322) $(10,486,337) $(10,486,337)
Add : reduction in interest
expense, net of
income taxes -- -- -- --
-------------- -------------- --------------- ---------------
Adjusted net earnings $(9,402,322) $(9,402,322) $(10,486,337) $(10,486,337)
============== ============== =============== ===============
ADJUSTED NUMBER OF COMMON SHARES
Weighted Average Common Shares
Outstanding 6,736,421 6,736,421 6,728,651 6,728,651
Incremental shares for assumed
exercise of outstanding
stock options and warrants 12,348 12,348 14,070 14,084
-------------- -------------- --------------- ---------------
Adjusted number of common shares 6,748,769 6,748,769 6,742,721 6,742,735
============== ============== =============== ===============
Net earnings per common share $(1.39) $(1.39) $(1.56) $(1.56)
============== ============== =============== ===============
</TABLE>
NOTE (1) : These calculations are submitted in accordance with
Regulation S-K Item 601(b)(11) although the
calculations are not required pursuant to Paragraph
40 of APB Opinion No. 15 because the effects are
less than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-01-1996
<PERIOD-END> MAY-03-1996
<CASH> 506,696
<SECURITIES> 0
<RECEIVABLES> 11,747,904
<ALLOWANCES> 500,000
<INVENTORY> 19,577,806
<CURRENT-ASSETS> 45,775,616
<PP&E> 13,250,395
<DEPRECIATION> 6,853,299
<TOTAL-ASSETS> 81,410,547
<CURRENT-LIABILITIES> 13,840,718
<BONDS> 0
<COMMON> 75,520
0
0
<OTHER-SE> 37,337,609
<TOTAL-LIABILITY-AND-EQUITY> 81,410,547
<SALES> 38,737,315
<TOTAL-REVENUES> 38,737,315
<CGS> 24,174,165
<TOTAL-COSTS> 13,769,869
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 771,676
<INCOME-PRETAX> 53,247
<INCOME-TAX> 19,224
<INCOME-CONTINUING> 34,023
<DISCONTINUED> (10,520,360)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,486,337)
<EPS-PRIMARY> (1.56)
<EPS-DILUTED> (1.56)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
[SPORT SUPPLY GROUP, INC. LETTERHEAD]
FOR IMMEDIATE RELEASE
JUNE 18, 1996
SPORT SUPPLY GROUP (NYSE - GYM) SECOND QUARTER RESULTS FROM
OPERATIONS:
o REVENUES FROM CONTINUING OPERATIONS RISE 93% FROM FIRST QUARTER
o OPERATING EARNINGS FROM CONTINUING OPERATIONS REACH $1.8
MILLION COMPARED TO FIRST QUARTER OPERATING LOSS OF $1.0
MILLION
o POTENTIAL AGREEMENTS TO EXPAND MARKETS
SPORT SUPPLY GROUP TODAY REPORTED ITS SECOND QUARTER RESULTS OF
OPERATIONS FOR THE PERIOD ENDING MAY 3, 1996.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MAY 3, ENDED MAY 3,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET REVENUES $25,521,321 $18,944,650 $ 38,737,315 $32,351,177
EARNINGS FROM CONTINUING
OPERATIONS $ 966,803 $ 1,120,901 $ 34,023 $
806,641
DISCONTINUED OPS, NET (10,369,125) 336,301 (10,520,360) 695,375
NET EARNINGS (LOSS) $(9,402,322) 1,457,202 (10,486,337) 1,502,016
EARNINGS (LOSS) PER SHARE:
CONTINUING OPERATIONS $ 0.14 $0.16 $0.00 $0.12
DISCONTINUED OPERATIONS (1.53) 0.05 (1.56) 0.10
------ ---- ------ ----
NET EARNINGS (LOSS) ($1.39) $0.21 ($1.56) $0.22
======== ===== ====== =====
WEIGHTED AVERAGE NUMBER
OF COMMON & COMMON
EQUIVALENT SHARES OUTSTANDING 6,748,769 6,934,483 6,742,721 6,881,742
========= ========= ========= =========
</TABLE>
MICHAEL BLUMENFELD, SPORT SUPPLY'S CEO, STATED "WE ACHIEVED OUR SECOND
QUARTER GOAL OF SEQUENTIALLY IMPROVING REVENUES AND EARNINGS. WHILE REVENUES
FROM CONTINUING OPERATIONS REACHED A RECORD QUARTERLY LEVEL, WE CONTINUE TO
PURSUE A LEVEL OF PROFITABILITY COMMENSURATE WITH THIS GROWTH. WE
<PAGE> 2
BELIEVE THE CONTINUED FAILURES OF MASS MERCHANTS AND RETAILERS IN THE SPORTS
EQUIPMENT MARKETS, WHILE SUBJECTING THE INDUSTRY AND SPORT SUPPLY GROUP TO A
LOWER THAN AVERAGE LEVEL OF MARGINS, IS RESULTING IN A FAVORABLE SHIFT OF
BUSINESS ACTIVITY TO SPORT SUPPLY. THERE REMAINS SIGNIFICANT AREAS OF EARNINGS
POTENTIAL TO ACHIEVE. WE BELIEVE THE PLANNED DISPOSAL OF THE COMPANY'S RETAIL
SEGMENT OPERATIONS WILL ALLOW MAXIMUM ASSET UTILIZATION AND INTERNAL GROWTH.
THE RESULTS RELATED TO THE DISCONTINUED OPERATION INCLUDE, AMONG OTHER THINGS,
CERTAIN CHARGES THAT SPORT SUPPLY EXPECTS TO INCUR DURING THE PERIOD OF TIME IN
WHICH THE PLAN OF DISPOSAL IS BEING CONDUCTED. WE NOW BELIEVE REVENUES FROM
CONTINUING OPERATIONS WILL REACH $105 MILLION IN 1997 AND APPROACH $120 MILLION
IN 1998. GIVEN THIS LEVEL OF GROWTH, THERE IS NO LONGER AN INTENSITY TO PURSUE
ACQUISITIONS. THE COMPANY WILL CONTINUE TO SEEK JOINT VENTURE AGREEMENTS AND
NEW LICENSING AGREEMENTS, EXPAND ITS SALES FORCE AND SOLICIT FAVORABLE
CORPORATE RELATIONSHIPS.
POTENTIAL DISTRIBUTION AGREEMENTS
SPORT SUPPLY STATED THAT DURING THE PAST SEVERAL WEEKS IT HAS RECEIVED
SEVERAL PROPOSALS FROM A VARIETY OF MAJOR SPORTS EQUIPMENT COMPANIES THAT WOULD
ALLOW SPORT SUPPLY TO EXPAND ITS PRODUCT OFFERINGS TO INCLUDE VIRTUALLY EVERY
MAJOR BRAND OF SPORTS EQUIPMENT OFFERED BY SUCH COMPANIES TO SPORT SUPPLY'S
100,000 INSTITUTIONAL AND RETAIL CUSTOMERS. IF THESE PROPOSALS MATURE INTO
DEFINITIVE AGREEMENTS, THESE AGREEMENTS WILL ALLOW SPORT SUPPLY TO ACCELERATE
ITS PENETRATION OF THE YOUTH LEAGUE AND INSTITUTIONAL MARKETS THAT HAVE ANNUAL
EXPENDITURES EXCEEDING $2 BILLION.
THIS NEWS RELEASE, OTHER THAN THE HISTORICAL FINANCIAL INFORMATION,
CONSISTS OF FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES
DETAILED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION, INCLUDING THE REPORT ON FORM 10-Q FOR THE QUARTER ENDED
MAY 3, 1996, WHICH IS ANTICIPATED TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION SHORTLY. ACTUAL RESULTS MAY VARY MATERIALLY.
FOR ADDITIONAL INFORMATION CONTACT MICHAEL J. BLUMENFELD, CHAIRMAN,
AT (214) 484-9484.
