<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 2, 1997.
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
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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: (972) 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 preceeding 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 10, 1997.
Title of Each Class of Common Stock Number Outstanding
- ----------------------------------- ---------------------------------
Common Stock, $0.01 par value 8,364,834 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 2, November 1,
1997 1996
-------------- --------------
CURRENT ASSETS :
<S> <C> <C>
Cash $ 464,435 $ 435,213
Accounts receivable --
Trade, less allowance for doubtful accounts of
$1,250,000 in 1997 and $552,000 in 1996 12,099,944 11,836,173
Other 485,884 138,994
Income taxes receivable 2,114,627 1,343,579
Inventories, net 14,867,876 15,320,505
Other current assets 877,222 899,588
Deferred tax assets 4,453,579 5,883,341
-------------- --------------
Total current assets 35,363,567 35,857,393
-------------- --------------
DEFERRED CATALOG EXPENSES 2,439,782 2,367,875
PROPERTY, PLANT AND EQUIPMENT :
Land 8,663 8,663
Buildings 1,553,371 1,551,723
Machinery and equipment 6,087,096 6,029,845
Furniture and fixtures 2,923,294 2,900,870
Leasehold improvements 2,380,517 2,365,821
-------------- --------------
12,952,941 12,856,922
Less -- Accumulated depreciation and amortization (7,258,246) (6,779,589)
-------------- --------------
5,694,695 6,077,333
-------------- --------------
DEFERRED TAX ASSETS 4,492,847 4,492,847
COST IN EXCESS OF TANGIBLE NET ASSETS ACQUIRED, less accumulated
amortization of $1,087,000 in 1997 and
$1,036,000 in 1996 3,002,145 3,053,780
TRADEMARKS, less accumulated amortization of $852,000 in
1997 and $748,000 in 1996 3,447,842 3,551,801
OTHER ASSETS, less accumulated amortization of $1,081,000
in 1997 and $1,078,000 in 1996 727,347 761,826
NET NONCURRENT ASSETS OF DISCONTINUED OPERATIONS - 16,365,572
-------------- --------------
$ 55,168,225 $ 72,528,427
============== ==============
CURRENT LIABILITIES :
Accounts payable $ 5,269,657 $ 9,993,049
Accrued property taxes 88,083 370,789
Other accrued liabilities 2,487,735 1,806,334
Notes payable and capital lease obligations,
current portion 564,167 696,955
Net current liabilities of discontinued operations - 6,329,927
-------------- --------------
Total current liabilities 8,409,642 19,197,054
-------------- --------------
DEFERRED GAIN 27,112 33,137
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS, net of
current portion 7,524,079 24,135,267
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Preferred stock, par value $0.01, 100,000 shares
authorized, no shares outstanding in 1997 or 1996 - -
Common stock, par value $0.01, 20,000,000 shares
authorized, 9,151,899 and 7,551,899 shares issued in
1997 and 1996, 8,364,834 and 6,764,834 shares
outstanding in 1997 and 1996 91,519 75,519
Paid-in capital 58,527,193 46,543,193
Retained deficit (11,666,934) (9,711,357)
Treasury stock, at cost, 787,065 shares in 1997
and 1996 (7,744,386) (7,744,386)
-------------- --------------
39,207,392 29,162,969
-------------- --------------
$ 55,168,225 $ 72,528,427
============== ==============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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 2, 1997 May 3, 1996 May 2, 1997 May 3, 1996
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Net revenues $28,312,254 $25,521,321 $42,892,062 $38,737,315
Cost of sales 17,595,076 16,070,395 26,270,094 24,174,165
-------------- ---------------- -------------- ----------------
Gross profit 10,717,178 9,450,926 16,621,968 14,563,150
Selling, general and
administrative expenses 7,479,557 7,623,951 14,017,665 13,769,869
Nonrecurring charges - - 1,300,000 -
-------------- ---------------- -------------- ----------------
Operating profit 3,237,621 1,826,975 1,304,303 793,281
Interest expense (272,880) (313,863) (469,211) (771,676)
Other income, net 26,460 7,007 33,589 31,642
-------------- ---------------- -------------- ----------------
Earnings from continuing operations
before provision for income taxes 2,991,201 1,520,119 868,681 53,247
Provision for income taxes 1,017,010 553,316 250,258 19,224
-------------- ---------------- -------------- ----------------
Earnings from continuing
operations 1,974,191 966,803 618,423 34,023
-------------- ---------------- -------------- ----------------
Discontinued operations:
Loss from operations, net - (1,930,908) - (2,082,143)
Loss on disposal, net - (8,438,217) (2,574,000) (8,438,217)
-------------- ---------------- -------------- ----------------
Loss from discontinued
operations - (10,369,125) (2,574,000) (10,520,360)
-------------- ---------------- -------------- ----------------
Net earnings (loss) $1,974,191 $(9,402,322) $(1,955,577) $(10,486,337)
============== ================ ============== ================
Earnings (loss) per common and common equivalent share:
Continuing operations $0.24 $0.14 $0.08 $0.00
Discontinued operations 0.00 (1.53) (0.32) (1.56)
-------------- ---------------- -------------- ----------------
Net earnings (loss) $0.24 $(1.39) $(0.24) $(1.56)
============== ================ ============== ================
Weighted average number of
common and common
equivalent shares outstanding 8,366,963 6,748,769 8,028,690 6,742,721
============== ================ ============== ================
</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 2, 1997 May 3, 1996
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES :
<S> <C> <C>
Net loss $(1,955,577) $(10,486,337)
Adjustments to reconcile net loss
to net cash used in operating activities --
Loss on disposal of discontinued operations 2,574,000 8,438,217
Depreciation and amortization 717,057 854,021
Provision for allowances for accounts
receivable 249,169 416,700
Changes in assets and liabilities --
(Increase) decrease in receivables (1,630,878) 12,762
(Increase) decrease in inventories 452,629 (2,947,651)
(Increase) decrease in deferred catalogs and
other current assets 1,380,221 (2,000,105)
Increase (decrease) in payables (4,723,392) 3,561,954
Increase in accrued liabilities 398,695 1,670,436
(Increase) decrease in other assets (7,305) 253,601
Other (6,025) (48,587)
Discontinued operations - noncash charges and
working capital changes (697,524) 1,779,339
Total adjustments (1,293,353) 11,990,687
------------------- -------------------
Net cash (used in) provided by operating activities (3,248,930) 1,504,350
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES :
Acquisitions of property, plant & equipment (168,041) (424,843)
Proceeds from sale of investments 31,000 -
Investing activities of discontinued operations (1,657)
Proceeds from sale of discontinued operations 8,160,826 (516,400)
------------------- -------------------
Net cash (used in) provided by investing activities 8,022,128 (941,243)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES :
Proceeds from issuances of notes payable 6,595,140 2,818,946
Payments of notes payable and capital lease
obligations (23,339,116) (3,248,052)
Proceeds from common stock issuances 12,000,000 3,878
Dividends paid to stockholders - (201,650)
------------------- -------------------
Net cash used in financing activities (4,743,976) (626,878)
------------------- -------------------
Net change in cash 29,222 (63,771)
Cash, beginning of period 435,213 570,467
------------------- -------------------
Cash, end of period $464,435 $506,696
=================== ===================
The accompanying notes are an integral part of these financial statements.
</TABLE>
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 2, 1997 May 3, 1996
---------- -----------
<S> <C> <C>
Cash paid during the period for interest $ 957,807 $ 721,967
========== ===========
Cash paid during the period for income taxes $ 9,500 $ 106,000
========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES :
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 2, 1997 and the results of its operations for the
three and six month periods ended May 2, 1997 and May 3, 1996. In January 1997,
the Company changed its financial reporting year end from October 31 to
September 30. Accordingly, fiscal year 1997 is a transition period consisting
of eleven months. The Company is currently operating on a 52/53 week year
ending on the Friday closest to September 30. Operating results for the interim
period ending May 2, 1997 are not necessarily indicative of the results that
may be expected for the eleven month period ending September 30, 1997.
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. The consolidated financials also include estimates and
assumptions made by management which affect the reported amounts of assets and
liabilities, the reported amounts of revenues and expenses, provisions for and
the disclosure of contingent assets and liabilities. Actual results could
materially differ from those estimates.
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). As a
result, the Company's retail segment was being reported as a discontinued
operation in the accompanying consolidated financial statements through March
28, 1997, the date of the disposal of the remaining retail segment (See Note
6).
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 2, 1997 and
November 1, 1996, inventories consisted of the following:
<TABLE>
<CAPTION>
May 2, November 1,
1997 1996
---------------------- ----------------------
<S> <C> <C>
Raw $ 2,522,980 $ 2,255,675
Materials.........................
Work-in- 192,294 146,751
progress....................
Finished and purchased goods. 12,152,602 12,918,079
---------------------- ----------------------
$14,867,876 $15,320,505
====================== ======================
</TABLE>
Note 2 - Stockholders' Equity
The Company maintains a stock option plan that provides up to 2,000,000 shares
of common stock for awards of incentive and non-qualified stock options to
directors, employees and consultants 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 Amended and Restated Stock Option Plan. Options expire 10
years from the grant date, or 5 years
7
<PAGE> 8
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 2, 1997, the Company granted a total of 594,375
options under the stock option plan at exercise prices ranging from $6.125 to
$7.50 per share. 585,000 of these options were granted to key executive
officers of, and a consultant to, the Company at an exercise price of $7.50 per
share. The following table summarizes transactions under the plan for the six
months ended May 2, 1997 and May 3, 1996:
<TABLE>
<CAPTION>
Six Months Ended
----------------
May 2, 1997 May 3, 1996
---------------------- ---------------------
<S> <C> <C>
Options outstanding- beginning of 685,473 811,772
period
Options granted 594,375 11,125
Options exercised -- (562)
Options forfeited (140,975) (33,250)
---------------------- ---------------------
Options outstanding - end of period 1,332,953 789,085
====================== =====================
Range of exercise prices $4.80 - $13.125 $4.80 - $14.25
====================== =====================
</TABLE>
As of May 2, 1997 there were 245,130 non-qualified options outstanding that
were issued outside the plan. Such options have exercise prices ranging from
$6.88 to $15.00 per share.
Note 3 - Notes Payable and Capital Lease Obligations
As of May 2, 1997 and November 1, 1996, notes payable and capital lease
obligations consisted of the following:
<TABLE>
<CAPTION>
May 2, November 1,
1997 1996
----------- ----------
<S> <C> <C>
Note payable under revolving line of credit,
interest at prime plus 3/4% (9.25% at May 2, 1997) or
LIBOR plus 2-3/4% (8.19% at May 2, 1997), due October
31, 1999 collateralized by substantially all assets $ 5,961,906 $21,811,339
Term loan, interest at prime plus 1.0% (9.5% at May
2, 1997), payable in quarterly installments plus
accrued interest of $125,000 through October 31, 1999,
collateralized by substantially all assets 1,750,000 2,628,126
Capital lease obligation, interest at 7.4%, payable
in monthly installments of principal and
interest totaling $3,159 through December 1998 59,277 75,694
Capital lease obligation, interest at 9.0%, payable
in annual installments of principal and
interest totaling $55,000 through August 2005 317,063 317,063
----------- -----------
Total 8,088,246 24,832,222
Less - current portion (564,167) (696,955)
----------- -----------
Long-term debt and capital lease obligations, $ 7,524,079 $24,135,267
net =========== ===========
</TABLE>
8
<PAGE> 9
The Company has a senior secured credit facility to finance its working capital
requirements. The Company's ability to borrow funds under its revolving credit
facility is based upon certain percentages of eligible trade accounts
receivable and eligible inventories. On November 27, 1996, SSG's lenders
amended certain provisions of the senior credit facility including reducing the
credit facility, changing the maturity date, reducing the number of financial
covenants and modifying the remaining covenants. On June 13, 1997, the Company
received a letter agreement from its senior lender extending the maturity date
to October 31, 1999.
Amounts outstanding under the senior credit facility are collateralized by
substantially all assets of the Company. As of May 2, 1997, the Company had the
option of electing the revolving credit facility to bear interest at the
prevailing LIBOR rate plus 2.75% (8.19% at May 2, 1997) or the Lender's prime
rate plus .75% (9.25% at May 2, 1997). The Company also had the option of
electing the term loan to bear interest at the prevailing LIBOR rate plus 3.0%
(8.44% at May 2, 1997) or the Lender's prime rate plus 1.0% (9.5% at May 2,
1997). Historically, the Company has elected the lower of the interest rates
available under the facility.
As of May 2, 1997, the Company had borrowings of approximately $5,962,000
outstanding under the revolver, approximately $597,000 of letters of credit
outstanding for foreign purchases of inventory, and availability of
approximately $11,330,000. In addition, as of May 2, 1997, SSG had borrowings
of $1,750,000 under the term loan which is payable in quarterly installments of
principal and accrued interest of $125,000 through October 31, 1999.
Note 4 - Net Earnings (Loss) Per Common Share
Net earnings (loss) per common share is based upon the weighted average number
of common and common equivalent shares outstanding during the six month periods
ended May 2, 1997 and May 3, 1996. Outstanding stock options and common stock
purchase warrants are considered common stock equivalents when dilution results
from their assumed exercise.
Note 5 - Change in Control of Management
On December 10, 1996, pursuant to a Securities Purchase Agreement dated
November 27, 1996 between Emerson Radio Corp. and SSG ("the Purchase
Agreement"), Emerson acquired directly from SSG 1,600,000 shares of
newly-issued Common Stock for an aggregate consideration of $11,500,000 and
five-year warrants to acquire an additional 1,000,000 shares of Common Stock at
an exercise price of $7.50 per share for an aggregate consideration of
$500,000. In addition, Emerson agreed to arrange for foreign trade credit
financing of $2.0 million for the benefit of SSG to supplement SSG's existing
credit facilities. Pursuant to the Purchase Agreement, SSG caused a majority of
the members of SSG's Board of Directors to consist of Emerson's designees.
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. The sale of the Gold Eagle Division
resulted in a pretax loss of approximately $750,000.
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) and therefore had
classified these operations as discontinued. On March 28, 1997, SSG disposed of
substantially all of the remaining assets of the discontinued operation to
Nitro Leisure Products, Inc., a Delaware corporation. Pursuant to the Asset
Acquisition Agreement, the total consideration paid to SSG was $8,161,000 in
cash and $430,000 in cash payable one hundred and twenty (120) days from the
date of closing, subject to certain adjustments as provided in the Asset
Acquisition Agreement. The following represents net current liabilities as well
as net noncurrent assets of discontinued operations as of November 1, 1996 and
the results of operations of the discontinued operations for the six month
periods ended May 3, 1996 and the period from November 2, 1997 to the disposal
date of March 28, 1997:
9
<PAGE> 10
<TABLE>
<CAPTION>
November 1,
1996
---------------
<S> <C>
Current assets $14,188,152
Current liabilities (20,518,079)
---------------
Net current liabilities $(6,329,927)
===============
Noncurrent assets $16,365,572
Noncurrent liabilities --
===============
Net noncurrent assets $16,365,572
===============
</TABLE>
<TABLE>
<CAPTION>
For the Period From For the Six Months Ended
November 2, 1996 - March 28, 1997 May 3, 1996
---------------------------------------------------------------------
<S> <C> <C>
Net revenues $ 1,790,395 $ 11,021,779
Selling, general, and administrative expenses 1,235,398 2,715,553
Loss from operations, net of income taxes -- (2,082,143)
Loss on disposal, net of income taxes (2,574,000) (8,438,217)
</TABLE>
The net loss from discontinued operations for the period from November 2, 1996
to the date of disposal includes allocated interest expense of approximately
$355,000 related to borrowings under the Company's senior credit facility.
Interest expense charged to discontinued operations was based upon the amount
of borrowings that were available based upon the asset eligibility formulas set
forth in the senior secured credit agreement.
On March 4, 1997, the Company signed a letter of intent for the sale of the
remaining assets of the discontinued retail segment. Based upon management's
estimates at that time of the net proceeds to be received pursuant to such
disposal, the Company recorded a pre-tax charge of $3.9 million ($2.6 million
after estimated income tax benefit) during the quarter ended January 31, 1997.
This charge was provided to record the net assets at estimated net realizable
value in accordance with the purchase price set forth in the letter of intent.
On March 28, 1997, the Company sold the remaining assets of the discontinued
segment for approximately $8.6 million in which the proceeds from the sale were
used to reduce the Company's outstanding debt.
Note 7 - Subsequent Event
On May 28, 1997, 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 privately
negotiated transactions. Such purchases are subject to price and availability
of shares, working capital availability and any alternative capital spending
programs of the Company, and maintaining compliance with the senior credit
facility.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased approximately $10.3 million during the
six months ended May 2, 1997, from $16.7 million at November 1, 1996 to $26.9
million at May 2, 1997. The increase in working capital is primarily a result
of: (i) a $4.7 million decrease in accounts payable; and (ii) a $6.3 million
decrease in net current liabilities of discontinued operations due to the sale
of the remaining discontinued operations on March 28, 1997.
As of May 2, 1997, the Company had total borrowings under its senior credit
facility of approximately $7.7 million including a term loan of $1,750,000
which is payable in quarterly installments of principal and accrued interest of
$125,000 through October 31, 2000, outstanding letters of credit for foreign
purchases of inventory of approximately $0.6 million, and availability of
approximately $11.3 million. The net decrease of $16.7 million in borrowings
under the senior credit facility and the net decrease of $4.7 million in trade
payables compared to November 1, 1996 reflects (i) a payment of approximately
$12.0 million using the proceeds received by the Company from the sale of
1,600,000 shares of the Company's common stock and 1.0 million common stock
purchase warrants to Emerson Radio Corp. ("Emerson") and (ii) a payment of
approximately $8.2 million using the proceeds received from the sale of the
remaining assets of the discontinued retail segment.
On November 27, 1996, the Company entered into an agreement with its senior
lender whereby the senior lender amended certain provisions of the senior
secured credit agreement. The amendment included reducing the credit facility
to $25 million, extending the maturity date, and reducing the number of
financial covenants from seven to three as well as modifying the remaining
covenants to only include results from continuing operations. At May 2, 1997,
the Company was in compliance with the debt covenants as amended and the
Company believes it will remain in compliance with the financial covenants
throughout 1997. On June 13, 1997, the Company received a letter agreement from
its senior lender that extended the maturity date to October 31, 1999.
The Company believes it will satisfy its short-term and long-term liquidity
needs from borrowings under its senior credit facility and cash flows from
operations. The proceeds from the sale of the discontinued operations and
proceeds from the Emerson transaction were used to reduce the Company's
outstanding borrowings. As a result of the sale and the Emerson transaction,
interest expense is expected to be less in future operating periods.
On May 28, 1997, 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 privately
negotiated transactions. Such purchases are subject to price and availability
of shares, working capital availability and any alternative capital spending
programs of the Company. The Company had no material commitments for capital
expenditures as of May 2, 1997. However, the Company believes it will be able
to satisfy any projected capital requirements that may arise in the foreseeable
future from borrowings under the senior credit facility and cash flows from
operations.
RESULTS OF OPERATIONS
Net Revenues. Net revenues increased approximately $2.8 million (10.9%) and
$4.2 million (10.7%) for the three and six month periods ended May 2, 1997 as
compared to the same periods of 1996. This increase in net revenues reflects
increases in revenues associated primarily with youth sports league customers.
These increases were partially offset by a decrease in Government sales. As
Government spending continues to be reduced, the Company will experience a
decrease in Government sales in future periods.
Gross Profit. Gross profit increased approximately $1.3 million (13.4%) and
$2.1 million (14.4%) for the three and six month periods ended May 2, 1997 as
compared to the same periods of 1996. As a percentage of net revenues, gross
profit increased from 37.0% to 37.9% and from 37.6% to 38.8% for the three and
six month periods ended May 2, 1997 as compared to the same periods of 1996.
The dollar increase in gross profit as well as the increase in gross
11
<PAGE> 12
profit as a percentage of net revenues were attributable to, among other
factors, the increase in sales related to SSG's youth league division.
Selling, General and Administrative Expenses. Operating expenses decreased
approximately $144,000 (1.9%) and increased approximately $248,000 (1.8%) for
the three and six month periods ended May 2, 1997 as compared to the same
periods of 1996. As a percentage of net revenues, operating expenses decreased
from 29.9% to 26.4% and from 35.6% to 32.7% for the three and six month periods
ended May 2, 1997 as compared to the same periods of 1996. The dollar increase
in operating expenses for the six month period ended May 2, 1997 was primarily
a result of the following:
(i) Variable selling expenses such as salaries and commissions associated
with the increase in revenues as compared to the same period in 1996.
(ii) An increase in advertising expenses due to the expansion of the
Company's marketing efforts, primarily expenses relating to catalogs
mailed to customers. Since the Company has combined its BSN, GSC, and
Passons' catalogs, the Company anticipates a decrease in catalog
expenses for fiscal year 1998.
These increases in operating expenses were primarily offset by the decrease in
the following:
(i) A decrease in expenses relating to the Company's participation in the
1996 Olympic games, as all expenses related to royalties and travel
were incurred and paid in fiscal year 1996.
(ii) A decrease in depreciation and amortization related to the write-offs
of certain software and forecasting systems recorded in the fourth
quarter of fiscal year 1996.
(iii) A decrease in bad debt expense associated with the Company's
successful collection efforts.
(iv) A decrease in warehouse expenses associated with the redesign of
certain aspects of the Company's primary distribution facility as
efficiencies have made it possible to eliminate some of the fixed
expenses that occurred in fiscal year 1996.
(v) A decrease in other expenses such as office supplies, postage, paper
and forms, delivery service, and telephone as a result of
management's efforts to reduce overall general and administrative
expenses.
Nonrecurring Charges. A majority of the nonrecurring pre-tax charge of $1.3
million for the six month period ended May 2, 1997 related to the "change in
control" of management that occurred on December 10, 1996 (including severance
payments to the former CEO of approximately $680,000). The change in control
was the result of a stock purchase agreement with Emerson. As part of the
agreement, Emerson purchased 1,600,000 shares of SSG common stock, 1,000,000
Common Stock Purchase Warrants and caused a majority of the members of SSG's
Board of Directors to consist of Emerson's designees.
Operating Profit. Operating profit for the three and six month periods ended
May 2, 1997 increased approximately $1,411,000 (77.2%) and $511,000 (64.4%),
respectively. However, not including the nonrecurring charges, operating profit
increased approximately $1,811,000 for the six months ended May 2, 1997 as
compared to the same period of 1996, which reflects the impact of the (i)
increase in both gross profit dollars as well as gross profit percentages
related to increased sales, and (ii) the decrease in operating expenses as a
percentage of revenues.
12
<PAGE> 13
Interest Expense. Interest expense decreased approximately $41,000 (13.1%) and
$302,000 (39.2%) for the three and six month periods ended May 2, 1997 as
compared to the same periods of 1996. The significant decrease in interest
expense resulted from lower borrowing levels as a result of the equity infusion
by Emerson and the sale of the discontinued operations. See Item 2 "Liquidity
and Capital Resources" for a discussion of the lower borrowing levels
associated with the Company's senior credit facility. The Company anticipates
that interest expense in fiscal year 1997 will continue to decrease as compared
to fiscal year 1996 due to the lower borrowing levels.
Provision for Income Taxes. The provision for income taxes increased
approximately $464,000 and $231,000 for the three and six month periods ended
May 2, 1997 as compared to the same periods of 1996. The Company's effective
tax rate decreased from 36.4% to 34.0% and from 36.1% to 28.8% for the three
and six month periods ended May 2, 1997 as compared to the same periods of
1996.
Net Earnings from Continuing Operations. Net earnings from continuing
operations increased approximately $1,007,000 and $584,000 for the three and
six month periods ended May 2, 1997, respectively, as compared to the same
periods of 1996. Net earnings per share from continuing operations increased
from $0.14 to $0.24 and from $0.00 to $0.08 for the three and six month periods
ended May 2, 1997 as compared to the same periods of 1996. The three and six
month periods ended May 2, 1997 include an increase of approximately 23.9% and
19.1% in weighted average shares outstanding related to the sale to Emerson of
1,600,000 shares of SSG's newly-issued common stock.
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS OR FUTURE OPERATING
RESULTS
This report contains various forward looking statements and information that
are based on Management's beliefs as well as assumptions made by and
information currently available to Management. When used in this report, the
words "anticipate", "estimate", "expect", "predict", "project", and similar
expressions are intended to identify forward looking statements. Such
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, expected or projected. Among the key factors that may have a
direct bearing on the Company's results are set forth below.
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, United States Government sales, risk of
nonpayment of accounts receivable, competitive factors, 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 7% of the Company's institutional sales are made to the U.S.
Government, a majority of which are made to military installations. Anticipated
reductions in U.S. Government spending could reduce funds available to various
government customers for sports related equipment, which could adversely affect
the Company's results of operations.
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
13
<PAGE> 14
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.
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 will 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
The Company's Annual Meeting of Stockholders was held on March 21, 1997. The
Company submitted the following three proposals to its stockholders: (i)
election of seven (7) persons to serve as Directors of the Company; (ii) the
adoption of the Sport Supply Group, Inc. Amended and Restated Stock Option
Plan; and (iii) the adoption of the Sport Supply Group, Inc. 1997 Employee
Stock Purchase Plan. The results of the vote on each of these proposals is as
follows:
ELECTION OF DIRECTORS
---------------------
<TABLE>
<CAPTION>
Directors Votes For Votes Withheld
--------- --------- --------------
<S> <C> <C> <C>
(1) Geoffrey P. Jurick 8,010,768 214,118
(2) Eugene I. Davis 8,010,518 214,368
(3) Peter S. Blumenfeld 8,007,211 217,675
(4) John P. Walker 8,009,018 215,868
(5) Peter G. Bunger 8,010,518 214,368
(6) Johnson C. S. Ko 8,010,518 214,368
(7) Thomas P. Treichler 8,011,143 213,743
</TABLE>
15
<PAGE> 16
ADOPTION OF SPORT SUPPLY GROUP, INC.
AMENDED AND RESTATED STOCK OPTION PLAN
--------------------------------------
<TABLE>
<S> <C>
Votes For: 3,864,102
Votes Against: 938,300
Abstentions: 55,285
Broker Nonvotes: 3,367,199
</TABLE>
ADOPTION OF SPORT SUPPLY GROUP, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
--------------------------------------
<TABLE>
<S> <C>
Votes For: 4,543,743
Votes Against: 270,948
Abstentions: 42,996
Broker Nonvotes: 3,367,199
</TABLE>
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 was 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. In December 1995, the Company responded to all
of the SEC's requests in connection with this matter and has not been contacted
by the SEC since such time.
16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
<TABLE>
<CAPTION>
Item
----
<S> <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-K for the year
ended November 1, 1996).
(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 4.3 -- Warrant Agreement entered into between the Company and Emerson
relating to the purchase of up to 1,000,000 shares of the Company's
common stock for $7.50 per share, which expires on December 10, 2001
(incorporated by reference from Exhibit 4 (a) to the Company's Report
on Form 8-K filed on December 12, 1996.
*(a)(17) Exhibit 11 -- Earnings per Common and Common Equivalent Share.
*(a)(18) Exhibit 27 -- Financial Data Schedule
(b) -- A report on Form 8-K was filed with the Securities and Exchange Commission
on April 11, 1997 to report the disposition of the Company's discontinued
golf-related operations. The disposition was reported pursuant to Item 2 of
the Form 8-K. Pro Forma Financial Information was reported under Item 7
in the Form 8-K.
</TABLE>
- ----------------------------------
* Filed Herewith
17
<PAGE> 18
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 16, 1997 By: /s/ John P. Walker
--------------------------------
John P. Walker
Executive Vice President and
Chief Financial Officer
18
<PAGE> 19
INDEX TO EXHIBITS
ITEM
Exhibit 11 -- Earnings per Common and Common Equivalent Share
Exhibit 27 -- Financial Data Schedule
19
<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 2, 1997 Six Months Ended May 2, 1997
-------------------------------------- -------------------------------------
Full Full
Adjusted Net Earnings Primary Dilution (1) Primary Dilution (1)
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net earnings $ 1,974,191 $ 1,974,191 $ (1,955,577) $ (1,955,577)
Add : reduction in interest
expense, net of
income taxes -- -- -- --
----------------- ----------------- ---------------- ----------------
Adjusted net earnings $1,974,191 $ 1,974,191 $ (1,955,577) $ (1,955,577)
================= ================= ================ ================
Adjusted Number of Common Shares
Weighted Average Common Shares
Outstanding 8,364,834 8,364,834 8,027,056 8,027,056
Incremental shares for assumed
exercise of outstanding
stock options and warrants 2,129 2,129 1,634 1,634
----------------- ----------------- ---------------- ----------------
Adjusted number of common shares 8,366,963 8,366,963 8,028,690 8,028,690
================= ================= ================ ================
Net earnings per common share $ $0.24 $ 0.24 $ (0.24) $ (0.24)
================= ================= ================ ================
</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> SEP-26-1997
<PERIOD-END> MAY-02-1997
<CASH> 464,435
<SECURITIES> 0
<RECEIVABLES> 15,950,455
<ALLOWANCES> (1,250,000)
<INVENTORY> 14,867,876
<CURRENT-ASSETS> 35,363,567
<PP&E> 12,952,941
<DEPRECIATION> (7,258,246)
<TOTAL-ASSETS> 55,168,225
<CURRENT-LIABILITIES> 8,409,642
<BONDS> 0
0
0
<COMMON> 91,519
<OTHER-SE> 39,207,392
<TOTAL-LIABILITY-AND-EQUITY> 55,168,225
<SALES> 42,892,062
<TOTAL-REVENUES> 42,892,062
<CGS> 26,270,094
<TOTAL-COSTS> 15,317,665
<OTHER-EXPENSES> 33,589
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 469,211
<INCOME-PRETAX> 868,681
<INCOME-TAX> 250,258
<INCOME-CONTINUING> 618,423
<DISCONTINUED> (2,574,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,955,577)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
