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 July 3, 1998.
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: (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 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 August 10, 1998.
Title of Each Class of Common Stock Number Outstanding
Common Stock, $0.01 par value 8,017,327 shares
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Index to Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
<TABLE>
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JULY 3, 1998 AND SEPTEMBER 26, 1997
<CAPTION>
July 3, September 26,
1998 1997
<S>
CURRENT ASSETS: <C> <C>
Cash $2,338,847 $602,779
Accounts receivable --
Trade, less allowance for
doubtful accounts of $627,000
in 1998 and $797,000 in 1997 12,099,136 13,452,286
Other 370,770 467,661
Income taxes receivable - 1,653,875
Inventories, net 15,039,697 12,284,425
Other current assets 832,110 583,414
Deferred tax assets 285,695 2,069,678
Total current assets 30,966,255 31,114,118
DEFERRED CATALOG EXPENSES 1,733,918 1,150,514
<PAGE>
PROPERTY, PLANT AND EQUIPMENT:
Land 8,663 8,663
Buildings 1,592,353 1,595,228
Machinery and equipment 5,544,836 5,661,315
Furniture and fixtures 2,559,017 2,427,527
Leasehold improvements 2,764,384 2,277,372
12,469,253 11,970,105
Less -- Accumulated depreciation
and amortization (7,360,280) (6,638,319)
5,108,973 5,331,786
DEFERRED TAX ASSETS 5,838,895 5,838,895
COST IN EXCESS OF TANGIBLE NET
ASSETS ACQUIRED, less amortization
of $1,212,000 IN 1998
and $1,130,000 in 1997 3,202,575 2,959,114
TRADEMARKS, less accumulated
amortization of $1,085,000 IN 1988
and $935,000 in 1997 3,213,996 3,364,046
OTHER ASSETS, less accumulated
amortization of $974,000 IN 1998
And $1,119,00 in 1997 1,876,313 725,624
$51,940,925 $50,484,097
CURRENT LIABILITIES :
Accounts payable $5,569,038 $4,956,830
Accrued property taxes 129,132 294,882
Other accrued liabilities 472,048 1,292,247
Notes payable and capital lease
obligations, current portion 571,104 564,638
6,741,322 7,108,597
DEFERRED GAIN 13,054 22,091
NOTES PAYABLE AND CAPITAL
LEASE OBLIGATIONS, net of
current portion 2,445,454 4,396,090
COMMITMENTS AND CONTINGENCIES
<PAGE>
STOCKHOLDERS' EQUITY :
Preferred stock, par value $0.01,
100,000 shares authorized, no shares
outstanding in 1998 or 1997 - -
Common stock, par value $0.01,
20,000,000 shares authorized,
9,241,534 and 9,158,749 shares
issued in 1998 and 1997,
8,106,627 and 8,084,384 shares
outstanding in 1998 and 1997 92,415 91,588
Paid-in capital 59,095,796 58,574,218
Retained deficit (6,000,229) (9,709,357)
Treasury stock, at cost,
1,134,907 shares in 1998
and 1,074,365 in 1997 (10,446,887) (9,999,130)
42,741,095 38,957,319
$51,940,925 $50,484,097
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<CAPTION>
For The Three Months For The Nine Months Ended
Ended
July 3, June 27 July 3, June 27,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net revenues $25,340,174 $23,060,707 $72,025,265 $62,722,218
Cost of sales 15,500,267 14,005,97 44,409,386 39,088,972
Gross profit 9,839,907 9,054,737 27,615,879 23,633,246
Selling, general and
administrative expenses 7,239,915 6,671,619 22,145,564 21,906,615
Nonrecurring charges - - - 1,300,000
Earnings before
interest, other
income and taxes 2,599,992 2,383,118 5,470,315 426,631
<PAGE>
Interest expense (93,610) (219,475) (368,401) (696,773)
Other income, net 128,065 5,544 517,967 37,070
Earnings (loss) from
continuing operations
before provision (benefit)
for income taxes 2,634,447 2,169,187 5,619,881 (233,072)
Provision (benefit) for
income taxes 895,706 737,769 1,910,753 (93,458)
Earnings (loss) from
continuing operations 1,738,741 1,431,418 3,709,128 (139,614)
Discontinued operations:
Loss from operations, net - - - (160,000)
Loss on disposal, net - - - (5,934,000)
Loss from discontinued
operations - - - (6,094,000)
Net earnings (loss) $1,738,741 $1,431,418 $3,709,128 $(6,233,614)
Earnings (loss) per common
and common equivalent share:
Continuing operations $ 0.22 $ 0.17 $ 0.46 $ (0.02)
Discontinued operations 0.00 0.00 0.00 (0.76)
Net earnings (loss) $ 0.22 $ 0.17 $ 0.46 $ (0.78)
Continuing operations -
assuming dilution $ 0.20 $ 0.17 $ 0.45 $ (0.02)
Discontinued operations -
assuming dilution 0.00 0.00 0.00 (0.76)
Net earnings (loss) -
assuming dilution $ 0.20 $ 0.17 $ 0.45 $ (0.78)
Weighted average number of
common and common
equivalent shares
outstanding 8,089,451 8,325,070 8,098,222 8,134,421
<PAGE>
Weighted average number of
common and common equivalent
shares outstanding -
assuming dilution 8,560,378 8,334,441 8,267,382 8,134,421
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<TABLE>
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<CAPTION>
For The Nine Months
Ended
July 3, June 27,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings - loss $3,709,128 $(6,233,614)
Adjustments to reconcile net
earnings (loss) to net cash used
in operating activities --
Loss on disposal of discontinued - 6,094,000
operations
Depreciation and amortization 1,023,974 1,426,460
Position for (recovery of)
allowances (185,001) 23,212
for accounts
receivable
Changes in assets and liabilities
--
Decrease in receivables 4,356,631 2,483,148
(Increase) decrease in (1,978,099) 1,944,149
inventories
(Increase) decrease in deferred
catalogs and
other current assets (832,100) 1,343,963
Increase (decrease) in payables 612,208 (4,122,791)
(Increase) decrease in deferred 1,783,983 (5,082,306)
taxes
Increase (decrease) in accrued (1,285,949) 708,883
liabilities
Increase in other assets (1,168,571) (4,599,976)
<PAGE>
Other (9,037) (9,038)
Discontinued operations - noncash
charges and
working capital changes - 5,840,265
Net cash provided by (used in) 6,027,167 (183,645)
operating activities
CASH FLOWS FROM INVESTING ACTIVITIES :
Acquisitions of property, plant & (339,027) (90,523)
equipment
Payments for acquisitions, net of (1,500,682) 8,160,826
cash acquired
Proceeds from sale of investments 6,200 28,000
Net cash provided by (used in) (1,833,509) 8,098,303
investing activities
CASH FLOWS FROM FINANCING ACTIVITIES :
Proceeds from issuances of notes 2,922,599 1,987,959
payable
Payments of notes payable and
capital lease obligations (5,454,837) (21,034,027)
Proceeds from common stock issuances 689,135 12,000,000
Purchase of treasury stock (614,487) (260,000)
Net cash used in financing (2,457,590) (7,306,068)
activities
Net change in cash 1,736,068 608,590
Cash, beginning of period 602,779 577,888
Cash, end of period $2,338,847 $ 1,186,478
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 356,727 $ 1,160,087
Cash paid during the period
for income taxes $ 856 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
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 July 3, 1998 and the results of its
operations for the three and nine month periods ended July 3, 1998 and
June 27, 1997. In January 1997, the Company changed its financial
reporting year end from October 31 to September 30. The Company is
operating on a 52/53 week year ending on the Friday closest to September
30. Consequently, results of operations presented for the three and nine
month periods ended June 27, 1997 represent a different period than
historically reported by the Company.
The consolidated financial statements include the accounts of SSG and its
wholly-owned subsidiary, Athletic Training Equipment Company, Inc.
"ATEC"). All significant intercompany accounts and transactions have
been eliminated in consolidation. The consolidated financials also
include estimates and assumptions made by management that 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 the remaining operations of the Company's retail segment (which
previously included the Gold Eagle Division) and therefore has
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. As a result, the Company's retail segment is being
reported as a discontinued operation through the date of disposal in the
accompanying consolidated financial statements.
<PAGE>
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 July 3,
1998 and September 26, 1997, inventories consisted of the following:
July 3, September 26,
1998 1997
Raw materials $ 3,277,018 $2,410,009
Work-in-progress 326,200 113,170
Finished and purchased goods 12,047,269 10,471,262
15,650,487 12,994,441
Less inventory reserve for (610,790) (710,016)
obsolete or slow moving items $15,039,697 $12,284,425
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 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 Amended and Restated 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 (or a Stock Option Committee comprised of members of the Board of
Directors).
<PAGE>
Transactions under the plan for the nine months ended July 3, 1998 and
June 27, 1997 are summarized as follows:
Nine Months Ended
July 3, 1998 June 27, 1997
Options outstanding- beginning of period 1,040,573 708,723
Options granted 182,300 594,375
Options exercised (71,887) --
Options forfeited (1,425) (218,900)
Options outstanding - end of period 1,149,561 1,084,198
Weighted average prices $7.32 $7.18
Stock Options Stock Options
Outstanding Exercisable
Wtd. Avg. Wtd. Avg.
Remaining Exercise Exercise
Range of Exercise Prices Shares Life Price Shares Price
$4.80 - $7.50 1,149,561 7 yrs. $7.32 439,561 $7.15
As of July 3, 1998 there were 171,200 non-qualified options outstanding
that were issued outside the plan. Such options have exercise prices
ranging from $6.88 to $7.50 per share.
Note 3 - Notes Payable and Capital Lease Obligations
As of July 3, 1998 and September 26, 1997, notes payable and capital lease
obligations consisted of the following:
<TABLE>
<CAPTION>
July 3, September 26,
1998 1997
<S> <C> <C>
Note payable under revolving line of credit
Interest at prime plus 1/2% (9.0% at
July 3, 1998) or LIBOR plus 2-1/4% (7.9% at
July 3, 1998), due October 31, 2000
Collateralized by substantially all assets $1,009,725 $3,000,000
<PAGE>
Term loan, interest at LIBOR plus 2-1/4%
(7.9% at July 3, 1998), payable in
quarterly installments plus accrued interest
of $125,000 through October 31, 2000,
collateralized by substantially all assets 1,125,000 1,625,000
Promissory note, noninterest bearing,
due June 30, 1999 525,000 --
Capital lease obligation, interest at 9.0%,
payable in annual installments of principal
and interest totaling $55,000
through August 2005 290,599 290,599
Other 66,234 45,129
Total 3,016,558 4,960,728
Less - current portion (571,104) (564,638)
Long-term debt and capital
lease obligations, net $ 2,445,454 $ 4,396,090
</TABLE>
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 September 9,
1997, the Company entered into a Second Amended and Restated Loan and
Security Agreement ("Agreement"), which includes a senior credit
facility of $25,000,000 with a maturity date of October 31, 2000. This
Agreement provides for a revolving line of credit, a letter of credit
facility, a term loan, additional loans to be made to SSG for the cost
of certain capital expenditures (up to a maximum of $4,000,000) and
reduced interest rates and fees. The Agreement also contains financial
and net worth covenants in addition to limits on capital expenditures.
As of July 3, 1998, the Company was in compliance with the covenants in
the senior credit facility.
Amounts outstanding under the senior credit facility are collateralized
by substantially all assets of the Company. As of July 3, 1998, the
Company had the option of electing the revolving credit facility and the
term loan to bear interest at the prevailing LIBOR rate plus 2-1/4%
(7.9% at July 3, 1998) or the lender's prime rate plus 1/2% (9.0% at
July 3, 1998). Historically, the Company has elected the lower of the
interest rates available under the facility.
<PAGE>
As of July 3, 1998, the Company had borrowings of approximately
$1,010,000 outstanding under the revolving credit facility,
approximately $1,063,000 of letters of credit outstanding for foreign
purchases of inventory, and availability of approximately $17,704,000.
In addition, as of July 3, 1998, SSG had borrowings of $1,125,000 under
the term loan which is payable in quarterly installments of principal
and accrued interest of $125,000 through October 31, 2000.
Note 4 Capital Structure
In 1997, the Financial Accounting Standards Board issued Statement No. 129,
"Disclosure of Information About Capital Structure" which requires companies
to disclose an entity's capital structure including liquidation preferences
of preferred stock, information about rights and privileges of the outstanding
equity securities, and the redemption amounts for all issues of capital stock.
The following information sets forth all disclosure requirements by Statement
No. 129.
As of July 3, 1998, the Company's outstanding capital stock consisted of
common stock. The Company has approximately 1.1 million options
outstanding under the stock option plan with exercise prices ranging
from $4.80 to $7.50 and approximately 1.0 million warrants outstanding
with an exercise price of $7.50. In addition, the Company has 171,200
non-qualified options outstanding that were issued outside the Plan.
Such options have exercise prices ranging from $6.88 to $7.50 per share.
If the options and warrants were exercised, all holders would have rights
similar to common shareholders.
Note 5 - Net Earnings (Loss) Per Common Share
In 1997, the Financial Accounting Standards Board issued Statement No. 129.
"Earnings Per Share". Statement No. 128 replaced the previously reported
primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented and, where
necessary, restated to conform to the Statement No. 128 requirements.
<PAGE>
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
July 3, 1998 June 27, 1997 July 3, 1998 June 27, 1997
<S> <C> <C> <C>
Numerator:
Net earnings (loss) from $1,738,741 $1,431,418 $3,709,128 ($139,614)
continuing operations
Numerator for basic and
diluted earnings per share-
income available to common $1,738,741 $1,431,418 $3,709,128 ($139,614)
stockholders
Denominator:
Denominator for basic earnings
per share-Weighted average
shares 8,089,451 8,325,070 8,098,222 8,134,421
Effect of dilutive securities:
Warrants 195,489 -- 61,448 --
Employee stock options 275,438 9,371 107,712 --
Denominator for diluted
earnings per share - Adjusted
weighted average shares
and Assumed conversions 8,560,378 8,334,441 8,267,382 8,134,421
Basic earnings (loss) per share $0.22 $0.17 $0.46 ($0.02)
Diluted earnings (loss)
per share $0.20 $0.17 $0.45 ($0.02)
</TABLE>
Note 6 - Acquisitions
During December 1997, the Company acquired certain assets of Athletic
Training Equipment Company, Inc. ("ATEC"), a manufacturer of pitching
machines for cash, a noninterest bearing promissory note and the
assumption of certain liabilities.
<PAGE>
Note 7 - Recently Issued Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," which is required to be adopted
in fiscal year 1999. At that time, the Company will be required to
disclose total comprehensive income and comprehensive income per share.
Comprehensive income is defined as all changes in stockholders' equity
exclusive of transactions with owners such as capital investments and
dividends.
In 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information"
which is required to be adopted in fiscal year 1999. At that time, the
Company will be required to report financial and descriptive information
about its operating segments, if any. Operating segments are revenue
producing components of the Company for which separate financial information
is produced internally and subject to evaluation.
Note 8 - Subsequent Event
The Company will record a nonrecurring pre-tax charge of approximately
$1.2 million in the fourth quarter of the fiscal year ended October 2,
1998 for compensation payments and a consulting agreement relating to the
retirement in July, 1998 of Peter Blumenfeld, President and Chief
Operating Officer of the Company. The severance payments were paid upon
resignation, and the consulting agreement will be paid through July,
2000.
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 $219,000 during the
nine months ended July 3, 1998, from $24.0 million at September 26, 1997
to $24.2 million at July 3, 1998. The increase in working capital is
primarily a result of a $2.8 million increase in inventory associated with
the seasonality of the Company's business as well as the inventory
acquired from the acquisition of Athletic Training Equipment Company, Inc.
("ATEC") in December, 1997. This increase was partially offset by (i) a
$1.4 million decrease in trade receivables and (ii) a $1.7 million
decrease in federal income tax receivable as the Company received its
federal tax refund in the third quarter of 1998.
<PAGE>
On September 9, 1997, the Company entered into a Second Amended and
Restated Loan and Security Agreement ("Agreement") which includes a
senior credit facility of $25,000,000 with a maturity date of October 31,
2000. This Agreement provides for a revolving line of credit, a letter of
credit facility, a term loan, additional loans to be made to SSG for the
cost of certain capital expenditures (up to a maximum of $4,000,000) and
reduced interest rates. The Agreement also contains financial and net
worth covenants in addition to limits on capital expenditures.
As of July 3, 1998, the Company had total borrowings under its senior
credit facility of approximately $1.0 million including a term loan of
$1.1 million 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 $1.1
million, and availability of approximately $17.7 million. The net
decrease of $2.5 million in borrowings under the senior credit facility
compared to September 26, 1997 partially reflects the federal income tax
refund received offset by the cash payment for the ATEC acquisition in
December, 1997.
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.
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. As of July 3, 1998,
the Company repurchased approximately 364,500 of its issued and
outstanding common stock in the open market. Subsequent to July 3, 1998
the Company has purchased an additional 48,500 shares of its issued and
outstanding common stock in the open market. Except as described in the
next paragraph, the Company does not currently have any material
commitments for capital expenditures.
<PAGE>
Impact of Year 2000 and System Implementation
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Some of
the Company's computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a failure or miscalculations causing disruptions of
operations, including the inability to process transactions or engage in
normal business activities. The Company has determined that it will be
necessary to replace significant portions of its software and hardware so
that its computer systems will function properly with respect to dates in
the year 2000 and thereafter. The Company expects that with successful
conversions to new software that are Year 2000 compatible, the Year 2000
Issue will pose no significant operational problems for its computer
systems. However, if such conversions are not made, or are not
successfully completed on a timely basis, the Year 2000 Issue and system
implementation could have a material adverse effect on the Company's
operations because there are no other viable alternatives for the Company.
The Company is utilizing internal and external resources to convert to,
test, and implement the new software. The Company anticipates completing
the Year 2000 project and system implementation during calendar
year 1999. The Company has selected a vendor and has determined the total
estimated cost of the system implementation project to range between $3.5
and $4.5 million. The cost of the system implementation project will be
funded through operating cash flows and borrowings under the Company's
senior credit facility. The majority of these costs associated with the
Year 2000 and system implementation project will be capitalized and
amortized in accordance with Generally Accepted Accounting Principles.
The Company believes it is taking all necessary steps to become Year 2000
compliant; however, the Company's Year 2000 compliance is also dependent
on the compliance of third parties such as vendors and customers. Due to
the diversity and volume of customers and vendors, the Company can not
determine the full extent to which the Company may be affected if such
Year 2000 issues are not resolved by third parties.
Results of Operations
Net Revenues. Net revenues increased approximately $2.3 million (9.9%)
and $9.3 million (14.8%) for the three and nine month periods ended July
3, 1998 as compared to the same periods ended June 27, 1997. This
increase in net revenues reflects increases in revenues associated
<PAGE>
primarily with the Company's Youth, U.S. Games, and track and field
divisions as well as the Company's new subsidiary, ATEC, which was
acquired on December 1, 1997. These increases were partially offset by a
decrease in Government sales. If Government spending continues to be
reduced, the Company will continue to experience a decrease in Government
sales in future periods. Net revenues were also adversely impacted
because the Company mailed significantly less catalogs to its customers
after consolidating the BSN, GSC, and Passons' catalogs into one catalog.
The benefits from reducing catalog and postage expenses are reflected in
the "Selling, General and Administrative Expenses." The Company is
constantly reviewing its marketing methods to maximize revenue growth and
minimize expenses. As a result of the ATEC acquisition, the Company
expects to experience an increase in sales related to sporting goods
dealers and retailers.
Gross Profit. Gross profit increased approximately $785,000 (8.7%) and
$4.0 million (16.9%) for the three and nine month periods ended July 3,
1998 as compared to the same periods ended June 27, 1997. As a
percentage of net revenues, gross profit decreased from 39.3% to 38.8%
and increased from 37.7% to 38.3% for the three and nine month periods
ended July 3, 1998 as compared to the same periods ended June 27, 1997.
The decrease in gross profit as a percentage of net revenues for the
three month period ended July 3, 1998 as compared to the same period
ended June 27, 1997 is attributable to sales related to ATEC and the
Youth division, as such sales have lower margins than other sales within
SSG's business. In the event that revenues related to ATEC and the Youth
division continue to represent a larger percentage of total revenues, the
Company may experience a decrease in gross profit as a percentage of net
revenues in future periods. The increase in gross profit as a percentage
of net revenues for the nine month period ended July 3, 1998 as compared
to June 27, 1997 is attributable to a $950,000 charge to the inventory
reserve in 1997.
Selling, General and Administrative Expenses. Operating expenses
increased approximately $568,000 (8.5%) for the three month period ended
July 3, 1998 as compared to the same period ended June 27, 1997 and
decreased approximately $1.1 million for the nine month period ended July
3, 1998 as compared to the same period ended June 27, 1997. As a
percentage of net revenues, operating expenses decreased from 28.9% to
28.6% and from 37.0% to 30.8% for the three and nine month periods ended
July 3, 1998 as compared to the same periods ended June 27, 1997. The
decrease in operating expenses as a percentage of net revenues was
primarily a result of the following:
<PAGE>
(i) A non-recurring charge of $1.3 million recorded in the prior
year related to the "change in control" of the Company as a result
of a stock purchase agreement with Emerson Radio Corp. ("Emerson").
(ii) A decrease in catalog expenses associated with the Company's
consolidation of the BSN, GSC, and Passons' catalogs.
(iii) A decrease in bad debt expense associated with the Company's
successful collection efforts and better credit evaluations of
potential customers.
The decrease in operating expenses as discussed above were partially
offset by the additional operating expenses associated with the
Company's acquisition of ATEC.
The Company will record a nonrecurring pre-tax charge of approximately $1.2
million in the fourth quarter of the fiscal year ended October 2, 1998 for
compensation payments and a consulting agreement relating to the retirement
in July, 1998 of Peter Blumenfeld, President and Chief Operating Officer
of the Company. The severance payments were paid upon resignation, and
the consulting agreement will be paid through July, 2000.
Operating Profit. Operating profit for the three and nine month periods
ended July 3, 1998 increased approximately $217,000 and $5.0 million as
compared to the same periods ended June 27, 1997. This reflects the
impact of the (i) increase in gross profit dollars and (ii) the decrease
in operating expenses as a percentage of revenues as discussed above.
Interest Expense. Interest expense decreased approximately $126,000
(57.4%) and $328,000 (47.1%) for the three and nine month periods ended
July 3, 1998 as compared to the same periods ended June 27, 1997. The
decrease in interest expense resulted from reduced interest rates and
overall reduced levels of borrowings. See Item 2 "Liquidity and Capital
Resources".
Other Income, Net. Other income increased approximately $123,000 and
$481,000 for the three and nine month periods ended July 3, 1998 as
compared to the same periods ended June 27, 1997. The increase in other
income resulted from promotional agreements entered into between the
Company and certain corporate sponsors of a market segment. In
addition, other income includes services provided to Emerson such as
human resources, advertising, warehousing/distribution, and banking
functions as provided in a Management Services Agreement between the
Company and Emerson effective May 1997.
<PAGE>
Provision (Benefit) for Income Taxes. The provision for income taxes
increased approximately $158,000 and $2.0 million for the three and nine
month periods ended July 3, 1998 as compared to the same periods ended
June 27, 1997. The Company's effective tax rate remained constant at 34%
and decreased from 40.0% to 34.0% for the three and nine month periods
ended July 3, 1998 as compared to the same periods ended June 27, 1997.
Net Earnings (Loss) from Continuing Operations. Net earnings from
continuing operations increased approximately $307,000 and $3.8 million
for the three and nine month periods ended July 3, 1998, as compared to
the same periods ended June 27, 1997. Net earnings per share from
continuing operations increased from $0.17 to $0.22 and from a loss of
($0.02) to $0.46 for the three and nine month periods ended July 3, 1998
as compared to the same periods ended June 27, 1997. The three and nine
month periods ended July 3, 1998 include a decrease of approximately 2.8%
and 0.5% in weighted average shares outstanding, respectively.
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", "believes", "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, reduced sales to the
United States Government due to reduction in Government spending, 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 as well as finished goods. Any material price
increases to the customer could have an adverse effect on revenues and
any price increases from vendors could have an adverse effect on costs.
<PAGE>
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.
The Company ships approximately 80% of its products using United Parcel
Service ("UPS"). As experienced in 1997, a strike by UPS or any of the
Company's major carriers could adversely affect the Company's results of
operations due to not being able to deliver its products in a timely
manner and using other more expensive freight carriers. Although the
Company has analyzed the cost benefit effect of using other carriers, the
Company continues to utilize UPS for the majority of its small package
shipments.
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 and ATEC's retail customer base
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 and there are no significant barriers to enter this
market. 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 and/or economic turmoil. The occurrence of any
one or more of the foregoing could adversely affect the Company's
operations.
<PAGE>
Advances and changes in available technology can significantly impact the
Company. The Year 2000 Issue and system implementation project (as
described above) creates risks for the Company from unforeseen problems
in its own computer systems and from third parties with whom the Company
deals on a daily basis. Such failures of the Company's and/or third
parties' computer systems could have a material adverse impact on the
Company's ability to conduct its business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
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
Not applicable
<PAGE>
Item 5. Other Information
The Company will record a nonrecurring pre-tax charge of
approximately $1.2 million in the fourth quarter of the fiscal year
ended October 2, 1998 for compensation payments and a consulting
agreement relating to the resignation in July, 1998 of Peter
Blumenfeld, President and Chief Operating Officer of the Company.
The severance payments were paid upon resignation, and the
consulting agreement will be paid through July, 2000.
Item 6. Exhibits and Reports on Form 8-K
Item
(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 4.1 to the Company's Registration
Statement on Form S-3 (Registration No. 33-71574).
<PAGE>
(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)(7) Exhibit 10 -- Amended Lease Agreement entered into between the
Company and ACQUIPORT DFWIP, Inc., dated as of July 13, 1998.
*(a)(8) Exhibit 27 -- Financial Data Schedule.
(b) No Reports on Form 8-K were filed during the quarter ended
July 3, 1998.
----------------------------------
* Filed Herewith
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.
August 14, 1998 By: /s/ John P. Walker
John P. Walker
President, Chief Operating Officer and
Chief Financial Officer
INDEX TO EXHIBITS
ITEM
Exhibit 10 -- Amended Lease Agreement entered into between
the Company and ACQUIPORT DFWIP, Inc. dated
as of July 13, 1998
Exhibit 27 -- Financial Data Schedule
FIRST AMENDMENT TO LEASE
This FIRST AMENDMENT TO LEASE (this "First Amendment") is made and
entered into as of this 13th day of July, 1998 by and between
ACQUIPORT DFWIP, Inc., a Delaware corporation ("Landlord") and SPORT
SUPPLY GROUP, INC., a Delaware corporation ("Tenant").
W I T N E S S E T H :
WHEREAS, Landlord's predecessor and Tenant entered into that
certain lease (the "Lease") dated July 28, 1989, whereby Landlord leased
to Tenant the premises described as 1901 Diplomat, Farmers Branch,
Texas, measuring approximately 137,670 rentable square feet (the
"Premise"), for a term ending July 31, 1999 (the "Term");
WHEREAS, the parties desire to extend the Term of the Lease and to
make certain other modifications to the Lease as provided herein.
NOW, THEREFORE, for Ten Dollars and other good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged, Landlord and Tenant agree that the Lease shall be and is
amended as follows:
1. Incorporation of Lease Terms. The terms, conditions and
covenants of the Lease are incorporated herein by this reference except
to the extent expressly modified herein.
2. Term. The Termination Date is hereby extended to July 31,
2001.
3. Rent. Subsequent to July 31, 1999, the monthly payment of
minimum fixed rent shall be for $47,955.08.
4. Full Force and Effect. Except as modified herein, all other
terms and conditions of the Lease shall continue in full force and
effect. Any conflict between the provisions of this First Amendment and
the provisions of the Lease will be resolved in favor of this First
Amendment.
5. Limitation of Landlord's Liability. Redress for any claim
against Landlord under this Lease shall be limited to and enforceable
only against and to the extent of Landlord's interest in the Premises.
The obligations of Landlord under this Lease are not intended to and
<PAGE>
shall not be personally binding on, nor shall any resort be had to the
private properties of, any of its trustees or board of directors and
officers, as the case may be, its investment manager, the general
partners thereof, or any beneficiaries, stockholders, employees, or
agents of Landlord or the investment manager.
IN WITNESS WHEREOF, Landlord and Tenant have respectively signed
this First Amendment as of the date first hereinabove set forth.
TENANT: LANDLORD:
SPORT SUPPLY GROUP, INC. , ACQUIPORT DFWIP, Inc.
a Delaware corporation a Delaware corporation
/s/ Peter S. Blumenfeld
By: Peter S. Blumenfeld By: Robert W. Rice
Title: President and Vice President
Chief Operating Officer Date: August 6, 1998
Date: July 17, 1998
WITNESSED: WITNESSED:
/c/ Cheri Zetley Jeffrey M. Sable
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