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 2, 1999.
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 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 August 10, 1999.
Title of Each Class of Common Stock Number Outstanding
Common Stock, $0.01 par value 7,252,606 shares
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Index to Consolidated Financial Statements
Page
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JULY 2, 1999 AND OCTOBER 2, 1998
<CAPTION>
July 2, October 2,
1999 1998
<S>
CURRENT ASSETS: <C> <C>
Cash $ 1,214,787 $ 1,035,466
Accounts receivable --
Trade, less allowance for
doubtful accounts of $721,000
in 1999 and $372,000 in 1998 16,949,540 16,151,371
Other 1,052,187 572,234
Inventories, net 21,438,914 14,102,837
Other current assets 1,152,869 943,521
Deferred tax assets - 904,318
Total current assets 41,808,297 33,709,747
DEFERRED CATALOG EXPENSES 2,276,135 1,916,035
PROPERTY, PLANT AND EQUIPMENT:
Land 8,663 8,663
Buildings 1,605,102 1,595,228
Machinery and equipment 6,168,784 5,585,710
Furniture and fixtures 3,389,963 2,683,122
Leasehold improvements 2,361,851 2,764,384
13,534,363 12,637,107
Less -- Accumulated depreciation
and amortization (8,485,035) (7,574,023)
5,049,328 5,063,084
DEFERRED TAX ASSETS 4,659,189 4,659,189
<PAGE>
COST IN EXCESS OF TANGIBLE NET
ASSETS ACQUIRED, less accumulated
amortization of $1,389,000 in 1999
and $1,240,000 in 1998 8,594,454 3,174,725
TRADEMARKS, less accumulated
amortization of $1,288,000 in 1999
and $1,136,000 in 1998 3,040,292 3,163,290
OTHER ASSETS, less accumulated
amortization of $1,037,000
in 1999 and $994,000 in 1998 7,112,823 3,117,545
$ 72,640,518 $ 54,803,615
CURRENT LIABILITIES:
<PAGE>
Accounts Payable $ 8,017,949 $ 6,178,080
Income taxes payable - 87,250
<PAGE>
Accrued property taxes - 218,201
Other accrued liabilities 1,652,524 893,598
Deferred Tax Payable 1,471,621 -
Notes payable and capital lease
obligations, current portion 2,925,826 1,087,809
14,067,920 8,464,938
NOTES PAYABLE AND CAPITAL LEASE
OBLIGATIONS, net of current portion 16,062,954 5,160,965
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01,
100,000 shares authorized, no shares
outstanding in 1999 or 1998 - -
Common stock, par value $0.01,
20,000,000 shares authorized,
9,307,988 and 9,243,195 shares
issued in 1999 and 1998,
7,385,306 and 7,754,703 shares
outstanding in 1999 and 1998 93,080 92,432
Paid-in capital 59,377,896 59,100,187
Retained deficit (526,231) (4,745,046)
Treasury stock, at cost,
1,922,682 shares in 1999
and 1,488,492 in 1998 (16,435,101 (13,269,861)
42,509,644 41,177,712
$ 72,640,518 $ 54,803,615
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<TABLE>
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<CAPTION>
For The Three Months Ended For the Six Months Ended
July 2, 1999 July 3, 1998 July 2, 1999 July 3,1998
<S> <C> <C> <C> <C>
Net revenues $26,310,019 $25,340,174 $76,656,224 $72,025,265
Cost of sales 15,592,879 15,500,267 46,799,033 44,409,386
Gross profit 10,717,140 9,839,907 29,857,191 27,615,879
Selling, general and
administrative expenses 8,100,295 7,239,915 23,087,731 22,145,564
Interest before income,
other income and taxes 2,616,845 2,599,992 6,769,460 5,470,315
<PAGE>
Interest Expense (370,774) (93,610) (870,604) (368,401)
Other income, net 583,068 128,065 881,756 517,967
Earnings from continuing
operations before provision
for income taxes 2,829,139 2,634,447 6,780,612 5,619,881
Provision for Income Taxes 1,069,899 895,706 2,561,797 1,910,753
Net Earnings $1,759,240 $1,738,741 $4,218,815 $3,709,128
Earnings per common and
common equivalent share:
Net earnings $ 0.24 $ 0.22 $ 0.57 $0.46
Net earnings -
assuming dilution $ 0.22 $ 0.20 $ 0.55 $0.45
Weighted average number of
common shares outstanding 7,360,364 8,089,451 7,448,658 8,098,222
Weighted average number of
common and common equivalent
shares - assuming dilution 7,825,598 8,560,378 7,726,179 8,267,382
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<TABLE>
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<CAPTION>
For the Six Months Ended
July 2, 1999 July 3, 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 4,218,815 $ 3,709,128
Adjustments to reconcile net
Earnings to net cash used in
operating activities --
Depreciation and amortization 1,354,261 1,023,974
Provision for(recovery of)allowances
for accounts receivable (242,645) (185,001)
Changes in assets and liabilities --
(Increase) decrease in receivables (48,047) 4,356,631
Increase in inventories (5,968,900) (1,978,099)
Increase in deferred catalogs and
other current assets (381,228) 832,100
Increase in payables 645,076 612,208
Decrease in deferred taxes 904,318 1,783,983
Decrease in accrued liabilities (216,501) (1,285,949)
Increase in other assets (4,016,258) (1,168,571)
<PAGE>
Other - (9,037)
Net cash provided by (used in)
operating activities (3,751,309) 6,027,167
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant
& equipment (967,478) (339,027)
Payments for acquisitions, net of
<PAGE>
cash acquired (4,260,100) (1,500,682)
Proceeds from sale of investments 4,885 6,200
Net cash used in investing activities (5,222,693) (1,833,509)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of notes
payable 13,526,155 2,922,599
Payments of notes payable and
capital lease obligations (1,486,149) (5,454,837)
Proceeds from common stock issuances 480,145 689,135
Purchase of treasury stock (3,367,028) (614,487)
Net cash provided by (used in)
financing activities 9,153,123 (2,457,590)
Net change in cash 179,321 1,736,068
Cash, beginning of period 1,035,466 602,779
Cash, end of period $ 1,214,787 $ 2,338,847
<PAGE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 818,379 $ 356,727
Cash paid during the period for
income taxes $ 150,000 $ 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 2, 1999 and the results of
its operations for the three and nine month periods ended July 2, 1999
and July 3, 1998.
The consolidated financial statements include the accounts of SSG and
its wholly-owned subsidiaries, Athletic Training Equipment Company,
Inc., a Delaware corporation ("ATEC") and Conlin Bros., Inc., a
California corporation ("Conlin"). 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.
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 2, 1999 and October 2, 1998, inventories consisted of the
following:
July 2, October 2,
1999 1998
Raw Materials $ 3,723,703 $ 2,761,885
Work-in-progress 380,894 236,466
Finished and purchased goods 18,433,428 11,530,406
22,538,025 14,528,757
Less inventory reserve for
slow moving items (1,099,111) (425,920)
$21,438,914 $14,102,847
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 2, 1999 and
July 3, 1998 are summarized as follows:
Nine Months Ended
July 2, July 3,
1999 1998
Options outstanding - beginning
of period 860,286 1,040,573
Options granted 116,875 182,300
Options exercised (58,725) (71,887)
Options forfeited (10,912) (1,425)
Options outstanding - end
of period 907,524 1,149,561
Weighted average prices $ 7.38 $7.32
Stock Options Stock Options
Outstanding Exercisable
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Remaining Exercise Exercise
Range of Exercise Prices Shares Life Price Shares Price
$5.60 - $9.44 907,524 7.5 yrs. $7.38 660,230 $7.29
As of July 2, 1999 there were 100,000 non-qualified options outstanding
that were issued outside the plan. Such options have an exercise price
of $6.88 per share.
Note 3 - Notes Payable and Capital Lease Obligations
As of July 2, 1999 and October 2, 1998, notes payable and capital lease
obligations consisted of the following:
July 2, October 2,
1999 1998
Note payable under revolving line of
credit, interest at prime minus 1/2%
(7.5% at July 2, 1999) or LIBOR plus
1-1/4% (6.44% and 6.46% at July 2, 1999),
due April 26, 2002, collateralized by
substantially all assets $ 8,122,885 $ 4,411,967
Term loan, interest at LIBOR plus
1-1/4% (6.46% and 6.52% at July 2, 1999),
payable in monthly installments plus
accrued interest of $166,667 through
April 26, 2002, collateralized by
substantially all assets 9,500,000 1,000,000
Promissory note, noninterest bearing,
due June 30, 1999 525,000 525,000
Promissory note, interest at 7.75% payable
in monthly installments of $29,167 plus
accrued interest through February 2001 554,167 --
<PAGE>
Capital lease obligation, interest at
9.0%, payable in annual installments of
principal and interest totaling $55,000
through August 2005 261,753 261,753
Other 24,975 50,054
Total 18,988,780 6,248,774
Less - current portion (2,925,826) (1,087,809)
Long-term debt and capital lease
obligations, net $ 16,062,954 $ 5,160,965
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. As of July 2, 1999,
the Company was in compliance with the covenants in its senior credit
facility.
On April 26, 1999, the Company entered into a new Credit Agreement
("Agreement"), which includes a revolving line of credit of $30,000,000
and term loan of $10,000,000 with a maturity date of April 26, 2002.
The Agreement provides for reduced interest rates and fees as well as
reduced reporting requirements. The Agreement also contains financial
and net worth covenants in addition to limits on capital expenditures.
Amounts outstanding under the senior credit facility are collateralized
by substantially all assets of the Company. As of July 2, 1999, the
Company had the option of electing the revolving credit facility and the
term loan to bear interest at the prevailing LIBOR rate plus 1-1/4%
(6.44% thru 6.52% at July 2, 1999) or the lender's prime rate minus 1/2%
(7.5% at July 2, 1999). Historically, the Company has elected the lower
of the interest rates available under the facility.
As of July 2, 1999, the Company had borrowings of approximately
$8,123,000 outstanding under the revolving credit facility,
approximately $821,000 of letters of credit outstanding for foreign
purchases of inventory. In addition, as of July 2, 1999, SSG had
borrowings of $9,500,000 under the term loan which is payable in monthly
installments of principal and accrued interest of $166,667 through
April 26, 2002.
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.
<PAGE>
As of July 2, 1999, the Company's issued and outstanding capital stock
consisted solely of common stock. The Company has approximately 908,000
options outstanding under the stock option plan with exercise prices
ranging from $5.60 to $9.44, approximately 100,000 options issued
outside the plan with an exercise price of $6.88, and approximately 1.0
million warrants outstanding with an exercise price of $7.50. 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.
128, "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.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
For the Three For the Nine
Months Ended Months Ended
<CAPTION>
July 2, July 3 July 2, July 3,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Numerator:
Net earnings from
continuing operations $1,759,240 $1,738,741 $4,218,815 $3,709,128
Numerator for basic and
diluted earnings per share -
income available to
common stockholders $1,759,240 $1,738,741 $4,218,815 $3,709,128
Denominator:
Denominator for basic earnings
per share -
Weighted average shares 7,360,364 8,089,451 7,448,658 8,098,222
Effect of dilutive securities:
Warrants 235,804 195,489 134,975 61,448
Employee stock options 229,430 275,438 142,546 107,712
Denominator for diluted
earnings per share -
Adjusted weighted average
shares and assumed
conversions 7,825,598 8,560,378 7,726,179 8,267,382
Basic earnings per share $0.24 $0.22 $0.57 $0.46
Diluted earnings per share $0.22 $0.20 $0.55 $0.45
</TABLE>
<PAGE>
Note 6 - Acquisitions
During January 1999, the Company paid cash for the stock of Conlin
Bros., Inc. ("Conlin"), a distributor of sporting goods equipment. The
Company has accounted for this acquisition using the purchase method
and, as such, its results of operations are combined with the Company's
results of operations subsequent to the acquisition date. No proforma
information is presented herein because the proforma information would
not materially differ from actual results.
During February 1999, the Company acquired certain assets of Larry Black
Sporting Goods, Inc. ("Larry Black"), a distributor of sporting goods
equipment for cash, a promissory note and the assumption of certain
liabilities. The Company has accounted for this acquisition using the
purchase method and, as such, its results of operations are combined
with the Company's results of operations subsequent to the acquisition
date. No proforma information is presented herein because the proforma
information would not materially differ from actual results.
During April 1999, the Company acquired certain assets of Flag A Tag,
Inc. ("Flag A Tag"), a manufacturer of flag football belts for cash and
the assumption of certain liabilities. The Company has accounted for
this acquisition using the purchase method and, as such, its results of
operations are combined with the Company's results of operations
subsequent to the acquisition date. No proforma information is
presented herein because the proforma information would not materially
differ from actual results.
Note 7 - Recently Issued Accounting Pronouncements
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 at the end of fiscal year
1999. As this standard only provides guidance for disclosure of segment
information, its adoption will have no effect on the financial position
or results of operations of the Company.
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 $2.5 million
during the nine months ended July 2, 1999, from $25.2 million at October
2, 1998 to $27.7 million at July 2, 1999. The increase in working
capital is primarily a result of a $7.3 million increase in inventory
associated with the seasonality of the Company's business as well as the
inventory acquired from the acquisitions of Conlin in January, 1999 and
Larry Black in February, 1999. This increase was partially offset by
(i) a $1.8 million increase in trade payables and (ii) a $1.8 million
increase in current notes payable.
On April 26, 1999, the Company replaced its existing senior credit
facility with a new credit facility. The Credit Agreement ("Agreement")
under the new credit facility includes a revolving line of credit of
$30,000,000 and term loan of $10,000,000 with a maturity date of April
26, 2002. The Agreement provides for reduced interest rates and fees as
well as reduced reporting requirements. The Agreement also contains
financial and net worth covenants in addition to limits on capital
expenditures.
<PAGE>
As of July 2, 1999, the Company had total borrowings under its senior
credit facility of approximately $17.6 million including a term loan of
$9.5 million which is payable in monthly installments of principal and
accrued interest of $167,000 through April 26, 2002, and outstanding
letters of credit for foreign purchases of inventory of approximately
$821,000. The net increase of $2.5 million in borrowings under the
senior credit facility compared to October 2, 1998 reflects the cash
payments for the Conlin, Larry Black, and Flag A Tag acquisitions, the
stock purchased under the Company's stock buyback program, and cash paid
for the system implementation.
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. On October 28, 1998, the
Company approved a second repurchase program of up to an additional
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 2, 1999, the Company repurchased approximately
10,178,000 of its issued and outstanding shares of common stock in the
open market under both repurchase programs.
Except as described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Impact of Year 2000 and
System Implementation," the Company does not currently have any material
commitments for capital expenditures.
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
replaced 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 used internal and external
resources to convert to, test, and implement the new software. The
Company has completed the final stages of the Year 2000 project and
system implementation. The total cost of the project was approximately
$6.0 million. The majority of these costs associated with the Year 2000
and system implementation project will be capitalized and amortized.
The Company's Year 2000 compliance is also dependent on the compliance
of third parties such as vendors and customers. The Company is
currently surveying its third parties regarding Year 2000 compliance;
however, 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.
Since no one individual customer accounts for a material portion of the
Company's revenues, the potential of a negative impact is minimized.
<PAGE>
The Company's above efforts are intended to reduce the possibility of
any disruptions to the business related to Year 2000 issues. While the
Company believes these actions will be successful, the issues are full
of complexities and uncertainties. If a material disruption were to
occur, it could have a material adverse effect on the Company's results
of operations. At present the Company's Year 2000 efforts have been directed
at the goal of reducing or eliminating the potential for Year 2000 problems.
The Company has not yet established a contingency plan which provides for
alternate procedures should any of its primary efforts fail.
Results of Operations
Net Revenues. Net revenues increased approximately $970,000 (3.8%) and
$4.6 million (6.4%) for the three and nine month periods ended July 2,
1999 as compared to the same periods ended July 3, 1998. This increase
in net revenues reflects increases in revenues associated primarily with
the Company's Youth division as well as the Company's subsidiary, ATEC.
This increase was offset by a decrease in bid revenues. The Company
expects to experience an increase in sales as a result of the Conlin,
Larry Black, and Flag A Tag acquisitions.
Gross Profit. Gross profit increased approximately $877,000 (8.9%) and
$2.2 million (8.1%) for the three and nine month periods ended July 2,
1999 as compared to the same periods ended July 3, 1998. As a
percentage of net revenues, gross profit increased from 38.9% to 40.7%
and from 38.3% to 38.9% for the three and nine month periods ended July
2, 1999 as compared to the same periods ended July 3, 1998. This increase
was primarily related to the decrease in bid revenues, as such revenues
have lower margins. In the event revenues related to the Conlin and
Larry Black acquisitions as well as the Youth and ATEC divisions 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 due to the
margins being lower than the historical margins of the Company.
Selling, General and Administrative Expenses. Operating expenses
increased approximately $860,000 (11.9%) and $942,000 for the three and
nine month periods ended July 2, 1999 as compared to the same periods
ended July 3, 1998. As a percentage of net revenues, operating expenses
increased from 28.6% to 30.8% and decreased from 30.7% to 30.1% for the
three and nine month periods ended July 2, 1999 as compared to the same
periods ended July 3, 1998. The increase in operating expenses as a
percentage of net revenues for the three months ended July 2, 1999 as
compared to the same period ended July 3, 1998 was primarily a result of
the following:
(i) An increase in operating expenses associated with the Company's
acquisition of Conlin and Larry Black in February and March of 1999.
(ii) An increase in payroll costs associated with the additional
telemarketers and sales road force hired by the Company.
Operating Profit. Operating profit for the three and nine month periods
ended July 2, 1999 increased approximately $17,000 (0.6%) and $1.3
million (23.7%) as compared to the same periods ended July 3, 1998.
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.
<PAGE>
Interest Expense. Interest expense increased approximately $277,000 and
$502,000 for the three and nine month periods ended July 2, 1999 as
compared to the same periods ended July 3, 1998. The increase in
interest expense resulted from overall higher levels of borrowings. See
Item 2 "Liquidity and Capital Resources". Due to the higher borrowing
levels associated with the stock buyback program, the system
implementation, and the acquisitions of Conlin, Larry Black, and
Flag A Tag, the Company anticipates interest expense to increase in
future periods.
Other Income, Net. Other income increased approximately $455,000 and
$364,000 for the three and nine month periods ended July 2, 1999 as
compared to the same periods ended July 3, 1998. The increase in other
income resulted primarily from one time vendor rebates. 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.
Provision for Income Taxes. The provision for income taxes increased
approximately $174,000 and $651,000 for the three and nine month periods
ended July 2, 1999 as compared to the same periods ended July 3, 1998.
The Company's effective tax rate increased from 34.0% to 37.8% for the
three and nine month periods ended July 2, 1999 as compared to the same
periods ended July 3, 1998.
Net Earnings. Net earnings increased approximately $20,000 and $510,000
for the three and nine month periods ended July 2, 1999 as compared to
the same periods ended July 3, 1998. Net earnings per share increased
from $0.22 to $0.24 and from $0.46 to $0.57 for the three and nine month
periods ended July 2, 1999 as compared to the same periods ended July 3,
1998. The three and nine month periods ended July 2, 1999 include a
decrease of approximately 9.0% and 8.0% 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, risks
associated with its freight carriers, reduced sales to the United States
Government due to reduced Government spending, risk of nonpayment of
accounts receivable, competitive factors, foreign supplier related
issues, risks associated with the Year 2000 Issue, and uncertainties
related to its litigation with MacMark. See Part II, Item 1 "Legal
Proceedings".
<PAGE>
The general economic condition in the U.S. could affect pricing on (i)
services provided to the Company (such as freight); (ii) raw materials,
such as metals and other commodities used in the manufacturing of
certain products; and (iii) 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 the
Company's costs.
The Company ships approximately 50% of its products using United Parcel
Services ("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. The Company
utilizes UPS for the majority of its small package shipments and another
carrier for a majority of its heavy shipments.
Approximately 7% of the Company's institutional sales are made to the
U.S. Government, a majority of which are made to military installations.
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 customers, newly acquired team dealer
customers, 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.
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, increases in inbound freight, 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.
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 problems with 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
<PAGE>
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, except as set
forth below, any ultimate liability arising out of currently pending
claims and lawsuits are not expected to have a material effect on the
financial condition or the results of operations of SSG.
On June 18, 1999 the Company filed a lawsuit for declaratory relief in
the United States District Court for the Northern District of Texas
against MacMark Corporation ("MacMark") and Equilink Licensing Corp.
("Equilink"), both of which the Company believes are controlled by
Riddell Sports, Inc. ("Riddell"). The Company subsequently amended the
lawsuit to add Riddell as a defendant and to assert additional claims
for relief.
The lawsuit arises out of a notice delivered by MacMark purportedly
terminating the Company's rights under its license to use the
MacGregor(r) trademark. The license is perpetual and royalty free
subject to certain limited termination rights. MacMark stated in its
notice that it considers there to be continuing and material breaches of
the License Agreement and that such breaches are incurable, all of which
the Company disputes.
On July 7, 1999, MacMark and Equilink filed a lawsuit against the
Company in the United States District Court for the Southern District of
New York. The lawsuit alleges trademark infringement, false designation
of origin, unfair competition, trademark dilution and violation of the
New York Deceptive Practices Act. The lawsuit seeks injunctive relief
and unspecified damages.
The Company believes it has complied with the terms of the License
Agreement and intends to vigorously defend itself and to pursue its
claims. Because the Company has converted a substantial portion of its
products to the MacGregor brand, termination of the License Agreement
could have at least a short term material adverse effect on the
Company's results of operations.
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
Not applicable
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 10.1 -- Form of Stock Option Agreement by and
between the Company and each of Terrence M. Babilla and
John P. Walker.
*(a)(6) Exhibit 27 -- Financial Data Schedule
(b) -- A report on Form 8-K was filed with the Securities and
Exchange Commission on July 9, 1999 to report the lawsuit filed
by the Company against MacMark and Equilink that is more fully
described above in Part II, Item 1. "Legal Proceedings".
-- A report on Form 8-K was filed with the Securities and
Exchange Commission on August 5, 1999 to report the Letter of
Intent from Oaktree Capital Management of acquiring 2,269,500
shares of Sport Supply Group, Inc. from Emerson Radio Corp.
----------------------------------
* 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.
<PAGE>
SPORT SUPPLY GROUP, INC.
August 16, 1999 By: /s/ John P. Walker
John P. Walker
President and Chief Financial Officer
INDEX TO EXHIBITS
ITEM
Exhibit 10.1 -- Form of Stock Option Agreement by and between the
Company and Terrence M. Babilla and John P. Walker.
Exhibit 27 -- Financial Data Schedule
SPORT SUPPLY GROUP, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
___________________
(Effective Date of Grant)
TO: ______________________
WHEREAS, Sport Supply Group, Inc. (the "Company") wishes to
encourage _______________'s (the "Optionee") sense of
proprietorship in the Company by owning the Common Stock, par
value $.01 per share (the "Common Stock"), of the Company;
NOW, THEREFORE, in consideration of the mutual agreements
and covenants contained herein, the Company hereby grants to the
Optionee a non-qualified stock option to purchase up to a total
of 50,000 shares of the Common Stock at a price per share of
$9.00 (the "Option Price") on the terms and conditions and
subject to the restrictions as set forth in this Agreement and in
the Sport Supply Group, Inc. Stock Option Plan (the "Plan").
I. DEFINITIONS
a. Acquiring Person: An "Acquiring Person" shall mean any
person (including any "person" as such term is used in Sections
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) that, together with all Affiliates
and Associates of such person, is the beneficial owner of 10% or
more of the outstanding Common Stock. The term "Acquiring
Person" shall not include the Company, any subsidiary of the
Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company or subsidiary of the
Company or any person holding Common Stock for or pursuant to the
terms of any such plan, any corporation owned, directly or
indirectly, by the shareholders of the Company in substantially
the same proportions as their ownership of stock of the Company,
Emerson Radio Corp. and its Affiliates and Associates or Geoffrey
P. Jurick. For the purposes of this Agreement, a person who
becomes an Acquiring Person by acquiring beneficial ownership of
10% or more of the Common Stock at any time after the date of
this Agreement shall continue to be an Acquiring Person whether
or not such person continues to be the beneficial owner of 10% or
more of the outstanding Common Stock.
b. Affiliate and Associate. "Affiliate" and "Associate"
shall have the respective meanings ascribed to such terms in Rule
12b-2 of the General Rules and Regulations under the Exchange Act
in effect on the date of this Agreement.
c. Change in Control. A "Change in Control" of the
Company shall have occurred if at any time during the term of
this Agreement any of the following events shall occur:
(i) The Company is merged, consolidated or reorganized
into or with another corporation or other legal person and as a
result of such merger, consolidation or reorganization less than
60% of the combined voting power to elect each class of directors
of the then outstanding securities of the remaining corporation
or legal person or its ultimate parent immediately after such
transaction is available to be received by all of the Company's
stockholders on a pro rata basis and is actually received in
respect of, or in exchange for, voting securities of the Company
pursuant to such transaction;
(ii) The Company sells all or substantially all of its
assets to any other corporation or other legal person and as a
result of such sale less than 60% of the combined voting power to
elect each class of directors of the then outstanding securities
of such corporation or legal person or its ultimate parent
immediately after such transaction is available to be received by
all of the Company's stockholders on a pro rata basis and is
actually received in respect of, or in exchange for, voting
securities of the Company pursuant to such sale (provided that
this provision shall not apply to a registered public offering of
securities of a subsidiary of the Company, which offering is not
part of a transaction otherwise a part of or related to a Change
in Control);
(iii) Any Acquiring Person has become the
beneficial owner (as the term "beneficial owner" is defined under
Rule 13d-3 or any successor rule or regulation promulgated under
the Exchange Act) of securities which when added to any
securities already owned by such person would represent in the
aggregate 20% or more of the then outstanding securities of the
Company which are entitled to vote to elect any class of
directors; or
(iv) Any occurrence that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation
14A or any successor rule or regulation promulgated under the
Exchange Act; or
(v) If at any time, the Continuing Directors then
serving on the Board of Directors of the Company cease for any
reason to constitute at least a majority thereof; or
(vi) Such other events that cause a change in control
of the Company, as determined by the Board of Directors of the
Company in its sole discretion.
d. Continuing Director. A "Continuing Director"
shall mean a director of the Company who (i) is not an Acquiring
Person or an Affiliate or Associate thereof, or a representative
of an Acquiring Person or nominated for election by an Acquiring
Person and (ii) was either a member of the Board of Directors of
the Company on the date of this Agreement or subsequently became
a Director of the Company and whose initial election or initial
nomination for election by the Company's stockholders was
approved by a majority of the Continuing Directors then on the
Board of Directors of the Company.
II. GENERAL PROVISIONS
Subject to the other terms and provisions hereof, the shares
subject to this option shall vest annually in equal installments
on January 13, 2000 and 2001. The right to exercise this option
shall expire ten years from the Effective Date of Grant as set
forth in the upper right hand corner on page 1 of this Agreement,
except as the right to exercise this option is otherwise
qualified by the terms of the Plan or this Agreement.
This option is not transferable otherwise than by will or
the laws of descent and distribution, or as specifically provided
below. Optionee may transfer this option to (i) the spouse,
children or grandchildren of the Optionee ("Immediate Family
Members"), (ii) a trust or trusts for the exclusive benefit of
such Immediate Family Members, (iii) a partnership or other
entity in which such Immediate Family Members are the only
partners, or (iv) to other persons or entities deemed appropriate
by the Company's Stock Option Committee. This option may be
exercised during the lifetime of the Optionee only by the
Optionee or by his guardian or legal representative or his
transferee as permitted hereunder. This option is not liable for
or subject to, in whole or in part, the debts, contracts,
liabilities or torts of the Optionee nor shall it be subject to
garnishment, attachment, execution, levy or other legal or
equitable process.
This option shall be subject to the provisions of the Plan,
which is a part of the Form S-8 Prospectus (the "Prospectus")
covering the shares granted under this option, and is incorporated
in its entirety by express reference herein. A copy
of the Prospectus, as well as a copy of the Company's annual
report to security holders containing the information required by
Rule 14a-3(b) under the Exchange Act for its latest fiscal year,
has been provided to the Optionee by the Company, and the
Optionee hereby acknowledges receipt of same. Additional copies
of these documents are available from the Company upon request.
All defined terms contained herein shall have the meaning
provided in the Plan except to the extent otherwise provided
herein.
Except as otherwise provided herein, the option granted
hereunder shall terminate six (6) months after the date the
Optionee ceases to be an employee of the Company (the
"Termination Date") or until the option by its terms expires,
whichever first occurs. Notwithstanding the foregoing, in the
event the termination results from the Optionee's death or
disability, the option, to the extent it was exercisable on the
Termination Date shall be exercisable for twelve months from the
Termination Date or until the option by its terms expires,
whichever first occurs. After the Optionee's death, this option
shall be exercisable only by the Optionee's transferee as
permitted hereunder or by the executor or administrator of the
Optionee's estate, or if the Optionee's estate is not in
administration, by the Optionee's transferee as permitted
hereunder or by the person or persons to whom the Optionee's
rights shall have passed by the Optionee's will or under the laws
of descent and distribution of the state where the Optionee was
domiciled at the date of death. The Company may suspend for a
reasonable period or periods the time during which this option
may be exercised if, in the opinion of the Company, such
suspension is required to enable the Company to remain in
compliance with regulatory requirements relating to the issuance
of shares of Common Stock subject to this option.
Notwithstanding the provisions set forth herein, in the
event (i) of a Change in Control, (ii) Optionee is terminated
other than for Cause (as defined in that certain Employment
Agreement by and between the Company and the Optionee dated as of
January 14, 1998, the "Employment Agreement") or (iii) of a
Constructive Discharge (as defined in the Employment Agreement)
of Optionee, then from and after the date of the Change in
Control, the Constructive Discharge or the termination without
Cause, whichever is applicable, all of the Options hereunder
shall vest in full and become immediately exercisable and shall
remain exercisable until the option expires by its terms.
Notwithstanding the provisions set forth herein, the
Optionee may elect for a period of 180 days following a Change in
Control to surrender to the Company for cancellation all or any
part of the unexercised portion of this option. In consideration
of such surrender and cancellation, the Optionee shall be
entitled to receive for each share of Common Stock as to which
the surrendered portion of the Option relates an amount in cash
equal to the difference between the Option Price per share under
this option and the highest closing sales price per share (as
reported on the principal stock exchange on which the Common
Stock is traded) of Common Stock during the 360 calendar day
period prior to Optionee's election pursuant to this paragraph.
III. EXERCISE OF OPTION
This option may be exercised only by written notice (the
"Exercise Notice") by the Optionee to the Company at its
principal executive office. The Exercise Notice shall be deemed
given when deposited in the U. S. mails, postage prepaid,
addressed to the Company at its principal executive office, or if
given other than by deposit in the U.S. mails, when delivered in
person to an executive officer of the Company at that office. The
date of exercise of the Option (the "Exercise Date") shall be the
date of the postmark if the notice is mailed or the date received
if the notice is delivered other than by mail. The Exercise
Notice shall state the number of shares in respect of which the
option is being exercised and, if the shares for which the option
is being exercised are to be evidenced by more than one stock
certificate, the denominations in which the stock certificates
are to be issued. The Exercise Notice shall be signed by the
Optionee and shall include the complete address of such person,
together with such person's social security number.
This option may be exercised either by tendering cash in the
amount of the Option Price or by tendering shares of Common Stock
(which may include shares previously acquired upon exercise of
options granted under the Plan). The Exercise Notice shall be
accompanied by payment of the aggregate Option Price of the
shares purchased by cash or check payable to the order of the
Company or by delivery of shares of Common Stock owned by the
Optionee, in form satisfactory to the Company, tendered in full
or partial payment of the Option Price. If shares of Common
Stock are used to pay part or all of the Option Price, the value
of such shares for purposes of exercising this option shall be
the Fair Market Value of the Common Stock on the Exercise Date.
This Option may also be exercised by having shares of Common
Stock having a Fair Market Value on the Exercise Date equal to
the aggregate Option Price withheld by the Company.
In addition to the foregoing, any option granted under this
Agreement may be exercised by a broker-dealer acting on behalf of
the Optionee if (i) the broker-dealer has received from the
Optionee or the Company a fully- and duly-endorsed agreement
evidencing such option, together with instructions signed by the
Optionee requesting the Company to deliver the shares of Common
Stock subject to such option to the broker-dealer on behalf of
the Optionee and specifying the account into which such shares
should be deposited, (ii) adequate provision has been made with
respect to the payment of any withholding taxes due upon such
exercise, and (iii) the broker-dealer and the Optionee have
otherwise complied with Section 220.3(e)(4) of Regulation T, 12
CFR Part 220, or any successor provision.
The certificates for shares of Common Stock as to which
this option shall have been so exercised shall be registered in the
name of the Optionee and shall be delivered to the Optionee at
the address specified in the Exercise Notice. In the case of the
exercise of the option by an Optionee who is employed by the
Company or a Subsidiary on the Exercise Date, the Optionee in
exercising such option shall make payment or other arrangements
(including, but not limited to, requesting that the Company
withhold shares of Common Stock that were to be issued to the
Optionee upon such exercise) satisfactory to the Company for
withholding federal and state taxes, if applicable, with respect
to the shares acquired upon exercise of the option. In the case
of options exercised when the Optionee is no longer employed by
the Company or a Subsidiary, such option exercise shall be valid
only if accompanied by payment or other arrangement satisfactory
to the Company with respect to the Company's obligations, if any,
to withhold federal and state taxes with respect to the exercise
of the option. In the event the person exercising the option is
a transferee of the Optionee, the Exercise Notice shall be
accompanied by appropriate proof of the right of such transferee
to exercise this Option.
Subject to the limitation expressed herein, this Option may
be exercised with respect to all or a part of the shares of
Common Stock subject to it.
Neither the Optionee nor any person claiming under or
through the Optionee shall be or have any rights or privileges of
a stockholder of the Company in respect of any of the shares
issuable upon the exercise of the option, unless and until
certificates representing such shares shall have been issued (as
evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company).
IV. GOVERNING LAW
This Agreement has been executed in, and shall be deemed to
be performable in, Dallas, Dallas County, Texas. For these and
other reasons, the parties agree that this Agreement shall be
governed by and construed in accordance with the laws of the
State of Texas. The parties further agree that the courts of the
State of Texas, and any courts whose jurisdiction is derivative
on the jurisdiction of the courts of the State of Texas, shall
have personal jurisdiction over all parties to this Agreement.
V. ENTIRE AGREEMENT
Except for the Plan, this Agreement constitutes the entire
agreement between the parties pertaining to the subject matter
contained in it and supersedes all prior and contemporaneous
agreements, representations and understandings of the parties.
No supplement, modification or amendment of this Agreement shall
be binding unless executed in writing by the party to be charged
therewith. No waiver of any of the provisions of this Agreement
shall be deemed, or shall constitute a waiver of any other
provision, whether or not similar, nor shall any waiver
constitute a continuing waiver.
VI. DUPLICATE ORIGINALS
Both the Company and the Optionee, each of which shall
retain one duplicate original, shall execute duplicate originals
of this document.
SPORT SUPPLY GROUP, INC.
By: ________________________
Geoffrey P. Jurick
Chief Executive Officer
ACCEPTED:
________________________
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