SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000.
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 - 8914
(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
<PAGE>
Indicated below is the number of shares outstanding of each class
of the registrant's common stock as of May 12, 2000.
Title of Each Class of Common Stock Number Outstanding
Common Stock, $0.01 par value 7,275,558 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Index to Consolidated Financial Statements
Page
Consolidated Balance Sheets (Unaudited) 3
Consolidated Statements of Operations (Unaudited) 4
Consolidated Statements of Cash Flows (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
<TABLE>
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
March 31, October 1,
2000 1999
<S> <C> <C>
CURRENT ASSETS :
Cash and equivalents $351,512 $ 201,911
Accounts receivable:
Trade, less allowance for doubtful
accounts of $724,000 at Mar. 31, 2000
and $465,000 at Oct. 1, 1999 22,173,935 22,926,169
Other 992,350 975,956
Inventories, net 23,500,756 18,509,262
Other current assets 1,052,763 911,972
<PAGE>
Income tax receivable 1,354,940 0
Deferred tax assets 1,062,188 1,062,188
Total current assets 50,488,444 44,587,458
DEFERRED CATALOG EXPENSES 3,080,745 2,078,262
PROPERTY, PLANT AND EQUIPMENT :
Land 8,663 8,663
Buildings 1,605,102 1,605,102
Computer equipment and software 11,310,853 10,038,530
Machinery and equipment 6,298,024 6,192,272
Furniture and fixtures 1,478,573 1,286,745
Leasehold improvements 2,386,467 2,368,439
23,087,682 21,499,751
Less -- Accumulated depreciation
and amortization (9,975,884) (8,889,925)
13,111,798 12,609,826
DEFERRED TAX ASSETS 2,101,239 2,101,239
COST IN EXCESS OF TANGIBLE NET ASSETS
ACQUIRED, less accumulated amortization
Of $1,572,000 at March 31, 2000 and
$1,464,000 at October 1, 1999 7,817,755 7,937,809
TRADEMARKS, less accumulated
amortization of $1,442,000 at March 31,
2000 and $1,339,000 at October 1, 1999 3,137,774 3,079,010
OTHER ASSETS, less accumulated
amortization of $400,000 at March 31,
2000 and $1,058,000 at October 1, 1999 908,666 855,375
<PAGE>
$80,646,421 $73,248,979
CURRENT LIABILITIES :
Accounts payable $10,364,974 $ 7,975,509
Other accrued liabilitie 2,806,793 2,328,549
Notes payable and capital lease
obligations, current portion 25,277,838 2,410,839
Total current liabilities 38,449,605 12,714,897
NOTES PAYABLE AND CAPITAL LEASE
OBLIGATIONS, net of current portion 252,116 18,425,925
STOCKHOLDERS' EQUITY :
Preferred stock, par value $0.01,
100,000 shares authorized, no shares
outstanding - -
Common stock, par value $0.01,
20,000,000 shares authorized,
9,344,194 and 9,333,241 shares
issued at Mar. 31, 2000 and Oct. 1,
1999, 7,269,412 and
7,273,899 shares outstanding at Mar. 31,
2000 and Oct. 1, 1999 93,442 93,332
Additional paid-in capital 59,756,275 59,743,384
Accumulated deficit (203,000) (122,207)
Treasury stock, at cost, 2,074,782
shares at Mar. 31, 2000 and 2,059,342
at Oct. 1, 2000 (17,702,017) (17,606,352)
41,944,700 42,108,157
$80,646,421 $73,248,979
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<TABLE>
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<PAGE>
<CAPTION>
Three Months Six Months Three Months Six Months Ended Ended
Ended Ended Ended Ended
March 31, 2000 March 31, 2000 April 2, 1999 April 2, 1999
<S> <C> <C> <C> <C>
Net revenues $34,793,725 $53,828,647 $35,476,066 $50,346,205
Cost of sales 23,279,931 35,974,778 23,336,655 33,127,875
Gross profit 11,513,794 17,853,869 12,139,411 17,218,330
Selling, general
and administrative
expenses 8,798,614 16,468,254 6,967,580 12,797,700
Nonrecurring charges 605,000 605,000 0 0
Earnings before
provision for
income taxes 2,110,180 780,615 5,171,831 4,420,630
Interest expense (518,418) (932,391) (334,298) (499,830)
Other income, net 7,891 1,904 12,350 30,673
Earnings before provision
for income taxes 1,599,653 (149,872) 4,849,883 3,951,473
Provision for income
taxes 572,893 (69,203) 1,830,205 1,491,898
Net earnings (loss) $1,026,760 $(80,669) $3,019,678 $2,459,575
Earnings (loss):
Net earnings (loss)
- basic $0.14 $(0.01) $0.41 $0.33
Net earnings (loss)
- - diluted $0.14 $(0.01) $0.39 $0.32
<PAGE>
Weighted average
number of common
shares outstanding
- -basic 7,270,179 7,274,702 7,387,852 7,486,263
Weighted average
number of common
shares outstanding
- - diluted 7,272,706 7,274,702 7,748,331 7,637,795
</TABLE>
<TABLE>
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
--- For The Six Months Ended --
March 31, 2000 April 2, 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES :
Net earnigns (loss) $(80,669) $2,459,575
Adjustments to reconcile net
earnings (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,389,927 837,262
Provision for (recovery of) allowances
for accounts receivable 243,448 (31,185)
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable 1,239,523 (3,997,044)
(Increase) decrease in inventories (4,213,683) (5,180,694)
(Increase) decrease in deferred
catalog expenses and other
current assets (1,143,274) (277,766)
Increase (decrease) in accounts
payables 1,655,579 2,789,688
(Increase) decrease in income tax
receivable (1,354,940) -
Increase (decrease) in accrued
liabilities 372,415 73,962
<PAGE>
(Increase) decrease in other assets 103,999 1,902
Net cash used in operating activites (1,787,675) (3,324,300)
CASH FLOWS FROM INVESTING ACTIVITIES :
Acquisitions of property,
plant & equipment (1,544,157) (3,158,991)
Payments for acquisitions, net of cash
acquired (854,093) (4,003,548)
Proceeds from sale of investments - 2,160
Net cash used in investing activities (2,398,250) (7,160,379)
CASH FLOWS FROM FINANCING ACTIVITIES :
Proceeds from issuances of
notes payable 5,556,250 14,403,169
Payments of notes payable
and capital lease obligations (1,138,060) (822,778)
Proceeds from common stock issuances 61,523 232,167
Purchase of treasury stock (144,187) (3,306,464)
Net cash provided by financing
activities 4,335,526 10,506,094
NET CHANGE IN CASH AND EQUIVALENTS 149,601 21,415
Cash and equivalents, beginning of period 201,911 1,035,466
Cash and equivalents, end of period $351,512 $1,056,881
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION :
Cash paid during the period for interest $932,391 $397,225
Cash paid during the period for
income taxes $1,373,501 $150,000
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
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 March 31, 2000 and the results of
its operations for the three and six month periods ended March 31, 2000
and April 2, 1999.
The consolidated financial statements include the accounts of SSG
and its wholly owned subsidiaries, Athletic Training Equipment Company,
Inc., a Delaware corporation and Conlin Bros., Inc., a California
corporation. All significant intercompany accounts and transactions
have been eliminated in consolidation. The consolidated financial
statements 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.
Certain financial information for fiscal 1999 has been reclassified
to conform to fiscal 2000 presentation.
Note 1 - Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method for items manufactured
by the Company and weighted-average cost for items purchased for resale.
As of March 31, 2000 and October 1, 1999, inventories consisted of the
following:
March 31, October 1,
2000 1999
Raw materials $3,747,422 $3,209,581
Work-in-progress 653,952 435,904
Finished and purchased goods 20,129,548 15,928,680
24,530,922 19,574,165
<PAGE>
Less inventory allowance for
obsolete or slow moving items (1,030,166) (1,064,903)
Inventories, net $23,500,756 $18,509,262
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: (i.) the fair market value of the common stock at the date of
grant; or (ii.) 110% of the 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 five 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).
The following table contains transactional data for the Company's
stock option plan.
For The Six Months Ended
March 31, April 2,
2000 1999
Options outstanding -
beginning of period 1,087,799 860,286
Options granted 44,375 13,750
Options exercised (5,000) (30,075)
Options forfeited (29,975) (250)
Options outstanding -
end of period 1,097,199 843,711
Weighted average prices $7.68 $7.34
Stock Options Outstanding Stock Options
Wtd. Avg. Wtd. Avg. Exercisable
Range of Remaining Exercise Exercise
Exercise Prices Shares Life Price Shares Price
$6.13 - $9.44 1,097,199 5.7 yrs. $7.68 789,531 $7.28
<PAGE>
As of March 31, 2000 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 and are scheduled to expire on May 5,
2001.
Note 3 - Notes Payable and Capital Lease Obligations
As of March 31, 2000 and October 1, 1999, notes payable and capital
lease obligations consisted of the following:
March 31, October 1,
2000 1999
Note payable under revolving line of credit,
Interest at prime minus 1/2% (8.50% at
Mar 31, 2000 and 7.75% at Oct 1, 1999),
or LIBOR plus 1-1/4% (6.5175%, 8.0575, and
7.84125%, at Mar 31, 2000 and 6.52%, 6.96%,
6.44% and 7.13% at Oct 1, 1999) due April 26,
2002, collateralized by substantially all assets. $ 16,637,965 $11,044,264
Term loan, interest at LIBOR plus 1-1/4%
(6.5175%, 8.0575% and 7.84125% at Mar 31, 2000
and 6.52%, 6.96%, 6.44%, and 7.13% at Oct 1, 1999),
payable in monthly installments plus accrued interest
of $166,667 through April 26, 2002, collateralized
by substantially all assets. 8,166,667 9,000,000
Promissory note, interest at 7.75%, payable in
monthly installments of $29,167 plus accrued interest
through February 2001. 254,215 466,667
Promissory note, interest at 5%, payable in monthly
installments of $22,916 plus accrued interest
through October 2000. 160,417 -
Capital lease obligation, interest at 9.0%,
payable in annual installments of principal and
interest totaling $55,000 through August 2005. 230,311 230,311
Other 80,379 95,522
Total 25,529,954 20,836,764
Less - current portion (25,277,838) (2,410,839)
Long-term notes payable and capital lease
obligations, net $ 252,116 18,425,925
<PAGE>
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. The Credit Agreement
("Agreement") governing the credit facility includes a revolving line of
credit of up to $30 million and a term loan of $10 million with a
maturity date of April 26, 2002.
The Agreement contains financial and net worth covenants in addition to
limits on capital expenditures. As of March 31, 2000, the Company was in
compliance with all the covenants in its senior credit facility except
for the Fixed Charge Coverage Ratio. The Agreement requires a minimum
Fixed Charge Coverage Ratio of 2.0 to 1.0. At March 31, 2000 this
ratio, after non-recurring litigation charges, was 1.9 to 1.0. The
Company received a waiver of this default from its senior lender and the
senior lender continues to advance funds to the Company pursuant to the
terms of the Agreement. The senior lender and the Company have agreed
to negotiate appropriate modifications to the Agreement within the next
thirty days to enable the Company to remain in compliance with the
Agreement. Such amended agreement may include higher interest rates
that would result in higher interest expense in the future.
Nevertheless this violation has caused the amounts due under the
Agreement to be classified as a current liability until an amended
credit agreement is in place. Although the Company anticipates
successfully entering into an amended credit agreement with the senior
lender, there can be no assurance given that this will happen. If the
Company is not successful in negotiating an amended credit agreement,
the Company will be considered to be in default of the Agreement. The
Company will then need to seek an alternative financing arrangement that
may include terms and interest rates that are less favorable than the
Company's current credit facility, although no assurance can be given
that the Company will be able to obtain such financing.
Amounts outstanding under the senior credit facility are collateralized
by substantially all assets of the Company. As of March 31, 2000, the
Company had the option of electing the revolving credit facility and the
term loan to bear interest at either of: (i.) prevailing LIBOR rate plus
1-1/4% (6.5175%, 7.84125% and 8.0575%), at March 31, 2000 or (ii.)
lender's prime rate minus 1/2% (8.50% at March 31, 2000). Historically,
the Company has elected the lower of the interest rates available under
the facility.
As of March 31, 2000, the Company had borrowings of approximately
$24.8 million outstanding under the senior credit facility, and no
letters of credit outstanding for foreign purchases of inventory.
<PAGE>
Note 4 - Capital Structure
As of March 31, 2000, the Company's issued and outstanding capital stock
consisted solely of common stock. The Company has 1,097,199 options
outstanding under the stock option plan with exercise prices ranging
from $6.13 to $9.44, and 100,000 options issued outside the plan with an
exercise price of $6.88, and 1,000,000 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 - Earnings (Loss) Per Common Share
Basic earnings (loss) per share is computed by dividing net income
(loss) available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted earnings per
share reflects the potential dilution that could occur if securities to
issue common stock were exercised into common stock.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
For the Three For the Six
Months Ended Months Ended
<CAPTION> March 31, April 2, March 31, April 2,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Numerator:
Net earnings (loss) $1,026,760 $3,019,678 ($80,669) $2,459,575
Denominator:
Weighted average common
shares - basic 7,270,179 7,387,852 7,274,702 7,486,263
Effect of dilutive securities:
Warrants 0 177,202 0 67,200
Employee stock options 2,527 183,277 0 84,332
Adjusted average common
shares - diluted 7,272,706 7,748,331 7,274,702 7,637,795
<PAGE>
Per Share Calculations:
Net earnings - basic $0.14 $0.41 ( $0.01) $0.33
Net earnings - diluted $0.14 $0.39 ( $0.01) $0.32
Securities excluded from
weighted average common
shares diluted because
their effect would be
antidilutive 2,152,774 0 2,197,199 59,375
Note 6 - Acquisitions
During October 1999, the Company acquired certain assets of LAKCO,
Inc. (located in California) and Spaulding, Inc. (located in Arkansas),
both distributors of sporting goods equipment to the institutional
market. The purchase price for these acquisitions consisted of cash and
the assumption of certain liabilities. Total consideration for these
acquisitions was approximately $0.9 million. The Company has accounted
for these acquisitions using the purchase method and, as such, their
results of operations are combined with the Company's results of
operations subsequent to the acquisition dates. The resulting cost in
excess of tangible net assets acquired will be amortized on a straight-
line basis over a period of 30 years.
No proforma information for the above acquisitions is presented herein
because the proforma information, individually and in aggregate, would
not materially differ from actual results.
Note 7 - Recently Announced Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Investments and Hedging Activities" ("SFAS 133"). SFAS 133
is effective for all fiscal quarters in fiscal years beginning after
June 15, 2000. SFAS 133 established accounting and reporting standards
for derivative instruments embedded in other contracts and for hedging
activities. Application of this accounting standard is not expected to
have a material impact on the Company's consolidated financial position,
results of operations or liquidity.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
Subsequent to March 31, 2000, the Company successfully negotiated the
settlement of one material lawsuit and engaged in settlement discussions
related to a second material lawsuit whereby the Company believes there
is a reasonable likelihood of settlement. The Company's insurance
carrier has denied coverage of these claims. Consequently, as of March
31, 2000, the Company recorded a non-recurring charge related to these
claims in the amount of $605,000. This non-recurring charge reduced the
Company's Fixed Charge Coverage Ratio to 1:9 to 1. The Credit Agreement
governing the Company's credit facility requires a minimum Fixed Charge
Coverage Ratio of 2:1. Therefore, as of March 31, 2000 the Company was
not in compliance with the Fixed Charge Coverage Ratio under its Credit
Agreement with its senior lender. Consequently, all amounts owed under
the Credit Agreement are classified as current liabilities on the
Consolidated Balance Sheet as of March 31, 2000. The Company believes
this classification, as a current liability is a temporary situation.
The Company received a waiver of this default from its senior lender and
anticipates entering into an amendment to the Credit Agreement in the
near term. Refer to Note 3 to the Consolidated Financial Statements for
further disclosure.
For purposes of simplifying the following discussion, Working Capital
excludes the appropriate amounts due under the Credit Agreement that
would otherwise be reported as long-term debt. The Company's working
capital increased approximately $2.9 million during the six months ended
March 31, 2000, from $31.9 million at October 1, 1999 to $34.8 million
at March 31, 2000. The increase in working capital is primarily a
result of a $5.0 million increase in inventory associated with the
seasonality of the Company's business and the acquisitions of LAKCO and
Spaulding in October 1999. This increase was partially offset by a $2.4
million increase in trade payables.
As of March 31, 2000, the Company had total borrowings under its senior
credit facility of approximately $24.8 million. This balance included a
term loan of $8.2 million and a revolver balance of $16.6 million. The
term loan is payable in monthly installments of $167,000 principal plus
accrued interest. The term loan becomes due in full on April 26, 2002.
<PAGE>
The net increase of approximately $4.8 million in borrowings under the
senior credit facility compared to October 1, 1999 is a result of: (i.)
cash payments for the LAKCO and Spaulding acquisitions, and (ii.)
increased working capital needs.
So long as the Company successfully renegotiates the terms of the Credit
Agreement on a timely basis, 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. Although the
Company anticipates successfully entering into an amended credit
agreement with the senior lender, there can be no assurance given that
this will happen. If the Company is not successful in negotiating an
amended credit agreement, the Company will be considered to be in
default of the credit agreement. The Company will then need to seek an
alternative financing arrangement that may include terms and interest
rates that are less favorable than the Company's current credit
facility, although no assurance can be given that the Company will be
able to obtain such financing.
On May 28, 1997, the Company's Board of Directors 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's Board of Directors
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. As of March 31, 2000, the
Company had repurchased approximately 1,329,500 shares of its issued and
outstanding common stock in the open market and privately negotiated
transactions. Any future purchases will be subject to price and
availability of shares, working capital availability and any alternative
capital spending programs of the Company. The Company does not
currently have any material commitments for capital expenditures.
Results of Operations
Net Revenues. Net revenues decreased approximately $682,000 (-1.92%)
and increased $3.5 million (+6.92%) for the three and six month periods
ended March 31, 2000 as compared to the same periods in fiscal 1999.
The decrease in net revenue for the three month comparable periods is
primarily due to a higher level of backlog orders that have not been
filled as of quarter-end. The increase in net revenues for the six-
<PAGE>
month period reflects increases in revenues associated primarily with
the Company's team dealers, fund raising product sales and in-school and
out-of-school sales increases, partially offset by a higher level of
backlog orders as of March 31, 2000. The backlog of orders as of March
31, 2000 was approximately $4.1 million as compared to approximately
$1.7 million on April 2, 1999. The increased level of backlog is due to
customers ordering later in the quarter and an increase in orders for
drop-shipped products. Drop-ship products are products, such as
bleachers, that are shipped by third party vendors and typically require
a longer lead-time. As a result of the increased backlog, the Company
expects to recognize an increase in revenues for the quarter ended June
30, 2000 as compared to the quarter ended July 2, 1999.
Gross Profit. Gross profit decreased approximately $626,000 (5.2%) and
increased approximately $636,000 (3.7%) for the three and six month
periods as compared to the same periods in fiscal 1999. As a percentage
of net revenues, gross profit decreased to 33.1% from 34.2% and to 33.2%
from 34.2%for the three and six-month periods ended March 31, 2000 as
compared to the same periods in fiscal 1999. The Company expects to
experience a lower gross profit as a percentage of net revenue as
compared to the previous year due to expected increases in bid- related,
fund raising products and team dealer sales, as such revenues have lower
margins.
Selling, General and Administrative Expenses. Selling, general and
administraive expenses increased approximately $1.8 million (26.3%) and
$3.7 million (28.7%) for the three and six month periods ended March 31,
2000 as compared to the same periods in fiscal 1999. As a percentage of
net revenues, operating expenses increased from 19.7% to 25.3% and from
25.4% to 30.6% for the three and six month periods ended March 31, 2000
as compared to the same periods in fiscal 1999. The increase in selling,
general and administraive expenses is primarily a result of the
following:
(i.) An increase in payroll and related costs of approximately $890
thousand and $2.1 million for the three and six month periods
respectively. These increases were primarily a result of the increased
number of outside sales employees, the employees of companies acquired
during the second quarter of the prior year and temporary help related
to increased collection efforts.
<PAGE>
(ii.) An increase in depreciation and amortization expense of
approximately $260,000 thousand and $550,000 for the three and six month
periods respectively. This is primarily the result of hardware and
software acquisitions related to the Company's successful implementation
of its SAP/AS400 ERP information system implementation and Internet
platform. Currently, the depreciation for the SAP/AS400 and Internet
platform is approximately $1.0 million annually.
(iii.) An increase in operating expenses of approximately $350,000 and
$550,000 for the three and six month periods respectively, including
catalog and advertising expense increases of approximately $145,000 and
$199,000 for the three and six month periods and rent and utilities
increases of approximately $92,000 and $183,000 related to acquisition
facilities.
(iv.) An increase in the provision for doubtful accounts receivable of
approximately $31,000 and $241,000 for the three and six month periods
respectively. Based on an evaluation of the accounts receivable aging,
the Company concluded the need to increase the allowance for doubtful
accounts to provide for an increase in estimated write-offs although the
Company has also increased collection efforts to improve the accounts
receivable outstanding.
The Company expects that its operating expenses will continue to be
higher in fiscal 2000 as compared to fiscal 1999 as a result of the
foregoing factors. Notwithstanding the foregoing, the Company is
reviewing the implementation of certain production efficiencies and
significant cost reductions. The efficiencies include the potential
sale of the real estate owned by the Company in Alabama and the
consolidation of these production facilities, renegotiating the lease of
the Company's headquarters located in Farmer's Branch, Texas, and
various production and process efficiencies.
Non-recurring Litigation Charges. Subsequent to March 31, 2000, the
Company successfully negotiated the settlement of one lawsuit and
engaged in settlement discussions related to a second lawsuit whereby
the Company believes there is a reasonable likelihood of settlement.
Consequently, as of March 31, 2000, the Company recorded a non-recurring
charge related to these claims in the amount of $605,000.
<PAGE>
Interest Expense. Interest expense increased approximately $184,000
(55.1%) and $433,000 (86.5%) for the three and six month periods ended
March 31, 2000 as compared to the same periods in fiscal 1999. The
increase in interest expense resulted from overall higher levels of
borrowings. See Item 2 "Liquidity and Capital Resources". The higher
borrowing levels are a result of the: (i.) cash payments for the
acquisitions; (ii.) stock repurchased under the Company's stock buyback
program; (iii.) cash paid for the SAP/AS400 ERP and internet system
implementation and Internet technology development; and (iv.) funding
the growth of receivables and inventories. Interest expense in fiscal
year 2000 is expected to continue to be above interest expense in fiscal
year 1999 as the Company experiences the full twelve-month impact of
increased borrowing levels. In addition, the Company's borrowing rates
may increase as a result of negotiations relating to amending the
Company's credit agreement, as more fully described above.
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", "believe", "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, risk of nonpayment of accounts
receivable, competitive factors, foreign supplier related issues,
litigation risks and the impact of the evolving internet.
The general economic condition in the U.S. could affect a number of
issues, including pricing on raw materials such as metals and other
commodities used in the manufacturing of certain products as well as
finished goods and interest rates. Any material price increases to the
<PAGE>
customer could have an adverse effect on revenues and any price
increases from vendors could have an adverse effect on the Company's
costs. In addition, any material increase in interest rates could
materially increase interest expense assuming the Company's borrowing
levels remain constant or increase.
Approximately 7% of the Company's fiscal year 1999 sales were made to
the U.S. Government, a majority of which were made to military
installations. Fiscal 2000 government sales are tracking the prior
years' volume. However, 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 two freight
carriers. A strike by either of these 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 use these two carriers.
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. The aging of accounts
receivable has improved over the previous two quarters. 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 foreign manufacturers
produce many of the products it purchases from domestic suppliers. The
Company is subject to risks of doing business abroad, including delays
in shipments, adverse fluctuations in foreign currency exchange rates,
increases in import duties, decreases in quotas, changes in custom
regulations, acts of God (such as earthquakes) and political turmoil.
The occurrence of any one or more of the foregoing could adversely
affect the Company's operations.
<PAGE>
An adverse outcome in the legal proceedings described in "Part II.
Other Information, Item 1. - Legal Proceedings"(such as a termination
of the MacGregor License Agreement or a large monetary settlement) could
have a material adverse effect on the Company's results of operations
and its financial position.
On December 7, 1999, the Company's Board of Directors retained
PaineWebber, Inc. to explore strategic alternatives. Emerson Radio, who
beneficially owns approximately 40% of the Company's issued and
outstanding common stock, has indicated that it agrees with the decision
of the Company to explore alternatives. No assurance can be made that
any transaction or strategic alternative will be consummated by the
Company.
As of March 31, 2000, the Company was in compliance with all the
covenants in its senior credit facility except for the Fixed Charge
Coverage Ratio. The Company has received a waiver of this default from
its senior lender. The senior lender and the Company have agreed to
negotiate appropriate modifications to the Agreement within the next
thirty days to enable the Company to remain in compliance with the
credit agreement. Such amended agreement may include higher interest
rates, which would result in higher interest expense in the future.
Although the Company anticipates successfully entering into an amended
credit agreement with the senior lender, there can be no assurance given
that this will happen. If the Company is not successful in negotiating
an amended credit agreement, the Company will be considered to be in
default of the Agreement. The Company will then need to seek an
alternative financing arrangement that may include terms and interest
rates that are less favorable than the Company's current credit
facility, although no assurance can be given that the Company will be
able to obtain such financing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes from items disclosed in Form
10-K for the year ended October 1, 1999.
PART II. OTHER INFORMATION
<PAGE>
Item 1. Legal Proceedings
The Company from time to time becomes involved in various claims
and lawsuits incidental to its business. In management's opinion, any
ultimate liability arising out of currently pending product liability
claims will not have a material adverse effect on the Company's
financial condition or results of operations. However, any claims
substantially in excess of the Company's insurance coverage, or any
substantial claim not covered by insurance (such as the claims described
below) or any significant monetary settlement, could have a material
adverse effect on the Company's results of operations and financial
condition.
On September 29, 1997, the Company terminated Mr. Eugene Davis as
Vice Chairman and a Consultant and requested that Mr. Davis resign as a
director of the Company. On September 30, 1997, the Company filed a
complaint in the United States District Court for the Northern District
of Texas, Dallas Division, seeking a declaration as to the existence of
an alleged consulting agreement and as to the Company's continuing
obligations to make payments to Mr. Davis. Thereafter, Mr. Davis filed
a complaint in the Law Division of the Superior Court of New Jersey
against the Company for breach of an alleged consulting agreement and
against certain officers of the Company for tortious interference with
contractual relationships. Mr. Davis and the Company have reached a
tentative settlement agreement. The settlement agreement is subject to
definitive documentation. The amount of the settlement is included in
the legal expenses described in Results of Operations: Non-recurring
Litigation Charges.
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.,
both of which are controlled by Riddell Sports, Inc. Subsequently, the
Company added Riddell Sports, Corp. as a defendant. 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.
Because the Company has converted a substantial portion of its products
to the MacGregor brand, termination of the license agreement could have
<PAGE>
a material adverse effect on the Company's results of operations and its
financial position. The Company believes MacMark has no reasonable
basis to terminate this license agreement. The Company intends to
vigorously protect its rights under the license agreement and pursue any
other rights available against any and all parties, including the
Company's right to prevent any tortious interference with its business
relationships. The parties to this lawsuit are in settlement
discussions; however, no assurance can be made that a settlement will be
reached.
Item 2. Changes in Securities
(a) Not applicable.
(b) Not applicable.
Item 3. Defaults Upon Senior Securities
(a) Not applicable.
(b) Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholder's was held on February 25,
2000. The only item submitted to the stockholders was a proposal to
elect (5) persons to serve as Directors of the Company. The results of
the vote on this proposal are as follows:
ELECTION OF DIRECTORS
Directors Votes For Votes Withheld
(1) Geoffrey P. Jurick 6,614,847 49,536
(2) John P. Walker 6,615,047 49,336
(3) Peter G. Bunger 6,614,047 49,336
(4) Johnson C. S. Ko 6,614,797 49,586
(5) Thomas P. Treichler 6,615,047 49,336
<PAGE>
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibit
Nbr.
Description of Exhibit
(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) (6) Exhibit 27 (*)
Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended March 31,
2000.
( * ) = Filed Herewith
<PAGE>
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.
Dated: May 15, 2000
SPORT SUPPLY GROUP, INC.
By: /s/ John P. Walker
John P. Walker
President
By: /s/ Robert K. Mitchell
Robert K. Mitchell
Chief Financial Officer
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