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 June 30, 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
Indicated below is the number of shares outstanding of each class
of the registrant's common stock as of August 10, 2000.
Title of Each Class of Common Stock Number Outstanding
Common Stock, $0.01 par value 7,272,558 shares
<PAGE>
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
<PAGE>
<TABLE>
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
June 30, October 1,
2000 1999
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $161,132 $201,911
Accounts receivable:
Trade, less allowance for
doubtful accounts of
$785,000 at June 30, 2000
and $465,000 at Oct. 1, 1999 18,266,498 22,926,169
Other 899,905 975,956
Inventories, net 24,029,730 18,509,262
Other current assets 1,120,252 911,972
Income tax receivable 550,622 0
Deferred tax assets 1,454,112 1,062,188
Total current assets 46,482,251 44,587,458
<PAGE>
DEFERRED CATALOG EXPENSES 1,989,791 2,078,262
PROPERTY, PLANT & EQUIPMENT:
Land 8,663 8,663
Buildings 1,605,102 1,605,102
Computer equipment and software 11,374,992 10,038,530
Machinery and equipment 6,342,113 6,192,272
Furniture and fixtures 1,487,153 1,286,745
Leasehold improvements 2,422,069 2,368,439
23,240,092 21,499,751
Less -- Accumulated depreciation
and amortization (10,542,139) (8,889,925)
12,697,953 12,609,826
DEFERRED TAX ASSETS 1,512,275 2,101,239
COST IN EXCESS OF TANGIBLE
NET ASSETS ACQUIRED,
less accumulated amortization
of $1,678,000 at June 30, 2000
and $1,464,000 at Oct. 1, 1999 7,748,379 7,937,809
TRADEMARKS, less accumulated
amortization of $1,495,000 at
June 30, 2000 and $1,339,000
at Oct. 1, 1999 3,266,578 3,079,010
OTHER ASSETS, less accumulated
amortization of $424,000 at
June 30, 2000 and $1,058,000
at Oct. 1, 1999 888,248 855,375
$74,585,475 $73,248,979
CURRENT LIABILITIES:
Accounts payable $9,098,532 $7,975,509
Other accrued liabilities 2,038,574 2,328,549
Notes payable and capital
lease obligations,
current portion 1,782,684 2,410,839
Total current liabilities 12,919,790 12,714,897
<PAGE>
NOTES PAYABLE AND CAPITAL
LEASE OBLIGATIONS, net
of current portion 20,033,486 18,425,925
STOCKHOLDER'S 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,
9,347,340 and 9,333,241
shares issued at June 30, 2000
and Oct. 1, 1999, 7,272,558
and 7,273,899 shares outstanding
at June 30, 2000 and Oct. 1, 1999 93,473 93,332
Additional paid-in capital 59,772,291 59,743,384
Accumulated deficit (531,548) (122,207)
Treasury stock, at cost,
2,074,782 shares at June 30,
2000 and 2,059,342 at Oct. 1,
1999 (17,702,017) (17,606,352)
41,632,199 42,108,157
$74,585,475 $73,248,979
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
June 30, 2000 July 2, 1999 June 30, 2000 July 2, 1999
<S> <C> <C> <C> <C>
Net revenues $29,044,822 $ 26,310,019 $82,873,469 $76,656,224
Cost of sales 19,644,337 16,285,236 55,619,114 49,413,114
Gross profit 9,400,485 10,024,783 27,254,355 27,243,110
Selling, general and
administrative expenses 9,167,115 6,845,655 25,534,047 19,643,352
Internet expenses 314,793 0 416,115 0
Nonrecurring litigation
charges 0 0 605,000 0
Earnings (loss) before
interest, other income,
and taxes (81,423) 3,179,128 699,193 7,599,758
Interest expense (445,402) (370,774) (1,377,793) (870,604)
Other income (expense),
net (1,904) 20,785 1 51,458
Earnings (loss) before
provision for income
taxes (528,729) 2,829,139 (678,599) 6,780,612
Income tax provision
(benefit) (200,057) 1,069,899 (269,258) 2,561,797
Net earnings (loss) $ (328,672) $ 1,759,240 $(409,341) $ 4,218,815
Earnings (loss) per share:
Net earnings (loss) - basic $ (0.05) $ 0.24 $ (0.06) $ 0.57
Net earnings (loss)
- diluted $ (0.05) $ 0.22 $ (0.06) $ 0.55
Weighted average number
of common shares
outstanding - basic 7,272,558 7,360,364 7,272,532 7,448,658
Weighted average number
of common shares
outstanding - diluted 7,272,558 7,825,598 7,272,532 7,726,179
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
--- For The Nine Months Ended ---
June 30, 2000 July 3, 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES :
Net earnings (loss) $(409,341) $4,218,815
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,119,170 1,354,261
Provision for (recovery of)
allowances for accounts receivable 357,839 (242,645)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 5,125,015 (48,047)
(Increase) decrease in inventories (4,742,657) (5,968,900)
(Increase) decrease in deferred catalog
expenses and other current assets (119,809) (381,228)
Increase (decrease) in accounts payables 389,260 645,076
(Increase) decrease in income tax receivable (550,622) -
Decrease in deferred taxes 197,040 904,318
Increase (decrease) in accrued liabilities (395,804) (216,501)
(Increase) decrease in other assets (81,709) (97,499)
Net cash used in operating activites 1,888,382 167,650
CASH FLOWS FROM INVESTING ACTIVITIES :
Acquisitions of property, plant & equipment (1,712,857) (4,886,237)
Payments for acquisitions, net of cash acquired (854,093) (4,260,100)
Proceeds from sale of investments - 4,885
Net cash used in investing activities (2,566,950) (9,141,452)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of notes payable 2,502,153 13,526,155
Payments of notes payable and capital
lease obligations (1,797,747) (1,486,149)
Proceeds from common stock issuances 77,570 480,145
Purchase of treasury stock (144,187) (3,367,028)
Net cash provided by financing activities 637,789 9,153,123
NET CHANGE IN CASH AND EQUIVALENTS (40,779) 179,321
Cash and equivalents, beginning of period 201,911 1,035,466
Cash and equivalents, end of period $161,132 $1,214,787
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $1,342,249 $ 818,379
Cash paid during the period for income taxes $1,418,377 $ 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
June 30, 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 June 30, 2000 and the results of
its operations for the three and nine month periods ended June 30, 2000
and July 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
<PAGE>
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 June 30, 2000 and October 1, 1999, inventories consisted of the
following:
June 30, October 1,
2000 1999
Raw materials $3,618,950 $3,209,581
Work-in-progress 583,923 435,904
Finished and purchased goods 20,826,113 15,928,680
25,028,986 19,574,165
Less inventory allowance for
obsolete or slow moving items (999,256) (1,064,903)
Inventories, net $24,029,730 $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).
<PAGE>
The following table contains transactional data for the Company's
stock option plan.
For The Nine Months Ended
June 30, July 2,
2000 1999
Options outstanding - beginning of period 1,087,799 860,286
Options granted 44,375 116,875
Options exercised (5,000) (58,725)
Options forfeited (67,800) (10,912)
Options outstanding - end of period 1,059,374 907,524
Weighted average exercise prices $7.78 $7.38
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 1,059,374 5.7 yrs. $7.78 762,706 $7.28
As of June 30, 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 June 30, 2000 and October 1, 1999, notes payable and capital lease
obligations consisted of the following:
June 30, October 1,
2000 1999
Note payable under revolving line of credit,
Interest at prime minus 1/2% (8.50% at
June 30, 2000 and 7.75% at Oct 1, 1999),
or LIBOR plus 1-1/4% (6.5175%, 8.0575, and
7.84125%, at June 30, 2000 and 6.52%, 6.96%,
6.44% and 7.13% at Oct 1, 1999) due October 2,
2002, collateralized by substantially all assets. $ 18,784,809 $11,044,264
<PAGE>
Term loan, interest at LIBOR plus 1-1/4%
(6.5175%, 8.0575% and 7.84125% at June 30, 2000
and 6.52%, 6.96%, 6.44%, and 7.13% at Oct 1, 1999),
payable in monthly installments plus accrued interest
of $125,000 through October 2, 2002, collateralized
by substantially all assets. 2,500,000 9,000,000
Promissory note, interest at 7.75%, payable in
monthly installments of $29,167 plus accrued interest
through February 2001. 166,714 466,667
Promissory note, interest at 5%, payable in monthly
installments of $22,916 plus accrued interest
through October 2000. 91,667 -
Capital lease obligation, interest at 9.0%,
payable in annual installments of principal and
interest totaling $55,000 through August 2005. 196,039 230,311
Other 76,941 95,522
Total 21,816,170 20,836,764
Less - current portion (1,782,684) (2,410,839)
Long-term notes payable and capital lease
obligations, net $ 20,033,486 $18,425,925
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 terms governing the
credit facility includes a revolving line of credit of up to $25.0 million
and a term loan of $2.5 million with a maturity date of October 2, 2002.
On August 2, 2000 the Company and its Bank entered into a term sheet
that modified and restuctured the Company's credit facilities. The
amended terms include the following:
1. reducing the facility from $40.0 million to $27.5 million, which more
closely represents the available collateral base;
2. reducing the term-loan balance from $7.7 million to $2.5 million with
the remaining $5.2 million being added to the revolver;
<PAGE>
3. reducing the Fixed Charge Coverage Ratio requirement from 2.0 to 1.0
to 1.0 to 1.0 through March 31, 2001 and to 1.5 to 1.0 after March 31,
2001;
4. reducing the term-loan principal payments from $166,666 per month to
$125,000 per month;
5. changing the revolver interest rates from prime minus 0.5% to a range
of prime minus 0.25% to prime plus 1.0% based on a debt to EBITDA ratio;
6. changing the term loan interest rate from prime minus 0.5% to prime
plus 2.0%;
7. changing the LIBOR interest rates from LIBOR plus 1.25% to a range of
LIBOR plus 1.5% to LIBOR plus 4.0% based on a debt to EBITDA ratio; and,
8. extending the term of the facility through October 2, 2002.
The amended terms contain financial and net worth covenants;
limits on capital expenditures; $75,000 in fees; a provision for a
prepayment fee in the case of a change in control; and restrictions on
acquisitions and stock repurchases. Although the amended terms are
subject to definitive documentation that the Company expects to
finalize by August 25, 2000, the amounts reflected in these
financial statements and related footnotes reflect balances,
classifications and related interest rates as if the amended terms
were in place at June 30, 2000. As of June 30, 2000, the Company was
in compliance with all the covenants in its senior credit facility.
As of June 30, 2000, the Company had borrowings of approximately
$21.3 million outstanding under the senior credit facility, and no
letters of credit outstanding for foreign purchases of inventory.
Note 4 - Capital Structure
As of June 30, 2000, the Company's issued and outstanding capital
stock consisted solely of common stock. The Company has 1,059,374 options
outstanding under the stock option plan with exercise prices ranging
from $6.13 to $9.44 per share, and 100,000 options issued outside the
plan with an exercise price of $6.88 per share, and 1,000,000 warrants
outstanding with an exercise price of $7.50 per share. If the options
and warrants were exercised, all holders would have rights similar to
common shareholders.
<PAGE>
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:
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> June 30, July 2, June 30, July 2,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Numerator:
Net earnings (loss) ($328,673) $1,759,240 ($409,341) $4,218,815
Denominator:
Weighted average common
shares - basic 7,272,558 7,360,364 7,272,532 7,448,658
Effect of dilutive securities:
Warrants 0 235,804 0 134,975
Employee stock options 0 229,430 0 142,546
Weighted average common
shares - diluted 7,272,558 7,825,598 7,272,532 7,726,179
Per Share Calculations:
Net earnings - basic ($0.05) $0.24 ($0.06) $0.57
Net earnings - diluted ($0.05) $0.22 ($0.06) $0.55
Securities excluded from
weighted average common
shares diluted because
their effect would be
antidilutive 2,159,374 0 2,156,249 0
<PAGE>
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.
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 $1.2 million
during the nine months ended June 30, 2000, from $31.9 million at
October 1, 1999 to $33.1 million at June 30, 2000. The increase in
working capital is primarily a result of seasonal increases in inventory
($5.5 million), which was partially offset by seasonal decreases in
accounts receivable ($4.7 million).
<PAGE>
As of June 30, 2000, the Company had total borrowings under its senior
credit facility of approximately $21.3 million. This balance included a
term loan of $2.5 million and a revolver balance of $18.8 million. The
term loan is payable in monthly installments of $125,000 principal plus
accrued interest. See Note 3-Notes Payable and Capital Lease Obligations.
The Company believes it will satisfy its short-term and long-term
liquidity needs from borrowings under its senior credit facility and
cash flows from operations. The Company has no material commitments for
capital expenditures.
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 June 30, 2000, the
Company repurchased approximately 1,329,500 shares of its issued and
outstanding common stock in the open market and privately negotiated
transactions. Presently the amended bank Agreement prohibits any stock
repurchases.
Results of Operations
Net Revenues. Net revenues increased approximately $2.7 million (10.4%)
and $6.2 million (8.11%) for the three and nine month periods ended
June 30, 2000 as compared to the same periods in fiscal 1999. The
increase in net revenues 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.
Gross Profit. Gross profit decreased approximately $624,000 (6.2%) and
increased approximately $11,000 (0.04%) for the three and nine month
periods as compared to the same periods in fiscal 1999. A portion of
the decrease in gross profit is due to $500,000 one-time vendor rebates
that were recorded during the quarter ended July 2, 1999. As a percentage
of net revenues, gross profit decreased to 32.4% from 38.1% and to 32.9%
from 35.5% for the three and nine-month periods ended June 30, 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, because revenues associated
with such customer groups have lower margins than those historically
experienced by the Company.
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $2.3 million (33.9%) and
$5.9 million (30.0%) for the three and nine month periods ended June 30,
2000 as compared to the same periods in fiscal 1999. As a percentage of
net revenues, operating expenses increased from 26.0% to 31.6% and from
25.6% to 30.8% for the three and nine month periods ended June 30, 2000
as compared to the same periods in fiscal 1999. The increase in
selling, general and administrative expenses is primarily a result of
the following:
(i.) An increase in payroll and related costs of approximately $966,000
and $3.0 million for the three and nine 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.
(ii.) An increase in depreciation and amortization expense of
approximately $247,000 and $791,000 for the three and nine 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. Currently, the
depreciation for the SAP/AS400 is approximately $1.0 million annually.
(iii.) An increase in computer related expenses of approximately
$536,000 and $571,000 for the three and nine month periods,
respectively. This is primarily a result of higher operating costs of
maintaining the SAP/AS400 system and support after "go-live."
(iv.) An increase in the provision for doubtful accounts receivable of
approximately $328,000 and $569,000 for the three and nine month period,
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. 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
implementing significant cost reduction programs and certain production
<PAGE>
efficiencies. The Company is also attempting to reduce future operating
expenses by migrating customers to its fully integrated websites. The
first two of such websites, bsnsports.com and us-games.com went
"live" during August 2000.
Internet Expense. The Company incurred internet related expenses of
approximately $315,000 and $416,000 for the three and nine month periods
in fiscal 2000. These expenses are related to the continued enhancement
of the Company's websites and web development to post electronic
catalogs on the websites.
Interest Expense. Interest expense increased approximately $75,000
(20.1%) and $507,000 (58.3%) for the three and nine month periods ended
June 30, 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 of Spaulding and LAKCO in October 1999; (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 will increase as a result the
amendments to 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.
<PAGE>
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
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.
In addition, increases in freight rates 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. The aging of accounts
receivable has improved over the previous three 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.
<PAGE>
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, war, 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.
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 43% 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.
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.
<PAGE>
PART II. OTHER INFORMATION
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 that may not be 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 settled this
matter. SSG modifies its disclosure about the circumstances surrounding
Mr. Davis' termination and this litigation to state that SSG and Mr.
Davis have settled this litigation based on their mutual determination
that it was in the best interests of the parties to terminate their
business relationship.
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
<PAGE>
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
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. The parties to this
lawsuit have entered into a Memorandum of Understanding outlining the
primary business terms of a new license agreement that would settle this
matter; however, no assurance can be made that the parties will enter
into a new license agreement to settle this matter. The parties to this
lawsuit are engaged in settlement discussions and have entered into a
Memorandum of Understanding and Term Sheet outlining the primary
business terms of a potential settlement that would include a restated
and amended license; however, no assurance can be made that the parties
will enter into a restated and amended license agreement or otherwise
settle this lawsuit.
Item 2. Changes in Securities
(a) Not applicable.
(b) Not applicable.
Item 3. Defaults Upon Senior Securities
(a) Not applicable.
(b) Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
<PAGE>
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) (5) Exhibit 10.1 (*)
Amended Employment Agreement for Terrence M. Babilla
dated to be effective as of February 25, 2000
(a) (6) Exhibit 10.2 (*)
Amended Employment Agreement for John P. Walker
dated to be effective as of February 25, 2000
(a) (7) Exhibit 10.3 (*)
Second Amendment (effective July 30, 2000) to Lease Agreement
between Acquiport DFWIP, Inc. and Sport Supply Group, Inc.
(a) (8) Exhibit 27 (*)
Financial Data Schedule.
(b) A report on Form 8-K was filed by the Company on May 30, 2000
relating to a press release concerning approval from the
New York Stock Exchange for continued listing of Sport Supply
Group, Inc.
( * ) = 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: August 18, 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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