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 December 31, 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 - 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 preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
<PAGE>
Indicated below is the number of shares outstanding of each class of the
registrant's common stock as of February 10, 2000.
Title of Each Class of Common Stock Number Outstanding
Common Stock, $0.01 par value 7,267,108 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Page
Index to Consolidated Financial Statements 3
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 6
<TABLE>
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
December 31, October 1,
1999 1999
<S> <C> <C> <C>
CURRENT ASSETS :
Cash and equivalents $ 706,873 $ 201,911
Accounts receivable:
Trade, less allowance for doubtful accounts
Of $683,000 at Dec. 31, 1999 and $465,000
at Oct. 1, 1999 17,659,786 22,926,169
Other 939,620 975,956
Inventories, net 25,852,297 18,509,262
Other current assets 1,003,326 911,972
Income tax receivable 1,166,128 0
Deferred tax assets 1,779,883 1,062,188
Total current assets 49,107,913 44,587,458
DEFERRED CATALOG EXPENSES 2,292,216 2,078,262
<PAGE>
PROPERTY, PLANT AND EQUIPMENT :
Land 8,663 8,663
Buildings 1,605,102 1,605,102
Computer Equipment & Software 10,819,037 10,038,530
Machinery and equipment 4,001,583 3,994,706
Furniture and fixtures 3,563,906 3,484,311
Leasehold improvements 2,376,999 2,368,439
22,375,290 21,499,751
Less -- Accumulated depreciation
and amortization (9,415,756) (8,889,925)
12,959,534 12,609,826
DEFERRED TAX ASSETS 2,101,239 2,101,239
COST IN EXCESS OF TANGIBLE NET ASSETS ACQUIRED,
less accumulated amortization of $1,501,000 at
Dec. 31, 1999 and $1,464,000 at Oct. 1, 1999 8,207,046 7,937,809
TRADEMARKS, less accumulated amortization of
$1,390,000 at Dec. 31, 1999 and $1,339,000 at
Oct. 1, 1999 3,072,179 3,079,010
OTHER ASSETS, less accumulated amortization
of $1,080,000 at Dec. 31, 1999 and $1,058,000
at Oct. 1, 1999 889,231 855,375
78,629,358 $73,248,979
CURRENT LIABILITIES :
Accounts payable $10,468,943 $7,975,509
Other accrued liabilities 2,074,802 2,328,549
Notes payable and capital lease obligations,
current portion 2,639,996 2,410,839
Total current liabilities 15,183,741 12,714,897
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS,
net of current portion 22,539,188 18,425,925
COMMITMENTS AND CONTINGENCIES
<PAGE>
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, 9,340,390 and 9,333,241 shares issued
at Dec. 31, 1999 and Oct. 1, 1999, 7,259,959 and
7,273,899 shares outstanding at Dec. 31,1999 and
Oct. 1, 1999 93,404 93,332
Additional paid-in capital 59,734,085 59,743,384
Accumulated deficit (1,229,635) (122,207)
Treasury stock, at cost, 2,073,282 shares at
Dec. 31, 1999 and 2,059,342 at Oct. 1, 1999 (17,691,425) (17,606,352)
40,906,429 42,108,157
$78,629,358 $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)
<CAPTION>
--- For The Three Months Ended ---
December 31, 1999 January 1,1999
<S> <C> <C>
Net revenues $19,034,922 $14,870,139
Cost of sales 12,694,846 9,791,221
Gross profit 6,340,076 5,078,918
Selling, general and
administrative expenses 7,669,640 5,830,119
Operating loss (1,329,564) (751,201)
Interest expense (413,959) (165,532)
Other income (expense), net (6,000) 18,323
Loss before income taxes (1,749,523) (898,410)
Benefit from income taxes 642,095 338,307
<PAGE>
Net loss $(1,107,428) $(560,103)
Basic and diluted loss
per common share:
Net loss - basic $(0.15) $(0.07)
Net loss - diluted $(0.15) $(0.07)
WEIGHTED AVERAGE NUMBER OF:
COMMON SHARES OUTSTANDING -
BASIC 7,269,920 7,607,279
COMMON AND COMMON EQUIVALENT
SHARES OUTTSTANDING - DILUTED 7,269,920 7,607,279
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<CAPTION>
--- For The Three Months Ended ---
December 31, 1999 January 1,1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,107,428) $(560,103)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 677,642 396,426
Provision for (recovery of) allowances for accounts
receivable 95,168 (126,919)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 5,954,683 5,361,021
(Increase) decrease in inventories (6,565,224) (7,183,070)
(Increase) decrease in deferred catalog expenses
and other current assets (305,308) (229,684)
Increase (decrease) in accounts payables 1,759,671 1,339,402
Increase (decrease) in income tax receivable (1,166,128) -
(Increase) decrease in deferred tax assets (717,695) (313,681)
Increase (decrease) in accrued liabilities (359,576) (665,728)
<PAGE>
(Increase) decrease in other assets (52,230) (155)
Other - (3,012)
Net cash used in operating activites (1,786,425) (1,985,503)
CASH FLOWS FROM INVESTING ACTIVITIES :
Acquisitions of property, plant & equipment (827,640) (1,269,025)
Payments for acquisitions, net of cash acquired (854,093) -
Proceeds from sale of investments - 2,160
Net cash used in investing activities (1,681,733) (1,266,865)
CASH FLOWS FROM FINANCING ACTIVITIES :
Proceeds from issuances of notes payable 4,504,930 5,954,862
Payments of notes payable and capital lease
obligations (437,510) (694,000)
Proceeds from common stock issuances 39,295 34,119
Purchase of treasury stock (133,595) (2,663,958)
Net cash used in financing activities 3,973,120 2,631,023
NET CHANGE IN CASH AND EQUIVALENTS 504,962 (621,345)
Cash and equivalents, beginning of period 201,911 1,035,466
Cash and equivalents, end of period $706,873 $414,121
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION :
Cash paid during the period for interest $270,417 $113,322
Cash paid during the period for income taxes $1,308,878 $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
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 December 31, 1999 and the results of
its operations for the three month periods ended December 31, 1999 and
January 1, 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 December 31,
1999 and October 1, 1999, inventories consisted of the following:
December 31, October 1,
1999 1999
Raw Materials $ 4,142,699 $ 3,209,581
Work-in-progress 578,471 435,904
Finished and purchased goods 22,303,646 15,928,680
27,024,816 19,574,165
Less inventory allowance for
obsolete or slow moving items (1,172,519) (1,064,903)
$25,852,297 $18,509,262
<PAGE>
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).
The following table contains transactional data for the Company's stock
option plan.
For the Three Months Ended
December 31, October 31,
1999 1999
Options outstanding - beginning
of period 1,087,799 1,040,573
Options granted 25,000 182,300
Options exercised (5,000) (71,887)
Options forfeited (19,500) (1,425)
Options outstanding - end
of period 1,088,299 1,087,799
Weighted average prices $ 7.685 $7.695
Stock Options Stock Options
Outstanding Exercisable
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Remaining Exercise Exercise
Range of Exercise Prices Shares Life Price Shares Price
$6.13 - $9.44 1,088,299 5.7 yrs. $7.685 532,379 $7.31
As of December 31, 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.
<PAGE>
Note 3 - Notes Payable and Capital Lease Obligations
As of December 31, 1999 and October 1, 1999, notes payable and capital lease
obligations consisted of the following:
December 31 October 1,
1999 1999
Note payable under revolving line of
credit, interest at prime minus 1/2%
(8.00% Dec. 31, 1999 and 7.75% at
Oct. 1, 1999), or LIBOR plus
1-1/4% (6.5175%, 6.955% at Dec. 31,
1999 and 6.52%, 6.96%, 6.44% and
7.13% at Oct 1, 1999) due April 26,
2002, collateralized by substantially
all assets $ 15,558,212 $ 11,044,264
Term loan, interest at LIBOR plus
1-1/4% (6.5175%, 6.955% at Dec. 31,
1999 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 8,666,667 9,000,000
Promissory note, interest at 7.75%, payable
in monthly installments of $29,167 plus
accrued interest through February 2001 408,333 466,667
Promissory note, interest at 5%, payable
in monthly installments of $22,916 plus
accrued interest through October 2000 229,167 -
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 86,494 95,522
<PAGE>
Total $ 25,179,184 20,836,764
Less - current portion (2,639,996) (2,410,839)
Long-term notes payable and capital lease
obligations, net $22,539,188 $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 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 December 31,
1999, the Company was in compliance with the covenants in its senior credit
facility.
Amounts outstanding under the senior credit facility are collateralized
by substantially all assets of the Company. As of December 31, 1999, 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%, 6.955%), at December 31, 1999) or (ii.) lender's prime
rate minus 1/2% (8.00% at December 31, 1999). Historically, the Company
has elected the lower of the interest rates available under the facility.
As of December 31, 1999, the Company had borrowings of approximately $15.5
million outstanding under the senior credit facility, and approximately
$688,000 of letters of credit outstanding for foreign purchases of inventory.
Note 4 - Capital Structure
As of December 31, 1999, the Company's issued and outstanding capital stock
consisted solely of common stock. The Company has approximately 1,088,000
options outstanding under the stock option plan with exercise prices ranging
from $6.13 to $9.44, approximately 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 - Net Earnings (Loss) Per Common Share
<PAGE>
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 Months Ended
<CAPTION>
December 31, January 1,
1999 1999
<S> <C> <C>
Numerator:
Net loss ($1,107,428) $(560,103)
Denominator:
Weighted average common shares
outstanding - basic and diluted 7,269,920 7,607,279
Per Share Calculations:
Net loss - basic and diluted $(0.15) $(0.07)
</TABLE>
The weighted average common shares outstanding - diluted computation for
the three months ended December 31, 1999 and January 1, 1999 exclude
1,193,299 and 963,411 employee stock options, respectively, because this
impact would be anti-dilutive.
Note 6 - Acquisitions
During October 1999, the Company acquired certain assets of LAKCO, Inc.
and Spaulding, Inc., 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. The Company has accounted
for these acquisitions 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.
<PAGE>
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.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 explains how the SEC staff applies
by analogy the existing rules on revenue recognition to other transactions
not covered by such rules. SAB 101 provides that if registrants have not
historically applied the accounting in SAB 101 they should implement the
SAB and report a change in accounting principle no later than the first
fiscal quarter beginning after December 15, 1999. The Company is currently
evaluating the impact of SAB 101, although application of this accounting
standard is not expected to have a material impact on the Company's
consolidated financial position, results of operation 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 $2.0 million during
the fiscal quarter ended December 31, 1999, from $31.9 million at October 1,
1999 to $33.9 million at December 31, 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 and the acquisitions of LAKCO and
Spaulding in October 1999. This increase was partially offset by a $5.3
million decrease in trade receivables due to lower revenues generated in the
first fiscal quarter of 2000 as compared to the fourth fiscal quarter of 1999.
The lower revenues are a result of the seasonality of the Company's business.
<PAGE>
As of December 31, 1999, the Company had total borrowings under its senior
credit facility of approximately $24.2 million. This balance included a term
loan of $8.7 million and a revolver balance (including open letters of credit)
of $15.5 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. The net increase of approximately $4.2 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.
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'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 December 31,
1999, the Company had repurchased approximately 1,328,000 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 increased approximately $4.2 million (28.0%) for
the three-month period ended December 31, 1999 as compared to the same period
ended January 1, 1999. This 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. The Company
expects to continue to experience an increase in sales as a result of
acquired team dealers and an increased number of sales representatives.
Gross Profit. Gross profit increased approximately $1,261,158 (24.83%) for
the fiscal 2000 first quarter as compared to the same period in fiscal 1999.
As a percentage of net revenues, gross profit decreased from 34.2% to 33.3%
for the same fiscal three-month period. This decrease was primarily related
to increased fund raising product sales and team dealer sales, as such
<PAGE>
revenues have lower margins. The Company expects to continue to experience
a lower gross profit as a percentage of net revenue as compared to the
previous year due to expected increases in sales in fund raising products
and team dealer sales.
Selling, General and Administrative Expenses. Operating expenses increased
approximately $1.8 million (31.55%) for the fiscal 2000 first quarter as
compared to the same period in fiscal 1999. As a percentage of net revenues,
operating expenses increased from 39.2% to 40.3% for the same fiscal
three-month period. The increase in operating expenses is primarily a
result of the following:
(i.) An increase in payroll costs associated with the additional employees
hired from January 1, 1999 to December 31, 1999. The number of employees
increased by approximately 100 full-time employees.
(ii.) An increase in operating expenses, including catalog and advertising
expense, and rent and utilities related to acquisition facilities.
(iii.) An increase in the allowance for doubtful accounts receivable.
The accounts receivable days sales outstanding has increased. Management
believes the Company is not assuming an increase in the credit exposure.
It believes the increase in days sales outstanding has been impacted by
the staff time demands of implementing and training on the new SAP IT
system. Nevertheless, the Company has increased the reserve for doubtful
accounts because of this increase in days sales outstanding. The Company
has also increased collection efforts to improve the accounts receivable
outstanding.
(iv.) An increase in depreciation and amortization expense. This is
primarily the result of hardware and software acquisitions related to the
Company's successful Year 2000 compliant SAP/AS400 ERP information system
implementation and Internet technology.
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.
Operating Loss. Operating loss increased approximately $578,000 (77.0%)
for the fiscal 2000 first quarter as compared to the same period in the
fiscal 1999 first quarter. This reflects the impact of the increase in
operating expenses as discussed above, partially offset by the increase
in gross profit dollars.
<PAGE>
Interest Expense. Interest expense increased approximately $248,000
(150.1%) for the fiscal 2000 first quarter as compared to the same period
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 Year 2000 project, SAP/AS400
ERP 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.
Other Income (Expense), Net. Other income (expense) decreased approximately
$24,000 for the fiscal 2000 first quarter as compared to the same period in
fiscal 1999.
Benefit for Income Taxes. The benefit from income taxes increased
approximately $304,000 for the fiscal 2000 first quarter as compared to
the same period in fiscal 1999. The Company's effective tax rate decreased
from 37.7% to 36.7% for the same comparative time period.
Net Earnings (Loss). Net loss increased approximately $547,000, for the
fiscal 2000 first quarter as compared to the same period in fiscal 1999
first quarter. Net loss per share increased from $(0.07) to $(0.15) for
the same comparative time period. The weighted average shares outstanding
decreased by approximately 4.4% for the same comparative time period.
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 due to a reduction in Government spending, risk
of nonpayment of accounts receivable, competitive factors, foreign supplier
related issues, and litigation risks.
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 where made to the
U.S. Government, a majority of which were made to military installations.
Anticipated reductions in U.S. Government spending could reduce funds
available to various government customers for sports related equipment,
which could adversely affect the Company's results of operations.
The Company ships approximately 80% of its products using 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; however, it has experienced
an increase in days sales outstanding. 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.
<PAGE>
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.
Although the Company intends to vigorously defend itself in the legal
proceedings described in "Part II. Other Information, Item 1. - Legal
Proceedings", an adverse outcome in such proceedings (such as a termination
of the MacGregor License Agreement) 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 after the Company was notified that
Oaktree Capital Management was not exercising its option to acquire the
Company's common stock held by Emerson Radio Corp. under a letter of intent
previously reported in August 1999. 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.
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
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), could have a material adverse effect on the
Company's results of operations and financial condition.
<PAGE>
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. The Company intends to
vigorously defend itself and the individual defendants against Mr. Davis'
complaint.
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 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.
Item 2. Changes in Securities
(a) Not applicable.
(b) Not applicable.
Item 3. Defaults Upon Senior Securities
(a) Not applicable.
(b) Not applicable.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
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)(1)
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(*) Amendment No. 2 to License Agreement and Trademark
Maintenance Agreement between MacMark Corporation, Equilink
Licensing Corporation, and Sport Supply Group, Inc.,
dated October 8, 1998.
<PAGE>
(a)(6)
Exhibit 27(*) Financial Data Schedule.
(b) A report on Form 8-K was filed with the Securities and
Exchange Commission on December 13, 1999 to report its
engagement of PaineWebber Incorporated.
(*) = 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.
Dated: February 11, 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
AMENDMENT NO. 2 TO LICENSE AGREEMENT
AND TRADEMARK MAINTENANCE AGREEMENT
This Amendment No. 2 is made this 8th day of October 1998 by and
between MACMARK CORPORATION, a Delaware corporation ("MacMark"),
EQUILINK LICENSING CORPORATION, a Delaware corporation ("Equilink"), and
SPORT SUPPLY GROUP, INC., a Delaware corporation ("SSG").
PREAMBLES
WHEREAS, the parties hereto entered into a Perpetual License
Agreement (the "License Agreement") and a Trademark Maintenance
Agreement (the "Maintenance Agreement"), both dated as of February 19,
1992 and both amended on November 1, 1992 (the License Agreement as
amended and Maintenance Agreement as amended, collectively with all
related agreements, are referred to herein as the "Original License"),
SSG being the successor by assignment to BSN Corp., the original
licensee/party pursuant to said Original License.
WHEREAS, SSG has the rights to use the "MacGregor" trademark
in connection with the sale of certain products subject to the terms and
conditions of the Original License.
WHEREAS, SSG would like the right to use the MacGregor
trademark in connection with the sale of a lighted electronic scoreboard
for use in school stadiums (the "Scoreboard").
NOW, THEREFORE, in consideration of the mutual covenants made
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. A new section 2(c) shall be added to the License Agreement to read as
follows:
"(c) The exclusive, royalty-free license, during the term of this
Agreement, but only so long as you are selling Scoreboards bearing the
Trademarks, to use or to sublicense others to use, the Trademarks in
conjunction with the manufacture, promotion, advertising, merchandising,
sale, offering for sale and distribution of Scoreboards to the Exclusive
Customers in the United States and the non-exclusive, royalty-free
license, in perpetuity, to use, or to sublicense others to use, the
Trademarks in conjunction with the manufacture, promotion, advertising,
<PAGE>
merchandising, sale, offering for sale and distribution of Scoreboards
to the Non-Exclusive Customers for resale to the Exclusive Customers in
the United States."
2. Licensee agrees that it will comply with all applicable laws and
regulations, including without limitation, safety and certification
regulations, in connection with the manufacture, sale and distribution
of Scoreboards.
3. (a) During the term of the License Agreement and thereafter,
Licensee (as defined in the License Agreement) shall be solely
responsible for, defend, indemmity and hold harmless MacMark and
Equilink and their affiliates and their respective affiliates,
shareholders, officers, directors, agents and employees for, from and
against any claims, demands, causes of action, damages, costs and
expenses, including reasonable attorney's fees, judgments, and
settlements arising out of or in connection with: (i) Licensee's breach
or alleged breach of any of its representations, warranties, covenants
or obligations contained in the License Agreement; (ii) Licensee's use
of the Trademarks (as defined in the License Agreement); (iii)
Licensee's noncompliance with any applicable federal, state, or local
laws or regulations (including, without limitation, safety and
certification regulations); or (iv) the manufacture, promotion,
merchandising, distribution, sale, advertising or use of Scoreboards.
Licensee acknowledges that MacMark's or Equilink's approval of any
product pursuant to the License Agreement or promotional materials of
promotional concepts shall not relieve Licensee of its indemnification
obligations under this Paragraph.
(b) Licensee agrees that, throughout the term of the License Agreement
and for not less than three (3) years following the termination of the
License Agreement, it will maintain Comprehensive General Liability
Insurance, including blanket contractual liability and personal injury
liability and insurance against claims based upon products liability for
the Scoreboards and against other claims covered by the hold harmless
provisions of Section 4(a) of the License Agreement, with reputable
insurance companies and at such levels (not to be less than $500,000 per
occurrence or $1,000,000 in the aggregate) and with such deductions or
self insured retainages as are customary in the industry. With regard
to products' liability, Licensee will have such insurance policies
endorsed, and in force from October 8, 1998 naming MacMark, Equilink and
their respective officers, directors, employees and agents thereof as
additional insured with respect to claims arising under Section 4(a) of
the License Agreement.
<PAGE>
4. Without changing any other provision in Section 3(a) of the
Maintenance Agreement, a new sentence shall be added immediately prior
to the final sentence of Section 3(a) of the Maintenance Agreement as
follows:
"In the event of any default under this Agreement, the License Agreement
or the Master Agreement of even date herewith between MacMark, BSN and
MacGregor which is not capable of being cured, the aggrieved party shall
have the right to terminate this Agreement and the License Agreement by
written notice of termination."
5. All others terms and provisions of the Original License shall remain
in full force and effect.
MACMARK CORPORATION
/s/ David Mauer
By: David Mauer
Its: CEO
EQUILINK LICENSING CORPORATION
/s/ Lisa Marroni
By: Lisa Marroni
Its: Vice President
SPORT SUPPLY GROUP, INC.
/s/ Terrence M. Babilla
By: Terrence M. Babilla
Its: General Counsel and
Executive Vice President
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