-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WWR047hq6Z+TRUq3YHp8gRa6Df+FdA9WYsQ+Swwhu17+1o4YKtpDafjdWkm0nTDb FJMSYI77vE3N4O//+3uYig== 0000872855-00-000008.txt : 20000516 0000872855-00-000008.hdr.sgml : 20000516 ACCESSION NUMBER: 0000872855-00-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPORT SUPPLY GROUP INC CENTRAL INDEX KEY: 0000872855 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 752241783 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10704 FILM NUMBER: 635675 BUSINESS ADDRESS: STREET 1: 1901 DIPLOMAT DRIVE CITY: FARMERS BRANCH STATE: TX ZIP: 75234-8914 BUSINESS PHONE: 972 484 9484 10-Q 1 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 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 SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, October 1, 2000 1999 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 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 $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
The accompanying notes are an integral part of these financial statements. SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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 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 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
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
--- For The Six Months Ended -- March 31, 2000 April 2, 1999 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 (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
The accompanying notes are an integral part of these financial statements. 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 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 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 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. 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: For the Three For the Six Months Ended Months Ended
March 31, April 2, March 31, April 2, 2000 1999 2000 1999 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 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. 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. 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- 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. (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. 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 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. 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 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 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 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 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
EX-27 2
5 6-MOS SEP-29-2000 MAR-31-2000 351,512 0 22,173,935 (724,247) 23,500,756 50,488,444 23,087,682 (9,975,884) 80,646,421 38,449,605 0 0 0 93,442 41,851,258 80,646,421 53,828,647 53,828,647 35,974,778 17,073,254 1,904 0 (932,391) (149,872) (69,203) (80,669) 0 0 0 (80,669) (0.01) (0.01)
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