-----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, UnIbgYfFG3nZL7PTsJByFFFMR2SGx8dATRKuHynTFKR4rLt3AtJ//yho2p8b8Fzc 2gvCKTD/oISjE8BMTpRhGw== 0000872855-99-000002.txt : 19990217 0000872855-99-000002.hdr.sgml : 19990217 ACCESSION NUMBER: 0000872855-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990101 FILED AS OF DATE: 19990216 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: 99540532 BUSINESS ADDRESS: STREET 1: 1901 DIPLOMAT DR CITY: FARMERS BRANCH STATE: TX ZIP: 75234 BUSINESS PHONE: 2144849484 10-Q 1 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 January 1, 1999. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number 1-10704 SPORT SUPPLY GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 75-2241783 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1901 Diplomat Drive, Farmers Branch, Texas 75234 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 484-9484 Not Applicable Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicated below is the number of shares outstanding of each class of the registrant's common stock as of February 8, 1999. Title of Each Class of Common Stock Number Outstanding Common Stock, $0.01 par value 7,382,459 shares PART I. FINANCIAL INFORMATION Item 1. Financial Statements Index to Consolidated Financial Statements Page Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 7 SPORT SUPPLY GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF JANUARY 1, 1999 AND OCTOBER 2, 1998
January 1, October 2, 1999 1998 CURRENT ASSETS: Cash $ 414,121 $ 1,035,466 Accounts receivable -- Trade, less allowance for doubtful accounts of $258,000 in 1999 and $372,000 in 1998 10,856,178 16,151,371 Other 633,325 572,234 Inventories, net 21,285,907 14,102,837 Other current assets 842,683 943,521 Deferred tax assets 1,217,999 904,318 Total current assets 35,250,213 33,709,747 DEFERRED CATALOG EXPENSES 2,246,557 1,916,035 PROPERTY, PLANT AND EQUIPMENT: Land 8,663 8,663 Buildings 1,595,228 1,595,228 Machinery and equipment 6,069,164 5,585,710 Furniture and fixtures 2,863,380 2,683,122 Leasehold improvements 2,292,824 2,764,384 12,829,259 12,637,107 Less -- Accumulated depreciation and amortization (7,837,327) (7,574,023) 4,991,932 5,063,084 DEFERRED TAX ASSETS 4,659,189 4,659,189 COST IN EXCESS OF TANGIBLE NET ASSETS ACQUIRED, less accumulated amortization of $1,268,000 in 1999 and $1,240,000 in 1998 3,146,875 3,174,725 TRADEMARKS, less accumulated amortization of $1,187,000 in 1999 and $1,136,000 in 1998 3,112,585 3,163,290 OTHER ASSETS, less accumulated amortization of $1,015,000 in 1999 and $994,000 in 1998 4,137,846 3,117,545 $57,545,197 $54,803,615 CURRENT LIABILITIES: Accounts Payable $7,517,482 $ 6,178,080 Income taxes payable 87,250 87,250 Accrued property taxes - 218,201 Other accrued liabilities 443,059 893,598 Notes payable and capital lease obligations, current portion 1,078,451 1,087,809 9,126,242 8,464,938 NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS, net of current portion 10,431,185 5,160,965 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, par value $0.01, 100,000 shares authorized, no shares outstanding in 1999 or 1998 - - Common stock, par value $0.01, 20,000,000 shares authorized, 9,245,031 and 9,243,195 shares issued in 1999 and 1998, 7,383,879 and 7,754,703 shares, outstanding in 1999 and 1998 92,450 92,432 Paid-in capital 59,104,893 59,100,187 Retained deficit (5,305,149) (4,745,046) Treasury stock, at cost, 1,861,152 shares in 1999 and 1,488,492 in 1998 (15,904,424) (13,269,861) 37,987,770 41,177,712 $57,545,197 $54,803,615
The accompanying notes are an integral part of these financial statements. SPORT SUPPLY GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED
For The Three Months Ended January 1, 1999 January 2, 1998 Net revenues $14,870,139 $14,411,846 Cost of sales 9,117,169 8,784,692 Gross profit 5,752,970 5,627,154 Selling, general and administrative expenses 6,709,903 6,550,641 Loss before interest, other income and taxes (956,933) (923,487) Interest Expense (165,532) (118,619) Other income, net 224,055 279,523 Loss before benefit from income taxes (898,410) (762,583) Benefit from income taxes 338,307 259,281 Net loss $ (560,103) $ (503,302) Basic and diluted loss per common share: Net loss $ (0.07) $ (0.06) Weighted average number of common shares outstanding - Basic and Diluted 7,607,279 8,084,617
The accompanying notes are an integral part of these financial statements. SPORT SUPPLY GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
For the Three Months Ended January 1, January 2, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings - loss $ (560,103) $ (503,302) Adjustments to reconcile net earnings (loss) to net cash used in operating activities -- Depreciation and amortization 396,426 353,178 Provision for(recovery of)allowances for accounts receivable (126,919) 65,751 Changes in assets and liabilities -- Decrease in receivables 5,361,021 7,224,358 Decrease in inventories (7,183,070) (4,498,553) Increase in deferred catalogs and other current assets (1,040,828) (704,913) Increase (decrease) in payables 1,339,402) (456,847) Increase in deferred taxes (313,681) - Decrease in accrued liabilities (665,728) (911,057) Increase in other assets (229,684) (119,031) Other (3,012) (3,012) Net cash provided by (used in) operating activities (3,026,176) 446,572 CASH FLOWS FROM INVESTING ACTIVITIES : Acquisitions of property, plant & equipment (228,352) (140,534) Payments for acquisitions, net of cash acquired - (1,500,682) Proceeds from sale of investments 2,160 - Net cash provided by (used in) investing activities (226,192) (1,641,216) CASH FLOWS FROM FINANCING ACTIVITIES : Proceeds from issuances of notes payable 5,954,862 1,197,139 Payments of notes payable and capital lease obligations (694,000) (258,698) Proceeds from common stock issuances 34,119 30,083 Purchase of treasury stock (2,663,958) - Net cash provided by financing activities 2,631,023 968,524 Net change in cash (621,345) (226,120) Cash, beginning of period 1,035,466 602,779 Cash, end of period 414,121 376,659 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest 113,322 91,285 Cash paid during the period for income taxes - 856
The accompanying notes are an integral part of these financial statements. SPORT SUPPLY GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Basis of Presentation These consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of Sport Supply Group, Inc.'s (the "Company" or "SSG") consolidated financial position as of January 1, 1999 and the results of its operations for the three month periods ended January 1, 1999 and January 2, 1998. The consolidated financial statements include the accounts of SSG and its wholly-owned subsidiary, Athletic Training Equipment Company, Inc., a Delaware corporation ("ATEC"). All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financials also include estimates and assumptions made by management that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses, provisions for and the disclosure of contingent assets and liabilities. Actual results could materially differ from those estimates. Note 1 - Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for items manufactured by the Company and weighted-average cost for items purchased for resale. As of January 1, 1999 and October 2, 1998, inventories consisted of the following: January 1 October 2 1999 1998 Raw Materials $ 3,178,001 $ 2,761,885 Work-in-progress 309,700 236,466 Finished and purchased goods 18,224,126 11,530,406 21,711,827 14,528,757 Less inventory reserve for obsolete or slow moving items (425,920) (425,920) $21,285,907 $14,102,837 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). Transactions under the plan for the three months ended January 1, 1999 and January 2, 1998 are summarized as follows: Three Months Ended January 1, 1999 January 2, 1998 Options outstanding-beginning of period 860,286 708,723 Options granted -- 6,250 Options exercised -- -- Options forfeited -- (23,250) Options outstanding-end of period 860,286 691,723 Weighted average prices $7.30 $6.89 Stock Options Outstanding Stock Options Exercisable Wtd. Avg. Wtd. Avg. Wtd. Avg. Remaining Exercise Exercise Shares Life Price Shares Price Range of Exercise Prices $5.60-$8.38 860,286 7.5 yrs. $7.30 450,284 $7.11 As of January 1, 1999 there were 100,000 non-qualified options outstanding that were issued outside the plan. Such options have an exercise price of $6.88 per share. Note 3 - Notes Payable and Capital Lease Obligations As of January 1, 1999 and October 2, 1998, notes payable and capital lease obligations consisted of the following:
January 1, October 2, 1999 1998 Note payable under revolving line of credit interest at prime plus 1/2% (8.25% at January 1, 1999) or LIBOR plus 2-1/4% (7.19% at January 1, 1999), due October 31, 2000. Collateralized by substantially all assets $9,805,645 $ 4,411,967 Term loan, interest at LIBOR plus 2-1/4% (7.19% at January 1, 1999), payable in quarterly installments plus accrued interest of $125,000 through October 31, 2000, collateralized by substantially all assets 875,000 1,000,000 Promissory note, noninterest bearing, due June 30, 1999 525,000 525,000 Capital lease obligation, interest at 9.0%, payable in annual installments of principal and interest totaling $55,000 through August 2005 261,753 261,753 Other 42,238 50,054 Total 11,509,636 6,248,774 Less - current portion (1,078,451) (1,087,809) Long-term debt and capital lease obligations, net $10,431,185 $5,160,965
The Company has a senior secured credit facility to finance its working capital requirements. The Company's ability to borrow funds under its revolving credit facility is based upon certain percentages of eligible trade accounts receivable and eligible inventories. On September 9, 1997, the Company entered into a Second Amended and Restated Loan and Security Agreement ("Agreement"), which includes a senior credit facility of $25,000,000 with a maturity date of October 31, 2000. This Agreement provides for a revolving line of credit, a letter of credit facility, a term loan, and additional loans to be made to SSG for the cost of certain capital expenditures (up to a maximum of $4,000,000). The Agreement also contains financial and net worth covenants in addition to limits on capital expenditures. As of January 1, 1999, the Company was in compliance with the covenants in the senior credit facility. Amounts outstanding under the senior credit facility are collateralized by substantially all assets of the Company. As of January 1, 1999, the Company had the option of electing the revolving credit facility and the term loan to bear interest at the prevailing LIBOR rate plus 2-1/4% (7.19% at January 1, 1999) or the lender's prime rate plus 1/2% (8.25% at January 1, 1999). Historically, the Company has elected the lower of the interest rates available under the facility. As of January 1, 1999, the Company had borrowings of approximately $9,806,000 outstanding under the revolving credit facility, approximately $1,504,000 of letters of credit outstanding for foreign purchases of inventory, and availability of approximately $7,602,000. In addition, as of January 1, 1999, SSG had borrowings of $875,000 under the term loan which is payable in quarterly installments of principal and accrued interest of $125,000 through October 31, 2000. Note 4 - Capital Structure In 1997, the Financial Accounting Standards Board issued Statement No. 129, "Disclosure of Information About Capital Structure" which requires companies to disclose an entity's capital structure including liquidation preferences of preferred stock, information about rights and privileges of the outstanding equity securities, and the redemption amounts for all issues of capital stock. The following information sets forth all disclosure requirements by Statement No. 129. As of January 1,1999, the Company's outstanding capital stock consisted of common stock. The Company has approximately 860,000 options outstanding under the stock option plan with exercise prices ranging from $5.60 to $8.38 and approximately 1.0 million warrants outstanding with an exercise price of $7.50. Each option and warrant is exercisable into one share of common stock. If the options and warrants were exercised into shares of common stock, all holders would have rights similar to common shareholders. Note 5 - Net Earnings (Loss) Per Common Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share". Statement No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement No. 128 requirements. The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended January 1, 1999 January 2, 1998 Numerator: Net loss from continuing operations ($560,103) ($503,302) Numerator for basic and diluted earnings Per share - loss available to common stock holders ($560,103) ($503,302) Denominator: Denominator for basic and diluted earnings per share - weighted average shares 7,607,279 8,084,617 Basic and diluted earnings (loss) per share ($0.07) ($0.06) Note 6 - Recently Issued Accounting Pronouncements In 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" which is required to be adopted at the end of fiscal year 1999. As this standard only provides guidance for disclosure of segment information, its adoption will have no effect on the financial position or results of operations of the Company. Note 7 - Subsequent Event During January 1999, the Company acquired Conlin Bros., Inc. ("Conlin"), a distributor of sporting goods equipment for cash. The Company has accounted for this acquisition using the purchase method and, as such, its results of operations will be combined with the Company's results of operations subsequent to the acquisition date. 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 $879,000 during the three months ended January 1, 1999, from $25.2 million at October 2, 1998 to $26.1 million at January 1, 1999. The increase in working capital is primarily a result of a $7.2 million increase in inventory associated with the seasonality of the Company's business as revenues are much stronger in the second and third quarter of the fiscal year. This increase in working capital was offset by: (i) $1.3 million increase in trade payables and (ii) $5.3 million decrease in trade receivables due to lower revenues generated in the first fiscal quarter of 1999 as compared to the fourth fiscal quarter of 1998. The lower revenues are a result of the seasonality of the Company's business. On September 9, 1997, the Company entered into a Second Amended and Restated Loan and Security Agreement ("Agreement") which includes a senior credit facility of $25,000,000 with a maturity date of October 31, 2000. This Agreement provides for a revolving line of credit, a letter of credit facility, a term loan, and additional loans to be made to SSG for the cost of certain capital expenditures (up to a maximum of $4,000,000). The Agreement also contains financial and net worth covenants in addition to limits on capital expenditures. As of January 1, 1999, the Company had total borrowings under its senior credit facility of approximately $10.7 million including a term loan of $875,000 which is payable in quarterly installments of principal and accrued interest of $125,000 through October 31, 2000, outstanding letters of credit for foreign purchases of inventory of approximately $1.5 million, and availability of approximately $7.6 million. The net increase of $5.3 million in borrowings under the senior credit facility compared to October 2, 1998 primarily reflects the stock purchased under the Company's stock buyback program as well as the additional working capital needs as discussed above. The Company believes it will satisfy its short-term and long-term liquidity needs from borrowings under its senior credit facility and cash flows from operations. On May 28, 1997, the Company approved the repurchase of up to 1,000,000 shares of its issued and outstanding common stock in the open market and/or privately negotiated transactions. On October 28, 1998, the Company approved a second repurchase program of up to an additional 1,000,000 shares of its issued and outstanding common stock in the open market and/or privately negotiated transactions. Such purchases are subject to price and availability of shares, working capital availability and any alternative capital spending programs of the Company. As of January 1, 1999, the Company repurchased approximately 1,097,000 of its issued and outstanding common stock in the open market under both repurchase programs. Except as described in "Management's Discussion and Analysis of Financial Condition and Results of Operations---Impact of Year 2000 and System Implementation," the Company does not currently have any material commitments for capital expenditures. Impact of Year 2000 and System Implementation The Year 2000 Issue is the result of computer programs written using two digits rather than four digits to define the applicable year. Some of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a failure or miscalculations causing disruptions of operations, including the inability to process transactions or engage in normal business activities. The Company has determined that it will be necessary to replace significant portions of its software and hardware so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company expects that with successful conversions to new software that are Year 2000 compatible, the Year 2000 Issue will pose no significant operational problems for its computer systems. However, if such conversions are not made, or are not successfully completed on a timely basis, the Year 2000 Issue and system implementation could have a material adverse effect on the Company's operations. The Company is utilizing internal and external resources to convert to, test, and implement the new software. The Company anticipates completing the Year 2000 project and system implementation during calendar year 1999. The Company is in the process of implementing a new system and has determined the total estimated cost of the system implementation project to range between $4.5 and $5.0 million. The cost of the system implementation project will be funded through operating cash flows and borrowings under the Company's senior credit facility. The Company has currently spent approximately $3.0 million for the project and expects to meet the original date of completion. The majority of these costs associated with the Year 2000 and system implementation project will be capitalized and amortized. The Company believes it is taking all necessary steps to become Year 2000 compliant; however, the Company's Year 2000 compliance is also dependent on the compliance of third parties such as vendors and customers. The Company is currently surveying its third parties regarding Year 2000 compliance; however, due to the diversity and volume of customers and vendors, the Company can not determine the full extent to which the Company may be affected if such Year 2000 issues are not resolved by third parties. Results of Operations Net Revenues. Net revenues increased approximately $458,000 (3.2%) for the three month period ended January 1, 1999 as compared to the same period ended January 2, 1998. This increase in net revenues reflects increases in revenues associated primarily with the Company's Youth division as well as the Company's subsidiary, ATEC, which was acquired on December 2, 1997. The Company expects to experience an increase in sales related to sporting goods dealers and retailers as a result of the ATEC acquisition and the Conlin Bros., Inc. ("Conlin") acquisition that was consummated on January 29, 1999. Gross Profit. Gross profit increased approximately $126,000 (2.2%) for the three month period ended January 1, 1999 as compared to the same period ended January 2, 1998. As a percentage of net revenues, gross profit decreased from 39.1% to 38.7% for the three month period ended January 1, 1999 as compared to the same period ended January 2, 1998. This decrease was a result of sales related to ATEC and the Youth division, because such sales have lower margins than other sales within the Company's business. In the event that revenues related to ATEC, the Youth division, and the Conlin acquisition continue to represent a larger percentage of total revenues, the Company will continue to experience a decrease in gross profit as a percentage of net revenues in future periods. Selling, General and Administrative Expenses. Operating expenses increased approximately $159,000 (2.4%) for the three month period ended January 1, 1999 as compared to the same period ended January 2, 1998. As a percentage of net revenues, operating expenses decreased from 45.5% to 45.1% for the three month period ended January 1, 1999 as compared to the same period ended January 2, 1998. The dollar increase in operating expenses for the three month period ended January 1, 1999 was primarily a result of the following: (i) An increase in operating expenses associated with the Company's acquisition of ATEC in December, 1997. (ii) An increase in payroll costs associated with the additional telemarketers and sales road force hired by the Company. The Company anticipates operating expenses to increase in future periods due to the acquisition of Conlin. Operating Profit (Loss). Operating profit for the three month period ended January 1, 1999 decreased approximately $33,000 (3.6%). This decrease reflects the impact of the (i) decrease in gross profit percentages and (ii) the increase in operating expenses as discussed above. Interest Expense. Interest expense increased approximately $47,000 (39.6%) for the three month period ended January 1, 1999 as compared to the same period ended January 2, 1998. The increase in interest expense resulted from higher borrowing levels. See Item 2 "Liquidity and Capital Resources". Due to the higher borrowing levels associated with the stock buyback, working capital needs, and the Conlin acquisition, the Company anticipates interest expense to increase in future periods. Other Income, Net. Other income decreased approximately $55,000 for the three month period ended January 1, 1999 as compared to the same period ended January 2, 1998. Other income includes promotional agreements entered into between the Company and certain corporate sponsors of a market segment. In addition, other income also includes services provided to Emerson Radio Corp. ("Emerson") such as human resources, advertising, warehousing/distribution, and banking functions as provided in a Management Services Agreement between the Company and Emerson effective May 1997. Due to certain promotional agreements not being renewed, the Comp-any expects other income to decrease in future periods. In the event additional promotional agreements with certain corporate sponsors are not renewed or services provided to Emerson are discontinued, the Company would expect a decrease in other income in future periods. Provision (Benefit) for Income Taxes. The benefit from income taxes increased approximately $79,000 for the three month period ended January 1, 1999 as compared to the same period ended January 2, 1998. The Company's effective tax rate increased from 34.0% to 37.7% for the three month period ended January 1, 1999 as compared to the same period ended January 2, 1998. Net Earnings (Loss). Net loss increased approximately $57,000 for the three month period ended January 1, 1999, as compared to the same period ended January 2, 1998. Net loss per share increased from a loss of ($0.06) to ($0.07) for the three month period ended January 1, 1999 as compared to the same period ended January 2, 1998. The three month period ended January 1, 1999 includes a decrease of approximately 6.0% in weighted average shares outstanding. 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 due to reduced Government spending, risk of nonpayment of accounts receivable, competitive factors, and foreign supplier related issues. The general economic condition in the U.S. could adversely affect pricing on raw materials, such as metals and other commodities used in the manufacturing of certain products and finished goods. Any material price increases to the customer could have an adverse effect on revenues and any price increases from vendors could have an adverse effect on costs. Approximately 7% of the Company's institutional sales are made to the U.S. Government, a majority of which are 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 United Parcel Service ("UPS"). As experienced in 1997, a strike by UPS or any of the Company's major carriers could adversely affect the Company's results of operations due to not being able to deliver its products in a timely manner and using other more expensive freight carriers. Although the Company has analyzed the cost benefit effect of using other carriers, the Company continues to utilize UPS for the majority of its small package shipments. Management continues to closely monitor orders and the creditworthiness of its customers. The Company has not experienced abnormal increases in losses associated with accounts receivable; however, credit risks associated with the youth league division and ATEC's retail customer base are considered by the Company to be greater than any other division. The Company has made allowances for the amount it believes to be adequate to properly reflect the risk to accounts receivable; however, unforeseen market conditions may compel the Company to increase the allowances. The sports related equipment market in which the Company participates is highly competitive and there are no significant barriers to enter this market. SSG competes principally in the institutional market with local sporting goods dealers, as well as other direct mail companies. The Company derives a significant portion of its revenues from sales of products purchased directly from foreign suppliers located primarily in the Far East. In addition, the Company believes many of the products it purchases from domestic suppliers are produced by foreign manufacturers. The Company is subject to risks of doing business abroad, including delays in shipments, adverse fluctuations in currency exchange rates, increases in import duties, decreases in quotas, changes in custom regulations and political turmoil. The occurrence of any one or more of the foregoing could adversely affect the Company's operations. Advances and changes in available technology can significantly impact the Company. The Year 2000 Issue and system implementation project (as described above) creates risks for the Company from unforeseen problems in its own computer systems and from third parties with whom the Company deals on a daily basis. Such failures of the Company's and/or third parties' computer systems could have a material adverse impact on the Company's ability to conduct its business. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company from time to time becomes involved in various claims and lawsuits incident to its business (primarily relating to product liability issues). In the opinion of management of SSG, any ultimate liability arising out of currently pending claims and lawsuits will not have a material effect on the financial condition or the results of operations of SSG. 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 Stockholders was held on January 29, 1999. 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 Against Votes Withheld (1) Geoffrey P. Jurick 6,454,081 32,428 924,194 (2) John P. Walker 6,454,081 32,428 924,194 (3) Peter G. Bunger 6,454,081 32,428 924,194 (4) Johnson C. S. Ko 6,454,081 32,428 924,194 (5) Thomas P. Treichler 6,454,081 32,428 924,194 Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K Item (a)(1) Exhibit 3.1 -- Amended and Restated Certificate of Incorporation of the Company (incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-80028)). (a)(2) Exhibit 3.1.1 -- Certificate of Amendment of Amended and Restated Certificate of Incorporation to the Company (incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-80028)). (a)(3) Exhibit 3.2 -- Amended and Restated Bylaws of the Company (incorporated by reference from Exhibit 3.2 to the Company's Report on Form 10-K for the year ended November 1, 1996). (a)(4) Exhibit 4.1 -- Specimen of Common Stock Certificate (incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No.33-39218)). (a)(5) Exhibit 4.2 -- Warrant Agreement entered into between the Company and Warrant Agent, including form of Warrant, relating to the purchase of up to 1,300,000 shares of the Company's common stock for $25.00 per share, which expires on December 15, 1998 (incorporated by reference from Exhibit 4.2 to the Company's Registration Statement on Form S-3 (Registration No. 33-71574)). (a)(6) Exhibit 4.3 -- Warrant Agreement entered into between the Company and Emerson relating to the purchase of up to 1,000,000 shares of the Company's common stock for $7.50 per share, which expires on December 10, 2001 (incorporated by reference from Exhibit 4 (a) to the Company's Report on Form 8-K filed on December 12, 1996. *(a)(7) Exhibit 10 -- Amendment No. 1 to AMF Licensing Agreement dated as of December 30, 1998, to be effective as of January 1, 1999. *(a)(8) Exhibit 27 -- Financial Data Schedule (b) No Reports on Form 8-K were filed during the quarter ended January 1, 1999. ---------------------------------- * 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. SPORT SUPPLY GROUP, INC. February 15, 1999 By: /s/ John P. Walker John P. Walker President, Chief Operating Officer and Chief Financial Officer INDEX TO EXHIBITS ITEM Exhibit 10 -- Amendment No.1 to AMF Licensing Agreement dated as of December 30, 1998, to be effective as of January 1, 1999. Exhibit 27 -- Financial Data Schedule EX-10 2 AMENDMENT NO. 1 TO LICENSING AGREEMENT THIS AMENDMENT NO. 1 TO LICENSING AGREEMENT (this "Amendment") dated as of December 30, 1998 to be effective as of January 1, 1999 is by and between Sport Supply Group, Inc., a Delaware corporation ("SSG") and AMF Bowling Worldwide, Inc., a Delaware corporation ("AMF"). Capitalized terms used herein but not otherwise defined herein shall have the meaning ascribed to them in that certain Licensing Agreement dated as of July 21, 1993 between AMF Bowling Products, Inc. (f/k/a AMF Bowling, Inc. and a wholly-owned subsidiary of AMF) and SSG (the "Licensing Agreement"). WHEREAS, the parties desire to extend the term of the Licensing Agreement which is currently scheduled to expire on December 31, 1998. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. The provisions of Section 4 of the Licensing Agreement are deleted in their entirety and replaced with the following: The Contract Period shall be that period commencing on January 1, 1999 and concluding on December 31, 2001 unless such date is extended as provided herein. A "Contract Year" shall be a calendar year. Unless earlier terminated under the provisions of Paragraph 6 hereof, SSG shall have the right to renew this Agreement for an additional twelve (12) month period (an "Extended Contract Year") at the end of the Contract Period and at the end of Extended Contract Years 2002 and 2003 by giving AMF notice of such intent to renew within thirty (30) days prior to the end of the Contract Period or any applicable Extended Contract Year. It is the intent of both parties to renew this Agreement at the end of Contract Year 2003 at terms to be negotiated, provided, however, that with respect to any such renegotiation, AMF shall not, as a condition of the execution of a new Licensing Agreement, (i) require payment from SSG of any license fee, (ii) raise any royalty rate more than 0.5% over any applicable rate (as set forth in Paragraph 5), or (iii) require more stringent quality control restrictions (than those set forth in Paragraph 8). AMF's consent to a new license shall not be unreasonably withheld. 2. The provisions of Section 6 of the Licensing Agreement are deleted in their entirety and replaced with the following: For the Contract Year beginning January 1, 1999, the minimum royalty payable to AMF shall be Ninety-Three Thousand Five Hundred and No/100 Dollars ($93,500.00). For years 2000, 2001 and 2002, SSG shall pay AMF a minimum royalty in an amount equal to 105% of the minimum in effect with respect to the preceding Contract Year. If royalties derived from sales of Qualifying Licensed Products do not reach such minimum, SSG shall have the right to pay the difference between amounts actually earned and the minimum. If the minimum royalty payment derived from sales of Qualifying Licensed Products is not met in any Contract Year after 1999, a review will take place and at that time AMF reserves the right, subject to Paragraph 12(a), to terminate this agreement upon sixty (60) days prior notice to SSG, which notice shall be given within sixty (60) days following the end of the calendar year in which such minimum was not met. Providing the minimum royalty payment is made by SSG and all other terms are then being met by SSG, AMF shall have no right to terminate this Agreement. In such event, the Agreement shall only be terminated if SSG does not exercise its renewal right under Section 4. Except as otherwise modified herein, the Licensing Agreement shall remain in full force and effect. This Amendment and the Licensing Agreement constitute the entire agreement between the parties pertaining to the subject matter contained herein and therein and supersede all prior and contemporaneous agreements, representations and understandings of the parties. No supplement, modification or amendment of this Amendment shall be binding unless signed by the party to be charged therewith. IN WITNESS WHEREOF, each of the undersigned has caused its authorized representative to execute this Amendment as of the date first above written. SPORT SUPPLY GROUP, INC. By: /s/ John P. Walker President and Chief Operating Officer AMF BOWLING WORLDWIDE, INC. By: /s/Gary W. Moten Associate General Counse EX-27 3
5 3-MOS OCT-01-1999 JAN-01-1999 414,121 0 11,747,379 (257,876) 21,285,907 35,250,213 12,829,259 (7,837,327) 57,545,197 9,126,242 0 0 0 92,450 37,895,320 57,545,197 14,870,139 14,870,139 9,117,169 6,709,903 224,055 0 165,532 (898,410) (338,307) (560,103) 0 0 0 (560,103) (0.07) (0.07)
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