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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 2, 1998.
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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, $ .01 Par Value New York Stock Exchange
Common Stock Purchase Warrants American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-
affiliates of the registrant on November 5, 1998 based on the closing
price of the common stock on the New York Stock Exchange on such date,
was approximately $54,000,000.
Indicated below is the number of outstanding shares of each class of
the registrant's common stock, as of November 5, 1998.
Title of Each Class of Common Stock Number Outstanding
Common Stock, $.01 par value 7,619,703
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of the Form 10-K
Proxy Statement for Annual Meeting of
Stockholders to be held January 29, 1999 Part III
TABLE OF CONTENTS
Item Page
PART I
1 Business.......................................... 3
2 Properties........................................ 9
3 Legal Proceedings................................. 9
4 Submission of Matters to a Vote of Security Holders 10
PART II
5 Market for Registrant's Common Equity and Related
Stockholder Matters.............................. 10
6 Selected Financial Data........................... 12
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations ............. 13
8 Financial Statements and Supplementary Data....... 20
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............. 42
PART III
10 Directors and Executive Officers of the Registrant 42
11 Executive Compensation............................ 42
12 Security Ownership of Certain Beneficial Owners
and Management................................... 42
13 Certain Relationships and Related Transactions.... 42
PART IV
14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................... 43
PART I
Item 1. Business.
General
Sport Supply Group, Inc. (the "Company" or "SSG") is one of the
largest direct mail marketers of sports related equipment and leisure
products to the institutional market in the United States. The Company
principally serves the institutional market, which is comprised primarily
of schools, colleges, universities, government agencies, military
facilities, athletic clubs, youth sports leagues and recreational
organizations. SSG offers a broad line of institutional-grade equipment
and provides after-sale customer service through the use of sales
personnel strategically located in certain large metropolitan areas (the
"Metro Marketing Group"). See Item 1. -- "Business - Sales and
Marketing." The Company believes that prompt delivery of a broad range
of institutional-grade products at competitive prices differentiates it
from the retail sporting goods stores that primarily serve the consumer
market. The Company also serves the local sporting goods team dealer
market principally with its MacGregor brand products. The Company
markets approximately 8,000 sports related equipment products to over
100,000 institutional, retail, mass merchant and team dealer customers
and maintains over 200,000 names in mailing lists.
In May 1996, the Company made the strategic decision to dispose of
its golf operations to focus on its core institutional business. On May
20, 1996 as part of this plan of disposal, the Company sold virtually all
of the assets of its Gold Eagle Professional Golf Products Division,
which sold golf accessory products to the retail market. In addition to
the sale of Gold Eagle, the Company adopted a plan to dispose of the
remaining operations of its retail golf segment and classified these
operations as discontinued. On March 28, 1997, the Company disposed of
substantially all of the remaining assets of the discontinued operation
to Nitro Leisure Products, Inc., a Delaware corporation. The discussion
in this Report on Form 10-K regarding the Company's business, unless
otherwise noted, relates only to the Company's continuing operations
(i.e., core institutional business). Consequently, the Company will no
longer report segment information about this operation. For a discussion
regarding the Company's discontinued operations, see Note 10 to the
consolidated financial statements included in Item 8. -- "Financial
Statements and Supplementary Data."
The Company's net revenues have increased from $67 million in 1994
to $97 million for the fiscal year ended October 2, 1998. The Company
attributes its high level of growth to the successful development of an
effective mail order marketing program and competitive pricing programs
that have led to greater market penetration and to the development of,
and increase in, the Company's manufacturing capabilities.
On December 10, 1996, pursuant to a Securities Purchase Agreement
dated November 27, 1996 between Emerson Radio Corp. ("Emerson") and the
Company (the "Purchase Agreement"), Emerson acquired directly from the
Company (i) 1,600,000 shares of newly-issued Common Stock (the "Emerson
Shares") for an aggregate cash consideration of $11,500,000, or
approximately $7.19 per share, and (ii) 5-year warrants (the "Emerson
Warrants") to acquire an additional 1,000,000 shares of Common Stock at
an exercise price of $7.50 per share, subject to standard anti-dilution
adjustments, for an aggregate cash consideration of $500,000. In
addition, Emerson agreed to arrange for foreign trade credit financing of
$2 million for the benefit of the Company to supplement the Company's
existing credit facilities. If all of the Emerson Warrants are
exercised, Emerson will own approximately 38% of the issued and
outstanding shares of Common Stock. See Item 12 -- Security Ownership of
Certain Beneficial Owners and Management" and Item 13 -- "Certain
Relationships and Related Transactions."
The Company is a Delaware corporation incorporated in 1982 and in
1988 became the successor of an operating division of Aurora Electronics,
Inc. (f/k/a BSN Corp. and referred to herein as "Aurora"). Prior to the
completion of the initial public offering of 3,500,000 shares of the
Company's common stock in April, 1991, the Company was a wholly-owned
subsidiary of Aurora. The Company has one wholly-owned subsidiary,
Athletic Training Equipment Company, Inc., a Delaware corporation
("ATEC''), acquired in December, 1997, which was previously named Sport
Supply Group International Holdings, Inc.
The Company's executive offices are located at 1901 Diplomat Drive,
Farmers Branch, Texas 75234 and its telephone number is (972) 484-9484.
The Company also has a website to provide certain information about the
Company. The website is www.sportsupplygroup.com.
Products
The Company believes it manufactures and distributes one of the
broadest lines of sports related equipment and leisure products to the
institutional market. SSG offers approximately 8,000 sporting goods and
sports related products, over 3,000 of which it manufactures. The
product lines offered by SSG include archery, baseball and softball,
basketball, camping, football, tennis and other racquet sports,
gymnastics, indoor recreation, physical education, soccer, field hockey,
lacrosse, track and field, volleyball, weight lifting, exercise
equipment, and early childhood development products.
The Company believes brand recognition is important in the
institutional and team dealer markets. Most of SSG's products are
marketed under trade names or trademarks owned or licensed by the
Company. SSG believes its trade names and trademarks are well recognized
among institutional purchasers of sports related equipment. SSG intends
to continue to expand its product and brand name offerings by actively
pursuing product, trademark and trade name licensing arrangements and
acquisitions. The Company's trademarks, service marks, and trade names
include the following:
. Official Factory Direct Equipment Supplier of Little League Baseball
(See discussion below).
. Voit[R] -- institutional sports related equipment and products,
including inflated balls and baseball and softball products
(licensed from Voit Corporation - see discussion below).
. MacGregor[R] -- certain equipment and accessories relating to
baseball, softball, basketball, soccer, football, volleyball, and
general exercise (e.g., dumbbells, curling bars, etc.) (licensed
from MacMark Corporation - see discussion below).
. Alumagoal[R] -- track and field equipment, including starting
blocks, hurdles, pole vault and high jump standards and crossbars.
. AMF -- gymnastics equipment (licensed from AMF Bowling, Inc. - see
discussion below).
. ATEC _ pitching machines and related baseball and softball training
equipment.
. BSN[R] -- sport balls and mail order catalogs.
. Champion -- barbells, dumbbells and weight lifting benches and
machines.
. Curvemaster[R] -- baseball and softball pitching machines.
. Fibersport -- pole vaulting equipment.
. Gamecraft -- field and floor hockey equipment, soccer equipment,
scorebooks, coaching equipment, and table tennis equipment.
. GSC Sports -- gymnastics equipment.
. Hammett & Sons -- indoor table-top games.
. Maxpro[R] -- products include, among others, football practice
dummies, baseball, and other protective helmets and pads (other than
football protective equipment), baseball chest protectors and
baseball mitts and gloves (licensed from Proacq Corp., a subsidiary
of Riddell Sports Inc.).
. New England Camp and Supply -- camping and outdoor recreational
equipment and accessories.
. North American Recreation[R] -- billiard, table tennis and other
game tables.
. Passon's Sports -- mail order catalogs.
. Pillo Polo[R] -- recreational polo and hockey games.
. Port-A-Pit[R] -- high jump and pole vault landing pits.
. Pro Base[R] -- baseball bases.
. Pro Down -- football down markers.
. Pro Net -- nets, net assemblies and frames and practice cages.
. Rol-Dri[R] and Tidi-Court -- golf course and tennis court
maintenance equipment.
. Safe-Squat -- specialty weight lifting squat machines.
. Toppleball[R] -- recreational ball games.
. U.S. Games, Inc.[R] -- goals, nets, and playing equipment for
physical exercise games and mail order catalogs.
The Voit license permits the Company to use the Voit[R] trademark in
connection with the manufacture, advertisement, and sale to institutional
customers and sporting goods dealers of specified institutional sports
related equipment and products, including inflated balls for all sports
and baseball and softball products. The Company is required to pay
annual royalties under the license equal to the greater of a certain
percentage of revenues from the sale of Voit products or a minimum
royalty as set forth in the License Agreement. The initial term of the
Voit license expired on December 31, 1989, and was subject to three
renewal options for consecutive terms of five years each. SSG has
exercised two renewal periods, and currently is permitted to use the Voit
trademark through December 31, 1999.
In February, 1992, the Company acquired two separate licenses to use
several trade names, styles, and trademarks (including, but not limited
to, MacGregor[R]). Each license permits the Company to manufacture,
promote, sell, and distribute to institutional sporting goods customers
(subject to certain exceptions) in the United States, Canada, and Mexico,
specified institutional sports related equipment and products relating to
baseball, softball, basketball, soccer, football, volleyball, and general
exercise. Each license is royalty-free and exclusive with respect to
certain customers and non-exclusive with respect to others. Each license
is perpetual provided the Company generates a predetermined minimum
amount of revenues each year from the sale of products bearing the
MacGregor trademark, maintains certain quality standards for such
products and services, and does not commit any default under the license
agreements that remains uncured for a period of 30 days after the Company
receives notice of such default. The Company has converted a substantial
portion of its products to the MacGregor[R] brand, which is believed to
be one of the most widely recognized trade names in the industry. These
products are being sold to customers using the Company's existing
marketing channels. See Item 1. -- "Business - Sales and Marketing."
On August 19, 1993, the Company entered into an exclusive license
agreement with AMF Bowling, Inc. to use the AMF name in connection with
the promotion and sale of certain gymnastics equipment in the United
States and Canada. The Company is required to pay an annual royalty
under the license equal to the greater of: (i) a certain percentage of
net revenues from the sale of AMF products; or (ii) a minimum royalty as
set forth in the license agreement. The minimum royalty increases by a
predetermined percentage each year the license agreement is in effect.
The initial term of the agreement expired on December 31, 1995, and was
subject to three renewal options for consecutive terms of one year each
through December 31, 1998. SSG exercised its first three renewal options,
and currently is permitted to use the AMF name through December 31, 1998.
The Company is in the process of renegotiating an extension to the
agreement, but no assurance can be made that such renegotiations will be
successful.
On December 15, 1995, the Company entered into a three year
agreement with Little League Baseball, Incorporated that, among other
things, names the Company as the "Official Factory Direct Equipment
Supplier of Little League Baseball." On August 15, 1997, the Company and
Little League Baseball extended the expiration of this agreement to
December 31, 2001. The Company is required to pay an annual fee to keep
the agreement in effect each year.
In addition to the foregoing, the Company has acquired (or had
issued) a number of patents relating to products sold by the Company.
The following is a list of some of the patents owned by the Company: (i)
2 separate patents relating to a Power Squat/Weight Lifting Apparatus
(expire May 20, 2003 and June 23, 2004, respectively); (ii) Baseball
Hitting Practice Device (expires May 9, 2006); (iii) 2 separate patents
relating to Football Digital Display Markers (expire June 27, 2006 and
November 28, 2006, respectively); (iv) Tennis Net and Method of Making
(expires October 1, 2008); (v) Rotator Cuff Exercise Machine (expires
January 29, 2008); (vi) Portable Balance Beam (expires July 28, 2009);
and (vii) Holder for Beverage Containers (expires August 16, 2011).
Sales and Marketing
The Company markets its products through five primary marketing
divisions: 1) Sport Supply Group; 2) U.S. Games; 3) The Athletic
Connection; 4) Youth Sports; and 5) Athletic Training Equipment Company.
The Sport Supply Group marketing division markets SSG's products to
institutional customers through catalogs, outbound telemarketing, and bid
related sales efforts. SSG publishes two primary catalogs designed for
institutional customers: BSN[R] Sports, and New England Camp and
Recreation. Master catalogs containing a broad variety of the Company's
products are sent to all customers and potential customers on the
Company's mailing lists. Seasonal or specialty supplements are prepared
and mailed periodically to certain accounts that pertain to particular
sports, such as weight training, baseball or track and field. SSG
services its existing accounts and solicits new customers with a total of
over 2.0 million pieces of mail each year, including approximately 1.8
million catalogs.
The Company's mailing lists, developed over 20 years, are maintained
and updated by the Company periodically. SSG frequently buys and rents
lists that it attempts to screen, improve, and cross reference before
incorporating them into the Company's master list. The master list is
subdivided into various combinations designed to place catalogs in the
hands of individuals who make purchasing decisions. The master list is
also subdivided by relevant product types, seasons, and customer
profiles.
While SSG maintains a strong institutional customer base in rural
and small metropolitan areas, the institutional markets in large
metropolitan areas have historically been dominated by local sporting
goods dealers and retailers. Over the last several years, there has been
a growing trend of large metropolitan area school districts, city
recreation departments, and other institutions submitting proposed
purchases through competitive bids. In response to this trend, SSG
intensified its bid related sales efforts by having its Metro Marketing
Group target large metropolitan area school districts and institutions in
an effort to include SSG's products among those specified on bid
invitations.
The U.S. Games marketing division was established to market certain
of the Company's products to elementary schools and the preschool market.
The Athletic Connection marketing division was established in 1992
to market certain of the Company's products, principally MacGregor brand
products, to sporting goods team dealers who also market these products
to institutional customers and teams. Products are marketed through
catalogs mailed to team dealers as opposed to institutional customers
targeted by the Sport Supply Group marketing division.
The Youth Sports marketing division concentrates on selling team
sports products to independent youth leagues. The Youth Sports division
utilizes outbound telemarketing, outside salesmen and a master catalog in
conjunction with a supplier contract with Little League Baseball, Inc. to
reach this marketplace. In addition to equipment and uniforms, the
Youth Sports division also provides fund raising products. On May 15,
1996, SSG entered into a five-year Advertising and Distribution Agreement
with Hershey Chocolate U.S.A. Pursuant to this Agreement, SSG advertises
and distributes promotional materials featuring Hershey fund raising
programs and products to youth sports leagues and teams and also sells
Hershey Chocolate products to its customers. The Youth Sports division
has entered into Promotional Agreements with Lever Brothers, Warner-
Lambert (Bubbilicious), and Major League Baseball in an effort to
leverage SSG's direct marketing and distribution network. These
relationships help offset marketing costs and create valuable brand-name
recognition.
During December 1997, the Company acquired Athletic Training
Equipment Company, Inc. ("ATEC"). ATEC manufactures and markets pitching
machines and other baseball training equipment to sporting goods dealers
and other sporting goods channels. These products are marketed using
catalogs and outside salesmen to service the local dealers. ATEC has one
of the broadest and most versatile line of pitching machines in the
market today, and with the use of the latest technology, has continued to
meet the training needs of professional, college, high school, and youth
baseball and softball leagues.
Customers
The Company's revenues are not dependent upon any one or a few major
customers. Instead, the Company enjoys a very large and diverse customer
base. The Company's customers include all levels of public and private
schools, colleges, universities and military academies, municipal and
governmental agencies, military facilities, churches, clubs, camps,
hospitals, youth sports leagues, non-profit organizations, team dealers,
and certain large retail sporting goods chains. SSG believes its
customer base in the United States is the largest in the institutional
direct mail market for sports related equipment. The Company's
institutional customers typically receive annual appropriations for
sports related equipment, which appropriations are generally spent in the
period preceding the season in which the sport or athletic activity
occurs. While institutions are subject to budget constraints, once
allocations have been made, aggregate levels of expenditures are
typically not reduced.
Approximately 7%, 7%, and 8% of the Company's sales in fiscal 1998,
1997 (which consisted of the eleven months ending September 26, 1997),
and 1996 respectively, were to the United States Government, a majority
of which sales were to military installations. SSG has a contract with
the General Services Administration (the "GSA Contract") that grants the
Company an "approved" status when attempting to make sales to military
installations or other governmental agencies. The existing GSA Contract
expires in December 2001. Under the GSA Contract, the Company agrees to
sell approximately 700 products to United States Government agencies and
departments at catalog prices or at prices consistent with any discount
provided to other customers of the Company. Products sold to the United
States Government under the GSA Contract are always sold at the Company's
lowest offered price. The Company also has a contract with the General
Services Administration for the sale of approximately 40 camp related
products with terms similar to the GSA Contract. This contract expires
in August 2002.
SSG also sells products not covered by the GSA Contract to United
States Government customers, although the appropriation process for
purchases of these products differs. These sales are made through a U.S.
Government non-appropriated fund contract. This contract is administered
by the United States Air Force and is scheduled to expire on September
30, 1999. See Note 6 to the consolidated financial statements included
in Item 8. -- "Financial Statements and Supplementary Data."
Seasonal Factors and Backlog
Historically, SSG's revenues have peaked in the second, third and
fourth fiscal quarters of each year due primarily to the seasonal demand
for product offered by the Company. Less revenues are generated in the
fourth calendar quarter because of the reduced demand arising from
decreased sports activities, adverse weather conditions inhibiting
customer demand, holiday seasons and school recesses. See Note 13 to the
consolidated financial statements included in Item 8. -- "Financial
Statements and Supplementary Data."
SSG had a backlog for continuing operations of approximately
$2,433,000 at October 2, 1998, compared to approximately $2,526,000 at
September 26, 1997.
Manufacturing and Suppliers
The Company manufactures, assembles, and distributes many of its
products at its five facilities. See Item 2. -- "Properties." Game
tables, gym mats, netting, and tennis and baseball equipment are
manufactured in the Company's two Anniston, Alabama plants. Gymnastics
equipment is manufactured at SSG's facility in Cerritos, California.
Baseball and softball pitching machines are manufactured at SSG's newly
acquired facility in Reno, Nevada. Items of steel and aluminum
construction, such as soccer field equipment and weight equipment, are
principally manufactured at SSG's facilities in Farmers Branch, Texas.
Certain products manufactured by the Company are custom-made (such
as tumbling mats ordered in color or size specifications), while others
are standardized. The principal raw materials used by the Company in
manufacturing are, for the most part, readily available from several
different sources. Such raw materials include foam, vinyl, nylon thread,
steel and aluminum tubing, wood, slate, and cloth. Except as noted
above, items not manufactured by SSG are purchased from various suppliers
primarily located in the United States, the Republic of China (Taiwan),
South Korea, Australia, the Philippines, Thailand, the People's Republic
of China, Pakistan, and Germany. SSG has no significant purchase
contracts with any major supplier of finished products, and most products
purchased from suppliers are readily available from other sources. The
Company purchases most of its finished product in U.S. dollars and is
therefore not subject to exchange rate differences.
Competition
SSG competes in the institutional market principally with local
sporting goods dealers, retail sporting goods stores, and other direct
catalogue sporting goods companies. These competitors occasionally fill
institutional orders with Company products. The Company has identified
approximately 15 other direct mail companies in the institutional market.
SSG believes that most of these competitors are substantially smaller
than SSG in terms of geographic coverage, products, and revenues.
The Company competes in the institutional market principally on the
basis of brand, price, product availability and customer service. SSG
believes it has an advantage in the institutional market over traditional
sporting goods retailers and team dealers because its selling prices do
not include comparable price markups attributable to wholesalers,
manufacturers, and/or distributors. In addition, the Company's ability
to control the availability of goods it manufactures enables it to
respond more rapidly to customer demand. SSG believes its direct mail
competitors operate primarily as wholesalers and distributors, with
little or no manufacturing capability.
Government Regulation
Many of the Company's products are subject to 15 U.S.C.A. SS 2051-
2084 (1998 and Supp. 1998), among other laws, which empowers the Consumer
Product Safety Commission (the "CPSC") to protect consumers from
hazardous sporting goods and other articles. The CPSC has the authority
to exclude from the market certain articles that are found to be
hazardous and can require a manufacturer to refund the purchase price of
products that present a substantial product hazard. CPSC determinations
are subject to court review. Similar laws exist in some states and
cities in the United States.
Product Liability and Insurance
Because of the nature of the Company's products, SSG is periodically
subject to product liability claims resulting from personal injuries.
The Company from time to time may become involved in various lawsuits
incidental to the Company's business, some of which will relate to claims
of injuries allegedly resulting in substantial permanent paralysis.
Significantly increased product liability claims continue to be asserted
successfully against manufacturers and distributors throughout the United
States resulting in general uncertainty as to the nature and extent of
manufacturers' and distributors' liability for personal injuries. See
Item 3 -- "Legal Proceedings."
There can be no assurance that the Company's general product
liability insurance will be sufficient to cover any successful product
liability claims made against the Company. 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, could have a material adverse effect on the
Company's results of operations and financial condition.
Employees
On October 2, 1998, SSG had approximately 425 full-time employees in
its core institutional business, 174 of whom were involved in the
Company's manufacturing operations. SSG also hires part-time and
temporary employees primarily during the summer months. None of the
Company's employees are represented by a union, and the Company believes
its relations with employees is good.
EXECUTIVE OFFICERS OF THE COMPANY
Year
First
Became
Name Age Present Position Officer
---- --- ---------------- -------
Geoffrey P. Jurick 58 Chairman of the Board and 1996
Chief Executive Officer
John P. Walker 35 President, Chief Operating 1996
Officer and Chief Financial
Officer
Terrence M. Babilla 36 Executive Vice President, 1995
General Counsel and
Secretary
Adam L.Blumenfeld 28 Vice President of Sales 1998
and Marketing
All officers are elected for a term of one year or until their successors
are duly elected.
Item 2. Properties.
The Company leases (i) a 135,000 square foot corporate headquarters
and manufacturing facility and (ii) a 181,000 square foot warehouse
facility, each of which is located in Farmers Branch, Texas. The 135,000
square foot facility is under a lease expiring in July 2001. The 181,000
square foot warehouse facility is under a lease expiring in December
2004, with two (2) five year renewal options. The Company also leases a
45,000 square foot gymnastics equipment manufacturing facility in
Cerritos, California which expires in December 2001, and a 50,000 square
foot pitching machine manufacturing facility in Reno, Nevada which
expires in June 1999.
The Company owns (i) a 35,000 square foot foam product and netting
manufacturing plant and (ii) a 45,000 square foot game table
manufacturing plant, both of which are located in Anniston, Alabama.
Item 3. 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, could have a material adverse effect on the
Company's results of operations and financial condition. See Item 1. --
"Business -- Product Liability and Insurance."
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. The circumstances surrounding such termination
are the subject of two proceedings. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
SSG's common stock, par value $.01 per share (the "Common Stock") is
traded on the New York Stock Exchange, Inc. ("NYSE") under the symbol
GYM. SSG's Common Stock Purchase Warrants, which were distributed as a
special dividend to the Company's stockholders on December 27, 1993 (the
"1993 Warrants"), are traded on the American Stock Exchange, Inc.
("AMEX") under the symbol GYMW. The 1993 Warrants are scheduled to
expire on December 15, 1998. As of November 5, 1998, there were 3,908
holders of the Common Stock (including individual security position
listings). The following table sets forth the range for the periods
indicated of the high and low sales prices for the Common Stock and the
1993 Warrants (after giving effect to the 5 for 4 stock split declared by
the Company on January 26, 1994). There is no fourth quarter 1997
information set forth in the following table due to the Company's change
in its fiscal year end from October 31 to September 30.
Common Stock 1993 Warrants
High Low High Low
---- --- ---- ---
1997 First 6-7/8 4-5/8 5/16 1/16
Quarter
Second 6-1/2 5-1/8 5/16 1/64
Quarter
Third 8-7/8 5-3/8 1/8 1/32
Quarter
1998 First 8-1/2 6-1/8 5/32 1/32
Quarter
Second 9-7/8 7-1/4 1/32 1/32
Quarter
Third 10-1/4 8-1/8 1/16 1/16
Quarter
Fourth 9-15/16 6-7/8 N/A* N/A*
Quarter
* No trading activity this quarter
The Company currently intends to retain any earnings for use in its
business and does not anticipate paying any cash dividends on its capital
stock in the foreseeable future.
On January 14, 1998, the Company issued 50,000 shares of restricted
stock to John P. Walker, President, Chief Operating Officer, Chief
Financial Officer, and director of the Company in a privately negotiated
transaction pursuant to Section 4(2) of the Securities Act of 1933, as
amended (i.e., a transaction by an issuer not involving a public
offering). One third of these shares vested immediately and the remaining
shares are scheduled to vest in twenty-four equal monthly installments
beginning February 15, 1998. The Company did not receive any cash proceeds
from the issuances of these shares.
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. Such purchases are
subject to price and availability of shares, working capital availability
and any alternative capital spending programs of the Company. As of
October 2, 1998, the Company had repurchased approximately 721,000 of its
issued and outstanding common stock in the open market and 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. Again, such purchases are subject to price and
availability of shares, working capital availability and any alternative
capital spending programs of the Company.
Item 6. Selected Financial Data.
The following tables set forth certain historical financial data for
the Company. The historical financial data has been derived from the
audited financial statements of the Company. The historical data below
should be read in conjunction with Item 7. -- "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Company's financial statements and notes thereto included in Item 8. --
"Financial Statements and Supplementary Data."
SELECTED FINANCIAL DATA (4)
(Amounts in thousands, except per share amounts)
Eleven
Year Months Year Ten Months
Ended Ended Ended Ended Year Ended
Oct. 2 Sep. 26 Nov. 1 Oct. 31 Dec. 31
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Statement of Earnings Data:
Net revenues $97,292 $79,109 $80,521 $65,134 $66,920
Gross profit 37,726 31,404 29,955 25,259 26,326
Operating profit (loss) 7,157 4,226 (65) 3,894 5,162
Interest expense 474 757 1,372 1,126 973
Other income (expense), net 841 83 38 209 (5)
Earnings (loss) from continuing
operations 4,964 2,576 (964) 1,847 2,802
Earnings (loss) from discontinued
operations -- (2,574) (17,773) (457) 1,900
Net earnings (loss) 4,964 2 (18,737) 1,390 4,702
Net earnings (loss) per common share
from continuing operations(1) 0.62 0.32 (0.14) 0.27 0.43
Net earnings (loss) per common share
from discontinued operations(1)(3) -- (0.32) (2.64) (0.07) 0.29
Net earnings (loss) per common share(1) 0.62 0.00 (2.78) 0.20 0.72
Net earnings (loss) per common share
from continuing operations-
assuming dilution(1) 0.60 0.32 (0.14) 0.27 0.42
Net earnings (loss) per common share
from discontinued operations-
assuming dilution(1)(3) -- (0.32) (2.63) (0.07) 0.28
Net earnings (loss) per common share-
assuming dilution (1) $0.60 $0.00 $(2.77) $0.20 $0.70
Weighted average common shares
outstanding(1) 8,026 8,146 6,747 6,941 6,490
Weighted average common shares
Outstanding _ assuming dilution(1) 8,237 8,151 6,768 6,950 6,760
Cash dividends declared per
common share (2) -- -- -- $ .12 $ .13
At Oct. 2 At Sept. 26 At Nov. 1 At Oct. 31 At Dec. 31
Balance Sheet Data: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Working capital $25,245 $24,006 $21,322 $42,231 $32,886
Total assets 54,804 50,484 70,009 86,355 71,616
Long-term obligations, net 5,161 4,418 24,338 29,199 16,698
Total liabilities 13,626 11,527 40,846 38,745 25,143
Stockholders' equity 41,178 38,957 29,163 47,610 46,473
(1) Reflects the 5 for 4 stock split declared during January, 1994.
(2) Dividends declared in 1995 consisted of a $0.03 per share
dividend for the first three quarters. Dividends declared in 1994
consisted of a $0.04 per share dividend for the fourth quarter of 1993
and a $0.03 per share dividend for the first, second and third quarters
of 1994.
(3) See Note 10 to the consolidated financial statements included
in Item 8. _ "Financial Statements and Supplementary Data."
(4) During 1995, the Company changed its financial reporting year end
from December 31 to October 31. Consequently, the fiscal year ended
October 31, 1995 is a transition period consisting of ten calendar
months. During 1997, the Company changed its financial reporting year
end from October 31 to September 30. Therefore, the fiscal year ended
September 26, 1997 is a transition period consisting of eleven calendar
months.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following table sets forth, for the periods indicated, certain
items related to the Company's continuing operations as a percentage of
net revenues. During 1997, the Company changed its financial reporting
year end from October 31 to September 30. Therefore, the fiscal year
ended September 26, 1997 is a transition period consisting of eleven
calendar months. See Note 1 to the consolidated financial statements
included in Item 8. _ "Financial Statements and Supplementary Data".
For the For the For the
12 Months 11 Months 12 Months
Ended Ended Ended
Oct. 2, Sep. 26, Nov. 1,
1998 1997 1996
---- ---- ----
Net revenues (in thousands) $97,292 $79,109 $80,521
100.0% 100.0% 100.0%
Cost of sales 61.2% 60.3% 62.8%
Selling, general and administrative
Expenses 30.2% 32.7% 37.3%
---- ---- ----
Operating profit (loss) 7.7% 5.3% (0.1)%
==== ==== ====
In May 1996, the Company sold substantially all of the assets of its
Gold Eagle Professional Golf Products Division ("the Gold Eagle
Division") and approved a formal plan to dispose of its remaining retail
segment operations comprised of golf balls and golf related accessories.
In March 1997, the Company sold its remaining retail segment operations.
See Note 10 to the consolidated financial statements included in Item 8.
_ "Financial Statements and Supplementary Data". As a result, the
accompanying consolidated financial statements present SSG's retail
segment as a discontinued operation through the date of disposal. Due to
the change in the Company's fiscal year end from October 31 to September
30, the fiscal year ended September 26, 1997 is comprised only of an 11
month period. Therefore, certain financial data for 1998, 1997, and 1996
presented within this section also includes (where indicated) comparative
information relative to the twelve months ended September 26, 1997 and
the eleven months ended September 30, 1996 (which information is
unaudited) to provide a more meaningful discussion of comparable
operating results. The following discussion regarding 1998 as compared
to 1997 and 1997 as compared to 1996, unless otherwise indicated, relates
to the Company's continuing operations only.
1998 Compared to 1997
The following table summarizes certain financial information relating to
the Company's results of continuing operations for the twelve month
period ended October 2, 1998 and the comparable twelve month period of
1997:
1997
1998 (unaudited)
---------- ----------
Net Revenues $97,291,991 $86,025,581
Gross Profit $37,726,176 $33,248,371
SG&A $29,385,623 $29,482,847
Net Earnings $4,964,311 $1,306,699
Net Revenues. Net revenues for the fiscal year ended October 2, 1998
increased by approximately $18.2 million (23.0%) as compared to the
eleven month period ended September 26, 1997. Net revenues for the
fiscal year ended October 2, 1998 increased by approximately $11.3
million (13.1%) as compared to the twelve month comparable period ended
September 26, 1997. The increase in net revenues reflects increases in
revenues associated primarily with the Company's Youth, U.S. Games, and
track and field divisions as well as the Company's new subsidiary, ATEC,
which was acquired on December 1, 1997. These increases were partially
offset by a decrease in Government sales. If government spending
continues to be reduced, the Company will continue to experience a
decrease in government sales in future periods. Net revenues were also
adversely impacted because the Company mailed significantly less catalogs
to its customers after consolidating the BSN, GSC, and Passons' catalogs
into one catalog. The benefits from reducing catalog and postage
expenses are reflected in the "Selling, General and Administrative
Expenses." The Company is constantly reviewing its marketing methods to
maximize revenue growth and minimize expenses. As a result of the ATEC
acquisition, the Company expects to experience an increase in sales
related to sporting goods dealers and retailers.
Gross Profit. Gross profit for the fiscal year ended October 2, 1998
increased by approximately $6.3 million (20.1%) as compared to the eleven
month period ended September 26, 1997 and $4.5 million (13.5%) as
compared to the twelve month period ended September 26, 1997. As a
percentage of net revenues, gross profit decreased to 38.8% in 1998 from
39.7% for the fiscal year ended September 26, 1997 as a result of sales
related to ATEC and the Youth division, as such sales have lower margins
than other sales within the Company's business. In the event that
revenues related to ATEC and the Youth division continue to represent a
larger percentage of total revenues, the Company may experience a
decrease in gross profit as a percentage of net revenues in future
periods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the fiscal year ended October 2, 1998
increased by approximately $3.5 million (13.6%) as compared to the eleven
month period ended September 26, 1997 and decreased $97,000 (0.3%) as
compared to the twelve month period ended September 26, 1997. As a
percentage of net revenues, operating expenses decreased from 32.7% to
30.2% for the fiscal year ended October 2, 1998 as compared to the fiscal
year ended September 26, 1997. The decrease in these expenses as a
percentage of net revenues was primarily due to the following factors:
(i) A decrease in catalog expenses associated with the Company's
consolidation of the BSN, GSC, and Passons' catalogs.
(ii) A decrease in bad debt expense associated with the Company's
successful collection efforts and better credit evaluations of
potential customers.
The decrease in operating expenses, as discussed above, was partially
offset by the additional operating expenses associated with Company's
acquisition of ATEC. As the Company completes its system implementation
project and begins amortization of the capitalized costs associated with
the project, the Company will experience an increase in general and
administrative costs related to amortization. The Company anticipates
amortizing the capitalized costs associated with the project beginning in
May, 1999. The 1999 effect of the amortization is expected to be
approximately $300,000. See Item 7 - "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Impact of year 2000
and System Implementation."
Nonrecurring Charges. The Company recorded a nonrecurring pre-tax charge
of approximately $1.2 million in the fourth quarter of the fiscal year
ended October 2, 1998 for compensation payments and a consulting
agreement relating to the retirement of Peter Blumenfeld, President and
Chief Operating Officer of the Company. The severance payments were paid
upon his retirement, and the consulting agreement will be paid through
July, 2000.
Operating Profit. Operating profit increased by approximately $2.9
million (69.3%) to a profit of $7.2 million in fiscal year 1998 as
compared to the eleven month period ended September 26, 1997 and
increased by $4.7 million as compared to the twelve month period ended
September 26, 1997. As a percentage of net revenues, operating profit
increased to 7.4% in fiscal 1998 from 5.3% for the fiscal year ended
September 26, 1997. The increase in operating profit reflects the impact
of the (i) increase in gross profit dollars and (ii) the decrease in
operating expenses as a percentage of revenues as discussed above.
Interest Expense. Interest expense decreased approximately $283,000
(37.4%) to $474,000 in fiscal 1998 from $757,000 for the fiscal year
ended September 26, 1997 and by $399,000 (45.7%) as compared to the
twelve month period ended September 26, 1997. The decrease in interest
expense resulted from reduced interest rates and overall reduced levels
of borrowings. The Company anticipates borrowings under its Senior Secured
Credit Facility will increase over the next twelve months as the Company
continues to purchase common stock under its stock buyback program and
incurs costs associated with its system implementation project, As a
result of increased borrowings in the future, the Company anticipates
interest expense will increase in future periods. See Item 7, "Management
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Other Income, Net. Other income increased approximately $758,000 in
fiscal 1998 as compared to the fiscal year ended September 26, 1997 and
$759,000 as compared to the twelve month period ended September 26, 1997.
The increase in other income resulted from promotional agreements entered
into between the Company and certain corporate sponsors of a market
segment. Other income also included services provided to 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. See Item 13 _ "Certain
Relationships and Related Transactions". As promotional agreements
have currently expired, the Company anticipates a reduction in other income.
Provision for Income Taxes. The provision for income taxes increased
approximately $1.6 million to a provision of $2.6 million in fiscal 1998
from a provision of $976,000 in fiscal 1997. The Company's effective tax
rate increased to 34.0% in fiscal 1998 from 27.5% in fiscal 1997. See
Note 4 to the consolidated financial statements included in Item 8 --
"Financial Statements and Supplementary Data".
Earnings from Continuing Operations. Earnings from continuing
operations increased approximately $2.4 million to $5.0 million in 1998
from $2.6 million in fiscal 1997 and increased approximately $3.7 million
as compared to the twelve month period ended September 26, 1997. As a
percentage of the net revenues, net earnings increased to 5.1% in 1998
from 3.3% in fiscal 1997. Earnings per share before dilution from
continuing operations increased to $0.62 per share in 1998 from $0.32 per
share in fiscal 1997. The fiscal year ended October 2, 1998 includes a
decrease of approximately 1.5% in weighted average shares outstanding.
1997 Compared to 1996
The following table summarizes certain financial information relating to
the Company's results of continuing operations for the eleven month
period ended September 26, 1997 and the comparable eleven month period of
1996:
1996
1997 (unaudited)
---------- ----------
Net Revenues $79,109,063 $73,604,273
Gross Profit $31,403,655 $28,110,058
SG&A $25,877,428 $26,414,557
Net Earnings $2,576,000 $305,611
Net Revenues. Net revenues for the eleven month period ended September
26, 1997 decreased by approximately $1.4 million (1.8%) as compared to
the fiscal year ended November 1, 1996. Net revenues for the eleven
month period ended September 26, 1997 increased by approximately $5.5
million (7.5%) as compared to the eleven month comparable period ended
September 30, 1996. The increase in net revenues reflects increases in
revenues associated primarily with youth sports league customers. These
increases were partially offset by a decrease in Government sales. The
Company's revenues were also adversely affected by the United Parcel
Services ("UPS") strike that occurred in August of 1997. The Company was
unable to ship the entire balance of its order backlog, which resulted in
cancellation of some orders.
Gross Profit. Gross profit for the eleven month period ended September
26, 1997 increased by approximately $1.4 million (4.8%) as compared to
the fiscal year ended November 1, 1996 and $3.3 million (11.7%) as
compared to the eleven month period ended September 30, 1996. As a
percentage of net revenues, gross profit increased to 39.7% in 1997 from
37.2% for the fiscal year ended November 1, 1996. The dollar increase as
well as the increase in gross profit as a percentage of net revenues was
primarily attributable to the increase in sales related to SSG's youth
league division.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the eleven month period ended September 26,
1997 decreased by approximately $4.1 million (13.8%) as compared to the
fiscal year ended November 1, 1996 and $537,000 (2.0%) as compared to the
eleven month period ended September 30, 1996. As a percentage of net
revenues, operating expenses decreased from 37.3% to 32.7% for the fiscal
year ended September 26, 1997 as compared to the fiscal year ended
November 1, 1996. The decrease in these expenses as a percentage of net
revenues was primarily due to the following factors:
(i) A decrease in bad debt expense associated with the Company's
successful collection efforts and better credit evaluations potential
customers.
(ii) A decrease in expenses relating to the Company's participation in
the 1996 Olympic games, as all expenses related to royalties and
travel were incurred and paid in fiscal year 1996.
(iii) A decrease in depreciation and amortization related to the write-
offs of certain software and forecasting systems recorded in the
fourth quarter of fiscal year 1996.
(iv) A decrease in other expenses such as office supplies, postage,
paper and forms, delivery service, and telephone as a result of
management's efforts to reduce overall general and administrative
expenses.
These decreases in operating expenses were partially offset by additional
freight costs associated with the UPS strike as the Company had to
utilize other more expensive carriers in order to ship products.
Operating expenses were also offset by the increase in advertising
expenses due to the expansion of the Company's marketing efforts,
primarily expenses relating to catalogs mailed to customers.
Nonrecurring Charges. A majority of the nonrecurring pre-tax charge of
$1.3 million for the fiscal year ended September 26, 1997 related to the
"change in control" of the Company that occurred on December 10, 1996
(including severance payments to the former CEO of approximately
$680,000). The change in control was the result of a stock purchase
agreement with Emerson. As part of the agreement, Emerson purchased
1,600,000 shares of SSG common stock and 1,000,000 common stock purchase
warrants and caused a majority of the members of SSG's Board of Directors
to consist of Emerson's designees.
Operating Profit (Loss). Operating profit increased by approximately
$4.3 million to a profit of $4.2 million in fiscal 1997 from a loss of
approximately $65,000 for the fiscal year ended November 1, 1996 and
increased by $2.5 million as compared to the eleven month period ended
September 30, 1996. As a percentage of net revenues, operating profit
increased to 5.3% in fiscal 1997 from (0.1%) for the fiscal year ended
November 1, 1996. The increase in operating profit, both in dollar
amount and as a percentage of net revenues, reflects the impact of the
increase in gross profit percentages related to sales and the decrease in
operating expenses as discussed above.
Interest Expense. Interest expense decreased approximately $615,000
(44.8%) to $757,000 in fiscal 1997 from $1.4 million for the fiscal year
ended November 1, 1996 and by $500,000 (39.7%) as compared to the eleven
month period ended September 30, 1996. The decrease in interest expense
resulted from lower borrowing levels as a result of the equity infusion
by Emerson and the proceeds received from the sale of the discontinued
operations.
Other Income, Net. Other income increased approximately $45,000 in fiscal
1997 as compared to the fiscal year ended November 1, 1996. The increase
in other income resulted from services provided to 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. See Item 13 _ "Certain Relationships and
Related Transactions".
Provision (Benefit) for Income Taxes. The provision for income taxes
increased approximately $1.4 million to a provision of $976,000 in fiscal
1997 from a benefit of $436,000 in fiscal 1996. The Company's effective
tax rate decreased to 27.5% in fiscal 1997 from 31.1% in fiscal 1996.
See Note 4 to the consolidated financial statements included in Item 8 --
"Financial Statements and Supplementary Data".
Earnings (Loss) from Continuing Operations. Earnings (loss) from
continuing operations increased approximately $3.5 million to $2.6
million in 1997 from a loss of $964,000 in fiscal 1996. As a percentage
of the net revenues, net earnings increased to 3.3% in 1997 from a loss
of 1.2% in fiscal 1996. Earnings (loss) per share from continuing
operations increased to $.32 per share in 1997 from a loss of $(0.14) per
share in fiscal 1996. This reflects a 20.4% increase in weighted average
shares outstanding related to the sale to Emerson of 1,600,000 shares of
SSG's newly-issued common stock offset by approximately 287,000 shares of
its issued and outstanding common stock purchased in the open market.
Liquidity and Capital Resources
The Company's working capital increased approximately $1.2 million during
the fiscal year ended October 2, 1998, from $24.0 million at September 26,
1997 to $25.2 million at October 2, 1998. The increase in working capital
is primarily a result of: (i) the inventory acquired from the acquisition
of ATEC in December, 1997; and (ii) a $2.7 million increase in trade
receivables due to higher revenues. This increase was partially offset by
a $1.7 million decrease in federal income tax receivable as the Company
received its federal tax refund in the third quarter of fiscal 1998.
As of October 2, 1998, the Company had total borrowings under its senior
credit facility of approximately $5.4 million including a term loan of $1.0
million 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 $1.9 million,
and availability of approximately $14.7 million. The net increase of
$787,000 in borrowings under the senior credit facility as compared to
September 26, 1997 reflects the cash payment for the ATEC acquisition in
December, 1997 and cash purchases of the Company's common stock in the open
market offset by the federal income tax refund received in the third
quarter of fiscal 1998.
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, additional loans to be made to SSG for the cost of
certain capital expenditures (up to a maximum of $4,000,000) and reduced
interest rates. The Agreement also contains financial and net worth
covenants in addition to limits on capital expenditures.
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. Such purchases are subject to
price and availability of shares, working capital availability and any
alternative capital spending programs of the Company. As of October 2,
1998, the Company had repurchased approximately 721,000 of its issued and
outstanding common stock in the open market and 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. Again, such purchases are subject to price and
availability of shares, working capital availability and any alternative
capital spending programs of the Company. Except as described in the
next paragraph, 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 being 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 miscalculation 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 because there are no other viable alternatives or contingency
plans in place for the Company. 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 $3.5 and $4.5 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 $2.0 million for
the project and expects to be within the original estimate at the date of
completion. The majority of these cost 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. 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.
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 reduction in Government spending, risk of
nonpayment of accounts receivable, competitive factors, and foreign
supplier related issues.
The general economic condition in the U.S. could affect pricing on raw
materials such as metals and other commodities used in the manufacturing
of certain products as well as 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 its
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 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 8. Financial Statements and Supplementary Data.
Sport Supply Group, Inc.
Index to Financial Statements
Page
Report of Independent Auditors
Consolidated Balance Sheets as of October 2, 1998 and
September 26, 1997
Consolidated Statements of Operations for the Year Ended
October 2, 1998, the Eleven Month Period Ended
September 26, 1997, and the Year Ended November 1, 1996,
Consolidated Statements of Stockholders' Equity for
the Year Ended October 2, 1998, the Eleven Month Period
Ended September 26, 1997, and the Year Ended
November 1, 1996
Consolidated Statements of Cash Flows for the Year Ended
October 2, 1998, the Eleven Month Period Ended
September 26, 1997, and for the Year Ended November 1, 1996
Notes to Consolidated Financial Statements
Financial statement schedules are omitted as the required information is
presented in the consolidated financial statements or the notes thereto
or is not necessary.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Sport Supply Group, Inc.:
We have audited the accompanying consolidated balance sheets of
Sport Supply Group, Inc. and subsidiary as of October 2, 1998 and
September 26, 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flow for the year ended
October 2, 1998, and the eleven month period ended September 26, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Sport Supply Group, Inc. and subsidiary as of
October 2, 1998 and September 26, 1997, and the consolidated results of
its operation and its cash flow for the year ended October 2, 1998 and
the eleven month period ended September 26, 1997 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
November 6, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sport Supply Group, Inc.:
We have audited the accompanying consolidated statement of operations,
stockholders' equity and cash flow of Sport Supply Group, Inc. (a
Delaware corporation) and subsidiary for the year ended November 1,
1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the results of Sport
Supply Group, Inc. and subsidiary's operations and their cash flow for
the year ended November 1, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 29, 1997
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 2, 1998 AND SEPTEMBER 26, 1997
October 2, September 26,
1998 1997
---------- ----------
CURRENT ASSETS :
Cash $ 1,035,466 $ 602,779
Accounts receivable --
Trade, less allowance for doubtful
accounts of $372,000 in 1998 and
$797,000 in 1997 16,151,371 13,452,286
Other 572,234 467,661
Income taxes receivable -- 1,653,875
Inventories, net 14,102,837 12,284,425
Other current assets 943,521 583,414
Deferred tax assets 904,318 2,069,678
---------- ----------
Total current assets 33,709,747 31,114,118
---------- ----------
DEFERRED CATALOG EXPENSES 1,916,035 1,150,514
PROPERTY, PLANT AND EQUIPMENT :
Land 8,663 8,663
Buildings 1,595,228 1,595,228
Machinery and equipment 5,585,710 5,661,315
Furniture and fixtures 2,683,122 2,427,527
Leasehold improvements 2,764,384 2,277,372
---------- ----------
12,637,107 11,970,105
---------- ----------
Less -- Accumulated depreciation
and amortization (7,574,023) (6,638,319)
---------- ----------
5,063,084 5,331,786
---------- ----------
DEFERRED TAX ASSETS 4,659,189 5,838,895
COST IN EXCESS OF TANGIBLE NET ASSETS ACQUIRED,
less accumulated amortization of $1,240,000
in 1998 and $1,130,000 in 1997 3,174,725 2,959,114
TRADEMARKS, less accumulated amortization of
$1,136,000 in 1998 and $935,000 in 1997 3,163,290 3,364,046
OTHER ASSETS, less accumulated amortization of
$994,000 in 1998 and $1,119,000 in 1997 3,117,545 725,624
---------- ----------
$54,803,615 $50,484,097
========== ==========
CURRENT LIABILITIES :
Accounts payable $ 6,178,080 $ 4,956,830
Income taxes payable 87,250 --
Accrued property taxes 218,201 294,882
Other accrued liabilities 893,598 1,292,247
Notes payable and capital lease
obligations, current portion 1,087,809 564,638
---------- ----------
8,464,938 7,108,597
---------- ----------
DEFERRED GAIN -- 22,091
NOTES PAYABLE AND CAPITAL LEASE
OBLIGATIONS, net of current portion 5,160,965 4,396,090
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Preferred stock, par value $0.01, 100,000
shares authorized, no shares outstanding
in 1998 or 1997 - -
Common stock, par value $0.01, 20,000,000
shares authorized, 9,243,195 and
9,158,749 shares issued in 1998 and
1997, 7,754,703 and 8,084,384 shares
outstanding in 1998 and 1997 92,432 91,588
Paid-in capital 59,100,187 58,574,218
Retained deficit (4,745,046) (9,709,357)
Treasury stock, at cost, 1,488,492 shares
in 1998 and 1,074,365 shares in 1997 (13,269,861) (9,999,130)
---------- ----------
41,177,712 38,957,319
---------- ----------
$54,803,615 $50,484,097
========== ==========
The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Year Ended October 2, 1998, The Eleven Month Period Ended
September 26, and The Year Ended November 1, 1996 (See Note 1)
1998 1997 1996
---------- ---------- ----------
NET REVENUES $97,291,991 $79,109,063 $80,520,837
COST OF SALES 59,565,815 47,705,408 50,566,008
---------- ---------- ----------
GROSS PROFIT 37,726,176 31,403,655 29,954,829
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 29,385,623 25,877,428 30,019,994
NONRECURRING CHARGES 1,184,024 1,300,000 --
---------- ---------- ----------
Operating profit (loss) 7,156,529 4,226,227 (65,165)
OTHER INCOME (EXPENSE):
Interest expense (473,899) (757,181) (1,371,990)
Other income, net 840,763 82,523 37,962
---------- ---------- ----------
366,864 (674,658) (1,334,028)
Earnings (loss) from continuing
operations before (provision)
benefit for income tax 7,523,393 3,551,569 (1,399,193)
(PROVISION) BENEFIT FOR INCOME TAXES (2,559,082) (975,569) 435,536
---------- ---------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS 4,964,311 2,576,000 (963,657)
DISCONTINUED OPERATIONS:
Loss from operations, net of income tax -- -- (2,242,143)
benefit
Loss on disposal, net of income tax
benefit -- (2,574,000) (15,530,697)
---------- ---------- ----------
Loss from discontinued operations -- (2,574,000) (17,772,840)
---------- ---------- ----------
NET EARNINGS (LOSS) $4,964,311 $ 2,000 $(18,736,497)
========== ========== ==========
EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE:
Continuing operations $0.62 $0.32 ($0.14)
Discontinued operations -- (0.32) (2.64)
---------- ---------- ----------
Net earnings (loss) $0.62 $ -- ($2.78)
========== ========== ==========
Continuing operations - assuming
dilution $0.60 $0.32 $(0.14)
Discontinued operations - assuming
dilution -- (0.32) (2.63)
---------- ---------- ----------
Net earnings (loss) - assuming dilution $0.60 $ -- $ (2.77)
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 8,025,606 8,146,074 6,746,788
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING -
ASSUMING DILUTION 8,236,530 8,151,414 6,768,488
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Year Ended October 2, 1998, The Eleven Month Period Ended September 26, 1997,
And The Year Ended Novenber 1, 1996 (See Note 1)
Unrealized
Common Stock Preferred Stock Paid in Retained Treasury Stock Holding
Shares Amount Shares Amount Capital Earnings Shares Amount Period Total
(Deficit) Gain (loss)
--------- ------- ------ ------ ----------- ---------- ------- ------------ ------- -----------
Balance, October 31, 1995 7,551,337 75,513 -- $ - 46,649,095 9,025,140 829,664 (8,163,543) 23,760 47,609,965
Issuances of common stock
upon exercises of
outstanding stock options 562 6 3,872 3,878
Reissuances of treasury stock (109,774) (42,599) 419,157 309,383
Change in unrealized holding
period gain (loss) (23,760) (23,760)
Net loss (18,736,497) (18,736,497)
--------- ------- ------ ------ ----------- ---------- ------- ------------ ------- -----------
Balance, November 1, 1996 7,551,899 $75,519 -- $ - $46,543,193 $(9,711,357) 787,065 $(7,744,386) $ - $29,162,969
--------- ------- ------ ------ ----------- ---------- ------- ------------ ------- -----------
Issuances of common stock
upon exercises of
outstanding stock options 6,850 69 47,025 47,094
Issuances of common stock 1,600,000 16,000 11,984,000 12,000,000
Purchase of treasury stock 287,300 (2,254,744) (2,254,744)
Net earnings 2,000 2,000
--------- ------- ------ ------ ----------- ---------- ------- ------------ ------- -----------
Balance, September 26, 1997 9,158,749 $91,588 -- $ - $58,574,218 $(9,709,357) 1,074,365 $(9,999,130) $ - $38,957,319
--------- ------- ------ ------ ----------- ---------- ------- ------------ ------- -----------
Issuances of common stock
upon exercises of
outstanding stock options 73,387 734 502,370 503,104
Issuances of common stock 11,059 110 70,293 70,403
Purchase of treasury stock 433,725 (3,486,453) (3,486,453)
Reissuances of treasury shares (46,694) (19,598) 215,722 169,028
Net earnings 4,964,311 4,964,311
--------- ------- ------ ------ ----------- ---------- ------- ------------ ------- -----------
Balance, October 2, 1998 9,243,195 $92,432 -- $ - $59,100,187 $(4,745,046) 1,488,492 $(13,269,861) $ - $41,177,712
--------- ------- ------ ------ ----------- ---------- ------- ------------ ------- -----------
The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Year Ended October 2, 1998, The Eleven Month Period
Ended September 26, 1997, And The Year Ended November 1, 1996 (See Note 1)
1998 1997 1996
--------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES :
Net earnings (loss) $4,964,311 $ 2,000 $(18,736,497)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in)
operating activities --
Loss on disposal of discontinued operations -- 2,574,000 15,530,697
Depreciation and amortization 1,390,178 1,284,156 2,528,716
Provision for (recovery of) allowances for
accounts receivable (428,756) (244,730) 895,716
Changes in assets and liabilities --
(Increase) decrease in receivables 346,687 (2,010,346) (330,706)
(Increase) decrease in inventories (1,041,239) 3,036,080 1,309,650
(Increase) decrease in deferred catalogs and
other current assets (1,125,628) 1,533,535 (403,562)
(Increase) decrease in current deferred tax assets 1,165,360 3,813,663 (3,756,306)
Increase (decrease) in accounts payable 1,221,250 (5,036,219) 2,777,383
Increase (decrease) in accrued liabilities (688,080) (589,994) 603,017
(Increase) decrease in other assets (2,429,091) (64,547) 313,305
(Increase) decrease in noncurrent deferred tax asset 1,179,706 (1,346,048) (4,755,852)
Other (22,091) (11,046) (4,646)
Discontinued operations - noncash charges and
working capital changes -- (697,524) 11,135,347
--------- ---------- -----------
Net cash provided by operating activities 4,532,607 2,242,980 7,106,262
--------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES :
Acquisitions of property, plant and equipment (569,342) (155,439) (631,562)
Proceeds from sale of investments 14,044 -- 9,300
Payments for acquisitions, net of cash acquired (1,500,682) -- --
Investing activities of discontinued operations --
Proceeds from sale of discontinued operations -- --
--------- ---------- -----------
Net cash provided by (used in) investing activities (2,055,980) 8,003,730 112,720
--------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES :
Proceeds from issuances of notes payable 2,916,984 1,159,560 3,245,046
Payments of notes payable and capital lease
obligations (2,217,006) (21,031,054) (7,853,698)
Proceeds from common stock issuances 742,535 12,047,094 3,877
Dividends paid to stockholders -- -- (201,650)
Purchase of treasury stock (3,486,453) (2,254,744) --
Financing activities of discontinued operations -- -- (2,547,811)
--------- ---------- -----------
Net cash used in financing activities (2,043,940) (10,079,144) (7,354,236)
--------- ---------- -----------
Net change in cash 432,687 167,566 (135,254)
Cash, beginning of period 602,779 435,213 570,467
--------- ---------- -----------
Cash, end of period $1,035,466 $ 602,779 $ 435,213
========= ========== ===========
The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For The Year Ended October 2, 1998, The Eleven Month Period
Ended September 26, 1997, And The Year Ended November 1, 1996 (See Note 1)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION :
1998 1997 1996
--------- ---------- -----------
Cash paid during the period for interest $ 502,414 $ 1,297,675 $ 2,448,631
========= ========== ===========
Cash paid during the period for income taxes $ 6,671 $ 10,825 $ 134,735
========= ========== ===========
During 1998, the Company acquired the assets
of an entity. In connection with the
acquisition, liabilities were assumed as follows :
Fair value of assets acquired $2,388,750 -- --
Cash paid for the acquisition, net (1,500,682) -- --
Debt issued for the acquisition (588,068) -- --
--------- ---------- -----------
Liabilities assumed $300,000 $ -- $ --
========= ========== ===========
The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 2, 1998
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Background
Sport Supply Group, Inc. (the "Company" or "SSG") was incorporated in
1982. The assets of the Sports & Recreation Division of Aurora
Electronics, Inc. (f/k/a BSN Corp., "Aurora") were contributed to the
Company effective September 30, 1988. Prior to its initial public
offering completed in April, 1991, the Company was a wholly-owned
subsidiary of Aurora. The Company is engaged principally in the
manufacture and direct mail marketing of sports related equipment and
leisure products to institutional and sporting goods team dealer
customers in the United States. The Company manufactures many of the
products it sells, including tennis, volleyball, and other sports nets;
items of steel and aluminum construction, such as soccer and field hockey
goals and volleyball, pole vault, and high jump standards; other track
and field equipment; gymnastic and exercise mats; weight lifting
equipment; tabletop games and various plastic items.
Principles of Consolidation and Basis of Presentation
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
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.
During May 1996, the Company sold substantially all of the assets (other
than cash and accounts receivable) of its Gold Eagle Professional Golf
Products Division (the "Gold Eagle Division"). Subsequent to the sale of
the Gold Eagle Division, the Company adopted a formal plan to dispose of
the remaining operations of the Company's retail segment (which
previously included the Gold Eagle Division) and therefore has classified
these operations as discontinued. On March 28, 1997, SSG disposed of
substantially all of the remaining assets of the discontinued operation
to Nitro Leisure Products, Inc., a Delaware corporation. As a result,
the Company's retail segment is being reported as a discontinued
operation through the date of disposal in the accompanying consolidated
financial statements.
Change in Fiscal Year
In January 1997, the Company changed its financial reporting year end
from October 31 to September 30. Accordingly, the fiscal year ended
September 26, 1997 is a transition period consisting of eleven months.
The Company will operate on a 52/53 week year ending on the Friday
closest to September 30.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out and weighted-average cost
methods for items manufactured by the Company and weighted-average cost
for items purchased for resale. As of October 2, 1998 and September 26,
1997 inventories (excluding inventories related to discontinued
operations) consisted of the following:
1998 1997
---------- ----------
Raw materials $ 2,761,885 $ 2,410,009
Work-in-process 236,466 113,170
Finished and purchased goods 11,530,406 10,471,262
---------- ----------
14,528,757 12,994,441
Less inventory reserve for obsolete or
slow moving items (425,920) (710,016)
---------- ----------
$14,102,837 $12,284,425
========== ==========
The Company recorded a $950,000 provision for the year ended November 1,
1996 to establish an inventory reserve. This reserve reflects
management's periodic assessment of the carrying value of the Company's
inventory. For the year ended October 2, 1998 and September 26, 1997 the
Company recorded approximately $284,000 and $240,000, respectively,
against the reserve for the disposal of certain slow-moving inventory.
As of October 2, 1998 and September 26, 1997, approximately 33% and 34%
of total ending inventories were products manufactured by the Company
with the balance being products purchased from outside suppliers. Sales
of products manufactured by SSG accounted for approximately 31% and 35%
of total net revenues in 1998 and 1997, respectively. Costs included in
products manufactured by SSG include raw materials, direct labor, and
manufacturing overhead.
Advertising and Deferred Catalog Expenses
The Company expenses the production costs of advertising as incurred,
except for production costs related to direct-response advertising
activities which are capitalized. Direct response advertising consists
primarily of catalogs which include order forms for the Company's
products. Production costs, primarily printing and postage, associated
with catalogs are amortized over twelve months. The Company's
advertising expenses for the year ended October 2, 1998, the eleven month
period ended September 26, 1997, and the year ended November 1, 1996 were
$2,864,000, $3,776,000, and $3,864,000, respectively.
Property, Plant, and Equipment
Property, plant, and equipment is stated at cost and depreciated over the
estimated useful lives of the related assets using the straight-line
method. Leasehold improvements and property and equipment leased under
capital lease obligations are amortized over the terms of the related
leases or their estimated useful lives, whichever is shorter. The cost
of maintenance and repairs is charged to expense as incurred; significant
renewals and betterments are capitalized and depreciated over the
remaining estimated useful lives of the related assets.
Depreciation of property, plant and equipment is provided by the
straight-line method as follows:
Buildings Thirty to Forty years
Machinery and Equipment Five years
Furniture and Fixtures Five years
Intangible Assets
Cost in excess of tangible net assets acquired relates to acquisitions
made by the Company. Trademarks relate to costs incurred in connection
with the licensing agreements for the use of certain trademarks in
conjunction with the sale of the Company's products. Other intangible
assets are classified as other assets and consist principally of patents
and system implementation costs.
Amortization of intangible assets is provided by the straight-line
method as follows:
Cost in excess of tangible net assets
acquired -- principally forty years
Trademarks -- five to forty years
Patents -- seven to eleven years
Management periodically assesses the recoverability of the carrying value
of intangible assets in relation to current and anticipated net earnings
and cash flows. Based on management's assessment, the Company believes
its investments in intangible assets are fully realizable as of October
2, 1998.
The cost of intangible assets and related accumulated amortization are
removed from the Company's accounts during the year in which they become
fully amortized.
Long-Lived Assets
Effective November 2, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." The adoption of this new accounting standard did not have
a material effect on the Company's Consolidated Statements of Operations.
Other Accrued Liabilities
As of September 26, 1997, other accrued liabilities consisted of $682,000
of bonuses, $381,000 of payroll, and $229,000 of other.
Income Taxes
Deferred tax assets and liabilities are determined annually based upon
the estimated future tax effects of the differences in the tax bases of
existing assets and liabilities and the related financial statement
carrying amounts, using currently enacted tax laws and rates in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (See Note 4).
Net Earnings (Loss) Per Share of Common Stock
Net earnings (loss) per share of common stock is based upon the weighted
average number of common and common equivalent shares outstanding.
Outstanding stock options and common stock purchase warrants are treated
as common stock equivalents when dilution results from their assumed
exercise.
Revenue Recognition
Revenue is generally recognized when inventory is shipped to the
customer.
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 in 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.
2. STOCKHOLDERS' EQUITY:
Stock Options
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
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 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.
Transactions under the plan are summarized as follows:
Exercise Prices/
Shares Weighted Avg.
Price
------- -------------
Outstanding at
October 31, 1995 811,772 $4.80 - $14.25
Granted 29,125 $6.50 - $7.13
Exercised (562) $6.90
Forfeited (154,862) $6.88 - $14.25
------- -------------
Outstanding at
November 1, 1996 685,473 $8.85
Granted 594,375 $7.49
Exercised (6,850) $6.88
Forfeited (232,425) $7.92
------- -------------
Outstanding at
September 26, 1997 1,040,573 $7.26
Granted 286,675 $7.65
Exercised (73,387) $6.86
Forfeited (393,575) $8.06
------- -------------
Outstanding at
October 2, 1998 860,286 $7.30
======= =============
Stock Options Outstanding as Stock Options Exercisable
of Oct. 2, 1998 as of Oct. 2, 1998
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Range of Exercise Remaining Exercise Exercise
Prices Shares Life Price Shares Price
------ ------ ---- ----- ------ -----
$5.60 - $8.38 860,286 7.6yrs. $7.30 405,284 $7.06
All options granted under the stock option plan during the year ended
October 2, 1998, the eleven month period ended September 26, 1997, and
the year ended November 1, 1996 were at exercise prices equal to or
greater than the fair market value of the Company's stock on the date of
the grant. On May 13, 1996, the Company repriced the exercise price to
the current fair market value of certain employees' (excluding officers
and directors) stock options that were granted pursuant to the stock
option plan and that had an original exercise price in excess of the fair
market value of the common stock on May 13, 1996 of $6.875. The exercise
price of these options was lowered to $6.875. On January 23, 1997,
certain officers' options were repriced to an amount above the current
fair market value. The exercise price of these options was reduced to
$7.50. As of October 2, 1998, there were 708,655 shares available for
option grants under the stock option plan.
In addition to options granted pursuant to the stock option plan, the
Company periodically grants options to purchase shares of SSG's common
stock that are not reserved for issuance under the stock option plan
("non-Plan options"). During the year ended November 1, 1996, the
Company granted 20,000 non-Plan options. All non-Plan options granted
were at exercise prices ranging from $6.88 to $15.00 per share. Such
exercise prices were equal to or greater than the fair market value of
the Company's common stock on the dates of grant.
As of October 2, 1998, there were a total of 960,286 options (including
non-Plan options) outstanding with exercise prices ranging from $5.60 per
share to $8.38 per share. As of October 2, 1998, 505,284 of the total
options outstanding were fully vested with 455,002 options vesting
through January 2001. As of September 26, 1997, 735,703 of the total
options outstanding were fully vested with 550,000 options vesting in
January of 2000. As of November 1, 1996, all outstanding options were
fully vested.
The Company has adopted the pro forma disclosure provisions of SFAS No.
123 "Accounting for Stock Based Compensation". As required by SFAS 123,
pro forma information regarding net income and net income per share has
been determined as if the Company had accounted for employee stock
options subsequent to December 31, 1995 under the fair value method
provided for under SFAS 123. The fair value for those options was
estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions: risk-free interest rates
ranging from 5.34% to 6.24%; a dividend yield of 0%; expected volatility
of 25%; and a weighted average expected life for each option of 3 years.
The weighted average exercise prices and the weighted average fair values
of employee stock options are as follows:
For the Fiscal For the Eleven For the Fiscal
Month
Year Ended Period Ended Year Ended
October 2, 1998 September 26, 1997 November 1, 1996
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Exercise Fair Exercise Fair Exercise Fair
Price Value Price Value Price Value
----- ----- ----- ----- ----- -----
Exercise price
of stock
option on
grant date
Equals market
value - $7.65 $1.81 $ - $ - $6.89 $2.77
Exceeds market
value - $ - $ - $7.49 $3.01 $ - $ -
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period; therefore, its
proforma effect will not be fully realized until the completion of one
full vesting cycle. The Company's pro forma information is as follows:
For the For the Eleven For the
Fiscal Month Fiscal
Year Ended Period Ended Year Ended
October 2, September 26, November 1,
1998 1997 1996
--------- --------- ----------
Net income (loss):
As reported $4,964,311 $2,000 ($18,736,497)
Pro forma $4,526,870 ($804,809) ($19,163,574)
Earnings (loss) per share:
As reported $0.62 $0.00 ($2.77)
Pro forma $0.56 ($0.10) ($2.83)
Dividends
During January 1996, the Company terminated its annual cash dividend
policy.
Common Stock Purchase Warrants
On December 27, 1993, the Company issued 1,224,459 warrants to purchase
1,224,459 shares of SSG's common stock at an exercise price of $25.00 per
share which may be exercised on or before December 27, 1998. As a result
of the 5 for 4 stock split declared in 1994, each warrantholder will be
entitled to 1 1/4 shares of common stock upon the exercise of each
warrant at an exercise price of $20 per share. The warrants are
scheduled to expire on December 15, 1998. Pursuant to a Securities
Purchase Agreement dated November 27, 1996 between Emerson and the
Company, Emerson acquired directly from the Company 5-year warrants to
acquire 1,000,000 shares of Common Stock at an exercise price of $7.50
per share, subject to standard antidilution adjustments, for an aggregate
cash consideration of $500,000.
Repurchase of Common Stock
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. Such purchases are subject to
price and availability of shares, working capital availability and any
alternative capital spending programs of the Company, and maintaining
compliance with the senior credit facility. As of October 2, 1998, the
Company had repurchased approximately 721,000 of its issued and
outstanding common stock in the open market and privately negotiated
transactions.
Net Earnings (Loss) Per Common Share
In February 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:
For the For the Eleven For the Fiscal
Fiscal Year Month Period Year
Ended Ended Ended
Oct. 2, 1998 Sept. 26, 1997 Nov. 1, 1996
--------- --------- --------
Numerator:
Net earnings (loss) from $4,964,311 $2,576,000 $(963,657)
continuing operation
Numerator for basic and
diluted earnings
Per share _ Income
available to common
Shareholders $4,964,311 $2,576,000 $(963,657)
Denominator:
Denominator for basic
earnings per share -
Weighted average shares 8,025,606 8,146,074 6,746,788
Effect of dilutive
securities:
Warrants 94,884 -- --
Employee stock options 116,040 5,340 21,700
--------- --------- --------
Denominator for diluted
earnings per share -
Adjusted weighted average
shares and
Assumed conversions 8,236,530 8,151,414 6,768,488
========= ========= =========
Basic earnings (loss) per share $0.62 $0.32 $(0.14)
========= ========= =========
Diluted earning (loss) per share $0.60 $0.32 $(0.14)
========= ========= =========
3. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS:
As of October 2, 1998 and September 26, 1997, notes payable and capital
lease obligations consisted of the following:
1998 1997
--------- ---------
Note payable under revolving line
of credit,
interest at prime plus 1/2%
(8.75% at October 2, 1998 and
9.25% at September 26, 1997) or
LIBOR plus 2-1/4% (7.78% at
October 2, 1998 and 8.16% at
September 26, 1997), due
October 31, 2000 Collateralized
by substantially all assets $4,411,967 $3,000,000
Term loan, interest at LIBOR plus
2-1/4% (7.78% at October 2, 1998
and 8.16% at September 26, 1997),
Payable in quarterly installments
of $125,000 plus accrued interest
through October 31, 2000
Collateralized by substantially
all assets 1,000,000 1,625,000
Promissory note, noninterest
bearing, due June 30, 1999 525,000 --
Capital lease obligation, interest
at 7.4%, payable in monthly
installments of principal and
Interest totaling $3,159
through December 1998 9,357 45,129
Capital lease obligation, interest
at 9%, payable in annual
installments of principal and
Interest totaling $55,000
through August 2005 261,753 290,599
Other 40,697 --
--------- ---------
Total 6,248,774 4,960,728
Less - current portion (1,087,809) (564,638)
--------- ---------
Long-term debt and capital
lease obligations, net $5,160,965 $4,396,090
========= =========
Credit Facilities
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, additional loans to be made to SSG for the cost of certain
capital expenditures (up to a maximum of $4,000,000) and reduced
interest rates and fees. The Agreement also contains financial and net
worth covenants in addition to limits on capital expenditures. As of
October 2, 1998, 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 October 2, 1998, 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%
(7.78% at October 2, 1998) or the lender's prime rate plus 1/2% (8.75% at
October 2, 1998). Historically, the Company has elected the lower of the
interest rates available under the facility.
As of October 2, 1998, the Company had borrowings of approximately
$4,412,000 outstanding under the revolver, approximately $1,891,000 of
letters of credit outstanding for foreign purchases of inventory, and
availability of approximately $14,673,000. In addition, as of October 2,
1998, SSG had borrowings of $1,000,000 under the term loan which is
payable in quarterly installments of principal and accrued interest of
$125,000 through October 31, 2000.
Maturities of the Company's capital lease obligations and borrowings
under the senior credit facility as of October 2, 1998, by fiscal year
and in the aggregate, are as follows:
1999 $1,087,809
2000 546,295
2001 4,453,846
2002 42,861
2003 44,383
Thereafter 73,580
---------
Total maturities $6,248,774
4. INCOME TAXES:
As of October 2, 1998 and September 26, 1997, the components of the net
deferred tax assets and liabilities are as follows:
1998 1997
------- ---------
Current deferred tax assets --
Allowances for doubtful accounts $134,820 $373,029
Inventories 567,005 1,513,689
Other accrued liabilities 202,493 182,960
------- ---------
Total current deferred tax assets $904,318 $2,069,678
======= =========
Noncurrent deferred tax assets
(liabilities)
Cost in excess of tangible net
assets acquired $(122,643) $232,298
Other intangible assets (1,030,069) (1,348,406)
Net operating loss carryforward 5,537,457 6,767,809
Minimum tax credit carryforward 274,444 187,194
--------- ---------
Total noncurrent deferred tax assets $4,659,189 $5,838,895
========= =========
The Company's net operating loss carryforward can be used to offset
future taxable income and can be carried forward for 15 years. No
valuation allowance has been recorded for the Company's deferred tax
assets because management believes it is more likely than not such assets
will be realized. Management believes that the deferred tax assets will
be realized by future profitable operating results. Historically, the
Company has been profitable. The net loss reported for the fiscal year
ended November 1, 1996 is primarily the result of the retail segment
which has been discontinued. Management believes the Company's
continuing operations will continue to be profitable.
The income tax provision (benefit) consisted of the following:
1998 1997 1996
--------- ---------- ----------
Current $214,016 $(2,074,117) $(1,830,600)
Deferred 2,345,066 1,723,686 (8,512,158)
--------- ---------- ----------
Income tax
provision (benefit) $2,559,082 $(350,431) $(10,342,758)
========= ========= ==========
The provision (benefit) for income taxes related to continuing operations
in the accompanying statements of operations for the year ended October
2, 1998, the eleven months ended September 26, 1997, and the year ended
November 1, 1996, differ from the statutory federal rate (34%) as
follows:
1998 1997 1996
--------- --------- --------
Income tax provision
(benefit) at statutory
Federal rate of 34% $2,557,954 $1,207,533 ($475,726)
State income taxes, net of
federal benefit -- (306,611) --
Other 1,128 74,647 40,190
--------- --------- --------
Total provision (benefit)
for income taxes $2,559,082 $975,569 ($435,536)
========= ========= ========
5. ACQUISITION:
During December 1997, the Company acquired certain assets of Athletic
Training Equipment Company, Inc. ("ATEC"), a manufacturer of pitching
machines for cash, a noninterest bearing promissory note and the
assumption of certain liabilities. The Company has accounted for this
acquisition 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. No pro forma information is
presented herein as it would not materially differ from actual results.
6. MAJOR CUSTOMERS AND CONCENTRATION OF BUSINESS RISK:
The Company's customers for continuing operations are primarily public
and private schools, state and local governments, and the United States
Government. Sales to these customers for the year ended October 2, 1998,
the eleven month period ended September 26, 1997, and the year ended
November 1, 1996 were as follows:
1998 1997 1996
---- ---- ----
Public and private schools 35% 33% 36%
State and local governments 16% 12% 15%
United States Government 7% 7% 8%
The Company did not have any individual customers that accounted for more
than 10% of net revenues for the fiscal year ended October 2, 1998, the
eleven month period ended September 27, 1997, or the fiscal year ended
November 1, 1996.
The majority of the Company's sales are to institutional customers that
are publicly funded. The Company extends credit based upon an evaluation
of a customer's financial condition and provides for any anticipated
credit losses in its financial statements based upon management's
estimates and ongoing reviews of recorded allowances.
7. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases a portion of its office, warehouse, computer equipment
and manufacturing locations under noncancelable operating leases with
terms ranging from one to ten years. The majority of the Company's
leases contain renewal options that extend the leases beyond the current
lease terms.
Future minimum lease payments under noncancelable operating leases for
office, warehouse, computer equipment and manufacturing locations, with
remaining terms in excess of one year are as follows:
1999 $1,696,812
2000 1,562,382
2001 1,455,487
2002 615,086
2003 559,897
Thereafter 729,795
---------
$6,619,459
=========
Rent expense was approximately $1,644,646, $1,485,000, and $1,609,000 for
fiscal 1998, 1997, and 1996, respectively.
Severance Agreements
During 1991, the Company entered into Severance Agreements with two
executive officers of the Company providing that these officers would be
entitled to receive up to approximately three times their annual salary
and bonus if there is both a change in control and a termination or
resignation (as defined therein) of such officers. During 1995, the
Company entered into Severance Agreements with two additional executive
officers and an employee having substantially the same terms as those
described above. During 1998, the Company entered into a Severance
Agreement with an executive officer of the Company and also an employee
of the Company, In 1996, two of these Severance Agreements were cancelled
without payments due to the resignation of these designated employees.
Subsequent to November 1, 1996, an officer resigned pursuant to a
Purchase Agreement whereby Emerson Radio Corp. acquired 1,600,000 shares
of SSG's common stock and warrants to acquire an additional 1,000,000 shares.
The officer was paid approximately $680,000 pursuant to the Severance
Agreement on December 10, 1996. In July, 1998, an officer retired and
the Company recorded a nonrecurring pre-tax charge for the year ended
October 2, 1998 in the amount of $1.2 million relating to the retirement.
Product Liability and Other Claims
Because of the nature of the Company's products, SSG is periodically
subject to product liability claims resulting from personal injuries.
The Company from time to time may become involved in various lawsuits
incidental to the Company's business, some of which will relate to claims
of injuries allegedly resulting in substantial permanent paralysis.
Significantly increased product liability claims continue to be asserted
successfully against manufacturers throughout the United States resulting
in general uncertainty as to the nature and extent of manufacturer's and
distributors' liability for personal injuries.
There can be no assurance that the Company's general product liability
insurance will be sufficient to cover any successful product liability
made against the Company. In management's opinion, any ultimate
liability arising out of currently pending product liability and other
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, could have a material adverse effect on the
Company's results of operations and financial condition.
8. EMPLOYEES' SAVINGS PLAN AND EMPLOYEE STOCK PURCHASE PLAN
Effective June 1, 1993, the Company established a defined contribution
profit sharing plan (the "401(k) Plan") for the benefit of eligible
employees. All employees with one year of service and who have attained
the age of 21 are eligible to participate in the 401(k) Plan. Employees
may contribute up to 15% of their compensation, subject to certain
limitations, which qualifies under the compensation deferral provisions
of Section 401(k) of the Internal Revenue Code.
The 401(k) Plan contains provisions that allow the Company to make
discretionary contributions during each plan year. Employer contributions
for the fiscal year ended October 2, 1998 were $78,426. All
administrative expenses of the 401(k) Plan are paid by the Company.
Effective July 1, 1997, the Company established an Employee Stock
Purchase Plan for the benefit of eligible employees. All eligible
employees are allowed to purchase shares of SSG Common Stock at a 15%
discount from the market price.
9. CHANGE IN CONTROL OF MANAGEMENT
On December 10, 1996, pursuant to a Securities Purchase Agreement dated
November 27, 1996 between Emerson Radio Corp. and SSG ("the Purchase
Agreement"), Emerson acquired directly from SSG 1,600,000 shares of newly
issued Common Stock for an aggregate consideration of $11,500,000 and
five-year warrants to acquire an additional 1,000,000 shares of Common
Stock at an exercise price of $7.50 per share for an aggregate
consideration of $500,000. In addition, Emerson agreed to arrange for
foreign trade credit financing of $2,000,000 for the benefit of SSG to
supplement SSG's existing credit facilities. This currently has not been
utilized. Pursuant to the Purchase Agreement, SSG caused a majority of
the members of SSG's Board of Directors to consist of Emerson's
designees. A nonrecurring pre-tax charge of $1.3 million was recorded in
the first quarter of the fiscal year ended September 26, 1997 for
compensation payments relating to the "change in control" of the Company.
10. DISCONTINUED OPERATIONS
On May 20, 1996, SSG disposed of substantially all of the assets (other
than cash and accounts receivable) of the Gold Eagle Division to Morris
Rosenbloom & Co., Inc., a privately-held corporation. The sale of the
Gold Eagle Division resulted in a pretax loss of approximately $750,000.
Subsequent to the sale of the Gold Eagle Division, the Company adopted a
formal plan to dispose of the remaining operations of the Company's
retail segment (which previously included the Gold Eagle Division) and
therefore has classified these operations as discontinued. On March 28,
1997, SSG disposed of substantially all of the remaining assets of the
discontinued operations to Nitro Leisure Products, Inc., a Delaware
corporation. Pursuant to the Asset Acquisition Agreement, the total
consideration paid to SSG was $8,161,000 in cash. The following
represents net current assets and liabilities as well as net noncurrent
assets of discontinued operations as of November 1, 1996 and the results
of operations for the period from November 2, 1996 through the disposal
date of March 28, 1997, and the year ended November 1, 1996.
November 1,
1996
----------
Current assets $14,188,152
Current liabilities (20,518,079)
----------
Net current liabilities $(6,329,927)
==========
Noncurrent assets $16,365,572
Noncurrent liabilities --
==========
Net noncurrent assets $16,365,572
==========
For the period from For the Year Ended
Nov. 2, 1996 to November 1, 1996
March 28, 1997
----------- -----------
Net revenues $ 1,790,395 $ 18,725,955
Earnings (loss) from operations,
net income taxes -- (2,242,143)
Loss on disposal, net of income taxes (2,574,000) (15,530,697)
The net loss from operations for the year ended November 1, 1996 includes
allocated interest expense of approximately $1,090,000 related to
borrowings under the Company's senior credit facility. Interest expense
charged to discontinued operations was based upon the amount of borrowings
that management estimated would be repaid from the proceeds of the
disposal of the Company's retail segment operations.
The net loss on disposal includes a charge recorded during the quarterly
period ended May 3, 1996 of approximately $9.3 million ($5.9 million after
estimated income tax benefit) to record the net assets at estimated
realizable value based upon a proposed rights offering pursuant to the
Company's plan of disposal. During the quarterly period ended May 3, 1996,
the Company also recorded a reserve of approximately $3.9 million ($2.5
million after estimated tax benefit) for anticipated operating losses
during the estimated twelve month disposal period, including interest
expense. As a result of certain factors, including, among others,
management's assessment of the ultimate success of the proposed rights
offering and estimates of the time required to effect such transaction, as
well as the Company's projected liquidity requirements, the Company
determined that a private sale of the remaining assets of its retail
segment was a preferable and more expeditious method of disposal. Based
upon management's estimates of the net proceeds to be received pursuant to
such disposal, the Company recorded an additional charge of $5.8 million
($3.7 million after estimated income tax benefit) during the quarter ended
August 2, 1996 and a charge of $5.2 million ($3.4 million after estimated
income tax benefit) during the quarter ended November 1, 1996 to record
the net assets at estimated net realizable value.
On March 4, 1997, the Company signed a letter of intent for the sale of
the discontinued retail segment. Based upon management's estimates at that
time of the net proceeds to be received pursuant to such disposal, the
Company recorded a pre-tax charge of $3.9 million ($2.6 million after
estimated income tax benefit) during the quarter ended January 31, 1997.
This charge was provided to record the net assets at estimated net
realizable value in accordance with the purchase price set forth in the
letter of intent. On March 28, 1997, the Company sold the remaining assets
of the discontinued segment for approximately $8.2 million and used the
sale proceeds to reduce the Company's outstanding debt.
11. SUBSEQUENT EVENT
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. The Company will evaluate purchases of common stock based upon
day to day market conditions.
12. SELECTED FINANCIAL DATA (UNAUDITED)
The following sets forth certain historical financial information for
the Company for each of the last 5 years (amounts in thousands, except
per share amounts):
Eleven
Year Months Year Ten Months
Ended Ended Ended Ended Year Ended
Oct. 2 Sep. 26 Nov. 1 Oct. 31 Dec. 31
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Statement of Earnings Data:
Net revenues $97,292 $79,109 $80,521 $65,134 $66,920
Gross profit 37,726 31,404 29,955 25,259 26,326
Operating profit (loss) 7,157 4,226 (65) 3,894 5,162
Interest expense 474 757 1,372 1,126 973
Other income (expense), net 841 83 38 209 (5)
Earnings (loss) from continuing
operations 4,964 2,576 (964) 1,847 2,802
Earnings (loss) from discontinued
operations -- (2,574) (17,773) (457) 1,900
Net earnings (loss) 4,964 2 (18,737) 1,390 4,702
Net earnings (loss) per common share
from continuing operations(1) 0.62 0.32 (0.14) 0.27 0.43
Net earnings (loss) per common share
from discontinued operations(1)(3) -- (0.32) (2.64) (0.07) 0.29
Net earnings (loss) per common share(1) 0.62 0.00 (2.78) 0.20 0.72
Net earnings (loss) per common share
from continuing operations-
assuming dilution(1) 0.60 0.32 (0.14) 0.27 0.42
Net earnings (loss) per common share
from discontinued operations-
assuming dilution(1)(3) -- (0.32) (2.63) (0.07) 0.28
Net earnings (loss) per common share-
assuming dilution (1) $0.60 $0.00 $(2.77) $0.20 $0.70
Weighted average common shares
outstanding(1) 8,026 8,146 6,747 6,941 6,490
Weighted average common shares
Outstanding _ assuming dilution(1) 8,237 8,151 6,768 6,950 6,760
Cash dividends declared per
common share (2) -- -- -- $ .12 $ .13
At Oct. 2 At Sept. 26 At Nov. 1 At Oct. 31 At Dec. 31
Balance Sheet Data: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Working capital $25,245 $24,006 $21,322 $42,231 $32,886
Total assets 54,804 50,484 70,009 86,355 71,616
Long-term obligations, net 5,161 4,418 24,338 29,199 16,698
Total liabilities 13,626 11,527 40,846 38,745 25,143
Stockholders' equity 41,178 38,957 29,163 47,610 46,473
(1) Reflects the 5 for 4 stock split declared during January, 1994.
(2) Dividends declared in 1995 consisted of a $0.03 per share
dividend for the first three quarters. Dividends declared in 1994
consisted of a $0.04 per share dividend for the fourth quarter of 1993
and a $0.03 per share dividend for the first, second and third quarters
of 1994.
(3) See Note 10 to the consolidated financial statements included
in Item 8. _ "Financial Statements and Supplementary Data."
(4) During 1995, the Company changed its financial reporting year end
from December 31 to October 31. Consequently, the fiscal year ended
October 31, 1995 is a transition period consisting of ten calendar
months. During 1997, the Company changed its financial reporting year
end from October 31 to September 30. Therefore, the fiscal year ended
September 26, 1997 is a transition period consisting of eleven calendar
months.
13. QUARTERLY INFORMATION (UNAUDITED):
The following table sets forth certain information regarding the
Company's results of operations for each full quarter within the year
ended October 2, 1998, and September 26, 1997. The fourth quarter of
1997 is not presented since it consisted of two calendar months.
1998 1997
1st 2nd 3rd 4th 1st 2nd 3rd
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- -------
Statement of
Earnings Data
Net revenues $14,412 $32,273 $25,340 $25,267 $14,580 $28,312 $23,224
Gross profit 5,627 12,149 9,840 10,110 5,905 10,717 9,522
Operating profit
(loss) (1) (923) 3,794 2,600 1,686 (1,933) 3,238 2,875
Interest expense 119 156 94 105 196 273 179
Other income, net 280 110 128 323 7 26 16
Net earnings (loss)
from Continuing
operations (503) 2,474 1,739 1,255 (1,356) 1,974 1,976
Net earnings (loss)
from Discontinued
operations -- -- -- (2,574) -- --
Net earnings (loss) (503) 2,474 1,739 1,255 (3,930) 1,974 1,976
Net earnings (loss)
per Common share $(0.06) $0.31 $0.22 $0.16 $(0.51) $0.24 $0.24
Net earnings (loss)
per Common share -
assuming dilution $(0.06) $0.30 $0.20 $0.16 $(0.51) $0.24 $0.24
Weighted average
Shares outstanding 8,085 8,108 8,089 7,954 7,697 8,366 8,334
Weighted average
Shares outstanding
-assuming dilution 8,085 8,324 8,560 8,070 7,698 8,367 8,325
(1) The 1st quarter of 1997 includes $1.3 million of nonrecurring
charges and the 4th quarter of 1998 includes $1.2 million of nonrecurring
charges
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Effective June 20, 1997, the Company appointed Ernst & Young LLP as
its independent auditors for the fiscal year ending September 26, 1997,
to replace the firm of Arthur Andersen LLP, who was dismissed as auditors
of the Company effective June 20, 1997. The decision to change auditors
was recommended by the Audit Committee of the Board of Directors and
approved by the Company's Board of Directors.
The reports of Arthur Andersen LLP on the Company's financial
statements for the the year ended November 1, 1996 (which financial
statements are included in the Company's Annual Report on Form 10-K for
the fiscal year ended September 26, 1997) did not contain an adverse
opinion or a disclaimer of opinion, nor were they qualified or modified
as to uncertainty, audit scope or accounting principles.
During the ten month year ended November 1, 1996, and the subsequent
interim period prior to June 20, 1997, there were no disagreements with
Arthur Andersen LLP on any matter of accounting principles or practices,
financial statement disclosures, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Arthur Andersen
LLP, would have caused it to make a reference to the subject matter of
the disagreements in connection with its reports.
The Company had not consulted with Ernst & Young LLP during the
fiscal year ended November 1, 1996, or subsequent interim periods prior
to June 20, 1997, on either the application of accounting principles or
the type of opinion Ernst & Young LLP might issue on the Company's
financial statements.
PART III
Item 10. Directors and Executive Officers of the Registrant.
See the discussion under the captions "Election of Directors" and
"Executive Compensation and Other Information" contained in the Proxy
Statement for the Annual Meeting of Stockholders to be held January 29,
1999, which information is incorporated herein by reference, and Item 1.
"Business - Executive Officers of the Company."
Item 11. Executive Compensation.
See the discussion under the caption "Executive Compensation and
Other Information" contained in the Proxy Statement for the Annual
Meeting of Stockholders to be held January 29, 1999, which information,
except the Performance Graph and the Report of the Compensation Committee
and Stock Option Committee on Executive Compensation, is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
See the discussion under the caption "Security Ownership of
Certain Beneficial Owners and Management" contained in the Proxy
Statement for the Annual Meeting of Stockholders to be held January 29,
1999, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
See the discussion under the caption "Certain Relationships and
Related Transactions" contained in the Proxy Statement for the Annual
Meeting of Stockholders to be held on January 29, 1999, which
information is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements. See Item 8.
(a)(2) Supplemental Schedule Supporting Financial Statements. See Item 8.
(a)(3) Management Contract or Compensatory Plan. [See Index]. Each of
the following Exhibits described on the Index to Exhibits is a management
contract or compensatory plan: Exhibits 10.1, 10.2, 10.3, 10.4, 10.5,
10.6, 10.7, 10.8, 10.9, 10.10, 10.11, 10.12, 10.12.1 and 10.13.
(b) Reports on Form 8-K. None.
(c) Exhibits. See Index.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 23, 1998
SPORT SUPPLY GROUP, INC.
By: /s/ Geoffrey P. Jurick
Geoffrey P. Jurick
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on November 23, 1998 by the following persons
on behalf of the registrant and in the capacities indicated.
Signature Title
/s/Geoffrey P. Jurick Chairman of the Board and
Geoffrey P. Jurick Chief Executive Officer
/s/John P. Walker President, Chief Operating Officer,
John P. Walker Chief Financial Officer and Director
/s/Johnson C. S. Ko Director
Johnson C. S. Ko
/s/ Peter G. Bunger Director
Peter G. Bunger
/s/ Thomas P. Treichler Director
Thomas P. Treichler
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
2.1 Securities Purchase Agreement dated November 27, 1996 by
and between the Company and Emerson Radio Corp.
("Emerson") (incorporated by reference from Exhibit 2 to
the Company's Report on Form 8-K filed on December 12,
1996).
2.2 Asset Acquisition Agreement dated as of March 28, 1997 by
and between the Company and Nitro Leisure Products, Inc.
(incorporated by reference from Exhibit 2.1 to the
Company's Report on Form 8-K dated April 11, 1997).
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)).
3.1.1 Certificate of Amendment of 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)).
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 Fiscal Year ended November 1, 1996).
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)).
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)).
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
dated December 12, 1996).
*10.1 Consulting and Separation Agreement effective July 28,
1998, entered into by and between the Company and
Peter S. Blumenfeld.
Exhibit
Number Description of Exhibits
10.2 Employment Agreement entered into by and between the
Company and Terrence M. Babilla (incorporated by reference
from Exhibit 10.3 to the Company's Report on Form 10-Q for
the quarter ended April 3, 1998).
10.3 Employment Agreement by and between the Company and
John P. Walker (incorporated by reference from Exhibit
10.4 to the Company's Report on Form 10-Q for the quarter
ended April 3, 1998).
10.4 Employment Agreement by and between the Company and Eugene
J.P. Grant (incororated by reference from Exhibit 10.2 to
the Company's Report on Form 10-Q for the quarter ended
April 3, 1998).
10.5 Employment Agreement by and between the Company and Adam
L. Blumenfeld (incorporated by reference from Exhibit 10.1
to the Company's Report on Form 10-Q for the quarter ended
April 3, 1998).
10.6 Employment Agreement by and between the Company and
Geoffrey P. Jurick (incorporated by reference from Exhibit
10.4 to the Company's Report on Form 10-K for the fiscal year
ended September 26, 1997).
10.7 Non-Qualified Stock Option Agreement by and between the
Company and Geoffrey P. Jurick (incorporated by reference
from Exhibit 10.5 to the Company's Report on Form 10-Q for
the quarter ended August 1,1997).
10.8 Non-Qualified Stock Option Agreement by and between the
Company and John P. Walker (incorporated by reference from
Exhibit 10.6 to the Company's Report on Form 10-Q for the
quarter ended August 1, 1997).
10.8.1 Amendment No. 1 to Stock Option Agreement by and between the
Company and John P. Walker (incorporated by reference from
Exhibit 10.8 to the Company's Report on Form 10-Q for the
quarter ended April 3, 1998).
*10.9 Non-Qualified Stock Option Agreement by and between the
Company and Terrence M. Babilla.
10.9.1 Amendment No. 1 to Stock Option Agreement by and between the
Company and Terrence M. Babilla (incorporated by reference
from Exhibit 10.9 to the Company's Report on Form 10-Q for
the quarter ended April 3, 1998).
10.10 Restricted Stock Agreement by and between the Company and
John P. Walker (incorporated by refrence from Exhibit 10.6
to the Company's Report on Form 10-Q for the quarter ended
April 3, 1998).
10.11 Consulting and Separation Agreement dated as of September
16, 1994 by and between the Company and Jerry L.
Gunderson.
10.12 Form of Severance Agreement entered into between the
Company and Terrence M. Babilla (incorporated by reference
from Exhibit 10.5 to the Company's Registration Statement
on Form S-1(Registration No. 33-39218)).
10.12.1 Severance Agreement by and between the Company and
John P. Walker (incorporated by reference from Exhibit 10.5
to the Company's Report on Form 10-Q for the quarter ended
April 3, 1998).
10.13 Severance Agreement entered into between the
Company and Doug Pryor (incorporated by reference from
Exhibit 10.7 to the Company's Report on Form 10-Q for the
quarter ended April 3, 1998).
10.14 Form of Indemnification Agreement entered into between the
Company and each of the directors of the Company and the
Company's General Counsel (incorporated by reference from
Exhibit 10.3 to the Company's Registration Statement on
Form S-1 (Registration No. 33-39218)).
10.15 Sport Supply Group, Inc. Employee Stock Purchase Plan
(incorporated by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (Registration
No. 33-27191)).
10.16 Sport Supply Group, Inc. Amended and Restated Stock Option
Plan (incorporated by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (Registration
No. 33-27193)).
10.17 Registration Rights Agreement by and among the Company,
Emerson and Emerson Radio (Hong Kong) Limited
(incorporated by reference from Exhibit 4(b) to the
Company's Report on Form 8-K filed on December 12, 1996)
Exhibit
Number Description of Exhibits
10.18 Assignment of Agreement and Inventory Purchase Agreement
to Affiliate by Aurora (incorporated by reference from
Exhibit 10.10 to the Company's Registration Statement on
Form S-1 (Registration No. 33-39218)).
10.19 Form of Tax Indemnity Agreement by and between the Company
and Aurora (incorporated by reference from Exhibit 10.16
to the Company's Registration Statement on Form S-1
(Registration No. 33-39218)).
10.20 Master Agreement, dated as of February 19, 1992, by and
between MacMark Corporation, MacGregor Sports Products,
Inc. and Aurora (incorporated by reference from Exhibit
10.21 to the Company's Report on Form 10-K for the year
ended 1991).
10.21 Perpetual License Agreement, dated as of February 19,
1992, by and between MacMark Corporation, Equilink
Licensing Corporation, and Aurora (incorporated by
reference from Exhibit 10.22 to the Company's Report on
Form 10-K for the year ended 1991).
10.22 Perpetual License Agreement, dated as of February 19,
1992, by and between MacGregor Sports Products, Inc. and
Aurora (incorporated by reference from Exhibit 10.23 to
the Company's Report on Form 10-K for the year ended
1991).
10.23 Trademark Maintenance Agreement, dated as of February 19,
1992, by and between MacMark Corporation, Equilink
Licensing Corporation, and Aurora (incorporated by
reference from Exhibit 10.24 to the Company's Report on
Form 10-K for the year ended 1991).
10.24 Trademark Maintenance Agreement, dated as of February 19,
1992, by and between MacGregor Sports Products, Inc. and
Aurora (incorporated by reference from Exhibit 10.25 to
the Company's Report on Form 10-K for the year ended
1991).
10.25 Trademark Security Agreement, dated as of February 19,
1992, by and between MacGregor Sports Products, Inc. and
Aurora (incorporated by reference from Exhibit 10.26 to
the Company's Report on Form 10-K for the year ended
1991).
10.26 Amendment No. 1 to Perpetual License Agreement and
Trademark Maintenance Agreement dated as of November 1,
1992, by and between MacMark Corporation, Equilink
Licensing Corporation and the Company (incorporated by
reference from Exhibit 10.24 to the Company's Report on
Form 10-K for the year ended 1992).
Exhibit
Number Description of Exhibits
10.27 Amendment No. 1 to Perpetual License Agreement and
Trademark Maintenance Agreement dated as of November 1,
1992, by and between MacGregor Sports Products, Inc. and
the Company (incorporated by reference from Exhibit 10.25
to the Company's Report on Form 10-K for the year ended
1992).
10.28 Assignment and Assumption Agreement, dated to be effective
as of February 28, 1992, by and between Aurora and the
Company (incorporated by reference from Exhibit 10.27 to
the Company's Report on Form 10-K for the year ended
1991).
10.29 Second Amended and Restated Loan and Security Agreement
between the Company and LaSalle Business Credit, Inc.
dated as of September 9, 1997 (incorporated by reference
from Exhibit 10.1 to the Company's Report on Form 10-Q for
the quarter ended August 1, 1997).
10.30 Amended Lease Agreement entered into between the Company
and ACQUIPORT DFWIP, Inc., dated as of July 13, 1998
(incorporated by reference from Exhibit 10 to the
Company's Report on Form 10-Q filed on August 14, 1998).
10.31 Lease, dated July 28, 1989, by and between Merit
Investment Partners, L.P. and the Company (incorporated by
reference from Exhibit 10.14 to the Company's Registration
Statement on Form S-1 (Registration No. 33-39218)).
10.32 Industrial Lease Agreement, dated April 25, 1994, by and
between the Company and Centre Development Co.
(incorporated by reference from Exhibit 10.1 to the
Company's Report on Form 10-Q for the quarter ended June
30, 1994).
10.32.1 Amendment to Industrial Lease Agreement, dated July 8,
1994, by and between the Company and Centre Development
Co. (incorporated by reference from Exhibit 10.19.1 to the
Company's Report on Form 10-K for the fiscal year ended
December 31, 1994).
10.33 Lease, dated December 2, 1991, by and between Injans
Investments and the Company (incorporated by reference
from Exhibit 10.20 to the Company's Report on Form 10-K
for the year ended December 31, 1991).
10.33.1 First Amendment to Standard Industrial Lease dated
September 12, 1996 by and between Injans Investments and
the Company (incorporated by reference from Exhibit
10.23.1 to the Company's Report on Form 10-K for the year
ended November 1, 1996).
10.34 Office Building Lease, dated November 20, 1992, by and
between the Company and Benson Associates (incorporated by
reference from Exhibit 10.30 to the Company's Report on
Form 10-K for the year ended 1992).
Exhibit
Number Description of Exhibits
10.35 First Amendment to Office Building Lease, by and between
the Company and Benson Associates dated April 25, 1994
(incorporated by reference from Exhibit 10.2 to the
Company's Report on Form 10-Q for the quarter ended June
30, 1994)
10.36 License Agreement, dated as of September 23, 1991, by and
between Proacq Corp. and the Company (incorporated by
reference from Exhibit 10.17 to the Company's Report on
Form 10-K for the year ended 1991).
10.37 Sport Supply Group Employees' Savings Plan dated June 1,
1993 (incorporated by reference from Exhibit 10.27 to the
Company's Report on Form 10-K for the year ended 1993).
10.38 Management Services Agreement dated July 1, 1997 to be
effective as of March 7, 1997 by and between the Company
and Emerson (incorporated by reference from Exhibit 10.2
to the Company's Report on Form 10-Q for the quarter ended
August 1, 1997).
10.38.1 Letter Agreement dated October 18, 1997 amending the
Management Services Agreement (incorporated by reference
from Exhibit 10.31.1 to the Company's Report on Form 10-K
for the year ended September 26, 1997).
16 Letter from Arthur Andersen LLP to the Securities and
Exchange Commission dated June 24, 1997 regarding change
in certifying accountants (incorporated by reference from
Exhibit 16.1 to the Company's Report on Form 8-K dated
June 26, 1997).
*23.1 Consent of Independent Auditors.
Consent of Independent Public Accountants
*27.1 Financial Data Schedule
99 Pledge and Security Agreement, dated December 10, 1996 by
Emerson in favor of Congress Financial Corporation
(incorporated by reference from Exhibit 99 to the
Company's Report on Form 8-K filed on December 12, 1996.
* Filed Herewith.