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.
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.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
PART II.
Item 5.
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.
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.
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:
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:
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 8.
Item 8. Financial Statements and Supplementary Data.
Sport Supply Group, Inc.
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 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:
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, ---------- 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.
(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 9.
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.
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.
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.
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.
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.
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.