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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 27, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________.
Commission File Number 1-10704
Sport Supply Group, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2241783
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1901 Diplomat Drive, Farmers Branch, Texas 75234 - 8914
------------------------------------------ ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 484-9484
Not Applicable
Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicated below is the number of shares outstanding of each class of
the registrant's common stock as of January 31, 2003
Title of Each Class of Common Stock Number Outstanding
----------------------------------- ------------------
Common Stock, $0.01 par value 8,917,244 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
---------------------
Index to Consolidated Financial Statements Page
------------------------------------------ ----
Consolidated Balance Sheets as of December 27, 2002
and March 29, 2002 (Unaudited) 3
Consolidated Statements of Operations for the three
and nine months ended December 27, 2002 and
December 28, 2001 (Unaudited) 4
Consolidated Statements of Cash Flows for the
nine months ended December 27, 2002 and
December 28, 2001 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 27, March 29,
2002 2002
----------- -----------
(unaudited)
CURRENT ASSETS :
Cash and equivalents $ 1,300,047 $ 586,911
Accounts receivable:
Trade, less allowance for doubtful
accounts of $491,000 at Dec. 27, 2002
and $524,000 at Mar. 29, 2002 12,759,340 18,824,829
Other 346,820 235,008
Inventories, net 20,794,433 18,368,392
Other current assets 918,846 560,362
Deferred tax assets 1,659,039 1,659,039
----------- -----------
Total current assets 37,778,525 40,234,541
----------- -----------
DEFERRED CATALOG EXPENSES 1,486,982 2,017,280
PROPERTY, PLANT AND EQUIPMENT :
Land 8,663 8,663
Buildings 1,605,102 1,605,102
Computer equipment & software 11,661,220 11,231,120
Machinery and equipment 6,406,278 6,358,546
Furniture and fixtures 1,443,178 1,673,683
Leasehold improvements 2,426,712 2,384,335
----------- -----------
23,551,153 23,261,449
Less -- Accumulated depreciation
and amortization (14,661,833) (13,310,710)
----------- -----------
8,889,320 9,950,739
----------- -----------
DEFERRED TAX ASSETS 3,841,186 3,841,186
COST IN EXCESS OF NET ASSETS ACQUIRED,
less accumulated amortization of $2,171,000
at Dec. 27, 2002 and Mar. 29, 2002 7,442,432 7,442,432
TRADEMARKS, less accumulated amortization of
$968,000 at Dec. 27, 2002 and $1,114,000
at Mar. 29, 2002 2,953,164 3,044,888
OTHER ASSETS, less accumulated amortization
of $750,000 at Dec. 27, 2002 and $589,000
at Mar. 29, 2002 645,028 775,839
----------- -----------
$ 63,036,637 $ 67,306,905
=========== ===========
CURRENT LIABILITIES :
Accounts payable $ 10,913,684 $ 9,532,407
Other accrued liabilities 3,737,868 3,652,310
Notes payable and capital lease
obligations, current portion 72,769 73,132
----------- -----------
Total current liabilities 14,724,321 13,257,849
----------- -----------
NOTES PAYABLE AND CAPITAL LEASE
OBLIGATIONS, net of current portion 13,390,263 17,000,139
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Preferred stock, par value $0.01, 100,000
shares authorized, no shares outstanding - -
Common stock, par value $0.01, 20,000,000
shares authorized, 9,362,397 shares issued
at Dec. 27, 2002 and Mar. 29, 2002,
8,917,244 shares outstanding at Dec. 27,
2002 and Mar. 29, 2002 93,624 93,624
Additional paid-in capital 48,101,331 48,101,331
Accumulated deficit (9,471,620) (7,344,756)
Treasury stock, at cost, 445,153 shares
at Dec. 27, 2002 and Mar. 29, 2002 (3,801,282) (3,801,282)
----------- -----------
34,922,053 37,048,917
----------- -----------
$ 63,036,637 $ 67,306,905
=========== ===========
The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- For The Three Months Ended - - For The Nine Months Ended -
December 27, December 28, December 27, December 28,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net revenues $ 18,518,378 $ 17,042,624 $ 71,378,981 $ 73,242,437
Cost of sales 13,451,348 12,210,696 50,140,789 52,582,671
----------- ----------- ----------- -----------
Gross profit 5,067,030 4,831,928 21,238,192 20,659,766
Selling, general &
administrative expenses 7,327,387 7,836,683 22,631,828 24,014,519
Internet expenses 120,142 107,643 299,478 269,786
----------- ----------- ----------- -----------
Operating loss (2,380,499) (3,112,398) (1,693,114) (3,624,539)
Interest expense (135,996) (218,559) (451,220) (812,257)
Other income, net 21,464 11,370 17,470 86,546
----------- ----------- ----------- -----------
Loss before income taxes (2,495,031) (3,319,587) (2,126,864) (4,350,250)
(Provision for) benefit from
income taxes 136,222 (375,468) 0 0
----------- ----------- ----------- -----------
Net loss $ (2,358,809) $ (3,695,055) $ (2,126,864) $ (4,350,250)
=========== =========== =========== ===========
Loss per share:
Net loss - basic $ (0.26) $ (0.41) $ (0.24) $ (0.49)
=========== =========== =========== ===========
Net loss - diluted $ (0.26) $ (0.41) $ (0.24) $ (0.49)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding - basic 8,917,244 8,914,606 8,917,244 8,914,606
=========== =========== =========== ===========
Weighted average number of common
shares outstanding - diluted 8,917,244 8,914,606 8,917,244 8,914,606
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- For The Nine Months Ended -
December 27, December 28,
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES :
Net loss $ (2,126,864) $ (4,350,250)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 1,654,219 1,949,501
Provision for accounts receivable 275,331 222,973
Changes in assets and liabilities:
Decrease in accounts receivable 5,678,346 6,946,541
(Increase) decrease in inventories (2,426,041) 728,435
Decrease in deferred catalog expenses
and other current assets 171,814 863,267
Increase (decrease) in accounts payable 1,381,277 (5,775,876)
Increase in accrued liabilities 85,558 1,597,915
Increase in other assets (19,959) (81,012)
----------- -----------
Net cash provided by operating activites 4,673,681 2,101,494
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES :
Acquisitions of property, plant & equipment (350,306) (385,755)
----------- -----------
Net cash used in investing activities (350,306) (385,755)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES :
Payments of notes payable and capital
lease obligations, net (3,610,239) (2,306,191)
----------- -----------
Net cash used in financing activities (3,610,239) (2,306,191)
----------- -----------
NET CHANGE IN CASH AND EQUIVALENTS 713,136 (590,452)
Cash and equivalents, beginning of period 586,911 1,271,096
----------- -----------
Cash and equivalents, end of period $ 1,300,047 $ 680,644
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION :
Cash paid during the period for interest $ 492,966 $ 871,026
=========== ===========
Cash paid during the period for income taxes $ 84,628 $ 52,351
=========== ===========
The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 27, 2002
(Unaudited)
Basis of Presentation
---------------------
These consolidated financial statements reflect all normal and
recurring adjustments that are, in the opinion of management, necessary to
present a fair statement of Sport Supply Group, Inc.'s ("SSG") consolidated
financial position as of December 27, 2002 and the results of its operations
for the three and nine month periods ended December 27, 2002 and December
28, 2001.
The consolidated financial statements include the accounts of SSG and
its wholly-owned subsidiaries, Athletic Training Equipment Company, Inc., a
Delaware corporation and Sport Supply Group Asia Limited, a Hong Kong
corporation. All significant intercompany accounts and transactions have
been eliminated in consolidation. Effective March 2001, Sport Supply Group,
Inc. became a majority-owned subsidiary of Emerson Radio Corp. 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.
Note 1 - 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 us and weighted-average cost for items purchased
for resale. As of December 27, 2002 and March 29, 2002, inventories
consisted of the following:
December 27, March 29,
2002 2002
----------- -----------
Raw materials $ 2,047,737 $ 2,153,634
Work-in-progress 373,309 257,653
Finished and purchased goods 19,296743 17,121,730
----------- -----------
21,717,789 19,533,017
Less inventory allowance for
obsolete or slow moving items (923,356) (1,164,625)
----------- -----------
Inventories, net $ 20,794,433 $ 18,368,392
=========== ===========
Note 2 - Stock Options
----------------------
We maintain 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. Under the stock option plan, the exercise price of
options will not be less than: (i.) the fair market value of the common
stock at the date of grant; or (ii.) 110% of the fair market value for
incentive stock options granted to certain employees, as more fully
described in the Amended and Restated Stock Option Plan. Options expire ten
years from the grant date, or five years from the grant date for incentive
stock options granted to certain employees, or such earlier date as
determined by the Board of Directors (or a Stock Option Committee comprised
of members of the Board of Directors).
The following table contains transactional data for our stock option
plan.
For The Nine months Ended
---------------------------
December 27, December 28,
2002 2001
--------- ---------
Options outstanding - beginning of period 926,179 906,929
Options granted 6,250 26,250
Options exercised 0 0
Options forfeited (556,250) (9,875)
--------- ---------
Options outstanding - end of period 376,179 923,304
========= =========
Weighted average exercise prices $6.98 $7.47
========= =========
Stock Options Outstanding Stock Options Exercisable
------------------------------ -------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Range of Remaining Exercise Exercise
Exercise Prices Shares Life Price Shares Price
--------------- ------ --------- --------- ------- ---------
$0.95 - $9.44 376,179 6.4 yrs. $6.98 362,745 $7.185
As of December 27, 2002, there were a total of 376,179 options
outstanding with exercise prices ranging from $0.95 per share to $9.44 per
share. As of December 27, 2002, 362,745 of the total options outstanding
were fully vested with 13,434 vesting through April 2003. As of December
28, 2001, 893,303 of the total options outstanding were fully vested with
30,001 options vesting through April 2003.
Note 3 - Notes Payable and Capital Lease Obligations
----------------------------------------------------
As of December 27, 2002 and March 29, 2002, notes payable and capital
lease obligations consisted of the following:
December 27, March 29,
2002 2002
---------- ----------
Note payable under revolving line of credit,
Interest based on prime (4.25% at December 27,
2002 and 4.75% at March 29, 2002) and LIBOR,
as adjusted (3.91% at December 27, 2002 and
4.35% at March 29, 2002), due March 27, 2004,
collateralized by substantially all assets. $13,286,489 $16,838,905
Capital lease obligation, interest at 9.0%,
payable in annual Installments of principal
and interest totaling $55,000 through
August 2005. 117,963 158,682
Other 58,580 75,684
---------- ----------
Total 13,463,032 17,073,271
Less - current portion (72,769) (73,132)
---------- ----------
Long-term notes payable and
capital lease obligations, net $13,390,263 $17,000,139
========== ==========
We have a Loan and Security Agreement with Congress Financial
Corporation to finance our working capital requirements through March 2004.
This agreement, as amended, provides for revolving loans and letters of
credit which, in the aggregate, cannot exceed the lesser of $25 million or a
"Borrowing Base" amount based on specified percentages of eligible accounts
receivable and inventories. As of December 27, 2002, we had total available
borrowings under our senior credit facility of approximately $18.1 million
of which approximately $13.3 million were outstanding. Amounts outstanding
under the senior credit facility are secured by substantially all the assets
of Sport Supply Group, Inc. and its subsidiaries. Pursuant to the Amended
Loan and Security Agreement, we are restricted from, among other things,
paying cash dividends and entering into certain transactions without the
lender's prior consent and we are required to maintain certain net worth
levels.
Note 4 - Capital Structure
--------------------------
As of December 27, 2002, our issued and outstanding capital stock
consisted solely of common stock. We have 376,179 options outstanding under
the stock option plan with exercise prices ranging from $0.95 to $9.44 per
share. If the options were exercised, all holders would have rights similar
to common shareholders.
Note 5 - Loss Per Common Share
-------------------------------
Basic income (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted income (loss) per share
reflects the potential dilution that could occur if securities convertible
or exercisable into shares of common stock were converted or exercised into
common stock.
The following table sets forth the computation of basic and diluted
income (loss) per share:
For the Three Months Ended For the Nine months Ended
-------------------------- -------------------------
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Numerator:
----------
Net loss $(2,358,809) $(3,695,055) $(2,126,864) $(4,350,250)
========== ========== ========== ==========
Denominator:
------------
Weighted average common
shares - basic 8,917,244 8,914,606 8,917,244 8,914,606
========== ========== ========== ==========
Effect of dilutive
securities:
Employee stock options 0 0 0 0
---------- ---------- ---------- ----------
Weighted average common
shares - diluted 8,917,244 8,914,606 8,917,244 8,914,606
========== ========== ========== ==========
Per Share Calculations:
-----------------------
Net loss - basic $(0.26) $(0.41) $(0.24) ($0.49)
========== ========== ========== ==========
Net loss - diluted $(0.26) $(0.41) $(0.24) ($0.49)
========== ========== ========== ==========
Securites excluded from
weighted average common
shares diluted because
their effect would be
antidilutive 376,179 923,304 379,179 923,304
========== ========== ========== ==========
Note 6 - Income Taxes
---------------------
We have a net operating loss carryforward included in net deferred tax
assets that can be used to offset future taxable income and can be carried
forward for 15 to 20 years. We believe the net deferred tax assets will be
realized through tax planning strategies available in future periods and
future profitable operating results. Although realization is not assured,
we believe it is more likely than not that all of the net deferred tax
assets will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced or eliminated in the near term if
certain tax planning strategies are not successfully executed or estimates
of future taxable income during the carryforward period are reduced.
Note 7 - Adoption of New Accounting Pronouncements
--------------------------------------------------
In August 2001, the Financial Accounting Standards Board issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144). This statement supersedes Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" (SFAS 121), but carries over the key guidance from
SFAS 121 in establishing the framework for the recognition and measurement
of long-lived assets to be disposed of by sale and addresses significant
implementation issues. We have adopted SFAS 144 effective March 30, 2002.
The adoption of SFAS 144 did not significantly affect our financial
statements.
In June 2001, the Financial Accounting Standards Board issued Statement
No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142
requires that goodwill not be amortized but instead be tested for impairment
at least annually by reporting unit. We adopted SFAS 142 effective March
30, 2002. As a result, we ceased recording amortization of goodwill on
March 30, 2002. Had we ceased amortizing goodwill as of the beginning of
fiscal 2001, net loss for the three and nine month periods ending December
28, 2001 would have decreased by $213,000 ($0.03 per basic and diluted
share) and $79,000 ($0.00 per basic and diluted share), respectively.
Goodwill is required to be tested for impairment in a transitional
test upon adoption and then at least annually by reporting unit. Goodwill
impairment testing must also be performed more frequently if events or other
changes in circumstances indicate that goodwill might be impaired. Under the
provisions of SFAS 142, a two step process is used to evaluate goodwill
impairment. Under step one of the evaluation process, the carrying value of
a reporting unit is compared to its fair value to determine if a potential
goodwill impairment exists. Under step two of the evaluation process, if a
potential goodwill impairment is identified during step one, then the amount
of goodwill impairment, if any, is measured using a hypothetical purchase
price allocation approach. We completed step one of SFAS 142 and we are
required to complete step two by March 28, 2003.
The results of our step one analysis indicate that we have a potential
impairment of goodwill in each of our two reporting units. As step two of
the assessment process involves complex determinations with respect to the
fair value of the individual assets and liabilities of each reporting unit,
the amount of goodwill impairment, if any, cannot be reliably predicted at
this time. As of March 30, 2002 and December 27, 2002, we had $7.4 million
of goodwill recorded on our consolidated balance sheet. Under SFAS 142, any
goodwill impairment recorded upon transition, on or before March 28, 2003,
is reported as a cumulative effect of a change in accounting principle on
the consolidated statement of operations as of the date of adoption, and has
no cash impact.
Note 8 Contingencies
--------------------
During the past several years, we have used the services of Strategic
Technologies, Inc. ("STI") to process our outbound truck freight bills. STI
audited freight bills submitted by our carriers and provided us a detailed
listing of invoices that were scheduled for payment at which time we
transferred funds to STI. STI was required to issue checks to the carriers
within forty-eight (48) hours of receipt of our funds. STI filed for
reorganization under Chapter 11 of the U. S. Bankruptcy Code on July 19,
2002 in the United States Bankruptcy Court in the District of New Jersey,
Case No. 02-37935 (NLW). The case was converted to Chapter 7 of the U. S.
Bankruptcy Code on July 31, 2002. It is not possible for us to currently
determine the amount of funds, if any, that were transferred to STI and not
subsequently forwarded to our carriers. In certain circumstances, we may
have to pay our freight carriers for invoices that we previously paid to STI
and attempt to recover such monies from STI. No assurance can be made that
we will be able to recover such money.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations
---------------------
Net Revenues. Net revenues increased approximately $1.5 million (8.7%) and
decreased approximately $1.9 million (2.5%) for the three and nine month
period ended December 27, 2002, respectively, as compared to same periods
last year. The increase in net revenue for the three month period was
primarily the result of recovering government, school and youth sales. The
decrease for the nine month period was primarily the result of a general
slow-down in school and youth organization funding and competitive pressures
in the marketplace.
Gross Profit. As a percentage of net revenues, gross profit decreased to
27.4% from 28.4% and increased to 30.0% from 28.2% for the three and nine
month periods ended December 27, 2002, respectively, as compared to the same
periods last year. The decrease in gross profit for the three month period
was primarily due to lower margins from Government, Bid and Team Dealer
sales. Year to date increases are primarily the result of consolidating
several of our plants, exiting certain unprofitable product lines and
improving product sourcing.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased approximately $509,000 (6.5%) and
$1,383,000 (5.8%) for the three and nine month periods ended December 27,
2002, respectively, as compared to the same periods last year. As a
percentage of net revenues, selling, general and administrative expenses
decreased to 39.6% from 46.0% and to 31.7% from 32.8% for the three and nine
month periods ended December 27, 2002, respectively as compared to the same
periods last year. The decrease in the nine month period was primarily a
result of the following:
(i.) A decrease in payroll related expense of approximately $735,000,
attributable to a reduced headcount.
(ii.) A decrease in depreciation and amortization expense of approximately
$274,000, primarily a result of assets reaching their full depreciation
levels and the discontinuation of goodwill amortization.
(iii.) A decrease in selling and promotional expense of approximately
$136,000, primarily a result of decreased advertising and catalog
expense.
(iv.) A decrease in facility expense of approximately $132,000, primarily
associated with a reduction in telecommunication expenses and various
other facility operating expenses.
Internet Expense. Internet related expenses increased approximately $13,000
and $30,000 for the three and nine month periods ended December 27, 2002,
respectively, as compared to the same periods last year. These expenses are
related to the continued support and enhancement of our internet
capabilities to increase our ability to post electronic catalogs on our
websites and increase web originated orders.
Interest Expense. Interest expense decreased approximately $83,000 (37.8%)
and $361,000 (44.5%) for the three and nine month periods ended December
27, 2002, respectively, as compared to the same periods last year. This
decrease is due to lower borrowing levels and lower interest rates.
Income Tax Expense. Income taxes for the three month period ended December
27, 2002 resulted in a benefit of approximately $136,000 as compared to an
expense of approximately $375,000 for the three month period ended December
28, 2001. There were no provisions for income tax expenses in the nine month
periods ended December 27, 2002 and December 28, 2001. We have a net
operating loss carryforward included in net deferred tax assets that can be
used to offset future taxable income and can be carried forward for 15 to 20
years. A portion of our net deferred tax asset has been reduced by a
valuation allowance. We believe the remaining net deferred tax assets will
be realized through tax planning strategies available in future periods and
future profitable operating results. Although realization is not assured,
we believe it is more likely than not that the remaining net deferred tax
assets will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced or eliminated in the near term if
certain tax planning strategies are not successfully executed or estimates
of future taxable income during the carryforward period are reduced.
Net Loss. Net loss decreased to approximately $2.4 million for the three
month period ended December 27, 2002 as compared to $3.7 million for the
three month period ended December 28, 2001. Net loss decreased to
approximately $2.1 million for the nine month period ended December 27, 2002
as compared to $4.4 million for the nine month period ended December 28,
2001 with net loss per share decreasing to $(0.24) from $(0.49) for the
respective nine month periods.
Liquidity and Capital Resources
-------------------------------
Our working capital decreased approximately $3.9 million during the
nine month period ended December 27, 2002, from $27.0 million at March 29,
2002 to $23.1 million at December 27, 2002. The decrease in working capital
is primarily a result of a decrease in trade accounts receivable of
approximately $6.1 and an increase in trade payables of approximately $1.4
million. This decrease in working capital was partially offset by an
increase of approximately $2.4 million in inventories and an increase in
cash of approximately $713,000. These working capital changes are primarily
due to the seasonality of our business. Inventories are increased in the
third quarter in anticipation of increased revenues for our strong fourth
quarter. This reduction in working capital is reflected in the decrease of
our long term debt.
We have a credit agreement with Congress Financial Corporation to
finance our working capital requirements through March 2004. The credit
agreement, as amended, provides for a $25 million revolving credit facility.
Borrowings under the Amended Credit Agreement are subject to an accounts
receivable and inventory collateral base and are secured by substantially
all of our assets. We are required to maintain certain net worth levels and
as of December 27, 2002 we were in compliance with this requirement. As of
December 27, 2002, we had total available borrowings under our senior credit
facility of approximately $18.0 million, of which approximately $13.3
million were outstanding.
We believe our short-term and long-term working capital requirements
necessary to support our operations will be satisfied from borrowings under
our credit facility and cash flows from operations. Continued revenue
declines and additional future losses could negatively impact our results of
operations and impact our ability to support our working capital needs. We
have taken steps to improve our profitability, including revenue enhancement
programs and cost reductions which should support our anticipated working
capital requirements.
We do not currently have any significant commitments for capital
expenditures.
The following table sets forth our contractual obligations at December 27,
2002 for the periods shown:
Due in Due in
Due within Two to Four to
One year Three years Five years Thereafter Total
-------------------------------------------------------------
Notes payable $ 9,180 $13,270,467 $ 25,202 $ -- $13,304,849
Capital lease
obligations 63,589 94,594 -- -- 158,183
Leases 1,935,988 2,472,415 16,085 -- 4,424,488
-------------------------------------------------------------
Total $2,008,757 $15,837,476 $ 41,287 $ -- $17,887,520
=============================================================
Contingencies
-------------
During the past several years, we have used the services of Strategic
Technologies, Inc. ("STI") to process our outbound truck freight bills. STI
audited freight bills submitted by our carriers and provided us a detailed
listing of invoices that were scheduled for payment at which time we
transferred funds to STI. STI was required to issue checks to the carriers
within forty-eight (48) hours of receipt of our funds. STI filed for
reorganization under Chapter 11 of the U. S. Bankruptcy Code on July 19,
2002 in the United States Bankruptcy Court in the District of New Jersey,
Case No. 02-37935 (NLW). The case was converted to Chapter 7 of the U. S.
Bankruptcy Code on July 31, 2002. It is not possible for us to currently
determine the amount of funds, if any, that were transferred to STI and not
subsequently forwarded to our carriers. In certain circumstances, we may
have to pay our freight carriers for invoices that we previously paid to STI
and attempt to recover such monies from STI. No assurance can be made that
we will be able to recover such money.
Critical Accounting Policies
----------------------------
For the quarter ended December 27, 2002, the significant changes to our
accounting policies from those reported in our Report on Form 10-K for the
fiscal year ended March 29, 2002 were as follows:
Intangible Assets. We have significant intangible assets related to
goodwill and other acquired intangibles. The determination of related
estimated useful lives and whether or not these assets are impaired involves
significant judgments. Changes in strategy and/or market conditions could
significantly impact these judgments and require adjustments to recorded
asset balances. Effective March 30, 2002, we adopted SFAS 142 which requires
us to cease amortization of goodwill, to perform a transitional test for
potential goodwill impairment upon adoption, and then test goodwill for
impairment at least annually by reporting unit. (See Note 7 - Adoption of
New Accounting Pronouncements.)
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 our beliefs as well as assumptions made by and information
currently available to us. When used in this report, the words
"anticipate", "believe", "estimate", "expect", "predict", "intend",
"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 our results are set
forth below.
Future trends for revenues and profitability remain difficult to
predict. We continue to face many risks and uncertainties, including:
1. general and specific market and economic conditions;
2. budgetary restrictions of schools and government agencies;
3. unanticipated disruptions or slowdowns in operations;
4. high fixed costs;
5. competitive factors;
6. continuation of existing license agreement;
7. foreign supplier related issues;
8. use of deferred tax asset.
General and Specific Market and Economic Conditions
---------------------------------------------------
The general economic condition in the U.S. could affect pricing and
availability of raw materials such as metals, petroleum and other
commodities used in manufacturing certain products and certain purchased
finished goods as well as transportation costs. Any material price increases
to our customer could have an adverse effect on revenues and any price
increases from vendors could have an adverse effect on our costs.
Professional sports have a significant impact on the market conditions for
each individual sport. Collective bargaining, labor disputes, lockouts or
strikes by a professional sport could have a negative impact on our
revenues.
Budgetary Restrictions of Schools and Government Agencies
---------------------------------------------------------
Much of our business is dependent on the budgetary allowances of
schools as well as, local, state and federal government agencies.
Restrictions to the budgeted spending of these entities could adversely
affect our result of operations.
Unanticipated Disruptions or Slowdowns in Operations
----------------------------------------------------
Our ability to provide high quality customer service, process and
fulfill orders and manage inventory depends on: (i.) the efficient and
uninterrupted operation of our call center, distribution center and
manufacturing facilities and our management information systems and (ii.)
the timely performance of vendors, catalog printers and shipping companies.
Any material disruption or slowdown in the operation of our call center,
distribution center, manufacturing facilities or management information
systems, or comparable disruptions or slowdowns suffered by our principal
service providers, could cause delays in our ability to receive, process and
fulfill customer orders and may cause orders to be canceled, lost or
delivered late, goods to be returned or receipt of goods to be refused.
We ship approximately 70% of our products using United Parcel Service
("UPS"). As experienced in 1997, a strike by UPS or any of our other major
carriers could adversely affect our results of operations due to not being
able to deliver our products in a timely manner and using other more
expensive freight carriers. UPS and the International Brotherhood of
Teamsters have agreed on a new contract to replace the five year agreement
that expired on July 31, 2002. Although we have analyzed the cost benefit
effect of using other carriers, we continue to utilize UPS for the majority
of our small package shipments and believe this is most advantageous to our
company.
In addition to the foregoing, the International Longshore and Warehouse
Union ("ILWU"), which is the union of dock workers that move the cargo (such
as import containers) along the West Coast, reached a contract agreement on
November 23, 2002 with the Pacific Maritime Association ("PMA"), a group of
global ship owners and terminal operators. A strike by the ILWU, or lockout
by the PMA, as experienced in September 2002, would significantly slow the
receipt of our import products and could cause delays in our ability to
process and fulfill customer orders. Any strike or lockout could also cause
an increase in backlog and freight charges such as port congestion
surcharges, extended peak season surcharges, charges as a result of force
majeure clauses, etc.
High Fixed Costs
----------------
Operations and maintenance of our call center, distribution center,
manufacturing facilities and management information systems involve
substantial fixed costs. Paper and postage are significant components of our
operating costs. Catalog mailings entail substantial paper, postage, and
costs associated with catalog development. Each of these is subject to
price fluctuations. We will be able to further reduce our paper and postage
costs if we continue to migrate a significant portion of our business to the
Internet because we will be less reliant on paper catalogs. If net revenues
are substantially below expectations, our results of operations will be
adversely affected.
Competitive Factors
-------------------
The institutional market for sporting goods and leisure products is
highly competitive and there are no significant barriers to enter this
market. The size of this market has encouraged the entry of new competitors
as well as increased competition from established companies. Competitors
include large retail operations that also sell to the institutional market,
other catalog and direct marketing companies, team dealers, and Internet
sellers. Increased competition could result in pricing pressures, increased
marketing expenditures and loss of market share and could have a material
adverse effect on our results of operations.
Continuation of Existing License Agreement
------------------------------------------
In February 1992, we acquired two separate licenses to use several
trade names, styles, and trademarks (including, but not limited to,
MacGregor[R]). On December 21, 2000, the license relating to the use of
the MacGregor[R] trademark was amended and restated in its entirety (the
"License Agreement"). The License Agreement permits us to manufacture,
promote, sell, and distribute to designated customers throughout the world,
specified sports related equipment and products relating to baseball,
softball, basketball, soccer, football, volleyball, and general exercise.
The License Agreement requires us to pay royalties based upon sales of
MacGregor branded products, with the minimum annual royalty set at $100,000.
Futhermore, the License Agreement is exclusive with respect to certain
customers and non-exclusive with respect to others. The License Agreement
has an original term of forty (40) years, but will automatically renew for
successive forty (40) year periods unless terminated in accordance with the
terms of the license. We have converted a substantial portion of our
products to the MacGregor[R] brand, which is believed to be a widely
recognized trade name in the sporting goods industry. Termination of this
license agreement could have a material adverse effect on our results of
operations.
Foreign Supplier Related Issues
-------------------------------
We derive a significant portion of our revenues from sales of products
purchased directly from foreign suppliers located primarily in the Far East.
In addition, we believe foreign manufacturers produce many of the products
we purchase from domestic suppliers. We are subject to risks of doing
business abroad, including delays in shipments, adverse fluctuations in
foreign currency exchange rates, increases in import duties, decreases in
quotas, changes in custom regulations, acts of God (such as earthquakes),
war and political turmoil. The occurrence of any one or more of the
foregoing could adversely affect our operations.
Use of Deferred Tax Asset
-------------------------
We believe the net deferred tax assets will be realized through tax
planning strategies available in future periods and future profitable
operating results. Although realization is not assured, we believe it is
more likely than not that our remaining net deferred tax assets will be
realized. The amount of the deferred tax asset considered realizable,
however, could be reduced or eliminated in the near term if certain tax
planning strategies are not successfully executed or estimates of future
taxable income during the carryforward period are reduced.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
There have been no significant changes from items disclosed in Form
10-K for the fiscal year ended March 29, 2002.
Item 4. Controls and Procedures
-----------------------
Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the design and operation
of these disclosure controls and procedures were effective. No significant
changes were made in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Periodically, we become involved in various claims and lawsuits
incidental to our business. In management's opinion, any ultimate liability
arising out of currently pending claims will not have a material adverse
effect on our financial condition or results of operations. However, any
claims substantially in excess of our insurance coverage, or any substantial
claim that may not be covered by insurance or any significant monetary
settlement, could have a material adverse effect on our financial condition
or results of operations.
Item 2. Changes in Securities and Proceeds
----------------------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
(a) Not applicable.
(b) Not applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
----------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibit Nbr. Description of Exhibit
------------ ----------------------
(a)(1) Exhibit 3.1 Amended and Restated Certificate of Incorporation of
the Company (incorporated by reference from Exhibit
4.1 to the Company's Registration Statement on Form
S-8 (Registration No. 33-80028)).
(a)(2) Exhibit 3.1.1 Certificate of Amendment of Amended and Restated
Certificate of Incorporation to the Company
(incorporated by reference from Exhibit 4.1 to
the Company's Registration Statement on Form S-8
(Registration No. 33-80028)).
(a)(3) Exhibit 3.2 Amended and Restated Bylaws of the Company
(incorporated by reference from Exhibit 3.2 to
the Company's Report on Form 10-K for the year
ended November 1, 1996).
(a)(4) Exhibit 4.1 Specimen of Common Stock Certificate (incorporated
by reference from Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (Registration
No. 33-39218)).
(a)(5) Exhibit 10.1 (*) Employment Agreement by and between the Company
and Wayne Merritt dated January 16, 2003.
(a)(6) Exhibit 10.2 (*) First Amendment to Loan and Security Agreement
dated October 1, 2002 by and between the Company
and Congress Financial Corporation.
(a)(7) Exhibit 99.1 (*) Certification of the Company's Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
(a)(7) Exhibit 99.2 (*) Certification of the Company's Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
-----------------------
(*) = Filed Herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: January 31, 2003
SPORT SUPPLY GROUP, INC.
By: /s/ Geoffrey P. Jurick
--------------------------
Geoffrey P. Jurick
Chief Executive Officer
By: /s/ Robert K. Mitchell
--------------------------
Robert K. Mitchell
Chief Financial Officer
CERTIFICATIONS
I, Geoffrey P. Jurick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sport Supply
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: January 31, 2003
By: /s/ Geoffrey P. Jurick
--------------------------
Geoffrey P. Jurick
Chief Executive Officer
I, Robert K. Mitchell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sport Supply
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: January 31, 2003
By: /s/ Robert K. Mitchell
--------------------------
Robert K. Mitchell
Chief Financial Officer