Back to GetFilings.com
UNITED STATES
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 June 27, 2003
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
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
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act) Yes No X
Indicated below is the number of shares outstanding of each class of
the registrant's common stock as of July 30, 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 June 27, 2003
(Unaudited) and March 28, 2003 3
Consolidated Statements of Operations for the three
months ended June 27, 2003 and June 28, 2002 (Unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended June 27, 2003 and June 28, 2002 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 27, March 28,
2003 2003
----------- -----------
(unaudited)
CURRENT ASSETS :
Cash and equivalents $ 929,530 $ 2,142,302
Accounts receivable:
Trade, less allowance for doubtful
accounts of $527,000 at June 27,
2003 and $500,000 at March 28, 2003 13,136,501 19,756,947
Other 359,280 488,728
Inventories, net 19,741,323 19,564,314
Other current assets 743,258 576,653
Deferred tax assets 1,456,493 1,525,472
----------- -----------
Total current assets 36,366,385 44,054,416
----------- -----------
DEFERRED CATALOG EXPENSES 1,444,552 1,912,346
PROPERTY, PLANT AND EQUIPMENT :
Land 8,663 8,663
Buildings 1,605,102 1,605,102
Computer equipment & software 11,492,149 11,461,375
Machinery and equipment 6,564,353 6,558,502
Furniture and fixtures 1,509,688 1,508,393
Leasehold improvements 2,505,169 2,497,209
----------- -----------
23,685,124 23,639,244
Less -- Accumulated depreciation
and amortization (15,560,807) (15,119,308)
----------- -----------
8,124,317 8,519,936
----------- -----------
DEFERRED TAX ASSETS 3,974,753 3,974,753
TRADEMARKS, less accumulated amortization
of $1,022,000 at June 27, 2003 and
$995,000 at March 28, 2003 2,899,412 2,926,288
OTHER ASSETS, less accumulated amortization
of $847,000 at June 27, 2003 and
$798,000 at March 28, 2003 558,546 607,900
----------- -----------
$ 53,367,965 $ 61,995,639
=========== ===========
CURRENT LIABILITIES :
Accounts payable $ 4,879,623 $ 11,823,287
Other accrued liabilities 4,185,146 4,443,990
Notes payable and capital lease
obligations, current portion 75,076 71,082
----------- -----------
Total current liabilities 9,139,845 16,338,359
----------- -----------
NOTES PAYABLE AND CAPITAL LEASE
OBLIGATIONS, net of current portion 16,067,550 17,611,753
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 June 27, 2003 and March 28, 2003,
8,917,244 shares outstanding at June 27,
2003 and March 28, 2003 93,624 93,624
Additional paid-in capital 48,101,331 48,101,331
Accumulated deficit (16,233,103) (16,348,146)
Treasury stock, at cost, 445,153 shares at
June 27, 2003 and March 28, 2003 (3,801,282) (3,801,282)
----------- -----------
Total stockholders' equity 28,160,570 28,045,527
----------- -----------
$ 53,367,965 $ 61,995,639
=========== ===========
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-
June 27, 2003 June 28, 2002
----------- -----------
Net revenues $ 25,961,460 $ 26,773,157
Cost of sales 18,586,659 18,633,868
----------- -----------
Gross profit 7,374,801 8,139,289
Selling, general & administrative expenses 6,937,190 7,553,030
Internet expenses 117,340 73,619
----------- -----------
Operating income 320,271 512,640
Interest expense (149,438) (168,129)
Other income (expense), net 13,189 (7,945)
----------- -----------
Income before income taxes and cumulative
effect of accounting change 184,022 336,566
Provision for income taxes (68,979) (126,844)
----------- -----------
Net income before cumulative
effect of accounting change 115,043 209,722
Cumulative effect of accounting change - (7,442,432)
----------- -----------
Net income (loss) $ 115,043 $ (7,232,710)
=========== ===========
Earnings (loss) per share:
Net earnings (loss) per share before cumulative
effect of accounting change - basic $ 0.01 $ 0.02
=========== ===========
Cumulative effect of accounting change - basic $ - $ (0.83)
=========== ===========
Net earnings (loss) per share - basic $ 0.01 $ (0.81)
=========== ===========
Net earnings (loss) per share before cumulative
effect of accounting change - diluted $ 0.01 $ 0.02
=========== ===========
Cumulative effect of accounting
change - diluted $ - $ (0.83)
=========== ===========
Net earnings (loss) per share-diluted $ 0.01 $ (0.81)
=========== ===========
Weighted average number of
common shares outstanding - basic 8,917,244 8,917,244
=========== ===========
Weighted average number of
common shares outstanding - diluted 8,930,396 8,917,244
=========== ===========
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 Three Months Ended-
June 27, 2003 June 28, 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES :
Net income (loss) $ 115,043 $ (7,232,710)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 517,338 571,023
Provision for allowances for accounts
receivable 120,861 96,386
Cumulative effect of accounting change - 7,442,432
Changes in assets and liabilities:
Decrease in accounts receivable 6,629,033 4,979,659
Decrease (increase) in inventories (177,009) 519,983
Decrease in deferred catalog expenses
and other current 301,189 565,343
Decrease in accounts payable (6,943,664) (2,360,630)
Decrease in deferred tax assets 68,979 126,844
Decrease in accrued liabilities (258,844) (57,573)
Decrease (increase) in other assets 705 (10,360)
----------- -----------
Net cash provided by operating activites 373,631 4,640,397
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES :
Acquisitions of property, plant & equipment (46,194) (98,041)
----------- -----------
Net cash used in investing activities (46,194) (98,041)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES :
Proceeds from issuance of notes payable 33,330,126 32,232,683
Payments of notes payable and capital
lease obligations (34,870,335) (36,865,244)
----------- -----------
Net cash used in financing activities (1,540,209) (4,632,561)
----------- -----------
NET CHANGE IN CASH AND EQUIVALENTS (1,212,772) (90,205)
Cash and equivalents, beginning of period 2,142,302 586,911
----------- -----------
Cash and equivalents, end of period $ 929,530 $ 496,706
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 129,045 $ 157,418
=========== ===========
Cash paid during the period for income taxes $ 53,855 $ 66,603
=========== ===========
The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 27, 2003
(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 June 27, 2003 and the results of its operations for
the three month periods ended June 27, 2003 and June 28, 2002.
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.
Certain financial information for previous fiscal years has been
reclassified to conform to the fiscal 2004 presentation.
Note 1 - Inventories
--------------------
Inventories are stated at the lower of cost or market. Cost is
determined using the standard cost method for items manufactured by us and
weighted-average cost for items purchased for resale. As of June 27, 2003
and March 28, 2003, inventories consisted of the following:
June 27, March 28,
2003 2003
----------- -----------
Raw materials $ 2,048,787 $ 2,095,242
Work-in-progress 334,732 318,165
Finished and purchased goods 18,548,553 18,223,657
----------- -----------
20,932,072 20,637,064
Less inventory allowance for
obsolete or slow moving items (1,190,749) (1,072,750)
----------- -----------
Inventories, net $ 19,741,324 $ 19,564,314
=========== ===========
Note 2 - Notes Payable and Capital Lease Obligations
----------------------------------------------------
As of June 27, 2003 and March 28, 2003, notes payable and capital lease
obligations consisted of the following:
June 27, March 28,
2003 2003
----------- -----------
Note payable under revolving line of credit,
Interest based on prime (4.00% at
June 27, 2003 and 4.25% at March 28,
2003) and LIBOR, as adjusted (3.6% at
June 27, 2003 and 3.76% at March 28,
2003), due August 1, 2004, collateralized
by substantially all assets. $ 16,032,133 $ 17,521,601
Capital lease obligation, interest at
9.0%, payable in annual Installments
of principal and interest totaling
$55,000 through August 2005. 73,579 117,963
Other 36,914 43,271
----------- -----------
Total 16,142,626 17,682,835
Less - current portion (75,076) (71,082)
----------- -----------
Long-term notes payable and capital
lease obligations, net $ 16,067,550 $ 17,611,753
=========== ===========
We have a Loan and Security Agreement with Congress Financial
Corporation to finance our working capital requirements through August 1,
2004. This agreement 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 June 27, 2003, we had total available
borrowings under our senior credit facility of approximately $18.6 million,
of which approximately $16.0 million were outstanding. Amounts outstanding
under the senior credit facility are secured by substantially all the assets
of the Sport Supply Group, Inc. and its subsidiaries. Pursuant to the 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 3 - Capital Structure
--------------------------
As of June 27, 2003, our issued and outstanding capital stock consisted
solely of common stock. We have 278,942 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 4 - Income (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
June 27, 2003 June 28, 2002
----------- -----------
Numerator:
----------
Net income (loss) $ 115,043 $ (7,232,710)
=========== ===========
Denominator:
------------
Weighted average common shares - basic 8,917,244 8,917,244
=========== ===========
Effect of dilutive securities:
Employee stock options 13,152 0
----------- -----------
Weighted average common shares - diluted 8,930,396 8,917,244
=========== ===========
Per Share Calculations:
-----------------------
Net income (loss) - basic $0.01 $(0.81)
=========== ===========
Net income (loss) - diluted $0.01 $(0.81)
=========== ===========
Securites excluded from weighted
average common shares diluted because
their effect would be antidilutive 223,942 420,429
=========== ===========
Note 5 - 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. As of June 27, 2003 we have net deferred tax
assets of approximately $5.4 million, inclusive of a $5.6 million valuation
allowance. 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 6 - New Accounting Pronouncements
--------------------------------------
In January 2003, the FASB issued FASB Interpretation (FIN) 46,
"Consolidation of Variable Interest Entities". FIN 146 requires a company
to consolidate a variable interest entity if it is designated as the
primary beneficiary of that entity even if the company does not have a
majority of voting interests. A variable interest entity is generally
defined as an entity where its equity is unable to finance its own
activities or where the owners of the entity lack the risk and reward of
ownership. The provisions of this statement apply at inception for any
entity created after January 31, 2003. For an entity created before
February 1, 2003, the provisions of this Interpretation must be applied at
the beginning of the first interim or annual period beginning after June
15, 2003. We do not believe that FIN 46 will have an impact on our
consolidated financial statements when we adopt the provisions of this
statement in the second quarter of fiscal year 2004.
In April 2003, the FASB issued FAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." FAS 149 amends and clarifies
financial accounting and reporting for derivative instruments. This
statement is effective for contracts entered into or modified after June 30,
2003. We will adopt this statement in the second quarter of fiscal year
2004 and do not anticipate that it will have any impact on our financial
statements.
In May 2003, the FASB issued FAS 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity,"
which addresses how an issuer classifies and measures financial instruments
with characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances) because that financial
instrument embodies an obligation of the issuers. This Statement shall be
effective for financial instruments entered into or modified after May 31,
2003, and otherwise shall be effective at the beginning of the first
interim period beginning after June 15, 2003. For financial instruments
created before the issuance date of this Statement and still existing at
the beginning of the interim period of adoption, transition shall be
achieved by reporting the cumulative effect of a change in an accounting
principle by initially measuring the financial instruments at fair value or
other measurement attribute required by this Statement. We do not believe
that FAS 150 will have an impact on our consolidated financial statements
when we adopt the provisions of this statement in the second quarter of
fiscal year 2004.
Note 7 - Stock Based Compensation
----------------------------------
Stock-based Compensation
We have a stock option plan under which certain officers, directors and
employees have been granted options. All the options have been granted at
prices equal to the market value of the shares at the time of the grant and
expire on the tenth anniversary of the grant date. Our stock-based
compensation is measured in accordance with the provisions of Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, no compensation expense
is recognized for fixed option plans because the exercise prices of employee
stock options equal or exceed the market prices of the underlying stock on
the dates of grant.
The following table represents the effect on net income (loss) and
income (loss) per share if we had applied the fair value based method and
recognition provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," to stock based employee
compensation.
For the Three For the Three
Months Ended Months Ended
June 27, 2003 June 28, 2002
----------- -----------
Net income (loss), as reported $115,043 $(7,232,710)
Deduct: Total stock-based employee compensation
expense determined under the fair value method
for all awards, net of related tax effects (356) 0
Pro forma income (loss) $114,687 $(7,232,710)
Income (loss) per share - basic and diluted:
As reported $0.01 $(0.81)
Pro forma $0.01 $(0.81)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
Results of Operations
---------------------
Net Revenues. Net revenues decreased approximately $812,000 (3.0%) for the
three month period ended June 27, 2003 as compared to same period last year.
The decrease in net revenues was primarily the result of decreased sales to
resellers and decreased sales in the team dealer operations. Team dealer
operations are being restructured including the closing of the Little Rock
Arkansas location and the restructuring of the sales force in Oklahoma. We
believe the restructuring of team dealer operations will result in continued
team dealer revenue declines, significantly lower operating costs and
improved impact on operating income. Orders placed over the Internet
increased to $1.7 million for the quarter ended June 27, 2003 as compared
to $1.1 million the same period last year. We expect continued revenue
challenges in fiscal year 2004, due to increased competition, a decreased
salesforce, continued restrictions in state, federal and school budgets, an
overall soft economy, and declining participation and funding of youth
sports organizations.
Gross Profit. Gross profit decreased by approximately $764,000 (9.4%) for
the three month period ended June 27, 2003 as compared to same period last
year. As a percentage of net revenues, gross profit decreased 2.0% to 28.4%
from 30.4% for the three month period ended June 27, 2003 as compared to the
same period last year. This decrease is primarily the result of increased
competition and pricing pressure causing gross profit erosion.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased approximately $616,000 (8.2%) for the
three month period ended June 27, 2003 as compared to the same period last
year. As a percentage of net revenues, selling, general and administrative
expenses decreased to 26.7% from 28.2% for the three month period ended June
27, 2003 as compared to the same period last year. The decrease was
primarily a result of the following:
(i.) A decrease in payroll related expense of approximately $397,000,
attributable to reduced headcount.
(ii.) A decrease in selling and promotional expense of approximately
$235,000, primarily as a result of reduced spending on producing and
mailing catalogs.
We expect continued selling, general and administrative expense decreases
this fiscal year as compared to the prior year.
Internet Expense. Internet related expenses increased approximately $44,000
for the three month period ended June 27, 2003 as compared to the same
period last year. These expenses are related to the continued support and
enhancement of our websites and web development to post electronic catalogs
on our websites.
Interest Expense. Interest expense decreased approximately $19,000 (11.1%)
for the three month period ended June 27, 2003 as compared to the same
period last year. This decrease is due to lower interest rates.
Income Tax Expense. Income tax expense decreased approximately $58,000
(45.6%) for the three month period ended June 27, 2003 as compared to the
same period last year due to lower taxable income. 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.
Net Income before Cumulative Effect of Accounting Change. Net income before
cumulative effect of accounting change for the three month period ended June
27, 2003 decreased by $95,000 (45.2%) as compared to the same period last
year.
Cumulative Effect of Accounting Change. On March 30, 2002 we adopted
Financial Accounting Standards Board 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. Goodwill is required to be tested for impairment in a
transitional test upon adoption and then at least annually by reporting
unit. As a result of our impairment testing, we recorded a non-cash
"cumulative effect of accounting change" impairment write down of
approximately $7.4 million for the three month period ended June 28, 2002.
Net Income (Loss). Net income increased to $115,000 for the three month
period ended June 27, 2003 as compared to a net loss of $7.2 million for the
three month period ended June 28, 2002. Net income per share increased
to $0.01 for the three months ended June 28, 2002 from a loss per share of
$(0.81) for the three month period ended June 28, 2002. This increase is
due to the cumulative effect of accounting change recorded last year.
Liquidity and Capital Resources
-------------------------------
Our working capital decreased approximately $490,000 during the three
month period ended June 27, 2003, from $27.7 million at March 28, 2003 to
$27.2 million at June 27, 2003. This decrease in working capital is
primarily a result of seasonal decreases in trade receivables of
approximately $6.6 million and a decrease in cash of approximately $1.2
million. These decreases were partially offset by a decrease in trade
accounts payable of approximately $6.9 million.
We have a credit agreement with Congress Financial Corporation to
finance our working capital requirements through August 1, 2004. The credit
agreement provides for a $25 million revolving credit facility. Borrowings
under the 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 June
27, 2003 we were in compliance with this requirement. As of June 27, 2003,
we had total available borrowings under our senior credit facility of
approximately $18.6 million, of which approximately $16.0 million were
outstanding.
We believe we can satisfy our working capital requirements necessary to
support our current operations from borrowings under our credit facility and
cash flows from operations. However, continued revenue declines and future
losses would negatively impact our results of operations and impact our
ability to support our working capital needs.
We do not currently have any significant commitments for capital
expenditures.
The following table sets forth our contractual obligations at June 27, 2003
for the periods shown:
Due in Due in
Due within two to Four to
one year three years Five years Thereafter Total
------------------------------------------------------------
Notes payable $ 57,557 $16,057,335 $ -- $ -- $16,114,892
Capital lease 17,519 10,215 -- -- 27,734
obligations
Leases 1,790,962 1,674,007 226,154 -- 3,691,123
------------------------------------------------------------
Total $1,866,038 $17,741,557 $ 226,154 $ -- $19,833,749
============================================================
Contingencies
-------------
During the past several years, we 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.
Certain Factors that May Affect Our 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.
Several 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;
9. product liability and insurance; and
10. increased internet migration.
General and Specific Market and Economic Conditions
---------------------------------------------------
The general economic condition in the United States 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 customers 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. There is significant competition in the retail and institutional
sporting goods market. Difficult economic conditions and significant
competition in our market could have a negative impact on both revenues and
gross margins.
Budgetary Restrictions of Schools and Government Agencies
---------------------------------------------------------
Much of our business is dependent on the budgetary fundingof schools,
as well as local, state and federal government agencies. Many U.S. states
are currently reporting budget deficits and cost cutting measures. School
athletic funding in Arkansas and Oklahoma have continued to impact our team
dealer business. We have closed the Little Rock Arkansas location and
restructured the Oklahoma sales force as a result of declining revenues
in these markets. Decreases in school athletic budgets will continue
to impact our team dealer operations and increase the pricing and profit
margin competitive pressures in the institutional sporting goods market.
Restrictions or reductions to the funding or budgeted spending of these
entities could adversely affect our results 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,
manufacturing facilities, and 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 and product suppliers, 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. 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, packaging, shipping and postage are
significant components of our costs. Catalog marketing entails substantial
paper, postage, and costs associated with catalog development. Each of
these is subject to price fluctuations.
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, erosion
in gross profit margins, 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 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[R] 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
-------------------------------
Approximately 30% of our total product costs are from 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 our 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. If we determine
that we would not be able to realize all or part of the net deferred tax
asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made.
Product Liability and Insurance
-------------------------------
Because of the nature of our products, we are periodically subject to
product liability claims resulting from personal injuries. We may become
involved in various lawsuits incidental to our business, some of which
relate to claims allegedly resulting in substantial permanent paralysis.
Significantly increased product liability claims continue to be asserted
successfully against manufacturers and distributors of sports equipment
throughout the United States resulting in general uncertainty as to the
nature and extent of manufacturers' and distributors' liability for personal
injuries. See Part II. Item 1. -- "Legal Proceedings".
In recent years, product liability insurance has become much more
expensive, more restrictive and more difficult to obtain. There can be no
assurance that our general product liability insurance will be sufficient to
cover any successful product liability claims made against us. In our
opinion, any ultimate liability arising out of currently pending product
liability 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 not covered by
insurance, could have a material adverse effect on our financial condition
and results of operations.
Increased Internet Migration
----------------------------
We have significant investments in our Internet websites and IT
platform based on our belief that, in the future, an increasing portion of
our customer base will use the Internet as the predominant method for
quoting, ordering, procuring their products and performing customer service
inquires. We have cost structured our business anticipating customer
migration to the Internet to continue. If the increase in migration to the
Internet does not continue, we could experience reductions in revenue or
additional costs to market to and service these customers through direct
mail expense and increased call center personnel.
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 28, 2003.
Item 4. Controls and Procedures
-----------------------
(a) Disclosure controls and procedures. As of the end of the
period covered by this Quarterly Report on Form 10-Q, we have carried
out an evaluation, with the participation of our management, including
the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-15. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in ensuring that
information required to be disclosed by us in the reports that we file
or submit under the Securities Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's
rules and forms.
(b) Changes in internal controls over financial reporting. There have
been no changes in our internal control over financial reporting that
occurred during our first fiscal quarter to which this Quarterly Report
on Form 10-Q relates that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
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. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
During the quarter ended June 27, 2003, we filed a Current Report on
Form 8-K dated June 27, 2003, filed on June, 27, 2003, for the purpose of
reporting our filing of Form 12b-25 Notification of Late Filing of our Form
10-K for the fiscal year ended March 28, 2003.
Exhibit
Nbr. Description of Exhibit
---------------- ----------------------------------------------------------
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)).
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)).
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).
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))
Exhibit 10.1 (*) Second Amendment to Loan and Security Agreement dated June
27, 2003 by and between the Company and Congress Financial
Corporation.
Exhibit 10.2 (*) Amendment No. 1 to Voit License Agreement dated as of
August 1, 2003.
Exhibit 31.1 (*) Certification of the Company's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 (*) Certification of the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32 (*) Certification of the Company's Chief Executive Officer
and 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.
We hereby certify that this Report on Form 10-Q fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that the information contained in this report fairly presents, in
all material respects, the financial condition and results of operations of
the Company.
Dated: August 11, 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