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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 26, 1997.
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File number 1-10704
Sport Supply Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2241783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1901 Diplomat Drive, Farmers Branch, Texas 75234
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 484-9484
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, $ .01 Par Value New York Stock Exchange
Common Stock Purchase Warrants American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-
affiliates of the registrant on November 18, 1997 based on the
closing price of the common stock on the New York Stock Exchange on
such date, was approximately $44,801,223.
Indicated below is the number of outstanding shares of each
class of the registrant's common stock, as of November 18, 1997.
Title of Each Class of Common Stock Number Outstanding
Common Stock, $.01 par value 8,085,759
DOCUMENTS INCORPORATED BY REFERENCE
Document
Part of the Form 10-K
Proxy Statement for Annual Meeting of
Stockholders to be held January 13, 1998 Part III
TABLE OF CONTENTS
Item Page
PART I
1 Business..........................................
2 Properties........................................
3 Legal Proceedings.................................
4 Submission of Matters to a Vote of Security Holders
PART II
5 Market for Registrant's Common Equity and Related
Stockholder Matters.........................................
6 Selected Financial Data...........................
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................
8 Financial Statements and Supplementary Data.......
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................
PART III
10 Directors and Executive Officers of the Registrant
11 Executive Compensation............................
12 Security Ownership of Certain Beneficial Owners and
Management .............................................
13 Certain Relationships and Related Transactions....
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
PART I
Item 1. Business.
General
Sport Supply Group, Inc. (the "Company" or "SSG") believes it is
the largest direct mail marketer of sports related equipment and
leisure products to the institutional market in the United States.
The Company principally serves the institutional market, which is
comprised primarily of schools, colleges, universities, government
agencies, military facilities, athletic clubs, youth sports leagues
and recreational organizations. SSG offers a broad line of
institutional-grade equipment and provides after-sale customer
service through the use of sales personnel strategically located in
certain large metropolitan areas (the "Metro Marketing Group"). See
Item 1. -- "Business - Sales and Marketing." The Company believes
that prompt delivery of a broad range of institutional-grade products
at competitive prices differentiates it from the retail sporting
goods stores that primarily serve the consumer market. The Company
also serves the local sporting goods team dealer market principally
with its MacGregor brand products. The Company markets approximately
8,000 sports related equipment products to over 100,000
institutional, retail, mass merchant and team dealer customers and
maintains over 200,000 names in mailing lists.
In May 1996, the Company made the strategic decision to dispose
of its golf operations to focus on its core institutional business.
On May 20, 1996 as part of this plan of disposal, the Company sold
virtually all of the assets of its Gold Eagle Professional Golf
Products Division, which sold golf accessory products to the retail
market. In addition to the sale of Gold Eagle, the Company adopted a
plan to dispose of the remaining operations of its retail golf
segment and classified these operations as discontinued. On March
28, 1997, the Company disposed of substantially all of the remaining
assets of the discontinued operation to Nitro Leisure Products, Inc.,
a Delaware corporation. The discussion in this Report on Form 10-K
regarding the Company's business, unless otherwise noted, relates
only to the Company's continuing operations (i.e., core institutional
business). Consequently, the Company will no longer report segment
information about this operation. For a discussion regarding the
Company's discontinued operations, see Note 10 to the consolidated
financial statements included in Item 8. -- "Financial Statements and
Supplementary Data."
The Company's net revenues have increased from $47 million in
1991 to $79.1 million for the eleven month period ended September 26,
1997. The Company attributes its high level of growth to the
successful development of an effective mail order marketing program
and competitive pricing that have led to greater market penetration
and to the development of, and increase in, the Company's
manufacturing capabilities.
On December 10, 1996, pursuant to a Securities Purchase
Agreement dated November 27, 1996 between Emerson Radio Corp.
("Emerson") and the Company (the "Purchase Agreement"), Emerson
acquired directly from the Company (i) 1,600,000 shares of newly-
issued Common Stock (the "Emerson Shares") for an aggregate cash
consideration of $11,500,000, or approximately $7.19 per share, and
(ii) 5-year warrants (the "Emerson Warrants") to acquire an
additional 1,000,000 shares of Common Stock at an exercise price of
$7.50 per share, subject to standard anti-dilution adjustments, for
an aggregate cash consideration of $500,000. In addition, Emerson
agreed to arrange for foreign trade credit financing of $2 million
for the benefit of the Company to supplement the Company's existing
credit facilities. If all of the Emerson Warrants are exercised,
Emerson will own approximately 36% of the issued and outstanding
shares of Common Stock. See Item 12 -- Security Ownership of Certain
Beneficial Owners and Management" and Item 13 -- "Certain
Relationships and Related Transactions."
The Company is a Delaware corporation incorporated in 1982 and
in 1988 became the successor of an operating division of Aurora
Electronics, Inc. (f/k/a BSN Corp. and referred to herein as
"Aurora"). Prior to the completion of the initial public offering of
3,500,000 shares of the Company's common stock in April, 1991, the
Company was a wholly-owned subsidiary of Aurora. The Company has one
wholly-owned subsidiary, Sport Supply Group International Holdings,
Inc., a shell corporation that formerly held the operations of the
Gold Eagle Canada Division that was sold in May 1996.
The Company's executive offices are located at 1901 Diplomat
Drive, Farmers Branch, Texas 75234 and its telephone number is (972)
484-9484.
Products
The Company believes it manufactures and distributes one of the
broadest lines of sports related equipment and leisure products for
the institutional market. SSG offers approximately 8,000 sporting
goods and sports related products, over 3,000 of which it
manufactures. The product lines offered by SSG include archery,
baseball and softball, basketball, camping, football, tennis and
other racquet sports, gymnastics, indoor recreation, physical
education, soccer, field hockey, lacrosse, track and field,
volleyball, weight lifting, and exercise equipment.
The Company believes brand recognition is important in the
institutional and team dealer markets. Most of SSG's products are
marketed under trade names or trademarks owned or licensed by the
Company. SSG believes its trade names and trademarks are well
recognized among institutional purchasers of sports related
equipment. SSG intends to continue to expand its product and brand
name offerings by actively pursuing product, trademark and trade name
licensing arrangements and acquisitions. The Company's trademarks,
service marks, and trade names include the following:
. Official Factory Direct Equipment Supplier of Little League
Baseball (See discussion below).
. Voit[R] -- institutional sports related equipment and products,
including inflated balls and baseball and softball products
(licensed from Voit Corporation - see discussion below).
. MacGregor[R] -- certain equipment and accessories relating to
baseball, softball, basketball, soccer, football, volleyball,
and general exercise (e.g., dumbbells, curling bars, etc.)
(licensed from MacMark Corporation - see discussion below).
. Alumagoal[R] -- track and field equipment, including starting
blocks, hurdles, pole vault and high jump standards and
crossbars.
. AMF -- gymnastics equipment (licensed from AMF Bowling, Inc. -
see discussion below).
. BSN[R] -- sport balls and mail order catalogs.
. Champion -- barbells, dumbbells and weight lifting benches.
. Curvemaster[R] -- baseball and softball pitching machines.
. Fibersport -- pole vaulting equipment.
. Gamecraft -- field and floor hockey equipment, soccer equipment,
scorebooks, coaching equipment, and table tennis equipment.
. GSC Sports -- gymnastics equipment.
. Hammett & Sons -- indoor table-top games.
. Maxpro[R] -- products include, among others, football practice
dummies, baseball, and other protective helmets and pads (other
than football protective equipment), baseball chest protectors
and baseball mitts and gloves (licensed from Proacq Corp., a
subsidiary of Riddell Sports Inc.).
. New England Camp and Supply -- camping and outdoor recreational
equipment and accessories.
. North American Recreation[R] -- billiard, table tennis and other
game tables.
. Passon's Sports -- mail order catalogs.
. Pillo Polo[R] -- recreational polo and hockey games.
. Port-A-Pit[R] -- high jump and pole vault landing pits.
. Pro Base[R] -- baseball bases.
. Pro Down -- football down markers.
. Pro Net -- nets, net assemblies and frames and practice cages.
. Rol-Dri[R] and Tidi-Court -- golf course and tennis court
maintenance equipment.
. Safe-Squat -- specialty weight lifting squat machines.
. Toppleball[R] -- recreational ball games.
. U.S. Games, Inc.[R] -- goals, nets, playing equipment for
physical exercise games and mail order catalogs.
The Voit license permits the Company to use the Voit[R]
trademark in connection with the manufacture, advertisement, and sale
to institutional customers and sporting goods dealers of specified
institutional sports related equipment and products, including
inflated balls for all sports and baseball and softball products.
The Company is required to pay annual royalties under the license
equal to the greater of a certain percentage of revenues from the
sale of Voit products or a minimum royalty as set forth in the
License Agreement. The initial term of the Voit license expired on
December 31, 1989, and was subject to three renewal options for
consecutive terms of five years each. SSG has exercised two renewal
periods, and currently is permitted to use the Voit trademark through
December 31, 1999.
In February, 1992, the Company acquired two separate licenses to
use several trade names, styles, and trademarks (including, but not
limited to, MacGregor[R]). Each license permits the Company to
manufacture, promote, sell, and distribute to institutional sporting
goods customers (subject to certain exceptions) in the United States,
Canada, and Mexico, specified institutional sports related equipment
and products relating to baseball, softball, basketball, soccer,
football, volleyball, and general exercise. Each license is royalty-
free and exclusive with respect to certain customers and non-
exclusive with respect to others. Each license is perpetual provided
the Company generates a predetermined minimum amount of revenues each
year from the sale of products bearing the MacGregor trademark,
maintains certain quality standards for such products and services,
and does not commit any default under the license agreements that
remains uncured for a period of 30 days after the Company receives
notice of such default. The Company has converted a substantial
portion of its products to the MacGregor[R] brand, which is believed
to be one of the most widely recognized trade names in the industry.
These products are being sold to customers using the Company's
existing marketing channels. See Item 1. -- "Business - Sales and
Marketing."
On August 19, 1993, the Company entered into an exclusive
license agreement with AMF Bowling, Inc. to use the AMF name in
connection with the promotion and sale of certain gymnastics
equipment in the United States and Canada. The Company is required
to pay an annual royalty under the license equal to the greater of:
(i) a certain percentage of net revenues from the sale of AMF
products; or (ii) a minimum royalty as set forth in the license
agreement. The minimum royalty increases by a predetermined
percentage each year the license agreement is in effect. The initial
term of the agreement expired on December 31, 1995, and was subject
to three renewal options for consecutive terms of one year each
through December 31, 1998. SSG exercised its first two renewal
options, and currently is permitted to use the AMF name through
December 31, 1997. The Company may also renew the license agreement
after December 31, 1997, subject to certain provisions contained in
the license agreement.
On December 15, 1995, the Company entered into a three year
agreement with Little League Baseball, Incorporated that, among other
things, names the Company as the "Official Factory Direct Equipment
Supplier of Little League Baseball." On August 15, 1997, the Company
and Little League Baseball extended the expiration of this agreement
to December 31, 2001. The Company is required to pay an annual fee
to keep the agreement in effect each year.
In addition to the foregoing, the Company has acquired (or had
issued) a number of patents relating to products sold by the Company.
The following is a list of some of the patents owned by the Company:
(i) 2 separate patents relating to a Power Squat/Weight Lifting
Apparatus (expire May 20, 2003 and June 23, 2004, respectively); (ii)
Baseball Hitting Practice Device (expires May 9, 2006); (iii) 2
separate patents relating to Football Digital Display Markers (expire
June 27, 2006 and November 28, 2006, respectively); (iv) Tennis Net
and Method of Making (expires October 1, 2008); (v) Rotator Cuff
Exercise Machine (expires January 29, 2008); (vi) Portable Balance
Beam (expires July 28, 2009); and (vii) Holder for Beverage
Containers (expires August 16, 2011).
Sales and Marketing
The Company markets its products through four primary marketing
divisions: 1) Sport Supply Group; 2) The Athletic Connection;
3) Youth Sports; and 4) U.S. Games.
The Sport Supply Group marketing division markets SSG's products
to institutional customers through catalogs, outbound telemarketing,
and bid related sales efforts. SSG publishes two primary catalogs
designed for institutional customers: BSN[R] Sports, and New England
Camp and Recreation. Master catalogs containing a broad variety of
the Company's products are sent to all customers and potential
customers on the Company's mailing lists. Seasonal or specialty
supplements are prepared and mailed periodically to certain accounts
that pertain to particular sports, such as weight training, baseball
or track and field. SSG services its existing accounts and solicits
new customers with a total of over 2.2 million pieces of mail each
year, including approximately 2.0 million catalogs.
The Company's mailing lists, developed over 20 years, are
carefully maintained, screened, and cross-checked. SSG frequently
buys and rents lists that it attempts to screen, improve, and cross
reference before incorporating them into the Company's master list.
The master list is subdivided into various combinations designed to
place catalogs in the hands of individual purchase decision makers.
The master list is also subdivided by relevant product types,
seasons, and customer profiles.
While SSG maintains a strong institutional customer base in
rural and small metropolitan areas, the institutional markets in
large metropolitan areas have historically been dominated by local
sporting goods dealers and retailers. Over the last several years,
there has been a growing trend of large metropolitan area school
districts, city recreation departments, and other institutions
submitting proposed purchases through competitive bids. In response
to this trend, SSG intensified its bid related sales efforts by
having its Metro Marketing Group target large metropolitan area
school districts and institutions in an effort to include SSG's
products among those specified on bid invitations.
The U.S. Games marketing division was established to market
certain of the Company's products to elementary schools and the
preschool market.
The Athletic Connection marketing division was established in
1992 to market certain of the Company's products, principally
MacGregor brand products, to sporting goods team dealers who also
market these products to institutional customers. Products are
marketed through annual catalogs and commissioned sales
representatives to team dealers as opposed to institutional customers
targeted by the Sport Supply Group marketing division.
The Youth Sports marketing division concentrates on selling team
sports products to independent youth leagues. The Youth Sports
division utilizes outbound telemarketing, outside salesmen and a
master catalog in conjunction with a supplier contract with Little
League Baseball, Inc. to reach this marketplace. In addition to
equipment and uniforms, the Youth Sports division also provides
trophies and fund raising products. On May 15, 1996, SSG entered
into a five-year Advertising and Distribution Agreement with Hershey
Chocolate U.S.A. Pursuant to this Agreement, SSG advertises and
distributes promotional materials featuring Hershey fund raising
programs and products to youth sports leagues and teams and also
sells Hershey Chocolate products to its customers. The Youth Sports
division has entered into Promotional Agreements with Pizza Hut,
Lever Brothers, Lionel Trains, and Warner-Lambert (Bubbilicious) in
an effort to leverage SSG's direct marketing and distribution
network. These relationships help offset marketing costs and create
valuable brand-name recognition.
Customers
The Company's revenues are not dependent upon any one or a few
major customers. Instead, the Company enjoys a very large and
diverse customer base. The Company's customers include all levels of
public and private schools, colleges, universities and military
academies, municipal and governmental agencies, military facilities,
churches, clubs, camps, hospitals, youth sports leagues, non-profit
organizations and team dealer suppliers. SSG believes its customer
base in the United States is the largest in the institutional direct
mail market. The Company's institutional customers typically receive
annual appropriations for sports related equipment, which
appropriations are generally spent in the period preceding the season
in which the sport or athletic activity occurs. While institutions
are subject to budget constraints, once allocations have been made,
aggregate levels of expenditures are typically not reduced.
Approximately 7%, 8%, and 10% of the Company's sales in fiscal
1997 (which consisted of the eleven months ending September 26,
1997), 1996, and 1995 (which consisted of the 10 months ending
October 31, 1995), respectively, were to the United States
Government, a majority of which sales were to military installations.
SSG has a contract with the General Services Administration (the "GSA
Contract") that grants the Company an "approved" status when
attempting to make sales to military installations or other
governmental agencies. The existing GSA Contract expires in December
2001. Under the GSA Contract, the Company agrees to sell
approximately 700 products to United States Government agencies and
departments at catalog prices or at prices consistent with any
discount provided to other customers of the Company. Products sold
to the United States Government under the GSA Contract are always
sold at the Company's lowest offered price. The Company also has a
contract with the General Services Administration for the sale of
approximately 40 camp related products with terms similar to the GSA
Contract. This contract expires in August 2002.
SSG also sells products not covered by the GSA Contract to
United States Government customers, although the appropriation
process for purchases of these products differs. These sales are made
through a U.S. Government non-appropriated fund contract. This
contract is administered by the United States Air Force and is
scheduled to expire on September 30, 1999. See Note 6 to the
consolidated financial statements included in Item 8. -- "Financial
Statements and Supplementary Data."
Seasonal Factors and Backlog
Historically, SSG's revenues have peaked in the second and third
calendar quarters of each year due primarily to the budgeting
procedures of many of its customers and the seasonal demand for
product offered by the Company. Less revenues are generated in the
first and fourth calendar quarters because of the reduced demand
arising from decreased sports activities, adverse weather conditions
inhibiting customer demand, holiday seasons and school recesses. See
Note 12 to the consolidated financial statements included in Item 8.
-- "Financial Statements and Supplementary Data."
SSG had a backlog for continuing operations of approximately
$2,526,000 at September 26, 1997, compared to approximately
$2,174,000 at November 1, 1996.
Manufacturing and Suppliers
The Company manufactures many of the products it distributes at
its four manufacturing facilities. See Item 2. -- "Properties." Game
tables, gym mats, netting, and tennis and baseball equipment are
manufactured in the Company's two Anniston, Alabama plants.
Gymnastics equipment is manufactured at SSG's facility in Cerritos,
California. Items of steel and aluminum construction, such as soccer
field equipment and weight room equipment, are principally
manufactured at SSG's facilities in Farmers Branch, Texas.
Certain products manufactured by the Company are custom-made
(such as tumbling mats ordered in color or size specifications),
while others are standardized. The principal raw materials used by
the Company in manufacturing are, for the most part, readily
available from several different sources. Such raw materials include
foam, vinyl, nylon thread, steel and aluminum tubing, wood, slate,
and cloth. Except as noted above, items not manufactured by SSG are
purchased from various suppliers primarily located in the United
States, the Republic of China (Taiwan), South Korea, Australia, the
Philippines, Thailand, the People's Republic of China, Pakistan, and
Germany. SSG has no significant purchase contracts with any major
supplier of finished products, and most products purchased from
suppliers are readily available from other sources. The Company
purchases most of its finished product in U.S. dollars and is
therefore not subject to exchange rate differences.
Competition
SSG competes in the institutional market principally with local
sporting goods dealers and retail sporting goods stores, which
collectively dominate the institutional market. Dealers and retail
stores occasionally fill institutional orders with Company products.
The Company has identified approximately 15 other direct mail
companies in the institutional market. SSG believes that most of
these competitors are substantially smaller than SSG in terms of
geographic coverage, products offered, and revenues.
The Company competes in the institutional market principally on
the basis of price, product availability and customer service. SSG
believes it has an advantage in the institutional market over
traditional sporting goods retailers and team dealers because its
selling prices do not include comparable price markups attributable
to wholesalers, manufacturers, and/or distributors. In addition, the
Company's ability to control the availability of goods it
manufactures enables it to respond more rapidly to customer demand.
SSG believes its direct mail competitors operate primarily as
wholesalers and distributors, with little or no manufacturing
capability.
While large sporting goods companies such as Wilson Sporting
Goods Co., Spalding Sporting Goods, a division of Evenflo, Inc.,
Rawlings Sporting Goods, and Russell Athletic Company dominate the
marketing of sports related equipment in the United States, SSG does
not compete directly with such companies. Rather, certain of these
companies supply products to SSG as well as retail sporting goods
stores and team dealers, the Company's primary competitors in the
institutional market.
Government Regulation
Many of the Company's products are subject to 15 U.S.C. SS 2051-
2084 (1992 and Supp. 1996), among other laws, which empowers the
Consumer Product Safety Commission (the "CPSC") to protect consumers
from hazardous sporting goods and other articles. The CPSC has the
authority to exclude from the market certain articles which are found
to be hazardous, and can require a manufacturer to refund the
purchase price of products that present a substantial product hazard.
CPSC determinations are subject to court review. Similar laws exist
in some states and cities in the United States.
Product Liability and Insurance
Because of the nature of the Company's products, SSG is
periodically subject to product liability claims resulting from
personal injuries. The Company from time to time may become involved
in various lawsuits incidental to the Company's business, some of
which will relate to claims of injuries allegedly resulting in
substantial permanent paralysis. Significantly increased product
liability claims continue to be asserted successfully against
manufacturers and distributors throughout the United States resulting
in general uncertainty as to the nature and extent of manufacturers'
and distributors' liability for personal injuries. See Item 3 --
"Legal Proceedings."
There can be no assurance that the Company's general product
liability insurance will be sufficient to cover any successful
product liability claims made against the Company. Any claims
substantially in excess of the Company's insurance coverage, or any
substantial claim not covered by insurance, could have a material
adverse effect on the Company's results of operations and financial
condition.
Employees
On September 26, 1997, SSG had approximately 395 full-time
employees in its core institutional business, 146 of whom were
involved in the Company's manufacturing operations. SSG also hires
part-time and temporary employees primarily during the summer months.
None of the Company's employees are represented by a union, and the
Company believes its relations with employees is good.
EXECUTIVE OFFICERS OF THE COMPANY
Year
First
Became
Name Age Present Position Officer
Geoffrey P. 57 Chairman of the Board and 1996
Jurick Chief Executive Officer
Peter S. 49 President and Chief 1991
Blumenfeld Operating Officer
John P. Walker 34 Executive Vice President 1996
and Chief Financial Officer
Terrence M. 35 General Counsel and 1995
Babilla Secretary
All officers are elected for a term of one year or until their
successors are duly elected.
Item 2. Properties.
The Company leases (i) a 135,000 square foot corporate
headquarters and manufacturing facility and (ii) a 181,000 square
foot warehouse facility, each of which is located in Farmers Branch,
Texas. The 135,000 square foot facility is under a lease expiring in
July 1999, with a five year renewal option. The 181,000 square foot
warehouse facility is under a lease expiring in December 2004, with
two (2) five year renewal options. The Company also leases a 45,000
square foot gymnastics equipment manufacturing facility in Cerritos,
California. The Company's lease in California expires in December
2001.
The Company owns (i) a 35,000 square foot foam product and
netting manufacturing plant and (ii) a 45,000 square foot game table
manufacturing plant, both of which are located in Anniston, Alabama.
Item 3. Legal Proceedings.
The Company from time to time becomes involved in various claims
and lawsuits incidental to its business. In management's opinion,
any ultimate liability arising out of currently pending product
liability claims will not have a material adverse effect on the
Company's financial condition or results of operations. However, any
claims substantially in excess of the Company's insurance coverage,
or any substantial claim not covered by insurance, could have a
material adverse effect on the Company's results of operations and
financial condition. See Item 1. -- "Business-- Product Liability and
Insurance." On September 29, 1997, the Company terminated Mr. Eugene
Davis as Vice Chairman and a Consultant and requested that Mr. Davis
resign as a director of the Company. The circumstances surrounding
such termination are the subject of two proceedings. On September 30,
1997, the Company filed a complaint in the United States District
Court for the Northern District of Texas, Dallas Division, seeking a
declaration as to the existence of an alleged consulting agreement
and as to the Company's continuing obligations to make payments to
Mr. Davis. Thereafter, Mr. Davis filed a complaint in the Law
Division of the Superior Court of New Jersey, against the Company for
breach of an alleged consulting agreement and against certain unnamed
"John Does" of the Company for tortious interference with contractual
relationships. The Company intends to vigorously defend itself
against Mr. Davis' complaint.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
SSG's common stock, par value $.01 per share (the "Common
Stock") is traded on the New York Stock Exchange, Inc. ("NYSE") under
the symbol GYM. SSG's Common Stock Purchase Warrants, which were
distributed as a special dividend to the Company's stockholders on
December 27, 1993 (the "1993 Warrants"), are traded on the American
Stock Exchange, Inc. ("AMEX") under the symbol GYMW. As of October
28, 1997, there were 2,247 holders of the Common Stock (including
individual security position listings). The following table sets
forth the range for the periods indicated of the high and low sales
prices for the Common Stock and the 1993 Warrants (after giving
effect to the 5 for 4 stock split declared by the Company on January
26, 1994). There is no fourth quarter 1997 information set forth in
the following table due to the Company's change in its fiscal year
end from October 31 to September 30.
Common Stock 1993 Warrants
High Low High Low
1996 First 8-5/8 6-3/4 1-1/4 3/8
Quarter
Second 8-1/8 6-1/8 11/16 3/8
Quarter
Third 8-1/4 4-5/8 13/16 1/8
Quarter
Fourth 7-7/8 5-1/8 1/2 3/16
Quarter
1997 First 6-7/8 4-5/8 5/16 1/16
Quarter
Second 6-1/2 5-1/8 5/16 1/64
Quarter
Third 8-7/8 5-3/8 1/8 1/32
Quarter
The Company announced on January 2, 1996 that it terminated its
annual cash dividend policy effective immediately. The Company
currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends on its capital stock in
the foreseeable future.
On December 10, 1996, pursuant to a Securities Purchase
Agreement dated November 27, 1996 between Emerson and the Company
(the "Purchase Agreement"), Emerson acquired directly from the
Company (i) 1,600,000 shares of newly-issued Common Stock (the
"Emerson Shares") for an aggregate cash consideration of $11,500,000,
or approximately $7.19 per share, and (ii) 5-year warrants (the
"Emerson Warrants") to acquire an additional 1,000,000 shares of
Common Stock at an exercise price of $7.50 per share, subject to
standard anti-dilution adjustments, for an aggregate cash
consideration of $500,000. In addition, Emerson agreed to arrange
for foreign trade credit financing of $2 million for the benefit of
the Company to supplement the Company's existing credit facilities.
See Item 12 -- "Security Ownership of Certain Beneficial Owners and
Management" and Item 13 -- "Certain Relationships and Related
Transactions". The Emerson Shares and Emerson Warrants were sold in
a privately negotiated transaction pursuant to Section 4(2) of the
Securities Act of 1933, as amended (i.e., a transaction by an issuer
not involving a public offering).
On May 28, 1997, the Company approved the repurchase of up to
1,000,000 shares of its issued and outstanding common stock in the
open market and/or privately negotiated transactions. Such purchases
are subject to price and availability of shares, working capital
availability and any alternative capital spending programs of the
Company. As of September 26, 1997, the Company had repurchased
approximately 287,000 of its issued and outstanding common stock in
the open market.
Item 6. Selected Financial Data.
The following tables set forth certain historical financial data
for the Company. The historical financial data has been derived from
the audited financial statements of the Company. The historical data
below should be read in conjunction with Item 7. -- "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's financial statements and notes thereto
included in Item 8. -- "Financial Statements and Supplementary Data."
(4)
SELECTED FINANCIAL DATA
(Amounts in thousands, except per share amounts)
Eleven Months Year Ended Ten Months Year Ended
Ended Sep. 26 Nov. 1 Ended Oct. 31 Dec. 31
1997 1996 1995 1994 1993
Statement of
Earnings Data:
Net revenues $79,109 $80,521 $65,134 $66,920 $58,817
Gross profit 31,404 29,955 25,259 26,326 23,551
Operating profit (loss) 4,226 (65) 3,894 5,162 5,694
Interest expense 757 1,372 1,126 973 1,039
Other income
(expense), net 83 38 209 (5) 24
Cumulative effect of
accounting change -- -- -- -- 50
Earnings (loss) from
continuing operations 2,576 (964) 1,847 2,802 3,324
Earnings (loss) from
discontinued operations (2,574) (17,773) (457) 1,900 482
Net earnings (loss) 2 (18,737) 1,390 4,702 3,806
Net earnings (loss) per
common share from
continuing operations(1) 0.32 (0.14) 0.27 0.42 0.65
Net earnings (loss) per
common share from
discontinued
operations(1)(3) (0.32) (2.63) (0.07) 0.28 0.09
Net earnings (loss) per
common share(1) $0.00 $(2.77) $ .20 $ .70 $ .74
Weighted average common
shares outstanding(1) 8,151 6,768 6,950 6,760 5,154
Cash dividends declared
per common share (2) -- -- $ .12 $ .13 $ .16
At Sept. 26 At Nov. 1 At Oct. 31 At Dec. 31
Balance Sheet Data: 1997 1996 1995 1994 1993
Working capital $24,006 $21,322 $42,231 $32,886 $25,840
Total assets 50,484 70,009 86,355 71,616 45,574
Long-term
obligations, net 4,418 24,338 29,199 16,698 5,578
Total liabilities 11,527 40,846 38,745 25,143 10,618
Stockholders' equity 38,957 29,163 47,610 46,473 34,956
(1) Reflects the 5 for 4 stock split declared during January, 1994.
(2) Dividends declared in 1995 consisted of a $0.03 per share dividend
for the first three quarters. Dividends declared in 1994 consisted of
a $0.04 per share dividend for the fourth quarter of 1993 and a $0.03
per share dividend for the first, second and third quarters of 1994.
(3) See Note 10 to the consolidated financial statements
included in Item 8. - "Financial Statements and Supplementary Data."
(4) During 1995, the Company changed its financial reporting year
end from December 31 to October 31. Consequently, the fiscal year
ended October 31, 1995 is a transition period consisting of ten
calendar months. During 1997, the Company changed its financial
reporting year end from October 31 to September 30. Therefore, the
fiscal year ended September 26, 1997 is a transition period
consisting of eleven calendar months.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following table sets forth, for the periods indicated,
certain items related to the Company's continuing operations as a
percentage of net revenues. During 1995, the Company changed its
financial reporting year end from December 31 to October 31.
Consequently, the fiscal year ended October 31, 1995 is a transition
period consisting of ten calendar months. During 1997, the Company
changed its financial reporting year end from October 31 to September
30. Therefore, the fiscal year ended September 26, 1997 is a
transition period consisting of eleven calendar months. See Note 1 to
the consolidated financial statements included in Item 8. -
"Financial Statements and Supplementary Data".
For the For the For the
11 Months 12 Months 10 Months
Ended Ended Ended
Sep. 26, Nov. 1, Oct. 31,
1997 1996 1995
Net revenues (in $79,109 $80,521 $65,134
thousands)
100.0% 100.0% 100.0%
Cost of sales 60.3% 62.8% 61.2%
Selling, general and
administrative expenses 32.7% 37.3% 32.8%
Operating profit (loss) 5.3% (0.1)% 6.0%
In May 1996, the Company sold substantially all of the assets of
its Gold Eagle Professional Golf Products Division ("the Gold Eagle
Division") and approved a formal plan to dispose of its remaining
retail segment operations comprised of golf balls and golf related
accessories. In March 1997, the Company sold its remaining retail
segment operations. See Note 10 to the consolidated financial
statements included in Item 8. - "Financial Statements and
Supplementary Data". As a result, the accompanying consolidated
financial statements present SSG's retail segment as a discontinued
operation through the date of disposal. Due to the change in the
Company's fiscal year end from October 31 to September 30, the fiscal
year ended September 26, 1997 is comprised only of an 11 month
period. Therefore, certain financial data for 1997 and 1996 presented
within this section also includes (where indicated) comparative
information relative to the eleven months ended September 30, 1996
(which information is unaudited) to provide a more meaningful
discussion of comparable operating results. The following discussion
regarding 1997 as compared to 1996 and 1996 as compared to 1995,
unless otherwise indicated, relates to the Company's continuing
operations only.
1997 Compared to 1996
The following table summarizes certain financial information relating
to the Company's results of continuing operations for the eleven
month period ended September 26, 1997 and the comparable eleven month
period of 1996:
1996
1997 (unaudited)
Net Revenues $79,109,063 $73,604,273
Gross Profit $31,403,655 $28,110,058
Provision for Income Taxes $975,569 $171,906
Net Earnings $2,576,000 $305,611
Net Revenues. Net revenues for the eleven month period ended
September 26, 1997 decreased by approximately $1.4 million (1.8%) as
compared to the fiscal year ended November 1, 1996. Net revenues for the
eleven month period ended September 26, 1997 increased by approximately
$5.5 million (7.5%) as compared to the eleven month comparable period
ended September 30, 1996. The increase in net revenues reflects
increases in revenues associated primarily with youth sports league
customers. These increases were partially offset by a decrease in
Government sales. As the Government continues to reduce its
spending, the Company expects to experience a decrease in Government
sales in future periods. The Company's revenues were also adversely
affected by the United Parcel Services ("UPS") strike that occurred
in August of 1997. The Company was unable to ship the entire balance
of its order backlog, which resulted in cancellation of some orders.
Gross Profit. Gross profit for the eleven month period ended
September 26, 1997 increased by approximately $1.4 million (4.8%) as
compared to the fiscal year ended November 1, 1996 and $3.3 million
(11.7%) as compared to the eleven month period ended September 30,
1996. As a percentage of net revenues, gross profit increased to
39.7% in 1997 from 37.2% for the fiscal year ended November 1, 1996.
The dollar increase as well as the increase in gross profit as a
percentage of net revenues is primarily attributable to the increase
in sales related to SSG's youth league division.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the eleven month period ended September
26, 1997 decreased by approximately $4.1 million (13.8%) as compared
to the fiscal year ended November 1, 1996 and $537,000 (2.0%) as
compared to the eleven month period ended September 30, 1996. As a
percentage of net revenues, operating expenses decreased from 37.3%
to 32.7% for the fiscal year ended September 26, 1997 as compared to
the fiscal year ended November 1, 1996. The decrease in these
expenses as a percentage of net revenues was primarily due to the
following factors:
(i) A decrease in bad debt expense associated with the Company's
successful collection efforts and better credit evaluations
potential customers.
(ii) A decrease in expenses relating to the Company's participation
in the 1996 Olympic games, as all expenses related to
royalties and travel were incurred and paid in fiscal year 1996.
(iii) A decrease in depreciation and amortization related to the
write-offs of certain software and forecasting systems recorded in
the fourth quarter of fiscal year 1996.
(iv) A decrease in other expenses such as office supplies, postage,
paper and forms, delivery service, and telephone as a result of
management's efforts to reduce overall general and administrative
expenses.
These decreases in operating expenses were partially offset by
additional freight costs associated with the UPS strike as the
Company had to utilize other more expensive carriers in order to ship
products. Operating expenses were also offset by the increase in
advertising expenses due to the expansion of the Company's marketing
efforts, primarily expenses relating to catalogs mailed to customers.
Since the Company has combined its BSN, GSC, and Passons' catalogs,
the Company anticipates a decrease in catalog expenses for fiscal
year 1998.
Nonrecurring Charges. A majority of the nonrecurring pre-tax charge
of $1.3 million for the fiscal year ended September 26, 1997 related
to the "change in control" of the Company that occurred on December
10, 1996 (including severance payments to the former CEO of
approximately $680,000). The change in control was the result of a
stock purchase agreement with Emerson. As part of the agreement,
Emerson purchased 1,600,000 shares of SSG common stock and 1,000,000
common stock purchase warrants and caused a majority of the members
of SSG's Board of Directors to consist of Emerson's designees.
Operating Profit (Loss). Operating profit increased by approximately
$4.3 million to a profit of $4.2 million in fiscal 1997 from a loss
of approximately $65,000 for the fiscal year ended November 1, 1996
and increased by $2.5 million as compared to the eleven month period
ended September 30, 1996. As a percentage of net revenues, operating
profit increased to 5.3% in fiscal 1997 from (0.1%) for the fiscal
year ended November 1, 1996. The increase in operating profit, both
in dollar amount and as a percentage of net revenues, reflects the
impact of the increase in gross profit percentages related to sales
and the decrease in operating expenses as discussed above.
Interest Expense. Interest expense decreased approximately $615,000
(44.8%) to $757,000 in fiscal 1997 from $1.4 million for the fiscal
year ended November 1, 1996 and by $500,000 (39.7%) as compared to
the eleven month period ended September 30, 1996. The decrease in
interest expense resulted from lower borrowing levels as a result of
the equity infusion by Emerson and the proceeds received from the
sale of the discontinued operations.
Other Income, Net. Other income increased approximately $45,000 in
fiscal 1997 as compared to the fiscal year ended November 1, 1996.
The increase in other income resulted from services provided to
Emerson such as human resources, advertising,
warehousing/distribution, and banking functions as provided in a
Management Services Agreement between the Company and Emerson
effective May 1997. Other income is expected to increase in future
periods as a result of a full year benefit being realized from this
agreement. See Item 13 - "Certain Relationships and Related
Transactions".
Provision (Benefit) for Income Taxes. The provision for income taxes
increased approximately $1.4 million to a provision of $976,000 in
fiscal 1997 from a benefit of $436,000 in fiscal 1996. The Company's
effective tax rate decreased to 27.5% in fiscal 1997 from 31.1% in
fiscal 1996. See Note 4 to the consolidated financial statements
included in Item 8 -- "Financial Statements and Supplementary Data".
Earnings (Loss) from Continuing Operations. Earnings (loss) from
continuing operations increased approximately $3.5 million to $2.6
million in 1997 from a loss of $964,000 in fiscal 1996. As a
percentage of the net revenues, net earnings increased to 3.3% in
1997 from a loss of 1.2% in fiscal 1996. Earnings (loss) per share
from continuing operations increased to $.32 per share in 1997 from a
loss of $(0.14) per share in fiscal 1996. This reflects a 20.4%
increase in weighted average shares outstanding related to the sale
to Emerson of 1,600,000 shares of SSG's newly-issued common stock
offset by approximately 287,000 shares of its issued and outstanding
common stock purchased in the open market.
1996 Compared to 1995
Net Revenues. Net revenues for the fiscal year ended November 1,
1996 increased by approximately $15.4 million (23.6%) as compared to
the fiscal year ended October 31, 1995 and $7.0 million (9.5%) as
compared to the twelve month period ended October 31, 1995. The
increase in net revenues reflects increased sales in substantially
all operating divisions, including increases in revenues associated
with youth sports league customers, partially offset by declines in
revenues associated with the United States Government. The Company
believes these declines are attributable to the continued downsizing
of military installations and work stoppages of various government
agencies during fiscal 1996.
Gross Profit. Gross profit for the fiscal year ended November 1,
1996 increased by approximately $4.7 million (18.6%) as compared to
the fiscal year ended October 31, 1995 and $1.5 million (5.2%) as
compared to the twelve month period ended October 31, 1995. As a
percentage of net revenues, gross profit decreased to 37.2% in 1996
from 38.8% for the fiscal year ended October 31, 1995. The decrease
in gross profit as a percentage of net revenues is primarily
attributable to a $950,000 charge to the inventory reserve recorded
in the fourth quarter of 1996 and higher sales mix related to youth
sports leagues which are at lower margins than the Company's
institutional business. The inventory reserve reflects management's
periodic assessment of the carrying value of the Company's inventory
and the Company's strategy to dispose of slow-moving or obsolete
inventory. During fiscal year 1996, the Company intensified its
marketing efforts relating to youth sports leagues with new product
offerings and very aggressive pricing strategies designed to increase
its market penetration. As a result of these efforts, revenues
associated with youth sports league customers increased as a
percentage of total revenues but contributed to the decrease in gross
profit as a percentage of net revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the fiscal year ended November 1, 1996
increased by approximately $8.7 million (40.5%) as compared to the
fiscal year ended October 31, 1995 and $4.9 million (19.5%) as
compared to the twelve month period ended October 31, 1995. The
increase in these expenses was primarily due to the following
factors:
(i) An increase in expenses relating to the Company's primary
distribution facility for the twelve months ended November 1, 1996 as
compared to the twelve month period ended October 31, 1995. This
facility was opened during April 1995 and therefore was not
operational for the entire twelve month period ended October 31,
1995. Such expenses include labor, rent and depreciation.
(ii) An increase in payroll costs associated with an increase in
employees.
(iii) An increase in freight costs associated with the increase in
net revenues. Historically, the Company has not billed the U.S.
Government or bid customers freight. As a percentage of net
revenues, freight costs (net of freight costs recovered from
customers) increased for fiscal year 1996 compared to the twelve
months ended October 31, 1995. This increase was due primarily to
revenues associated with youth sports leagues. As a result of the
Company's pricing strategy with respect to youth sports leagues
discussed above, billable freight costs from sales to youth sports
league customers are lower than SSG's historical institutional
business. In addition, during 1996 the Company strategically elected
to change its primary freight carrier in order to improve customer
service. Average shipping rates of the new carrier were higher than
SSG's previous carrier.
(iv) Expenses relating to the Company's participation in the 1996
Olympic summer games. These expenses include royalties, travel, and
miscellaneous advertisements incurred during fiscal 1996, which
expenses were partially offset by the sale of products used in the
Olympic games.
(v) An increase in the provision for receivables relating primarily
to SSG's youth sports league customers based upon on-going credit
evaluations.
(vi) An increase in advertising expenses due to the expansion of the
Company's marketing efforts, primarily expenses relating to catalogs
mailed to customers and additional advertising relating to the youth
sports league division.
(vii) An increase in professional fees and expenses relating to legal
and financial services provided to the Company. Such fees and
expenses were incurred in connection with the Company's efforts to
arrange additional debt and equity financing, including fees and
expenses relating to the Emerson transaction.
(viii) The write-off of software and forecasting systems because the
Company determined these assets would have no future benefit.
Operating Profit (Loss). Operating profit decreased by approximately
$3.9 million to a loss of $65,165 in fiscal 1996 from a profit of
$3.9 million for the fiscal year ended October 31, 1995 and decreased
$3.4 million (101.9%) as compared to the twelve month period ended
October 31, 1995. As a percentage of net revenues, operating profit
decreased to (0.1)% in fiscal 1996 from 6.0% for the fiscal year
ended October 31, 1995. The decrease in operating profit, both in
dollar amount and as a percentage of net revenues, reflects the
impact of the increase in operating expenses and the decrease in
gross profit percentages as discussed above.
Interest Expense. Interest expense increased approximately $246,000
(21.8%) to $1.4 million in fiscal 1996 from $1.1 million for the
fiscal year ended October 31, 1995 and $31,000 (2.3%) as compared to
the twelve month period ended October 31, 1995. The increase in
interest expense reflects higher borrowing rates associated with the
Company's senior credit facility as compared to the Company's
borrowing rates in 1995, partially offset by a decrease in average
borrowing levels. The decrease in average borrowing levels was
associated primarily with the proceeds generated from the sale of the
Gold Eagle Division.
Provision (Benefit) for Income Taxes. The provision for income taxes
decreased approximately $1.6 million to a benefit of $436,000 in
fiscal 1996 from a provision of $1.1 million in fiscal 1995. The
Company's effective tax rate decreased to 31.1% in fiscal 1996 from
38.0% in fiscal 1995.
Earnings (Loss) from Continuing Operations. Earnings (loss) from
continuing operations decreased approximately $2.8 million to
$(964,000) in 1996 from $1.8 million in fiscal 1995. As a percentage
of net revenues, net earnings decreased to (1.2)% in 1996 from a
profit of 2.8% in fiscal 1995. Earnings (loss) per common share
decreased to $(0.14) per share in 1996 from earnings of $0.27 per
share in fiscal 1995, which reflects the reduction in earnings (loss)
offset by a slight decrease in weighted average shares outstanding.
Liquidity and Capital Resources
The Company's working capital increased approximately $7.3 million
during the fiscal year ended September 26, 1997, from $16.7 million at
November 1, 1996 to $24.0 million at September 26, 1997. The increase
in working capital is primarily a result of: (i) a $5.0 million
decrease in accounts payable; (ii) a $1.6 million increase in trade
receivables due to higher revenues; and (iii) a $6.3 million decrease
in net current liabilities of discontinued operations due to the sale
of the remaining discontinued operations on March 28, 1997. This
increase is partially offset by a $3.0 million decrease in inventories
resulting from the Company's working capital reduction program.
As of September 26, 1997, the Company had total borrowings under its
senior credit facility of approximately $4.6 million including a term
loan of $1,625,000 which is payable in quarterly installments of
principal and accrued interest of $125,000 through October 31, 2000,
outstanding letters of credit for foreign purchases of inventory of
approximately $1.3 million, and availability of approximately $13.6
million. The net decrease of $19.8 million in borrowings under the
senior credit facility and the net decrease of $5.0 million in trade
payables compared to November 1, 1996 reflects (i) a payment of
approximately $12.0 million using the proceeds received by the Company
from the sale of 1,600,000 shares of the Company's common stock and 1.0
million common stock purchase warrants to Emerson Radio Corp.
("Emerson"), (ii) a payment of approximately $8.2 million using the
proceeds received from the sale of the remaining assets of the
discontinued retail segment, and (iii) a payment of approximately $3.0
million using the amount received from tax refunds.
On September 9, 1997, the Company entered into a Second Amended and
Restated Loan and Security Agreement ("Agreement") which includes a
senior credit facility of $25,000,000 with a maturity date of October
31, 2000. This Agreement provides for additional loans to be made to
SSG for the cost of certain capital expenditures (up to a maximum of
$4,000,000) and reduced interest rates. The Agreement also contains
financial and net worth covenants in addition to limits on capital
expenditures.
The Company believes it will satisfy its short-term and long-term
liquidity needs from borrowings under its senior credit facility and
cash flows from operations. The proceeds from the sale of the
discontinued operations and proceeds from the Emerson transaction were
used to reduce the Company's outstanding borrowings. As a result of
the sale and the reduced interest rates included in the new credit
agreement, interest expense is expected to be less in future operating
periods.
On May 28, 1997, the Company approved the repurchase of up to 1,000,000
shares of its issued and outstanding common stock in the open market
and/or privately negotiated transactions. Such purchases are subject
to price and availability of shares, working capital availability and
any alternative capital spending programs of the Company. As of
September 26, 1997, the Company had repurchased approximately 287,000
of its issued and outstanding common stock in the open market. In
addition, the Company will need to address the Year 2000 issues
relating to its current management information system. At this time,
the Company is in the process of evaluating all of its options that may
result in a new system implementation. As of September 26, 1997, the
Company had no material capital requirements. However, the Company
believes it will be able to satisfy any projected capital requirements
that may arise in the foreseeable future from borrowings under the
senior credit facility and cash flows from operations.
Certain Factors that May Affect the Company's Business or Future
Operating Results
This report contains various forward looking statements and information
that are based on Management's beliefs as well as assumptions made by
and information currently available to Management. When used in this
report, the words "anticipate", "estimate", "expect", "predict",
"project", and similar expressions are intended to identify forward
looking statements. Such statements are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated,
expected or projected. Among the key factors that may have a direct
bearing on the Company's results are set forth below.
Future trends for revenues and profitability remain difficult to
predict. The Company continues to face many risks and uncertainties,
including: general and specific market economic conditions, United
States Government sales, risk of nonpayment of accounts receivable,
competitive factors, and foreign supplier related issues.
The general economic condition in the U.S. could affect pricing on raw
materials such as metals and other commodities used in the
manufacturing of certain products. The Company believes it will be
able to pass any significant price increases on to its customers;
however, any price increases could have an adverse effect on revenues
and costs.
Approximately 7% of the Company's institutional sales are made to the
U.S. Government, a majority of which are made to military
installations. Anticipated reductions in U.S. Government spending
could reduce funds available to various government customers for
sports related equipment, which could adversely affect the Company's
results of operations.
The Company ships approximately 80% of its products using UPS. As
experienced earlier this year, a strike by any of its major carriers
could adversely affect the Company's results of operations due to not
being able to deliver its products in a timely manner and using other
more expensive freight carriers. Although the Company has analyzed
the cost benefit effect of using other carriers, they will continue to
rely on UPS for the majority of its small package shipments.
Management continues to closely monitor orders and the
creditworthiness of its customers. The Company has not experienced
abnormal increases in losses associated with accounts receivable;
however, credit risks associated with the youth league division are
considered by the Company to be greater than any other division. The
Company has made allowances for the amount it believes to be adequate
to properly reflect the risk to accounts receivable; however,
unforeseen market conditions may compel the Company to increase the
allowances.
The sports related equipment market in which the Company participates
is highly competitive. SSG competes principally in the institutional
market with local sporting goods dealers, as well as other direct mail
companies. While large sporting goods companies dominate the market
of sporting goods in the United States, the Company does not compete
with such companies.
The Company derives a significant portion of its revenues from sales
of products purchased directly from foreign suppliers located
primarily in the Far East. In addition, the Company believes many of
the products it purchases from domestic suppliers are produced by
foreign manufacturers. The Company is subject to risks of doing
business abroad, including delays in shipments, adverse fluctuations
in currency exchange rates, increases in import duties, decreases in
quotas, changes in custom regulations and political turmoil. The
occurrence of any one or more of the foregoing could adversely affect
the Company's operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 8. Financial Statements and Supplementary Data.
Sport Supply Group, Inc.
Index to Financial Statements
Page
Report of Independent Auditors
Consolidated Balance Sheets as of September 26, 1997 and November 1,
1996
Consolidated Statements of Operations for the Eleven Month Period
Ended September 26, 1997, the Year Ended November 1, 1996, and the Ten
Month Period Ended October 31, 1995
Consolidated Statements of Stockholders' Equity for the Eleven Month
Period Ended September 26, 1997, the Year Ended November 1, 1997, and
the Ten Month Period Ended October 31, 1995
Consolidated Statements of Cash Flows for the Eleven Month Period
Ended September 26, 1997, the Year Ended November 1, 1996, and for
the Ten Month Period Ended October 31, 1995
Notes to Consolidated Financial Statements
Financial statement schedules are omitted as the required information
is presented in the consolidated financial statements or the notes
thereto or is not necessary.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Sport Supply Group, Inc.:
We have audited the accompanying consolidated balance sheet of
Sport Supply Group, Inc. and subsidiary as of September 26, 1997, and
the related consolidated statement of operations, stockholders'
equity, and cash flow for the eleven month period ended September 26,
1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated
financial position of Sport Supply Group, Inc. and subsidiary as of
September 26, 1997, and the consolidated results of its operation and
its cash flow for the eleven month period ended September 26, 1997,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
November 11, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sport Supply Group, Inc.:
We have audited the accompanying consolidated balance sheet of
Sport Supply Group, Inc. (a Delaware corporation) and subsidiary as
of November 1, 1996 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year ended
November 1, 1996, and the ten month period ended October 31, 1995.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Sport Supply Group, Inc. and subsidiary as of November 1,
1996 and the results of their operations and their cash flows for the
year ended November 1, 1996 and the ten month period ended October
31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP Dallas, Texas
January 29, 1997
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 26, 1997 AND NOVEMBER 1, 1996
September 26, November 1,
1997 1996
CURRENT ASSETS :
Cash $ 602,779 $ 435,213
Accounts receivable -
Trade, less allowance for
doubtful accounts of
$797,000 in 1997 and 13,452,286 11,836,173
$552,000 in 1996
Other 467,661 138,994
Income taxes receivable 1,653,875 1,343,579
Inventories,net 12,284,425 15,320,505
Other current assets 583,414 899,588
Deferred tax assets 2,069,678 5,883,341
Total current assets 31,114,118 35,857,393
DEFERRED CATALOG EXPENSES 1,150,514 2,367,875
PROPERTY, PLANT AND EQUIPMENT :
Land 8,663 8,663
Buildings 1,595,228 1,551,723
Machinery and equipment 5,661,315 6,029,845
Furniture and fixtures 2,427,527 2,900,870
Leasehold improvements 2,277,372 2,365,821
11,970,105 12,856,922
Less -- Accumulated depreciation (6,638,319) (6,779,589)
and amortization
5,331,786 6,077,333
DEFERRED TAX ASSETS 5,838,895 4,492,847
COST IN EXCESS OF TANGIBLE NET ASSETS ACQUIRED,
less accumulated amortization
of $1,130,000 in 1997 and
$1,036,000 in 1996 2,959,114 3,053,780
TRADEMARKS, less accumulated
amortization of $935,000 in
1997 and $748,000 in 1996 3,364,046 3,551,801
OTHER ASSETS, less accumulated
amortization of $1,119,000
in 1997 and $1,078,000 in 725,624 761,826
1996
NET NONCURRENT ASSETS OF DISCONTINUED -- 16,365,572
OPERATIONS
$50,484,097 $72,528,427
CURRENT LIABILITIES :
Accounts $4,956,830 $9,993,049
payable
Accrued property taxes 294,882 370,789
Other accrued liabilities 1,292,247 1,806,334
Notes payable and capital lease 564,638 696,955
obligations, current portion
Net current liabilities of -- 6,329,927
discontinued operations
7,108,597 19,197,054
DEFERRED GAIN 22,091 33,137
NOTES PAYABLE AND CAPITAL LEASE
OBLIGATIONS, net of
current portion 4,396,090 24,135,267
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS - CONTINUED
AS OF SEPTEMBER 26, 1997 AND NOVEMBER 1, 1996
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value
$0.01, 100,000 shares
authorized, no shares - -
outstanding in 1997 or 1996
Common stock, par value $0.01,
20,000,000 shares
authorized, 9,158,749 and 7,551,899
shares issued in
1997 and 1996, 8,084,384
and 6,764,834 shares
outstanding in 1997 91,588 75,519
and 1996
Paid-in capital 58,574,218 46,543,19
Retained deficit (9,709,357) (9,711,357)
Treasury stock, at cost,
1,074,365 shares in 1997
and 787,065 shares in 1996 (9,999,130) (7,744,386)
38,957,319 29,162,969
$50,484,097 $72,528,427
The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Eleven Month Period Ended September 26, 1997, The Year Ended
November 1, 1996
and The Ten Month Period Ended October 31, 1995 (See Note 1)
1997 1996 1995
NET REVENUES $79,109,063 $80,520,837 $65,133,959
COST OF SALES 47,705,408 50,566,008 39,874,637
GROSS PROFIT 31,403,655 29,954,829 25,259,322
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 25,877,428 30,019,994 21,365,188
NONRECURRING CHARGES 1,300,000 -- --
Operating profit (loss) 4,226,227 (65,165) 3,894,134
OTHER INCOME (EXPENSE):
Interest expense (757,181) (1,371,990) (1,126,024)
Other income, net 82,523 37,962 208,895
(674,658) (1,334,028) (917,129)
Earnings (loss) from
continuing operations
before (provision) 3,551,569 (1,399,193) 2,977,005
benefit for income taxes
(PROVISION) BENEFIT FOR (975,569) 435,536 (1,130,250)
INCOME TAXES
EARNINGS (LOSS) FROM 2,576,000 (963,657) 1,846,755
CONTINUING OPERATIONS
DISCONTINUED OPERATIONS:
Loss from operations, net -- (2,242,143) (456,534)
of income tax benefit
Loss on disposal, net of (2,574,000) (15,530,697) -
income tax benefit
Loss from discontinued (2,574,000) (17,772,840) (456,534)
operations
NET EARNINGS (LOSS) $2,000 $(18,736,497) $1,390,221
EARNINGS (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE:
Continuing operations $0.32 $(0.14) $0.27
Discontinued operations (0.32) (2.63) (0.07)
Net earnings (loss) $0.00 $(2.77) $0.20
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON
EQUIVALENT SHARES 8,151,414 6,768,488 6,949,984
OUTSTANDING
The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
or The Years Ended September 26, 1997, November 1, 1996,
And October 31, 1995 (See Note 1)
Unrealized
Retained Holding
Common Stock Preferred Stock Paid in Earnings Treasury Stock Period Gain
Shares Amount Shares Amount Capital (Deficit) Amount (Loss) Total
Balance, January 1, 7,534,899 75,349 -- $ -- $46,490,254 $8,440,348 842,065 $(8,285,563) $(247,500) $46,472,888
1995
Issuances of common
stock upon exercises
of outstanding stock 16,438 164 137,551 137,715
options
Tax benefit from
exercises of stock
options 19,300 19,300
Dividends declared
to stockholders (805,429) (805,429)
Reissuances of
treasury stock 1,990 (12,401) 122,020 124,010
Change in unrealized
holding period gain 271,260 271,260
Net earnings 1,390,221 1,390,221
Balance, October
31, 1995 7,551,337 75,519 -- $ - $46,649,095 $9,025,140 829,664 $(8,163,543) $23,760 $47,609,965
Issuances of common
stock upon exercises
of outstanding stock
options 562 6 3,872 3,878
Reissuances of
treasury stock (109,774) (42,599) 419,157 309,383
Change in unrealized
holding period gain
(loss) (23,760) (23,760)
Net loss (18,736,497) (18,736,497)
Balance, November
1, 1996 7,551,899 $75.519 -- $ - $46,543,193 (9,711,357) 787,065 $(7,744,386) $ - $29,162,969
Issuances of common
stock upon exercises
of outstanding stock 6,850 69 47,025 47,094
Issuances of common
stock 1,600,000 16,000 11,984,000 12,000,000
Purchase of
treasury stock 287,300 (2,254,744) (2,254,744)
Net earnings 2,000 2,000
Balance, September
26, 1997 9,158,749 $ 91,588 -- $- $58,574,218 $(9,709,357) 1,074,365 $(9,999,130) $ - $38,957,319
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Eleven Month Period Ended September 26, 1997, The Year Ended
November 1, 1996,
And The Ten Month Period Ended October 31, 1995 (See Note 1)
1997 1996 1995
CASH FLOWS FROM OPERATING
ACTIVITIES :
Net earnings (loss) $ 2,000 $(18,736,497) $ 1,390,221
Adjustments to reconcile net
earnings (loss) to net cash
provided by (used in)
operating activities --
Loss on disposal of 2,574,000 15,530,697 --
discontinued operations
Depreciation and amortization 1,284,156 2,528,716 1,821,768
Provision for (recovery of)
allowances for accounts
receivable (244,730) 895,716 538,311
Changes in assets and
liabilities --
Increase in receivables (2,010,346) (330,706) (5,456,837)
(Increase) decrease in
inventories 3,036,080 1,309,650 (2,598,262)
(Increase) decrease in
deferred catalogs and
other current assets 1,533,535 (403,562) (70,468)
(Increase) decrease in 3,813,663 (3,756,306) (1,195,035)
current deferred tax
assets
Increase (decrease) in (5,036,219) 2,777,383 2,607,183
accounts payable
Increase (decrease) in (589,994) 603,017 409,969
accrued liabilities
(Increase) decrease in (64,547) 313,305 (15,452)
other assets
Increase in noncurrent (1,346,048) (4,755,852) --
deferred tax assets
Other (11,046) (4,646) (5,205)
Discontinued operations -
noncash charges and
working capital changes (697,524) 11,135,347 (4,167,157)
Net cash provided by (used in) 2,242,980 7,106,262 (6,740,964)
operating activities
CASH FLOWS FROM INVESTING
ACTIVITIES :
Acquisitions of property, plant (155,439) (631,562) (1,585,820)
and equipment
Proceeds from sale of -- 9,300 1,177,761
investments
Investing activities of
discontinued operations (1,657) 734,982 (3,471,567)
Proceeds from sale of
discontinued operations 8,160,826 --
Net cash provided by (used in) 8,003,730 112,720 (3,879,626)
investing activities
CASH FLOWS FROM FINANCING
ACTIVITIES :
Proceeds from issuances of 1,159,560 3,245,046 13,252,769
notes payable
Payments of notes payable and
capital lease obligations (21,031,054) (7,853,698) (591,225)
Proceeds from common stock 12,047,094 3,877 157,015
issuances
Dividends paid to stockholders -- (201,650) (603,779)
Purchase of (2,254,744) -- --
treasury stock
Financing activities of -- (2,547,811) (1,259,900)
discontinued operations
Net cash provided by (used in) (10,079,144) (7,354,236) 10,954,880
financing activities
Net change in cash 167,566 (135,254) 334,290
Cash, beginning of period 435,213 570,467 236,177
Cash, end of period $602,779 $435,213 $570,467
The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For The Eleven Month Period Ended September 26, 1997, The Year Ended
November 1, 1996,
And The Ten Month Period Ended October 31, 1997 (See Note 1)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION : 1997 1996 1995
Cash paid during the period for
interest $ 1,297,675 $ 2,448,631 $ 1,608,665
Cash paid during the period for
income taxes $ 10,825 $ 134,735 $ 1,870,950
During 1995, the Company acquired
the assets of several entities. In
connection with these acquisitions,
liabilities were assumed as follows :
Fair value of -- -- $6,793,652
assets acquired
Cash paid for the acquisitions, net -- -- (2,651,697)
Debt issued for the -- -- (3,779,700)
acquisitions
Liabilities assumed $ - $ - $ 362,255
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES :
During 1996, the Company reissued
42,599 shares of its common stock
previously held in treasury in
connection with an acquisition
completed in 1994 $ -- $ 309,383 $ --
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 26, 1997
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Background
Sport Supply Group, Inc. (the "Company" or "SSG") was incorporated in
1982. The assets of the Sports & Recreation Division of Aurora
Electronics, Inc. (f/k/a BSN Corp., "Aurora") were contributed to the
Company effective September 30, 1988. Prior to its initial public
offering completed in April, 1991, the Company was a wholly-owned
subsidiary of Aurora. The Company is engaged principally in the
direct mail marketing of sports related equipment and leisure
products to institutional and sporting goods team dealer customers in
the United States. The Company manufactures many of the products it
sells, including tennis, volleyball, and other sports nets; items of
steel and aluminum construction, such as soccer and field hockey
goals and volleyball, pole vault, and high jump standards; other
track and field equipment; gymnastic and exercise mats; weight
lifting equipment; tabletop games and various plastic items.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of SSG and
its wholly-owned subsidiary, Sport Supply Group International
Holdings, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation. The consolidated
financial statements also include estimates and assumptions made by
management that affect the reported amounts of assets and
liabilities, the reported amounts of revenues and expenses,
provisions for and the disclosure of contingent assets and
liabilities. Actual results could materially differ from those
estimates.
During May 1996, the Company sold substantially all of the assets
(other than cash and accounts receivable) of its Gold Eagle
Professional Golf Products Division (the "Gold Eagle Division").
Subsequent to the sale of the Gold Eagle Division, the Company
adopted a formal plan to dispose of the remaining operations of the
Company's retail segment (which previously included the Gold Eagle
Division) and therefore has classified these operations as
discontinued. On March 28, 1997, SSG disposed of substantially all
of the remaining assets of the discontinued operation to Nitro
Leisure Products, Inc., a Delaware corporation. As a result, the
Company's retail segment is being reported as a discontinued
operation through the date of disposal in the accompanying
consolidated financial statements.
Change in Fiscal Year
In January 1997, the Company changed its financial reporting year end
from October 31 to September 30. Accordingly, the fiscal year ended
September 26, 1997 is a transition period consisting of eleven
months. The Company will operate on a 52/53 week year ending on the
Friday closest to September 30.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out and weighted-average cost
methods for items manufactured by the Company and weighted-average
cost for items purchased for resale. As of September 26, 1997 and
November 1, 1996 inventories (excluding inventories related to
discontinued operations) consisted of the following:
1997 1996
Raw materials $ 2,410,009 $ 2,255,675
Work-in-process 113,170 146,751
Finished and purchased goods 10,471,262 13,868,079
12,994,441 16,270,505
Less inventory reserve for obsolete or (710,016) (950,000)
slow moving items
$12,284,425 $15,320,505
The Company recorded a $950,000 provision for the year ended November
1, 1996 to establish an inventory reserve. This reserve reflects
management's periodic assessment of the carrying value of the
Company's inventory. For the year ended September 26, 1997, the
Company recorded approximately $240,000 against the reserve for the
disposal of certain slow-moving inventory. As of September 26, 1997
and November 1, 1996, approximately 34% and 32% of total ending
inventories were products manufactured by the Company with the
balance being products purchased from outside suppliers. Sales of
products manufactured by SSG accounted for approximately 35% and 36%
of total net revenues in 1997 and 1996, respectively. Costs included
in products manufactured by SSG include raw materials, direct labor,
and manufacturing overhead.
Advertising and Deferred Catalog Expenses
The Company expenses the production costs of advertising as incurred,
except for production costs related to direct-response advertising
activities which are capitalized. Direct response advertising
consists primarily of catalogs which include order forms for the
Company's products. Production costs, primarily printing and postage,
associated with catalogs are amortized over twelve months.
Property, Plant, and Equipment
Property, plant, and equipment is stated at cost and depreciated over
the estimated useful lives of the related assets using the straight-
line method. Leasehold improvements and property and equipment
leased under capital lease obligations are amortized over the terms
of the related leases or their estimated useful lives, whichever is
shorter. The cost of maintenance and repairs is charged to expense
as incurred; significant renewals and betterments are capitalized and
depreciated over the remaining estimated useful lives of the related
assets.
Depreciation of property, plant and equipment is provided by the
straight-line method as follows:
Buildings Thirty to Forty years
Machinery and Equipment Five years
Furniture and Fixtures Five years
Intangible Assets
Cost in excess of tangible net assets acquired relates to
acquisitions made by the Company. Trademarks relate to costs
incurred in connection with the licensing agreements for the use of
certain trademarks in conjunction with the sale of the Company's
products. Other intangible assets are classified as other assets and
consist principally of patents.
Amortization of intangible assets is provided by the straight-
line method as follows:
Cost in excess of tangible net assets acquired
-- principally forty years
Trademarks -- five to forty years
Patents -- seven to eleven years
Management periodically assesses the recoverability of the carrying
value of intangible assets in relation to current and anticipated net
earnings and cash flows. Based on management's assessment, the
Company believes its investments in intangible assets are fully
realizable as of September 26, 1997.
The cost of intangible assets and related accumulated amortization
are removed from the Company's accounts during the year in which they
become fully amortized.
Long-Lived Assets
Effective November 2, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of." The adoption of this new accounting
standard did not have a material effect on the Company's Consolidated
Statements of Operations.
Other Accrued Liabilities
As of September 26, 1997, other accrued liabilities consisted of
$682,000 of bonuses, $381,000 of payroll, and $229,000 of other.
Investment in Equity Securities
During 1994, the Company entered into an Exchange Agreement with
Aurora whereby SSG exchanged 105,769 shares of its common stock
(previously held in treasury) for 500,000 common shares of Riddell
Sports Inc. ("Riddell") held by Aurora. In accordance with the
provisions of Statement of Financial Accounting Standards No.115,
"Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115"), the Company determined that this investment should
be classified as "available-for-sale securities" and reported at fair
value. During the ten month period ended October 31, 1995, the
Company sold 356,000 Riddell shares resulting in proceeds of
approximately $1,178,000 and a related gain of approximately $199,000
which is included in other income in the accompanying statement of
operations for the ten month period ended October 31, 1995. The fair
value of SSG's remaining investment in Riddell common stock (144,000
shares) was approximately $432,000 as of October 31, 1995. During
the fiscal year ended November 1, 1996, the Company sold the
remaining Riddell shares resulting in proceeds of approximately
$427,520 and a related gain of approximately $31,520 which is
included in other income in the accompanying statement of operations
for the twelve month period ended November 1, 1996.
Income Taxes
Deferred tax assets and liabilities are determined annually based
upon the estimated future tax effects of the differences in the tax
bases of existing assets and liabilities and the related financial
statement carrying amounts, using currently enacted tax laws and
rates in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (See Note 4).
Net Earnings (Loss) Per Share of Common Stock
Net earnings (loss) per share of common stock is based upon the
weighted average number of common and common equivalent shares
outstanding. Outstanding stock options and common stock purchase
warrants are treated as common stock equivalents when dilution
results from their assumed exercise.
Revenue Recognition
Revenue is generally recognized when inventory is shipped to the
customer.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," which is required to be
adopted in the first quarter of fiscal year 1998. At that time, the
Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under
the new requirements, the dilutive effect of stock options will be
excluded for basic earnings per share. The impact is not expected to
be material for the eleven month period ended September 26, 1997 and
the year ended November 1, 1996.
2. STOCKHOLDERS' EQUITY:
Stock Options
The Company maintains a stock option plan that provides up to
2,000,000 shares of common stock for awards of incentive and non-
qualified stock options to directors and employees of the Company.
Under the stock option plan, the exercise price of options will not
be less than the fair market value of the common stock at the date of
grant or not less than 110% of the fair market value for incentive
stock options granted to certain employees, as more fully described
in the Amended and Restated Stock Option Plan. Options expire 10
years from the grant date, or 5 years from the grant date for
incentive stock options granted to certain employees, or such earlier
date as determined by the Board of Directors of the Company.
Transactions under the plan are summarized as follows:
Exercise Prices/
Shares Weighted Avg. Price
Outstanding at December 627,925 $4.80 - $13.38
31, 1994
Granted 261,900 $10.63 - $14.25
Exercised (16,438) $6.60 - $10.63
Forfeited (61,615) $6.60 - $13.13
Outstanding at October 811,772 $4.80 - $14.25
31, 1995
Granted 29,125 $6.50 - $7.13
Exercised (562) $6.90
Forfeited (154,862) $6.88 - $14.25
Outstanding at November 685,473 $8.85
1, 1996
Granted 594,375 $7.49
Exercised (6,850) $6.88
Forfeited (232,425) $7.92
Outstanding at September 1,040,573 $7.26
26, 1997
Stock Options Outstanding Stock Options Exercisable
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Range of Remaining Exercise Exercise
Exercise Prices Shares Life Price Shares Price
$4.80 - $12.13 1,040,573 7.6 yrs. $7.26 490,573 $7.75
All options granted under the stock option plan during the eleven
month period ended September 26, 1997, the year ended November 1,
1996, and the ten month period ended October 31, 1995 were at
exercise prices equal to or greater than the fair market value of the
Company's stock on the date of the grant. On May 13, 1996, the
Company repriced the exercise price to the current fair market value
of certain employees' (excluding officers and directors) stock
options that were granted pursuant to the stock option plan and that
had an original exercise price in excess of the fair market value of
the common stock on May 13, 1996 of $6.875. The exercise price of
these options was lowered to $6.875. On January 23, 1997, certain
officers' options were repriced to an amount above the current fair
market value. The exercise price of these options were lowered to
$7.50. As of September 26, 1997, there were 959,427 shares available
for option grants under the stock option plan.
In addition to options granted pursuant to the stock option
plan, the Company periodically grants options to purchase shares of
SSG's common stock that are not reserved for issuance under the stock
option plan ("non-Plan options"). During the year ended November 1,
1996, and the ten month period ended October 31, 1995, the Company
granted 20,000 and 264,380 non-Plan options, respectively. All non-
Plan options granted were at exercise prices ranging from $6.88 to
$15.00 per share. Such exercise prices were equal to or greater than
the fair market value of the Company's common stock on the dates of
grant.
As of September 26, 1997, there were a total of 1,285,703 options
(including non-Plan options) outstanding with exercise prices ranging
from $4.80 per share to $15.00 per share. As of September 26, 1997,
735,703 of the total options outstanding were fully vested with
550,000 options vesting in January of 2000. As of November 1, 1996
and October 31, 1995, all outstanding options were fully vested.
The Company has adopted the pro forma disclosure provisions of SFAS
No. 123 "Accounting for Stock Based Compensation". As required by
SFAS 123, pro forma information regarding net income and net income
per share has been determined as if the Company had accounted for
employee stock options subsequent to December 31, 1995 under the fair
value method provided for under SFAS 123. The fair value for those
options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
risk-free interest rates ranging from 6.01% to 6.24%; a dividend
yield of 0%; expected volatility of 51%; and a weighted average
expected life for each option of three years. The weighted average
exercise prices and the weighted average fair values of employee
stock options are as follows:
For the Eleven For the Fiscal
Month Year Ended
Period Ended
September 26, 1997 November 1, 1996
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Fair Exercise Fair
Price Value Price Value
Exercise price of stock
option on grant date
equals market value - $- $- $6.89 $2.77
exceeds market value - $7.49 $3.01 - -
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the vesting period;
therefore, its proforma effect will not be fully realized until the
completion of one full vesting cycle. The Company's pro forma
information is as follows:
For the Eleven For the Fiscal
Month Year
Period Ended Ended
September 26, November 1,
1997 1996
Net income (loss):
As reported $2,000 ($18,736,497)
Pro forma ($804,809) ($19,163,574)
Earnings (loss) per share:
As reported $0.00 ($2.77)
Pro forma ($0.10) ($2.83)
Dividends
Historically, the Company had a $0.16 per share annual cash dividend
policy payable quarterly at $.04 per share of common stock. After
the effective date of the 5 for 4 stock split declared in 1994, the
Company's Board of Directors revised the annual cash dividend to
$0.12 per share payable quarterly at $0.03 per share of common stock.
Total cash dividends paid in fiscal 1996 and 1995 were $201,650 and
$603,779, respectively. During October 1995, a $.03 per share
dividend was declared which was paid subsequent to October 31, 1995.
Accordingly, the total dividend payment of approximately $201,650 was
recorded as a charge to retained earnings during the ten month period
ended October 31, 1995. During January 1996, the Company terminated
its annual cash dividend policy.
Common Stock Purchase Warrants
On December 27, 1993, the Company issued 1,224,459 warrants to
purchase 1,224,459 shares of SSG's common stock at an exercise price
of $25.00 per share which may be exercised on or before December 27,
1998. As a result of the 5 for 4 stock split declared in 1994, each
warrantholder will be entitled to 1 1/4 shares of common stock upon
the exercise of each warrant at an exercise price of $20 per share.
Repurchase of Common Stock
On May 28, 1997, the Company approved the repurchase of up to
1,000,000 shares of its issued and outstanding common stock in the
open market and/or privately negotiated transactions. Such purchases
are subject to price and availability of shares, working capital
availability and any alternative capital spending programs of the
Company, and maintaining compliance with the senior credit facility.
As of September 26, 1997, the Company had repurchased approximately
287,000 shares of its issued and outstanding common stock in the open
market. The Company will evaluate purchases of common stock based
upon day to day market conditions.
3. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS:
As of September 26, 1997 and November 1, 1996, notes payable and
capital lease obligations consisted of the following:
1997 1996
Note payable under revolving line
of credit,
interest at prime plus 3/4%
(9.25% at September 26, 1997 and
11.0% at November 1, 1996) or
LIBOR plus
2-1/2% (8.16% at September 26,
1997 and 9.375% at November 1,
1996), due October 31, 2000
collateralized by substantially $3,000,000 $21,811,339
all assets
Term loan, interest at LIBOR plus
2-1/2% (8.16% at September 26, 1997
and 9.625% at November 1, 1996),
payable in quarterly
installments of $125,000 plus
accrued interest through October
31, 2000 collateralized by 1,625,000 2,628,126
substantially all assets
Capital lease obligation, interest
at 7.4%, payable in monthly
installments of principal and
interest totaling $3,159 45,129 75,694
through December 1998
Capital lease obligation, interest
at 9%, payable in annual
installments of principal and
interest totaling $55,000 290,599 317,063
through August 2005
Total 4,960,728 24,832,222
Less - current portion (564,638) (696,955)
Long-term debt and capital $4,396,090 $24,135,267
lease obligations, net
Credit Facilities
The Company has a senior secured credit facility to finance its
working capital requirements. The Company's ability to borrow funds
under its revolving credit facility is based upon certain percentages
of eligible trade accounts receivable and eligible inventories. On
September 9, 1997, the Company entered into a Second Amended and
Restated Loan and Security Agreement ("Agreement"), which includes a
senior credit facility of $25,000,000 with a maturity date of
October 31, 2000. This Agreement provides for additional loans to be
made to SSG for the cost of certain capital expenditures (up to a
maximum of $4,000,000) and reduced interest rates and fees. The
Agreement also contains financial and net worth covenants in addition
to limits on capital expenditures. As of September 26, 1997, the
Company was in compliance with the covenants in the senior credit
facility.
Amounts outstanding under the senior credit facility are
collateralized by substantially all assets of the Company. As of
September 26, 1997, the Company had the option of electing the
revolving credit facility and the term loan to bear interest at the
prevailing LIBOR rate plus 2-1/2% (8.16% at September 26, 1997) or
the lender's prime rate plus .75% (9.25% at September 26, 1997).
Historically, the Company has elected the lower of the interest rates
available under the facility.
As of September 26, 1997, the Company had borrowings of approximately
$3,000,000 outstanding under the revolver, approximately $1,321,797
of letters of credit outstanding for foreign purchases of inventory,
and availability of approximately $13,640,623. In addition, as of
September 26, 1997, SSG had borrowings of $1,625,000 under the term
loan which is payable in quarterly installments of principal and
accrued interest of $125,000 through October 31, 2000.
Maturities of the Company's capital lease obligations and borrowings
under the senior credit facility as of September 26, 1997, by fiscal
year and in the aggregate, are as follows:
1998 $ 564,638
1999 540,779
2000 534,272
2001 3,162,357
2002 40,719
Thereafter 117,963
Total maturities $4,960,728
4. INCOME TAXES:
As of September 26, 1997 and November 1, 1996, the components of the
net deferred tax assets and liabilities are as follows:
1997 1996
Current deferred tax
assets --
Allowances for $373,000 $385,000
doubtful accounts
Inventories 1,514,000 1,600,000
Reserve for estimated
loss on disposal 183,000 3,898,000
and other accrued
liabilities
Total current $2,070,000 $5,883,000
deferred tax assets
Noncurrent deferred tax
assets (liabilities)
Cost in excess of
tangible net assets acquired $232,000 ($329,000)
Other intangible (1,348,000) (235,000)
assets
Reserve for estimated -- 4,851,000
loss on disposal
Depreciation/other -- 206,000
Net operating loss 6,768,000 --
carryforward
Minimum tax credit 187,000 --
carryforward
Total noncurrent deferred
tax assets (liabilities) $5,839,000 $4,493,000
The Company's net operating loss carryforward can be used to offset
future taxable income and can be carried forward for 15 years. No
valuation allowance has been recorded for the Company's deferred tax
assets because management believes it is more likely than not such
assets will be realized. Management believes that the deferred tax
assets will be realized through prior taxes paid and by future
profitable operating results. Historically, the Company has been
profitable. The net loss reported for the fiscal year ended November
1, 1996 is primarily the result of the retail segment which has been
discontinued. Management believes the Company's continuing
operations will continue to be profitable.
The income tax provision (benefit) consisted of the following:
1997 1996 1995
Current $(2,074,117) $(1,830,600) $2,082,348
Deferred 1,723,686 (8,512,158) (1,208,898)
Income tax provision $(350,431) $(10,342,758) $873,450
(benefit)
The provision (benefit) for income taxes related to continuing
operations in the accompanying statements of operations for the
eleven months ended September 26, 1997, the year ended November 1,
1996, and the ten months ended October 31, 1995 differ from the
statutory federal rate (34%) as follows:
1997 1996 1995
Income tax provision
(benefit) at statutory
federal rate of 34% $1,207,533 ($475,726) $1,012,182
State income taxes, net of
federal benefit (306,611) -- 82,801
Other for income taxes 74,647 40,190 35,267
Total provision (benefit) $975,569 ($435,536) $1,130,250
5. ACQUISITIONS:
During June 1995, the Company acquired certain assets of the Nitro
golf division from Prince Golf International, Ltd. ("Nitro"), a
manufacturer and distributor of new golf balls, for $1,000,000 in
cash, a noninterest bearing promissory note in the amount of
approximately $3,800,000 and the assumption of certain liabilities.
The results of operations of this acquisition have been included in
discontinued operations since the acquisition was related to the
retail segment operations.
6. MAJOR CUSTOMERS AND CONCENTRATION OF BUSINESS RISK:
The Company's customers for continuing operations are primarily
public and private schools, state and local governments, and the
United States Government. Sales to these customers for the eleven
month period ended September 26, 1997, the year ended November 1,
1996, and the ten month period ended October 31, 1995 were as
follows:
1997 1996 1995
Public and private schools 33% 36% 33%
State and local governments 12% 15% 10%
United States Government 7% 8% 10%
With the exception of the United States Government during the ten
month period ended October 31, 1995, the Company did not have any
individual customers that accounted for more than 10% of net
revenues.
The majority of the Company's sales are to institutional customers
that are publicly funded. The Company extends credit based upon an
evaluation of a customer's financial condition and provides for any
anticipated credit losses in its financial statements based upon
management's estimates and ongoing reviews of recorded allowances.
7. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases a portion of its office, warehouse, computer
equipment and manufacturing locations under noncancelable operating
leases with terms ranging from one to ten years. The majority of the
Company's leases contain renewal options that extend the leases
beyond the current lease terms.
Future minimum lease payments under noncancelable operating leases
for office, warehouse, computer equipment and manufacturing
locations, with remaining terms in excess of one year are as follows:
1998 $1,583,171
1999 1,246,598
2000 743,642
2001 743,642
2002 596,420
Thereafter 1,277,141
$6,190,614
Rent expense was approximately $1,485,000, $1,609,000 and $1,328,000
for fiscal 1997, 1996 and 1995, respectively.
Severance Agreements
During 1991, the Company entered into Severance Agreements with two
executive officers of the Company providing that these officers would
be entitled to receive up to approximately three times their annual
salary if there is both a change in control and a termination or
resignation (as defined therein) of such officers. During 1995, the
Company entered into Severance Agreements with two additional
executive officers and an employee having substantially the same
terms as those described above. In 1996, two of these Severance
Agreements were cancelled without payments due to the resignation of
these designated employees. Subsequent to November 1, 1996, an
officer resigned pursuant to a Purchase Agreement whereby Emerson
Radio Corp. acquired 1,600,000 shares of SSG's common stock and
warrants to acquire an additional 1,000,000 shares. The officer was
paid approximately $680,000 pursuant to the Severance Agreement on
December 10, 1996. This expense is charged to earnings in fiscal
year 1997. Consequently, only two Severance Agreements remain.
Product Liability and Other Claims
Because of the nature of the Company's products, SSG is periodically
subject to product liability claims resulting from personal injuries.
The Company from time to time may become involved in various lawsuits
incidental to the Company's business, some of which will relate to
claims of injuries allegedly resulting in substantial permanent
paralysis. Significantly increased product liability claims continue
to be asserted successfully against manufacturers throughout the
United States resulting in general uncertainty as to the nature and
extent of manufacturer's and distributors' liability for personal
injuries.
There can be no assurance that the Company's general product
liability insurance will be sufficient to cover any successful
product liability claims made against the Company. In management's
opinion, any ultimate liability arising out of currently pending
product liability claims will not have a material adverse effect on
the Company's financial condition or results of operations. However,
any claims substantially in excess of the Company's insurance
coverage, or any substantial claim not covered by insurance, could
have a material adverse effect on the Company's results of operations
and financial condition.
Indemnification Agreements with Aurora
In connection with the transfer of all of the assets of Aurora's
Sports and Recreation Division to the Company on September 30, 1988,
the Company assumed all liabilities of the Sports and Recreation
Division associated with such assets and agreed to indemnify Aurora
and hold Aurora harmless from such liabilities and liabilities
relating to the Sports and Recreation Division's operations prior to
such date. Although Aurora has not formally made any claims under
this indemnity agreement, a plaintiff in a product liability suit has
received a judgment against Aurora in the approximate amount of
$100,000 and the Company has paid the judgment. In addition, the
Company is currently litigating one product liability claim that
names the Company and Aurora as co-defendants.
In connection with the Company's initial public offering, the Company
and Aurora entered into an indemnification agreement relating to
certain tax liabilities that may arise with respect to periods
beginning prior to the initial public offering. Aurora has not made
any claims under this indemnity agreement.
Except as described above, Management is not aware of any claims
intended to be made by Aurora relating to the above indemnity
agreements.
8. EMPLOYEES' SAVINGS PLAN AND EMPLOYEE STOCK PURCHASE PLAN
Effective June 1, 1993, the Company established a defined
contribution profit sharing plan (the "401(k) Plan") for the benefit
of eligible employees. All employees with one year of service and
who have attained the age of 21 are eligible to participate in the
401(k) Plan. Employees may contribute up to 15% of their
compensation, subject to certain limitations, which qualifies under
the compensation deferral provisions of Section 401(k) of the
Internal Revenue Code.
The 401(k) Plan contains provisions that allow the Company to make
discretionary contributions during each plan year. Employer
contributions for the eleven month period ended September 26, 1997
were $36,425. All administrative expenses of the 401(k) Plan are
paid by the Company.
Effective July 1, 1997, the Company established an Employee Stock
Purchase Plan for the benefit of eligible employees. All eligible
employees are allowed to purchase shares of SSG Common Stock at a 15%
discount from the market price.
9. CHANGE IN CONTROL OF MANAGEMENT
On December 10, 1996, pursuant to a Securities Purchase Agreement
dated November 27, 1996 between Emerson Radio Corp. and SSG ("the
Purchase Agreement"), Emerson acquired directly from SSG 1,600,000
shares of newly issued Common Stock for an aggregate consideration of
$11,500,000 and five-year warrants to acquire an additional 1,000,000
shares of Common Stock at an exercise price of $7.50 per share for
an aggregate consideration of $500,000. In addition, Emerson agreed
to arrange for foreign trade credit financing of $2,000,000 for the
benefit of SSG to supplement SSG's existing credit facilities. This
currently has not been utilized. Pursuant to the Purchase Agreement,
SSG caused a majority of the members of SSG's Board of Directors to
consist of Emerson's designees. A nonrecurring pre-tax charge of
$1.3 million was recorded in the first quarter of the fiscal year
ended September 26, 1997 for compensation payments relating to the
"change in control" of the Company (including severance payments to
the former CEO of approximately $680,000).
10. DISCONTINUED OPERATIONS
On May 20, 1996, SSG disposed of substantially all of the assets
(other than cash and accounts receivable) of the Gold Eagle Division
to Morris Rosenbloom & Co., Inc., a privately-held corporation. The
sale of the Gold Eagle Division resulted in a pretax loss of
approximately $750,000.
Subsequent to the sale of the Gold Eagle Division, the Company
adopted a formal plan to dispose of the remaining operations of the
Company's retail segment (which previously included the Gold Eagle
Division) and therefore has classified these operations as
discontinued. On March 28, 1997, SSG disposed of substantially all of
the remaining assets of the discontinued operations to Nitro Leisure
Products, Inc., a Delaware corporation. Pursuant to the Asset
Acquisition Agreement, the total consideration paid to SSG was
$8,161,000 in cash. The following represents net current assets and
liabilities as well as net noncurrent assets of discontinued
operations as of November 1, 1996 and the results of operations for
the period from November 2, 1996 through the disposal date of March
28, 1997, the year ended November 1, 1996, and the ten month period
ended October 31, 1995.
November 1, 1996
Current assets $14,188,152
Current liabilities (20,518,079)
Net current liabilities $ (6,329,927)
Noncurrent assets $16,365,572
Noncurrent liabilities --
Net noncurrent assets $16,365,572
For the period For the Year For the Ten
from Nov. 2, Ended November Months Ended
1996 to March 28, 1, 1996 Oct. 31, 1995
1997
Net revenues $ 1,790,395 $ 18,725,955 $23,857,372
Earnings(loss) from operations,
net of income taxes -- (2,242,143) (456,534)
Loss on disposal, net of (2,574,000) (15,530,697) -
income taxes
The net loss from operations for the year ended November 1, 1996
includes allocated interest expense of approximately $1,090,000
related to borrowings under the Company's senior credit facility.
Interest expense charged to discontinued operations was based upon the
amount of borrowings that management estimated would be repaid from
the proceeds of the disposal of the Company's retail segment
operations.
The net loss on disposal includes a charge recorded during the
quarterly period ended May 3, 1996 of approximately $9.3 million ($5.9
million after estimated income tax benefit) to record the net assets
at estimated realizable value based upon a proposed rights offering
pursuant to the Company's plan of disposal. During the quarterly
period ended May 3, 1996, the Company also recorded a reserve of
approximately $3.9 million ($2.5 million after estimated tax benefit)
for anticipated operating losses during the estimated twelve month
disposal period, including interest expense. As a result of certain
factors, including, among others, management's assessment of the
ultimate success of the proposed rights offering and estimates of the
time required to effect such transaction, as well as the Company's
projected liquidity requirements, the Company determined that a
private sale of the remaining assets of its retail segment was a
preferable and more expeditious method of disposal. Based upon
management's estimates of the net proceeds to be received pursuant to
such disposal, the Company recorded an additional charge of $5.8
million ($3.7 million after estimated income tax benefit) during the
quarter ended August 2, 1996 and a charge of $5.2 million ($3.4
million after estimated income tax benefit) during the quarter ended
November 1, 1996 to record the net assets at estimated net realizable
value.
On March 4, 1997, the Company signed a letter of intent for the sale
of the discontinued retail segment. Based upon management's estimates
at that time of the net proceeds to be received pursuant to such
disposal, the Company recorded a pre-tax charge of $3.9 million ($2.6
million after estimated income tax benefit) during the quarter ended
January 31, 1997. This charge was provided to record the net assets at
estimated net realizable value in accordance with the purchase price
set forth in the letter of intent. On March 28, 1997, the Company sold
the remaining assets of the discontinued segment for approximately
$8.2 million and used the sale proceeds to reduce the Company's
outstanding debt.
11. SELECTED FINANCIAL DATA (UNAUDITED)
The following sets forth certain historical financial information
for the Company for each of the last 5 years (amounts in
thousands, except per share amounts):
Eleven Months Year Ended Ten Months Year Ended
Ended Sep. 26 Nov. 1 Ended Oct. 31 Dec. 31
1997 1996 1995 1994 1993
Statement of
Earnings Data:
Net revenues $79,109 $80,521 $65,134 $66,920 $58,817
Gross profit 31,404 29,955 25,259 26,326 23,551
Operating profit
(loss) 4,226 (65) 3,894 5,162 5,694
Interest expense 757 1,372 1,126 973 1,039
Other income
(expense), net 83 38 209 (5) 24
Cumulative effect
of accounting change -- -- -- -- 50
Earnings (loss)
from continuing
operations 2,576 (964) 1,847 2,802 3,324
Earnings (loss)
from discontinued
operations (2,574) (17,773) (457) 1,900 482
Net earnings (loss) 2 (18,737) 1,390 4,702 3,806
Net earnings (loss)
per common share from (1)
continuing operations 0.32 (0.14) 0.27 0.42 0.65
Net earnings (loss) per
common share from (1)(3)
discontinued operations (0.32) (2.63) (0.07) 0.28 0.09
Net earnings (loss)
per (1) common share $0.00 $(2.77) $ .20 $ .70 $ .74
Weighted average common(1)
shares outstanding 8,151 6,768 6,950 6,760 5,154
Cash dividends declared
per (2) common share -- -- $ .12 $ .13 $ .16
At Sept. 26 At Nov. 1 At Oct. 31 At Dec. 31,
Balance Sheet Data: 1997 1996 1995 1994 1993
Working capital $24,006 $21,322 $42,231 $32,886 $25,840
Total assets 50,484 70,009 86,355 71,616 45,574
Long-term obligations, net 4,418 24,338 29,199 16,698 5,578
Total liabilities 11,527 40,846 38,745 25,143 10,618
Stockholders' equity 38,957 29,163 47,610 46,473 34,956
(1)Reflects the 5 for 4 stock split declared during January, 1994.
(2)Dividends declared in 1995 consisted of a $0.03 per share dividend
for the first three quarters. Dividends declared in 1994 consisted of
a $0.04 per share dividend for the fourth quarter of 1993 and a $0.03
per share dividend for the first, second and third quarters of 1994.
(3)See Note 10 to the consolidated financial statements included in
Item 8. - "Financial Statements and Supplementary Data."
(4) During 1995, the Company changed its financial reporting year
end from December 31 to October 31. Consequently, the fiscal year
ended October 31, 1995 is a transition period consisting of ten
calendar months. During 1997, the Company changed its financial
reporting year end from October 31 to September 30. Therefore, the
fiscal year ended September 26, 1997 is a transition period
consisting of eleven calendar months.
12. QUARTERLY INFORMATION (UNAUDITED):
The following table sets forth certain information regarding the
Company's results of operations for each full quarter within year
ended September 26, 1997, and November 1, 1996. The fourth quarter
of 1997 is not presented since it consisted of two calendar months.
1997 1996
1st 2nd 3rd 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Statement of
Earnings Data
Net revenues $14,580 $28,312 $23,224 $13,216 $25,521 $21,920 $19,864
Gross profit 5,905 10,717 9,522 5,112 9,451 8,352 7,040
Operating (1,933) 3,238 2,875 (1,034) 1,827 981 (1,839)
profit (loss)
Interest 196 273 179 458 314 290 310
expense
Other income, 7 26 16 25 7 3 3
net
Net earnings
(loss) from (1,356) 1,974 1,976 (933) 967 444 (1,442) continuing
operations
Net earnings
(loss) from (2,574) -- -- (151) (10,369) (3,733) (3,520)
discontinued
operations
Net earnings (3,930) 1,974 1,976 (1,084) (9,402) (3,289) (4,962)
(loss)
Net earnings
(loss) per $(0.51) $0.24 $0.24 $(0.16) $(1.39) $(0.49) $(0.73)
common share
Weighted
average 7,698 8,367 8,334 6,737 6,749 6,777 6,779
shares outstanding
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
Effective June 20, 1997, the Company appointed Ernst & Young LLP
as its independent auditors for the fiscal year ending September 26,
1997, to replace the firm of Arthur Andersen LLP, who was dismissed
as auditors of the Company effective June 20, 1997. The decision to
change auditors was recommended by the Audit Committee of the Board
of Directors and approved by the Company's Board of Directors.
The reports of Arthur Andersen LLP on the Company's financial
statements for the ten month period ended October 31, 1995 and the
year ended November 1, 1996 (which financial statements are included
in the Company's Annual Report on Form 10-K for the fiscal year ended
September 26, 1997) did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles.
During the ten month period ended October 31, 1995, the year
ended November 1, 1996, and the subsequent interim period prior to
June 20, 1997, there were no disagreements with Arthur Andersen LLP
on any matter of accounting principles or practices, financial
statement disclosures, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Arthur Andersen
LLP, would have caused it to make a reference to the subject matter
of the disagreements in connection with its reports.
The Company had not consulted with Ernst & Young LLP during the
ten month period ended October 31, 1995 and the fiscal year ended
November 1, 1996, or subsequent interim periods prior to June 20,
1997, on either the application of accounting principles or the type
of opinion Ernst & Young LLP might issue on the Company's financial
statements.
PART III
Item 10. Directors and Executive Officers of the Registrant.
See the discussion under the captions "Election of Directors"
and "Executive Compensation and Other Information" contained in the
Proxy Statement for the Annual Meeting of Stockholders to be held
January 13, 1998, which information is incorporated herein by
reference, and Item 1. "Business - Executive Officers of the
Company."
Item 11. Executive Compensation.
See the discussion under the caption "Executive Compensation
and Other Information" contained in the Proxy Statement for the
Annual Meeting of Stockholders to be held January 13, 1998, which
information, except the Performance Graph and the Report of the
Compensation Committee and Stock Option Committee on Executive
Compensation, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
See the discussion under the caption "Security Ownership of
Certain Beneficial Owners and Management" contained in the Proxy
Statement for the Annual Meeting of Stockholders to be held January
13, 1998, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
See the discussion under the caption "Certain Relationships
and Related Transactions" contained in the Proxy Statement for the
Annual Meeting of Stockholders to be held on January 13, 1998, which
information is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a)(1) Financial Statements. See Item 8.
(a)(2) Supplemental Schedule Supporting Financial Statements. See
Item 8.
(a)(3) Management Contract or Compensatory Plan. See Index.
Each of the following Exhibits described on the Index to
Exhibits is a management contract or compensatory plan:
Exhibits 10.1, 10.1.1, 10.2, 10.3, 10.4, 10.5,
10.6, 10.7, 10.8, 10.10, 10.11 and 10.30.
(b) Reports on Form 8-K. None.
(c) Exhibits. See Index to Exhibits on pages ___ through ____.
(d) Financial Statement Schedules
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 26, 1997
SPORT SUPPLY GROUP, INC.
By: /s/ Geoffrey P. Jurick
Geoffrey P. Jurick
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed on November 17, 1997 by the
following persons on behalf of the registrant and in the capacities
indicated.
Signature
Title
/s/ Geoffrey P. Jurick Chairman of the Board
Geoffrey P. Jurick and Chief Executive Officer
/s/ Peter S. Blumenfeld Director
Peter S. Blumenfeld
/s/ John P. Walker Executive Vice President, Chief
John P. Walker Financial Officer and Director
Eugene I. Davis Director
/s/ Johnson C. S. Ko Director
Johnson C.S. Ko
/s/ Peter G. Bunger Director
Peter G. Bunger
/s/ Thomas P. Treichler Director
Thomas P. Treichler
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
2.1 Securities Purchase Agreement dated
November 27, 1996 by and between the
Company and Emerson Radio Corp.
("Emerson") (incorporated by reference
from Exhibit 2 to the Company's Report
on Form 8-K filed on December 12,
1996).
2.2 Asset Acquisition Agreement dated as of
March 28, 1997 by and between the
Company and Nitro Leisure Products,
Inc. (incorporated by reference from
Exhibit 2.1 to the Company's Report on
Form 8-K dated April 11, 1997).
3.1 Amended and Restated Certificate of
Incorporation of the Company
(incorporated by reference from Exhibit
4.1 to the Company's Registration
Statement on Form S-8 (Registration No.
33-80028)).
3.1.1 Certificate of Amendment of Amended and
Restated Certificate of Incorporation
of the Company (incorporated by
reference from Exhibit 4.1 to the
Company's Registration Statement on
Form S-8 (Registration No. 33-80028)).
3.2 Amended and Restated Bylaws of the
Company (incorporated by reference from
Exhibit 3.2 to the Company's Report on
Form 10-K for the Fiscal Year ended
November 1, 1996.)
4.1 Specimen of Common Stock Certificate
(incorporated by reference from Exhibit
4.1 to the Company's Registration
Statement on Form S-1 (Registration No.
33-39218)).
4.2 Warrant Agreement entered into between
the Company and Warrant Agent,
including form of Warrant, relating to
the purchase of up to 1,300,000 shares
of the Company's common stock for
$25.00 per share, which expires on
December 15, 1998 (incorporated by
reference from Exhibit 4.2 to the
Company's Registration Statement on
Form S-3 (Registration No. 33-71574)).
4.3 Warrant Agreement entered into between
the Company and Emerson relating to the
purchase of up to 1,000,000 shares of
the Company's common stock for $7.50
per share, which expires on December
10, 2001 (incorporated by reference
from Exhibit 4(a) to the Company's
Report on Form 8-K dated December 12,
1996.)
10.1 Employment Agreement entered into by
and between the Company and Peter S.
Blumenfeld (incorporated by reference
from Exhibit 10.1 to the Company's
Registration Statement on Form S-1
(Registration No. 33-39218)).
10.1.1 Amendment No. 1 to Employment and
Severance Agreement by and between the
Company and Peter S. Blumenfeld
(incorporated by reference from Exhibit
10.3 to the Company's Report on Form
10-Q for the quarter ended August 1,
1997).
Exhibit
Number Description of Exhibits
10.2 Employment Agreement entered into by
and between the Company and Terrence M.
Babilla (incorporated by reference from
Exhibit 10.5 to the Company's Report on
Form 10-K for the fiscal year ended
October 31, 1995).
10.3 Employment Agreement by and between the
Company and John P. Walker
(incorporated by reference from Exhibit
10.4 to the Company's Report on Form
10-Q for the quarter ended August 1,
1997).
*10.4 Employment Agreement by and between the
Company and Geoffrey P. Jurick
10.5 Non-Qualified Stock Option Agreement by
and between the Company and Geoffrey P.
Jurick (incorporated by reference from
Exhibit 10.5 to the Company's Report on
Form 10-Q for the quarter ended August
1,1997).
10.6 Non-Qualified Stock Option Agreement by
and between the Company and John P.
Walker (incorporated by reference from
Exhibit 10.6 to the Company's Report on
Form 10-Q for the quarter ended August
1, 1997).
10.7 Consulting and Separation Agreement
dated as of September 16, 1994 by and
between the Company and Jerry L.
Gunderson.
10.8 Form of Severance Agreement entered
into between the Company and each of
Messrs. Peter S. Blumenfeld and
Terrence M. Babilla (incorporated by
reference from Exhibit 10.5 to the
Company's Registration Statement on
Form S-1 (Registration No. 33-39218)).
10.9 Form of Indemnification Agreement
entered into between the Company and
each of the directors of the Company
and the Company's General Counsel
(incorporated by reference from Exhibit
10.3 to the Company's Registration
Statement on Form S-1 (Registration No.
33-39218)).
10.10 Sport Supply Group, Inc. Employee Stock
Purchase Plan (incorporated by
reference from Exhibit 4.1 to the
Company's Registration Statement on
Form S-8 (Registration No. 33-27191)).
10.11 Sport Supply Group, Inc. Amended and
Restated Stock Option Plan
(incorporated by reference from Exhibit
4.1 to the Company's Registration
Statement on Form S-8 (Registration No.
33-27193)).
10.12 Registration Rights Agreement by and
among the Company, Emerson and Emerson
Radio (Hong Kong) Limited (incorporated
by reference from Exhibit 4(b) to the
Company's Report on Form 8-K filed on
December 12, 1996)
Exhibit
Number Description of Exhibits
10.13 Assignment of Agreement and Inventory
Purchase Agreement to Affiliate by
Aurora (incorporated by reference from
Exhibit 10.10 to the Company's
Registration Statement on Form S-1
(Registration No. 33-39218)).
10.14 Form of Tax Indemnity Agreement by and
between the Company and Aurora
(incorporated by reference from Exhibit
10.16 to the Company's Registration
Statement on Form S-1 (Registration No.
33-39218)).
10.15 Master Agreement, dated as of February
19, 1992, by and between MacMark
Corporation, MacGregor Sports Products,
Inc. and Aurora (incorporated by
reference from Exhibit 10.21 to the
Company's Report on Form 10-K for the
year ended 1991).
10.16 Perpetual License Agreement, dated as
of February 19, 1992, by and between
MacMark Corporation, Equilink Licensing
Corporation, and Aurora (incorporated
by reference from Exhibit 10.22 to the
Company's Report on Form 10-K for the
year ended 1991).
10.17 Perpetual License Agreement, dated as
of February 19, 1992, by and between
MacGregor Sports Products, Inc. and
Aurora (incorporated by reference from
Exhibit 10.23 to the Company's Report
on Form 10-K for the year ended 1991).
10.18 Trademark Maintenance Agreement, dated
as of February 19, 1992, by and between
MacMark Corporation, Equilink Licensing
Corporation, and Aurora (incorporated
by reference from Exhibit 10.24 to the
Company's Report on Form 10-K for the
year ended 1991).
10.19 Trademark Maintenance Agreement, dated
as of February 19, 1992, by and between
MacGregor Sports Products, Inc. and
Aurora (incorporated by reference from
Exhibit 10.25 to the Company's Report
on Form 10-K for the year ended 1991).
10.20 Trademark Security Agreement, dated as
of February 19, 1992, by and between
MacGregor Sports Products, Inc. and
Aurora (incorporated by reference from
Exhibit 10.26 to the Company's Report
on Form 10-K for the year ended 1991).
10.21 Amendment No. 1 to Perpetual License
Agreement and Trademark Maintenance
Agreement dated as of November 1, 1992,
by and between MacMark Corporation,
Equilink Licensing Corporation and the
Company (incorporated by reference from
Exhibit 10.24 to the Company's Report
on Form 10-K for the year ended 1992).
Exhibit
Number Description of Exhibits
10.22 Amendment No. 1 to Perpetual License
Agreement and Trademark Maintenance
Agreement dated as of November 1, 1992,
by and between MacGregor Sports
Products, Inc. and the Company
(incorporated by reference from Exhibit
10.25 to the Company's Report on Form
10-K for the year ended 1992).
10.23 Assignment and Assumption Agreement,
dated to be effective as of February
28, 1992, by and between Aurora and the
Company (incorporated by reference from
Exhibit 10.27 to the Company's Report
on Form 10-K for the year ended 1991).
10.24 Second Amended and Restated Loan and
Security Agreement between the Company
and LaSalle Business Credit, Inc. dated
as of September 9, 1997 (incorporated
by reference from Exhibit 10.1 to the
Company's Report on Form 10-Q for the
quarter ended August 1, 1997).
10.25 Lease, dated July 28, 1989, by and
between Merit Investment Partners, L.P.
and the Company (incorporated by
reference from Exhibit 10.14 to the
Company's Registration Statement on
Form S-1 (Registration No. 33-39218)).
10.26 Industrial Lease Agreement, dated April
25, 1994, by and between the Company
and Centre Development Co.
(incorporated by reference from Exhibit
10.1 to the Company's Report on Form
10-Q for the quarter ended June 30,
1994).
10.26.1 Amendment to Industrial Lease
Agreement, dated July 8, 1994, by and
between the Company and Centre
Development Co. (incorporated by
reference from Exhibit 10.19.1 to the
Company's Report on Form 10-K for the
fiscal year ended December 31, 1994).
10.27 Lease, dated December 2, 1991, by and
between Injans Investments and the
Company (incorporated by reference from
Exhibit 10.20 to the Company's Report
on Form 10-K for the year ended
December 31, 1991).
10.27.1 First Amendment to Standard Industrial
Lease dated September 12, 1996 by and
between Injans Investments and the
Company (incorporated by reference from
Exhibit 10.23.1 to the Company's Report
on Form 10-K for the year ended
November 1, 1996).
10.28 Office Building Lease, dated November
20, 1992, by and between the Company
and Benson Associates (incorporated by
reference from Exhibit 10.30 to the
Company's Report on Form 10-K for the
year ended 1992).
Exhibit
Number Description of Exhibits
10.28.1 First Amendment to Office Building
Lease, by and between the Company and
Benson Associates dated April 25, 1994
(incorporated by reference from Exhibit
10.2 to the Company's Report on Form
10-Q for the quarter ended June 30,
1994)
10.29 License Agreement, dated as of
September 23, 1991, by and between
Proacq Corp. and the Company
(incorporated by reference from Exhibit
10.17 to the Company's Report on Form
10-K for the year ended 1991).
10.30 Sport Supply Group Employees' Savings
Plan dated June 1, 1993 (incorporated
by reference from Exhibit 10.27 to the
Company's Report on Form 10-K for the
year ended 1993).
10.31 Management Services Agreement dated
July 1, 1997 to be effective as of
March 7, 1997 by and between the
Company and Emerson (incorporated by
reference from Exhibit 10.2 to the
Company's Report on Form 10-Q for the
quarter ended August 1, 1997).
*10.31.1 Letter Agreement dated October 18, 1997
amending the Management Services
Agreement.
* 11 Earnings Per Common and Common
Equivalent Share
16 Letter from Arthur Andersen LLP to the
Securities and Exchange Commission
dated June 24, 1997 regarding change in
certifying accountants (incorporated by
reference from Exhibit 16.1 to the
Company's Report on Form 8-K dated June
26, 1997).
* 23.1 Consent of Independent Auditors.
*27.1 Financial Data Schedule
99 Pledge and Security Agreement, dated
December 10, 1996 by Emerson in favor
of Congress Financial Corporation
(incorporated by reference from Exhibit
99 to the Company's Report on Form 8-K
filed on December 12, 1996.
* Filed Herewith.