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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to________________.
Commission File Number 1-10704
Sport Supply Group, Inc.
----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2241783
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1901 Diplomat Drive, Farmers Branch, Texas 75234 - 8914
------------------------------------------ ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 484-9484
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the 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 whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act) Yes No X
Indicated below is the number of shares outstanding of each class of
the registrant's common stock as of February 9, 2004.
Title of Each Class of Common Stock Number Outstanding
----------------------------------- ------------------
Common Stock, $0.01 par value 8,917,244 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
---------------------
Index to Consolidated Financial Statements Page
------------------------------------------ ----
Consolidated Balance Sheets as of December 26, 2003
(Unaudited) and March 28, 2003 3
Consolidated Statements of Operations for the three and nine
months ended December 26, 2003 and December 27, 2002 (Unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
December 26, 2003 and December 27, 2002 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 26, March 28,
2003 2003
----------- -----------
(unaudited)
CURRENT ASSETS :
Cash and equivalents $ 2,643,132 $ 2,142,302
Accounts receivable:
Trade, less allowance for doubtful
accounts of 400,000 at December 26,
2003 and $500,000 at March 28, 2003 8,302,072 19,756,947
Other 284,873 488,728
Inventories, net 17,670,670 19,564,314
Other current assets 548,593 576,653
Deferred tax assets 1,525,472 1,525,472
Net assets of discontinued operations 522,290 -
----------- -----------
Total current assets 31,497,102 44,054,416
----------- -----------
DEFERRED CATALOG EXPENSES 1,340,577 1,912,346
PROPERTY, PLANT AND EQUIPMENT :
Land 8,663 8,663
Buildings 1,605,102 1,605,102
Computer equipment & software 11,015,724 11,461,375
Machinery and equipment 6,170,429 6,558,502
Furniture and fixtures 1,306,432 1,508,393
Leasehold improvements 2,494,939 2,497,209
----------- -----------
22,601,289 23,639,244
Less -- Accumulated depreciation
and amortization (15,495,124) (15,119,308)
----------- -----------
7,106,165 8,519,936
----------- -----------
DEFERRED TAX ASSETS 1,771,208 3,974,753
TRADEMARKS, less accumulated amortization
of $1.1 million at Dec. 26, 2003 and
$995,000 at Mar. 28, 2003 2,846,633 2,926,288
OTHER ASSETS, less accumulated amortization
of $651,000 at Dec. 26, 2003 and
$798,000 at Mar. 28, 2003 479,895 607,900
----------- -----------
$ 45,041,580 $ 61,995,639
=========== ===========
CURRENT LIABILITIES :
Accounts payable $ 6,054,636 $ 11,823,287
Other accrued liabilities 3,576,169 4,443,990
Notes payable and capital lease
obligations, current portion 57,558 71,082
----------- -----------
Total current liabilities 9,688,363 16,338,359
----------- -----------
NOTES PAYABLE AND CAPITAL LEASE
OBLIGATIONS, net of current portion 6,901,642 17,611,753
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Preferred stock, par value $0.01, 100,000
shares authorized, no shares outstanding - -
Common stock, par value $0.01, 20,000,000
shares authorized, 9,362,397 shares issued
at December 26, 2003 and March 28, 2003,
8,917,244 shares outstanding at December
26, 2003 and March 28, 2003 93,624 93,624
Additional paid-in capital 48,101,331 48,101,331
Accumulated deficit (15,942,098) (16,348,146
Treasury stock, at cost, 445,153 shares at
December 26, 2003 and March 28, 2003 (3,801,282) (3,801,282)
----------- -----------
28,451,575 28,045,527
----------- -----------
$ 45,041,580 $ 61,995,639
=========== ===========
The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- For The Three Months Ended - - For The Nine Months Ended -
December 26, December 27, December 26, December 27,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net revenues $ 14,725,593 $ 15,126,330 $ 59,704,979 $ 58,711,581
Cost of sales 10,978,003 11,215,159 43,723,052 42,054,673
----------- ----------- ----------- -----------
Gross profit 3,747,590 3,911,171 15,981,927 16,656,908
Selling, general &
administrative expenses 6,205,269 6,135,731 18,215,298 18,938,253
----------- ----------- ----------- -----------
Operating loss (2,457,679) (2,224,560) (2,233,371) (2,281,345)
Interest expense (116,435) (134,417) (413,476) (445,817)
Other income, net 2,050 19,960 4,412 15,898
----------- ----------- ----------- -----------
Loss from continuing operations
before income taxes and cumulative
effect of accounting change (2,572,064) (2,339,017) (2,642,435) (2,711,264)
Benefit (provision) for income
taxes for continuing operations - (111,485) - -
----------- ----------- ----------- -----------
Loss from continuing operations (2,572,064) (2,450,502) (2,642,435) (2,711,264)
Discontinued operations, net of tax 3,153,327 91,693 3,048,483 584,400
Cumulative effect of
accounting change - - - (7,442,432)
----------- ----------- ----------- -----------
Net income (loss) $ 581,263 $ (2,358,809) $ 406,048 $ (9,569,296)
=========== =========== =========== ===========
Basic earnings (loss) per share:
Loss from continuing operations $ (0.29) $ (0.27) $ (0.30) $ (0.30)
Discontinued operations 0.36 0.01 0.35 0.06
Cumulative effect of
accounting change - - - (0.83)
----------- ----------- ----------- -----------
Basic income (loss) per share $ 0.07 $ (0.26) $ 0.05 $ (1.07)
=========== =========== =========== ===========
Diluted earnings (loss) per share:
Loss from continuing operations $ (0.29) $ (0.27) $ (0.30) $ (0.30)
Discontinued operations 0.36 0.01 0.35 0.06
Cumulative effect of
accounting change - - - (0.83)
----------- ----------- ----------- -----------
Diluted income (loss) per share $ 0.07 $ (0.26) $ 0.05 $ (1.07)
=========== =========== =========== ===========
Weighted average common shares
outstanding:
Basic 8,917,244 8,917,244 8,917,244 8,917,244
Diluted 8,924,101 8,917,244 8,925,208 8,917,244
The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- For The Nine Months Ended -
December 26, December 27,
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES :
Loss from continuing operations $ (2,642,435) $(10,153,696)
Adjustments to reconcile loss from continuing
operations to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,520,869 1,654,219
Provision for accounts receivable 340,560 275,331
Cumulative effect of accounting change - 7,442,432
Changes in assets and liabilities:
Decrease in accounts receivable 6,501,267 5,678,346
Increase in inventories (3,510,100) (2,426,041)
Decrease in deferred catalog expenses
and other current assets 529,886 171,814
Increase (decrease) in accounts payable (4,200,133) 1,381,277
Decrease in deferred tax assets 2,203,545 -
Increase in accrued liabilities 287,902 85,558
Increase in other assets (33,312) (19,959)
----------- -----------
Operating cash flow provided
by continuing operations 998,049 4,089,281
Operating cash flow provided
by discontinued operations 469,113 584,400
----------- -----------
Net cash provided by operating activites 1,467,162 4,673,681
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES :
Acquisitions of property, plant & equipment (276,789) (350,306)
Proceeds from sale of ATEC 10,517,000 -
----------- -----------
Net cash (used in) provided
by investing activities 10,240,211 (350,306)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES :
Proceeds from issuance of notes payable 81,159,917 81,557,108
Payments of notes payable and capital
lease obligations (92,366,460) (85,167,346)
----------- -----------
Net cash used in financing activities (11,206,543) (3,610,238)
----------- -----------
NET CHANGE IN CASH AND EQUIVALENTS 500,830 713,137
Cash and equivalents, beginning of period 2,142,302 586,911
----------- -----------
Cash and equivalents, end of period $ 2,643,132 $ 1,300,048
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION :
Cash paid during the period for interest $ 368,122 $ 492,966
=========== ===========
Cash paid during the period for income taxes $ 73,881 $ 84,628
=========== ===========
The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 26, 2003
(Unaudited)
Basis of Presentation
---------------------
These consolidated financial statements reflect all normal and
recurring adjustments that are, in the opinion of management, necessary to
present a fair statement of Sport Supply Group, Inc.'s ("SSG") consolidated
financial position as of December 26, 2003 and the results of its operations
for the three and nine month periods ended December 26, 2003 and December
27, 2002.
The consolidated financial statements include the accounts of SSG and
its wholly-owned subsidiary, Sport Supply Group Asia Limited, a Hong Kong
corporation. All significant intercompany accounts and transactions have
been eliminated in consolidation. Effective March 2001, Sport Supply Group,
Inc. became a majority-owned subsidiary of Emerson Radio Corp.
From July 2003 through October 2003 our team dealers located in Little
Rock, Arkansas, Enid, Oklahoma and Wichita, Kansas were discontinued. In
November 2003, we sold all of the issued and outstanding capital stock of
our wholly-owned subsidiary, Athletic Training Equipment Company, Inc.
("ATEC"). Collectively, we refer to these as "Discontinued Operations" and,
accordingly, the accompanying financial statements reflect these as
discontinued operations. (See Note 9 - Discontinued Operations.)
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 and the
provisions for and the disclosure of contingent assets and liabilities.
Actual results could materially differ from those estimates. Certain
financial information for previous fiscal years has been reclassified to
conform to the fiscal 2004 presentation.
Note 1 - Inventories
--------------------
Inventories are stated at the lower of cost or market value. Cost is
determined using the standard cost method for items manufactured by us and
weighted-average cost for items purchased for resale. As of December 26,
2003 and March 28, 2003, inventories consisted of the following:
December 26, March 28,
2003 2003
----------- -----------
Raw materials $ 1,134,904 $ 2,095,242
Work-in-progress 37,041 318,165
Finished and purchased goods 17,349,166 18,223,657
----------- -----------
18,521,111 20,637,064
Less inventory allowance for
obsolete or slow moving items (850,441) (1,072,750)
----------- -----------
Inventories, net $ 17,670,670 $ 19,564,314
=========== ===========
Note 2 - Notes Payable and Capital Lease Obligations
----------------------------------------------------
As of December 26, 2003 and March 28, 2003, notes payable and capital
lease obligations consisted of the following:
December 26, March 28,
2003 2003
----------- -----------
Note payable under revolving line of credit,
Interest based on prime (4.00% at December
26, 2003 and 4.25% at March 28, 2003) and
LIBOR, as adjusted (3.76% at March 28,
2003), due October 31, 2007, collateralized
by substantially all assets. $ 6,876,441 $ 17,521,601
Capital lease obligation, interest at
9.0%, payable in annual Installments
of principal and interest totaling
$55,000 through August 2005. 73,579 117,963
Other 9,180 43,271
----------- -----------
Total 6,959,200 17,682,835
Less - current portion (57,558) (71,082)
----------- -----------
Long-term notes payable and capital
lease obligations, net $ 6,901,642 $ 17,611,753
=========== ===========
We have an amended Loan and Security Agreement with Congress Financial
Corporation to finance our working capital requirements through October 31,
2007. This agreement provides for revolving loans and letters of credit
which, in the aggregate, cannot exceed the lesser of $20 million or a
"Borrowing Base" amount based on specified percentages of eligible accounts
receivable and inventories. As of December 26, 2003, we had total available
borrowings under our senior credit facility of approximately $15.5 million,
of which approximately $6.9 million were outstanding. Amounts outstanding
under the senior credit facility are secured by substantially all the assets
of Sport Supply Group, Inc. Pursuant to the Loan and Security Agreement, we
are restricted from, among other things, paying cash dividends and entering
into certain transactions without the lender's prior consent and we are
required to maintain certain net worth levels.
Our Loan and Security Agreement allows our lender to accelerate payment upon
the occurrence of an event that has a material adverse effect upon the
business, operations, properties, assets, goodwill, or condition (financial
or otherwise) of SSG on a consolidated basis. Additionally the Loan and
Security Agreement requires us to maintain a depository account in favor of
our lender. Our lender has agreed to modify the Loan and Security Agreement
to make the material adverse change clause provision an event of default
only if availability levels, net of borrowings, fall below certain levels.
Note 3 - Capital Structure
--------------------------
As of December 26, 2003, our issued and outstanding capital stock
consisted solely of common stock. We have options outstanding under the
stock option plan for 238,942 shares of our common stock with exercise
prices ranging from $0.95 to $9.44 per share. If the options were
exercised, all holders would have rights as common stockholders.
Note 4 - Income (Loss) Per Common Share
---------------------------------------
Basic income (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted income (loss) per share
reflects the potential dilution that could occur if securities convertible
or exercisable into shares of common stock were converted or exercised into
common stock.
The following table sets forth the computation of basic and diluted
income (loss) per share:
For the Three Months Ended For the Nine Months Ended
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
2003 2002 2003 2002
--------- --------- --------- ---------
Numerator:
----------
Net income (loss) $581,263 ($2,358,809) $406,048 ($9,569,296)
======== ============ ========= ============
Denominator:
------------
Weighted average
common shares - basic 8,917,244 8,917,244 8,917,244 8,917,244
========= ========= ========= =========
Effect of dilutive
securities:
Employee stock options 6,857 0 7,964 0
--------- --------- --------- ---------
Weighted average
common shares - diluted 8,924,101 8,917,244 8,925,208 8,917,244
========= ========= ========= =========
Per Share Calculations:
-----------------------
Net income (loss) - basic $0.07 ($0.26) $0.05 ($1.07)
==== ===== ==== =====
Net income (loss) - diluted $0.07 ($0.26) $0.05 ($1.07)
==== ===== ==== =====
Securites excluded from
weighted average common
shares diluted because their
effect would be antidilutive 203,942 376,179 203,942 376,179
Note 5 - Income Taxes
---------------------
We have a net operating loss carryforward included in net deferred tax
assets that can be used to offset future taxable income and can be carried
forward for 15 to 20 years. As of December 26, 2003, we have net deferred
tax assets of approximately $3.3 million. We believe the net deferred tax
assets will be realized through tax planning strategies available in future
periods and future profitable operating results. Although realization is
not assured, we believe it is more likely than not that all of the net
deferred tax assets will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced or eliminated in the near
term if certain tax planning strategies are not successfully executed or
estimates of future taxable income during the carryforward period are
reduced. If we determine that we would not be able to realize all or part
of the net deferred tax asset in the future, an adjustment to the deferred
tax asset would be charged to income in the period such determination was
made.
For the three and nine month periods ended December 26, 2003, we
provided $2.2 million of income tax expense related to our gain on the sale
of ATEC, which reduced our net deferred tax assets. Tax benefits earned
from continued operations losses and discontinued operations losses for the
nine months ended December 26, 2003 have been fully reserved in our tax
valuation allowance and, accordingly, a tax benefit was not recorded in our
consolidated Statement of Operations. (See Note 9-Discontinued Operations.)
In addition to the foregoing, as of December 26, 2003, we have a $6.8
million valuation allowance relating to deferred tax assets. We record a
valuation allowance to reduce the amount of our Deferred Taxes to the amount
that is more likely than not to be realized. While we have considered
future taxable income and ongoing tax planning strategies in assessing the
need for the valuation allowance, in the event that we determine that we
would be able to realize our deferred tax assets in the future in excess of
the net recorded amount, an adjustment to the deferred tax asset would
increase income in the period such determination was made.
Note 6 - Stock Based Compensation
----------------------------------
We have a stock option plan under which certain officers, directors and
employees have been granted options. All the options have been granted at
prices equal to the market value of the shares at the time of the grant and
expire on the tenth anniversary of the grant date. Our stock-based
compensation is measured in accordance with the provisions of Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, no compensation expense
is recognized for fixed option plans because the exercise prices of employee
stock options equal or exceed the market prices of the underlying stock on
the dates of grant.
The following table represents the effect on net income (loss) and
income (loss) per share if we had applied the fair value based method and
recognition provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," to stock based employee
compensation.
For the For the For the For the
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
December December December December
26, 2003 27, 2002 26, 2003 27, 2002
-------- ---------- -------- ----------
Net income (loss), as reported $581,263 ($2,358,809) $406,048 ($9,569,296)
Deduct: Total stock-based
employee compensation expense
determined under the fair
value method for all awards,
net of related tax effects (2,938) (2,143) (3,294) (2,143)
-------- ---------- -------- ----------
Pro forma income (loss) $578,325 ($2,360,952) $402,754 ($9,571439)
======== ========== ======== ==========
Income (loss) per share -
basic and diluted:
As reported $0.07 ($0.26) $0.05 ($1.07)
======== ========== ======== ==========
Pro forma $0.07 ($0.26) $0.05 ($1.07)
======== ========== ======== ==========
Note 7 - New Accounting Pronouncements
--------------------------------------
In January 2003, the FASB issued FASB Interpretation (FIN) 46,
"Consolidation of Variable Interest Entities." FIN 46 requires a company to
consolidate a variable interest entity if it is designated as the primary
beneficiary of that entity even if the company does not have a majority of
voting interests. A variable interest entity is generally defined as an
entity where its equity is unable to finance its own activities or where the
owners of the entity lack the risk and reward of ownership. In October
2003, the FASB agreed to defer the effective date of FIN 46 for variable
interests held by public companies in all entities that were acquired
prior to February 1, 2003. This deferral is to allow time for certain
implementation issues to be addressed through the issuance of a potential
modification to the interpretation. The deferral revised the effective date
for consolidation of these entities until the end of the first interim or
annual period ending after December 15, 2003. We adopted this statement as
of December 26, 2003 and it did not have any material impact on our
financial statements.
In April 2003, the FASB issued FAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." FAS 149 amends and clarifies
financial accounting and reporting for derivative instruments. This
statement is effective for contracts entered into or modified after June 30,
2003. We adopted this statement as of June 28, 2003 and it did not have any
material impact on our financial statements.
In May 2003, the FASB issued FAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity," which
addresses how an issuer classifies and measures financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or
an asset in some circumstances) because that financial instrument embodies
an obligation of the issuers. This Statement shall be effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise shall be effective at the beginning of the first interim period
beginning after June 15, 2003. For financial instruments created before the
issuance date of this Statement and still existing at the beginning of the
interim period of adoption, transition shall be achieved by reporting the
cumulative effect of a change in an accounting principle by initially
measuring the financial instruments at fair value or other measurement
attribute required by this Statement. We adopted this statement as of June
28, 2003 and it did not have any material impact on our financial
statements.
Note 8 - Goodwill and Other Intangible Assets
---------------------------------------------
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). SFAS 142 requires that goodwill not be amortized but
instead be tested for impairment at least annually by reporting unit. We
adopted SFAS 142 effective March 30, 2002 and ceased recording goodwill
amortization on March 30, 2002. As a result, we recorded a non-cash
"cumulative effect of change in accounting principle" of approximately $7.4
million ($0.83 per basic and diluted share) for the three months ended June
28, 2002.
As of December 26, 2003, estimated amortization expense of other
intangible assets for each of the next five years is as follows (in
thousands):
2004 $ 267
2005 143
2006 115
2007 110
2008 104
Thereafter 2,407
------
$ 3,146
======
Note 9 - Discontinued Operations
--------------------------------
In July 2003, we discontinued operations at our team dealer located in
Little Rock, Arkansas. In October 2003, we sold substantially all of the
assets at that location (other than cash and accounts receivable). In
October 2003, we discontinued operations at our team dealer located in Enid,
Oklahoma, and in November 2003, we sold substantially all the assets (other
than cash and accounts receivable) of our team dealer located in Wichita,
Kansas. These closures and sales of assets, and related discontinued
operations resulted in a loss of approximately $1.2 million for the nine
months ended December 26, 2003 and are included in Discontinued Operations,
net of tax in the accompanying consolidated statement of operations. (See
Part 1. Financial Statements, Consolidated Balance Sheets and Notes to
Consolidated Financial Statements Basis of Presentation.)
On November 18, 2003, we sold all of the issued and outstanding capital
stock of ATEC for $10.5 million. This sale resulted in a gain of $3.8
million (net of tax of $2.2 million). The proceeds received from the sale
were used to pay down outstanding debt.
The following table represents the results of these discontinued
operations, net of related income taxes and income tax benefits. (See Part
1. Financial Statements, Notes to Consolidated Financial Statements Note 5 -
Income Taxes.)
For the For the For the For the
Three Three Nine Nine
Months Months Months Months
ended ended ended ended
Dec 26, Dec 27, Dec 26, Dec 27,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net revenues - ATEC $2,796,594 $2,005,454 $6,184,029 $7,467,569
Net revenues - Team
Dealers $368,429 $1,386,594 $3,042,747 $5,199,831
Income from
operations - ATEC $181,378 $383,621 $477,600 $891,908
Loss from operations
- Team Dealers (147,869) (291,928) (352,500) (307,508)
Loss on sale of Team
Dealers (632,165) -- (828,600) --
Gain on sale of ATEC,
net of tax 3,751,983 -- 3,751,983 --
---------- ---------- ---------- ----------
Total discontinued
operations, net $3,153,327 $91,693 $3,048,483 $584,400
========== ========== ========== ==========
Note 10 - Contingencies
-----------------------
During the past several years, we used the services of Strategic
Technologies, Inc. ("STI") to process our outbound truck freight bills.
STI audited freight bills submitted by our carriers and provided us a
detailed listing of invoices that were scheduled for payment at which
time we transferred funds to STI. STI was required to issue checks to
the carriers within 48 hours of receipt of our funds. STI filed for
reorganization under Chapter 11 of the U. S. Bankruptcy Code on July 19,
2002 in the United States Bankruptcy Court in the District of New Jersey,
Case No. 02-37935 (NLW). The case was converted to Chapter 7 of the U. S.
Bankruptcy Code on July 31, 2002. In certain circumstances, we have had to
pay our freight carriers for invoices that we previously paid to STI and we
are attempting to recover such monies from STI. We have filed a proof of
claim of approximately $593,000 for unpaid shipping charges and service fees
paid to STI. No assurance can be made that we will be able to recover such
money.
During the past several years, we used the services of Consolidated
Freightways Corporation to ship products to our customers. Consolidated
Freightways Corporation filed for reorganization under Chapter 11 of the U.
S. Bankruptcy Code on December 2, 2002 in the United States Bankruptcy Court
in the District of California, Case No. RS 02-24284-MG. On August 25, 2003,
the Bankrutpcy Trustee for Consolidated Freightways Corporation of Delaware
filed a lawsuit in the United States Bankruptcy Court, Central District of
California, to collect fees for the transportation of goods that are alleged
to be owed to the bankruptcy estate. The Trustee's initial claim is
$866,684, which includes approximately $265,000 in collection fees and late
payment charges. SSG disputes the amount claimed by the Trustee and claims
an offset of approximately $308,000 for goods lost or damaged by
Consolidated Freightways in transit.
It is not possible at this time to determine the ultimate liabilities
or recoveries that we may incur resulting from these lawsuits, claims, and
proceedings. If these matters were to be ultimately resolved unfavorably at
amounts exceeding our reserves, an outcome not currently anticipated, it is
possible that such outcome could have a material adverse effect on our
consolidated financial position or results of operations.
Periodically, we become involved in various claims and lawsuits
incidental to our business. In management's opinion, any ultimate liability
arising out of currently pending claims will not have a material adverse
effect on our financial condition or results of operations. However, any
claims substantially in excess of our insurance coverage, or any substantial
claim that may not be covered by insurance or any significant monetary
settlement, could have a material adverse effect on our financial condition
or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
Results of Operations
---------------------
Net Revenues. Net revenues decreased approximately $401,000 (2.6%) and
increased $993,000 (1.7%) for the three and nine months periods ended
December 26, 2003, respectively, as compared to same periods last year. We
expect continued revenue challenges in fiscal year 2004 due to increased
competition, a decreased sales force, continued restrictions in state,
federal and school budgets and declining participation and funding of youth
sports organizations. We are continuing to implement sales and marketing
programs to stabilize our revenues in a very competitive marketplace.
Orders placed over the Internet for the quarter increased to $1.5 million as
compared to $1.1 million for the same three month period last year, and
increased to $4.4 million for the nine month period as compared to $3.3
million for the same period last year.
Gross Profit. Gross profit decreased by approximately $164,000 (4.2%) and
$675,000 (4.1%) for the three and nine month periods ended December 26,
2003, respectively, as compared to same periods last year. As a percentage
of net revenues, gross profit decreased 0.4% to 25.5 % from 25.9% for the
three month period and decreased 1.6% to 26.8% from 28.4% for the nine month
period ended December 26, 2003 as compared to the same periods last year.
The decrease in gross profit for the three and nine month periods is
primarily the result of more aggressive pricing, increased freight and
increased importing costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $70,000 (1.1%) and decreased
approximately $723,000 (3.8%) for the three and nine month periods ended
December 26, 2003, respectively, as compared to the same periods last year.
As a percentage of net revenues, selling, general and administrative
expenses increased to 42.1% from 40.6% for the three month period and
decreased to 30.5% from 32.3% for the nine month period ended December 26,
2003 as compared to the same period last year.
The increase for the three month period was primarily a result of an
increase of approximately $216,000 in legal fees and an increase in sales
and marketing expenses of approximately $152,000. These increases were
partially offset by a decrease in payroll related expense of approximately
$250,000 attributable to reduced headcount. The decrease for the nine month
period was primarily a result of a decrease in payroll related expense of
approximately $308,000 attributable to reduced headcount and a decrease of
approximately $379,000 in sales and marketing expenses.
We expect selling, general and administrative expense decreases this fiscal
year as compared to the prior year due to our previously implemented cost
reduction programs. Additionally, we have elected not to renew our Huffy and
AMF license agreements and expect a royalty expense reduction in future
fiscal years of approximately $185,000, annually, without an offsetting
reduction to revenues.
Interest Expense. Interest expense decreased approximately $18,000 (13.4%)
and $32,000 (7.3%) for the three and nine month periods ended December 26,
2003, respectively, as compared to the same periods last year. The cash
received from the sale of our ATEC subsidiary in November 2003 resulted in a
reduction in our debt and is expected to reduce our future interest expense.
Income Tax Expense. We recorded no income tax expense for the three and
nine month periods ended December 26, 2003, respectively, as compared to an
expense of approximately $111,000 and no income tax expense for the three
and nine month periods last year, respectively. Discontinued operations are
reported net of income tax benefits and provisions. See Item 1. Financial
Statements Note 5 - Income Taxes for a detailed explanation of our net
operating losses and deferred tax assets.
Loss from Continuing Operations. Because of the aforementioned, loss from
continuing operations for the three and nine month periods ended December
26, 2003 increased by approximately $122,000 and decreased by approximately
$69,000, respectively, as compared to the same periods last year.
Discontinued Operations. Discontinued operations reflect net operating
losses related to our discontinued and sold team dealer operations and the
net income from and net gain on sale of our ATEC subsidiary for the three
and nine months period ended December 26, 2003 and December 27, 2002. See
Item 1. Note 9 - Discontinued Operations for a detailed explanation of our
discontinued operations.
Cumulative Effect of Accounting Change. On March 30, 2002, we adopted
Financial Accounting Standards Board Statement No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 142 requires that goodwill not be
amortized but instead be tested for impairment at least annually by
reporting unit. Goodwill is required to be tested for impairment in a
transitional test upon adoption and then at least annually by reporting
unit. As a result of our impairment testing, we recorded a non-cash
"cumulative effect of accounting change" impairment write-down of
approximately $7.4 million for the nine month period ended December 27,
2002.
Net Income (Loss). Net income increased to approximately $581,000 and
$406,000 for the three and nine month periods ended December 26, 2003,
respectively, as compared to a net loss of approximately $2.4 million and a
net loss of approximately $9.6 million for the three and nine month periods
ended December 27, 2002, respectively. Earnings per share increased to $0.07
and $0.05 for the three and nine month periods ended December 26, 2003,
respectively, from a loss per share of ($0.27) and ($1.07) for the three
and nine month periods ended December 27, 2002, respectively. The
improvements for the three and nine month periods are due largely to the
gain on the sale of ATEC that occurred in November 2003. In addition, the
improvement for the nine month period reflects the $7.4 million cumulative
effect of accounting change recorded last fiscal year.
Liquidity and Capital Resources
-------------------------------
Our working capital decreased approximately $5.9 million during the
nine month period ended December 26, 2003, from $27.7 million at March 28,
2003 to $21.8 million at December 26, 2003 primarily as a result of
decreases in trade receivables of approximately $11.4 million and decreases
in inventories of $1.9 million partially offset by a decrease in trade
accounts payable of approximately $5.8 million. These working capital
changes are primarily due to the discontinued operations outlined above and
the seasonality of accounts receivable and inventories.
The following schedule sets forth the significant components of working
capital associated with both discontinued and continuing operations:
December 26, March 28,
2003 2003
---------- ----------
Accounts receivable:
Continuing operations accounts receivable $ 8,702,344 $15,285,774
Discontinued operations accounts receivable -- 4,971,259
Allowance for doubtful accounts (400,272) (500,086)
---------- ----------
Accounts receivable, net $ 8,302,072 $19,756,947
========== ==========
Inventory:
Continuing operations inventory $18,521,111 $15,163,862
Discontinued operations accounts inventory -- 5,473,202
Inventory reserve (850,441) (1,072,750)
---------- ----------
Inventories, net $17,670,670 $19,564,314
========== ==========
Net assets of discontinued operations:
Accounts receivable (net) $ 410,433
Inventory (net) 460,623
Other assets 2,950
Current liabilities (351,716)
----------
Net assets of discontinued operations $ 522,290
==========
Accounts payable:
Continuing operations accounts payable $ 6,054,636 $10,108,954
Discontinued operations accounts payable -- 1,714,333
---------- ----------
Accounts payable $ 6,054,636 $11,823,287
========== ==========
We believe our credit facility and cash flows from operations will
satisfy our working capital requirements necessary to support our
operations. However, future losses would negatively impact our results of
operations and impact our ability to support our working capital needs. We
do not currently have any significant commitments for capital expenditures.
The following table sets forth our contractual obligations at December 26,
2003 for the periods shown:
Due in Due in
Due within Two to Four to
one year three years Five years Thereafter Total
------------------------------------------------------------
Notes payable $ 9,180 $ -- $ 6,876,441 $ -- $ 6,885,621
Capital lease
obligations 48,378 25,201 -- -- 73,579
Leases (1) 1,582,596 619,950 -- -- 2,202,546
------------------------------------------------------------
Total $1,640,154 $ 645,151 $ 6,876,441 $ -- $ 9,161,746
============================================================
(1) Our facility leases end in December 2004. Our computer equipment lease
ends in April 2006. We anticipate having replacement leases on or before
the expiration of the current leases.
Contingencies
-------------
See Item 1. Financial Statements Note 11- Contingencies
Certain Factors that May Affect Our Business or Future Operating Results
------------------------------------------------------------------------
This report contains various forward looking statements and information
that are based on our beliefs as well as assumptions made by and information
currently available to us. When used in this report, the words
"anticipate," "believe," "estimate," "expect," "predict," "intend,"
"project" and similar expressions are intended to identify forward looking
statements. Such statements are made as of the date of this Report and are
subject to certain risks, uncertainties and assumptions. Should one or more
of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, expected or projected. Several key factors that may have a
direct bearing on our results are set forth below.
Future trends for revenues and profitability remain difficult to
predict. We continue to face many risks and uncertainties, including:
1. general and specific market and economic conditions;
2. budgetary restrictions of schools and government agencies;
3. unanticipated disruptions or slowdowns in operations;
4. high fixed costs;
5. competitive factors;
6. continuation of existing license agreement;
7. foreign supplier related issues;
8. use of deferred tax asset;
9. product liability and insurance; and
10. increased internet migration.
General and Specific Market and Economic Conditions
---------------------------------------------------
The general economic condition in the United States could affect
pricing and availability of raw materials such as metals, petroleum and
other commodities used in manufacturing certain products and certain
purchased finished goods as well as transportation costs. Any material price
increases to our customers could have an adverse effect on revenues and any
price increases from vendors could have an adverse effect on our costs.
Professional sports have a significant impact on the market conditions for
each individual sport. Collective bargaining, labor disputes, lockouts or
strikes by a professional sport could have a negative impact on our
revenues. There is significant competition in the retail and institutional
sporting goods market. Difficult economic conditions and significant
competition in our market could have a negative impact on both revenues and
gross margins.
Budgetary Restrictions of Schools and Government Agencies
---------------------------------------------------------
Much of our business is dependent on the budgetary funding of schools,
as well as local, state and federal government agencies. Decreases in
school athletic budgets will continue to increase the pricing and profit
margin competitive pressures in the institutional sporting goods market.
Restrictions or reductions to the funding or budgeted spending of these
entities could adversely affect our results of operations.
Unanticipated Disruptions or Slowdowns in Operations
----------------------------------------------------
Our ability to provide high quality customer service, process and
fulfill orders and manage inventory depends on: (i.) the efficient and
uninterrupted operation of our call center, distribution center,
manufacturing facilities and management information systems and (ii.) the
timely performance of vendors, catalog printers and shipping companies. Any
material disruption or slowdown in the operation of our call center,
distribution center, manufacturing facilities or management information
systems, or comparable disruptions or slowdowns suffered by our principal
service and product suppliers, could cause delays in our ability to receive,
process and fulfill customer orders and may cause orders to be canceled,
lost or delivered late, goods to be returned or receipt of goods to be
refused.
We ship approximately 70% of our products using United Parcel Service
("UPS"). As experienced in 1997, a strike by UPS or any of our other major
carriers could adversely affect our results of operations due to not being
able to deliver our products in a timely manner and using other more
expensive freight carriers. Although we have analyzed the cost-benefit
effect of using other carriers, we continue to utilize UPS for the majority
of our small package shipments and believe this is most advantageous to our
company.
In addition to the foregoing, the International Longshore and Warehouse
Union ("ILWU"), which is the union of dock workers that move the cargo (such
as import containers) along the West Coast, reached a contract agreement on
November 23, 2002 with the Pacific Maritime Association ("PMA"), a group of
global ship owners and terminal operators. A strike by the ILWU, or lockout
by the PMA, as experienced in December 2002, would significantly slow the
receipt of our import products and could cause delays in our ability to
process and fulfill customer orders. Any strike or lockout could also cause
an increase in backlog and freight charges such as port congestion
surcharges, extended peak season surcharges, charges as a result of force
majeure clauses, etc.
High Fixed Costs
----------------
Operations and maintenance of our call center, distribution center,
manufacturing facilities and management information systems involve
substantial fixed costs. Paper, packaging, shipping and postage are
significant components of our costs. Catalog marketing entails substantial
paper, postage and costs associated with catalog development. Each of these
is subject to price fluctuations.
Competitive Factors
-------------------
The institutional market for sporting goods and leisure products is
highly competitive and there are no significant barriers to enter this
market. The size of this market has encouraged the entry of new competitors
as well as increased competition from established companies. Competitors
include large retail operations that also sell to the institutional market,
other catalog and direct marketing companies, team dealers and Internet
sellers. Increased competition could result in pricing pressures, erosion
in gross profit margins, increased marketing expenditures and loss of market
share and could have a material adverse effect on our results of operations.
Continuation of Existing License Agreement
------------------------------------------
In February 1992, we acquired two separate licenses to use several
trade names, styles and trademarks (including, but not limited to,
MacGregor[R]). On December 21, 2000, the license relating to the use of the
MacGregor[R] trademark was amended and restated in its entirety. The
license agreement permits us to manufacture, promote, sell and distribute to
designated customers throughout the world, specified sports related
equipment and products relating to baseball, softball, basketball, soccer,
football, volleyball and general exercise. The license agreement requires
us to pay royalties based upon sales of MacGregor[R] branded products, with
the minimum annual royalty set at $100,000. Futhermore, the license
agreement is exclusive with respect to certain customers and non-exclusive
with respect to others. The license agreement has an original term of 40
years, but will automatically renew for successive 40 year periods unless
terminated in accordance with the terms of the license. We have converted a
substantial portion of our products to the MacGregor[R] brand, which is
believed to be a widely recognized trade name in the sporting goods
industry. Termination of this license agreement could have a material
adverse effect on our results of operations.
Foreign Supplier Related Issues
-------------------------------
Approximately 30% of our total product costs are from products
purchased directly from foreign suppliers located primarily in the Far East.
In addition, we believe foreign manufacturers produce many of the products
we purchase from domestic suppliers. We are subject to risks of doing
business abroad, including delays in shipments, adverse fluctuations in
foreign currency exchange rates, increases in import duties, decreases in
quotas, changes in custom regulations, acts of God (such as earthquakes),
war and political turmoil. The occurrence of any one or more of the
foregoing could adversely affect our operations.
Use of Deferred Tax Asset
-------------------------
We believe our net deferred tax assets will be realized through tax
planning strategies available in future periods and future profitable
operating results. Although realization is not assured, we believe it is
more likely than not that our remaining net deferred tax assets will be
realized. The amount of the deferred tax asset considered realizable,
however, could be reduced or eliminated in the near term if certain tax
planning strategies are not successfully executed or estimates of future
taxable income during the carryforward period are reduced. If we determine
that we would not be able to realize all or part of the net deferred tax
asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made.
Product Liability and Insurance
-------------------------------
Because of the nature of our products, we are periodically subject to
product liability claims resulting from personal injuries. We may become
involved in various lawsuits incidental to our business, some of which
relate to claims allegedly resulting in substantial permanent paralysis.
Significantly increased product liability claims continue to be asserted
successfully against manufacturers and distributors of sports equipment
throughout the United States resulting in general uncertainty as to the
nature and extent of manufacturers' and distributors' liability for personal
injuries. See Part II. Item 1. -- "Legal Proceedings".
In recent years, product liability insurance has become much more
expensive, more restrictive and more difficult to obtain. There can be no
assurance that our general product liability insurance will be sufficient to
cover any successful product liability claims made against us. In our
opinion, any ultimate liability arising out of currently pending product
liability claims will not have a material adverse effect on our financial
condition or results of operations. However, any claims substantially in
excess of our insurance coverage, or any substantial claim not covered by
insurance, could have a material adverse effect on our financial condition
and results of operations.
Increased Internet Migration
----------------------------
We have significant investments in our Internet websites and IT
platform based on our belief that, in the future, an increasing portion of
our customer base will use the Internet as the predominant method for
quoting, ordering, procuring their products and performing customer service
inquires. We have cost structured our business anticipating customer
migration to the Internet to continue. If the increase in migration to the
Internet does not continue, we could experience reductions in revenue or
additional costs to market to and service these customers through direct
mail expense and increased call center personnel.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
There have been no significant changes from items disclosed in Form 10-
K for the fiscal year ended March 28, 2003.
Item 4. Controls and Procedures
-----------------------
(a) Disclosure controls and procedures. As of the end of the period
covered by this Quarterly Report on Form 10-Q, we have carried out an
evaluation, with the participation of our management, including the
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-15. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in ensuring that
information required to be disclosed by us in the reports that we file
or submit under the Securities Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's
rules and forms.
(b) Changes in internal controls over financial reporting. There have been
no changes in our internal control over financial reporting that
occurred during our third fiscal quarter to which this Quarterly Report
on Form 10-Q relates that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
During the past several years, we used the services of Strategic
Technologies, Inc. ("STI") to process our outbound truck freight bills. STI
audited freight bills submitted by our carriers and provided us a detailed
listing of invoices that were scheduled for payment at which time we
transferred funds to STI. STI was required to issue checks to the carriers
within 48 hours of receipt of our funds. STI filed for reorganization under
Chapter 11 of the U. S. Bankruptcy Code on July 19, 2002 in the United
States Bankruptcy Court in the District of New Jersey, Case No. 02-37935
(NLW). The case was converted to Chapter 7 of the U. S. Bankruptcy Code on
July 31, 2002. In certain circumstances, we have had to pay our freight
carriers for invoices that we previously paid to STI and we are attempting
to recover such monies from STI. We have filed a proof of claim of
approximately $593,000 for unpaid shipping charges and service fees paid to
STI. No assurance can be made that we will be able to recover such money.
During the past several years, we used the services of Consolidated
Freightways Corporation to ship products to our customers. Consolidated
Freightways Corporation filed for reorganization under Chapter 11 of the U.
S. Bankruptcy Code on December 2, 2002 in the United States Bankruptcy Court
in the District of California, Case No. RS 02-24284-MG. On August 25, 2003,
the Bankrutpcy Trustee for Consolidated Freightways Corporation of Delaware
filed a lawsuit in the United States Bankruptcy Court, Central District of
California, to collect fees for the transportation of goods that are alleged
to be owed to the bankruptcy estate. The Trustee's initial claim is
$866,684, which includes approximately $265,000 in collection fees and late
payment charges. SSG disputes the amount claimed by the Trustee and claims
an offset of approximately $308,000 for goods lost or damaged by
Consolidated Freightways in transit.
It is not possible at this time to determine the ultimate liabilities
or recoveries that we may incur resulting from these lawsuits, claims, and
proceedings. If these matters were to be ultimately resolved unfavorably at
amounts exceeding our reserves, an outcome not currently anticipated, it is
possible that such outcome could have a material adverse effect on our
consolidated financial position or results of operations.
Periodically, we become involved in various claims and lawsuits
incidental to our business. In management's opinion, any ultimate liability
arising out of currently pending claims will not have a material adverse
effect on our financial condition or results of operations. However, any
claims substantially in excess of our insurance coverage, or any substantial
claim that may not be covered by insurance or any significant monetary
settlement, could have a material adverse effect on our financial condition
or results of operations.
Item 2. Changes in Securities and Proceeds
----------------------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
(a) None.
(b) None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit
Nbr. Description of Exhibit
------- ----------------------
Exhibit 3.1 Amended and Restated Certificate of Incorporation
of the Company (incorporated by reference from
Exhibit 4.1 to the Company's Registration Statement
on Form S-8 (Registration No. 33-80028)).
Exhibit 3.1.1 Certificate of Amendment of Amended and Restated
Certificate of Incorporation to the Company
(incorporated by reference from Exhibit 4.1 to
the Company's Registration Statement on Form S-8
(Registration No. 33-80028)).
Exhibit 3.2 Amended and Restated Bylaws of the Company
(incorporated by reference from Exhibit 3.2 to the
Company's Report on Form 10-K for the year ended
November 1, 1996).
Exhibit 4.1 Specimen of Common Stock Certificate (incorporated
by reference from Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (Registration
No. 33-39218))
Exhibit 10.1 (*) Fourth Amendment to Loan and Security Agreement
dated December 29, 2003 by and between the Company
and Congress Financial Corporation.
Exhibit 31.1 (*) Certification of the Company's Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Exhibit 31.2 (*) Certification of the Company's Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Exhibit 32 (*) Certification of the Company's Chief Executive
Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
-----------------------------
( * ) = Filed Herewith
(b) Reports on Form 8-K
Current Report on Form 8-K dated and filed December 3, 2003, furnishing
the pro forma financial statements adjusted to give effect to (i.) the
sale of ATEC Stock, which occurred on November 18, 2003 and (ii.) the
disposal of our Team Dealer locations in Enid, Oklahoma and Wichita,
Kansas, which occurred on October 31, 2003 and November 7, 2003,
respectively.
Current Report on Form 8-K dated and filed November 21, 2003,
furnishing the press release announcing the sale of our wholly-owned
subsidiary Athletic Training Equipment Company, Inc.
Current Report on Form 8-K dated and filed November 12, 2003,
furnishing the press release announcing our financial results for the
quarter ended September 26, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: February 9, 2004
SPORT SUPPLY GROUP, INC.
By: /s/ Geoffrey P. Jurick
--------------------------
Geoffrey P. Jurick
Chief Executive Officer
By: /s/ Robert K. Mitchell
--------------------------
Robert K. Mitchell
Chief Financial Officer