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SPORT SUPPLY GROUP INC 10-K 2007 Documents found in this filing:Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
For the Fiscal Year Ended June 30, 2007
OR
For the transition period from to
Commission File No. 1-15289
Sport Supply Group, Inc.
(Exact Name of Registrant as specified in Its Charter)
Registrant’s Telephone Number, Including Area Code: (972) 484-9484
Securities Registered Pursuant to Section 12(b) of the Act:
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Act.
Yes
o No þ
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 þ No o
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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of the voting stock of the registrant held by non-affiliates was
approximately $77,327,024, based on the closing price of such voting stock on December 29, 2006, of
$9.46.
At September 10, 2007, there were 12,188,160 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III of this report, to the extent not set forth herein, is
incorporated by reference from the Registrant’s definitive 2007 Proxy Statement to be filed with
the SEC.
Sport Supply Group, Inc.
FORM 10-K Fiscal Year Ended June 30, 2007 TABLE OF CONTENTS
Table of Contents
FORM 10-K ANNUAL REPORT
This Annual Report on Form 10-K contains forward-looking statements that are based on Sport
Supply Group, Inc.’s (f.k.a. Collegiate Pacific Inc.) and its consolidated subsidiaries’ (“Sport
Supply Group,” “we,” “us,” “our,” or the “Company”) current expectations or forecasts of future
events. Actual results in future periods may differ materially from those expressed or implied by
those forward-looking statements because of a number of risks and uncertainties. For a discussion
of risk factors affecting Sport Supply Group’s business and prospects, see “Item 1A — Risk
Factors.”
Our fiscal year ends on June 30 of each year. Accordingly, references in this report to
“fiscal 2004,” “fiscal 2005,” “fiscal 2006,” “fiscal 2007,” and “fiscal 2008” refer to our fiscal
years ended or ending, as the case may be, June 30, 2004, 2005, 2006, 2007 and 2008, respectively.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Our Business
Sport Supply Group is a marketer, manufacturer and distributor of sporting goods equipment,
physical education, recreational and leisure products and a marketer and distributor of soft good
athletic apparel and footwear products (“soft goods”), primarily to the institutional
market in the United States. The institutional market generally consists of youth sports programs,
YMCAs, YWCAs, park and recreational organizations, schools, colleges, churches, government
agencies, athletic teams, athletic clubs and sporting goods dealers. We offer a broad line of
sporting goods and equipment, soft goods and other recreational products, and provide after-sale
customer service. We currently market approximately 22 thousand sports related equipment products,
soft goods and recreational related equipment and products to institutional, retail and internet
customers.
We sell our products directly to our institutional customers primarily through:
We market our products through the use of a customer database of over 400 thousand potential
customers, our 197 person direct sales force strategically located throughout the Mid-Western and
Mid-Atlantic United States, and our call centers located at our headquarters in Farmers Branch,
Texas, Corona, California in the Los Angeles basin, and Richmond, Virginia. We have subdivided our
mailing list into various customer profiles to help ensure that our catalogs are directed to those
individuals that make the decisions to purchase the products we offer. The master mailing list is
also subdivided by relevant product types and seasonal demand. We regularly screen, cross check
and update our customer database to maintain its accuracy and functionality. Sport Supply Group
intends to distribute approximately 3.1 million catalogs and fliers from this database during
fiscal 2008.
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Corporate History; Additional Information
The Company commenced operations in February 1998 when it was acquired by Michael J.
Blumenfeld and Adam Blumenfeld. Michael Blumenfeld sold all of the assets of Collegiate Pacific
Inc. f/k/a Nitro Sports, Inc., a company he formed in 1997 to engage in the catalog and mail order
marketing of sports equipment, to the Company, at cost. We changed our name to Collegiate Pacific
Inc. at that time and in July 1999 reincorporated the Company as a Delaware corporation. In an
effort to streamline the organizational structure of the Company’s team dealers, on January 1,
2007, the Company caused to be effected the merger of Salkeld & Sons, Inc. (“Salkeld”) with
and into Kesslers Team Sports, Inc. (“Kesslers”), and the merger of CMS of Central Florida d/b/a
Orlando Team Sports (“OTS”) with and into Dixie Sporting Goods Co., Inc. (“Dixie”).
On June 30, 2007, the Company also caused to be effected the merger of Tomark Inc.
(“Tomark”) and Sport Supply Group, Inc. (“Old SSG”) with and into Collegiate
Pacific Inc. On June 30, 2007, the Company changed its name to Sport Supply Group, Inc. and, on
July 1, 2007, changed its stock ticker symbol from “BOO” to “RBI.” As a result of these mergers,
the Company currently has two wholly-owned subsidiaries: Kesslers Team Sports, Inc., a Delaware
corporation, and Dixie Sporting Goods Co., Inc., a Virginia corporation. On July 26, 2007, the
Company entered into a purchase agreement with CBT Holdings, LLC whereby the Company privately sold
1,830,000 shares of its common stock, par value $0.01 per share for $18,300,000. The transaction
was consummated on July 30, 2007.
Sport Supply Group’s common stock currently trades on the American Stock Exchange (symbol:
RBI). Our executive offices are located at 1901 Diplomat Drive, Farmers Branch, Texas 75234, and
our telephone number at that location is (972) 484-9484. The Company’s fiscal year ends on June
30.
Our Internet website is www.sportsupplygroup.com. Sport Supply Group makes available, free of
charge, on or through the website, its annual, quarterly and current reports and other Securities
and Exchange Commission (“SEC”) filings, including Forms 3, 4 and 5, as well as any
amendments to those reports, as soon as reasonably practicable after electronically filing those
reports with the SEC. This website address is intended to be an inactive textual reference only,
and none of the information contained on the website is part of this report or is incorporated in
this report by reference.
Acquisition Strategy
We believe a consolidation of the sporting goods industry has contributed to a shift of sales
within the institutional market from traditional, retail storefront sites to sales from catalogs,
direct marketing by road sales professionals and the Internet. Sport Supply Group believes the
most successful sporting goods companies will be those with strong financial resources and the
ability to produce or source high-quality, low cost products, deliver those products directly to
customers on a timely basis and access distribution channels with a broad array of products and
brands.
We believe we are well positioned to grow our business because of our superior catalog design,
our efficient merchandising and direct distribution capabilities, our 197 person direct sales
force, our extensive product offerings, our long-term customer relationships, our superior customer
service, and our superior sourcing and production capabilities. Since commencing operations in
1998, the Company’s annual net sales have grown to approximately $237 million for the fiscal year
ended June 30, 2007, through a combination of internal growth and strategic acquisitions. Net
sales were approximately $224 million and $106 million in 2006 and 2005, respectively. For
additional information on our financial results, see Item 8, Financial Statements and Supplementary
Data.
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Our strategic plan has included both organic growth from existing operations and growth
through the acquisition of other companies. Since January 2004, we have completed the following
acquisitions:
Fiscal 2007
Fiscal 2006
Fiscal 2005
Fiscal 2004
As its primary goal, Sport Supply Group’s management seeks to optimize the collective and
individual performance of these acquired businesses. We have strived to identify areas in which
these businesses are unique and areas in which they overlap.
In those areas where our businesses are unique, Sport Supply Group seeks to promote and
develop those unique qualities by integrating them into all of our distribution channels. As an
example of this integration, Sport Supply Group has enhanced Kesslers’, Dixie’s, OTS’ and Salkeld’s
existing offering of soft goods with the infusion of approximately 8,800 Sport Supply Group
proprietary products into their marketing mix. Sport Supply Group has designed catalogs for
Kesslers, Dixie, OTS and Salkeld that display both soft goods and sporting goods equipment.
In those areas where our businesses overlap, Sport Supply Group endeavors to integrate them to
build on inherent synergies, develop collective vision and maximize cost efficiencies. An example
of this effort is reflected in the integration of the Sport Supply Group, Old SSG, and Tomark
manufacturing and assembly capabilities in our Farmers Branch, Texas facility and the utilization
of in-house embroidery and screen print services at Team Print. We believe we can more effectively
monitor the quality of products while at the same time be able to realize cost savings for our
customers.
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For additional information on these acquisitions, see Note 3 in Notes to Consolidated
Financial Statements.
Products and Services
We offer a broad line of sporting goods equipment, soft goods, and physical education,
recreational and leisure products, which includes over 22 thousand products for sale. Our product
lines of sporting goods include, but are not limited to, equipment and soft goods for the following
sports: football; baseball; softball; basketball; volleyball; soccer; tennis; and other racquet
sports. Our line of equipment for these sports includes, but is not limited to, inflatable balls,
nets, batting cages, scoreboards, bleachers, weight lifting equipment, standards and goals. We
also offer other recreational products including fitness equipment, camping equipment, indoor
recreational games and outdoor playground equipment. We also provide after-sale customer service
through toll-free numbers.
Because we believe brand recognition is important to our institutional customers, we market
most of our products under trade names or trademarks owned by others or us. The following table
lists our principal products and includes, but not limited to, the various brand names under which
they are sold:
Team Sports Apparel (soft goods). Nike, Rawlings, Wilson, Under Armour, and Champion are all
leading suppliers of team sports apparel. Under the terms of non-exclusive supply arrangements we
have with these manufacturers, we purchase soft goods from these manufacturers for resale to our
customers and either complete the custom silk screening, embroidering and other decorating work on
the soft goods in-house or through subcontractors, or arrange to have the manufacturer complete the
custom decorating of the soft goods prior to shipment.
Cages, Goals and Camping Equipment. We own the registered trademarks FunNets, Mark
One and Alumagoal. We have a license agreement to use the MacGregor trademark, which permits us to
manufacture, promote, sell, and distribute certain products to designated customers throughout the
world. The original license was acquired in February 1992 and amended in December 2000. The
amended license agreement is with MacMark, Equilink, and Riddell and has an original term of forty
(40) years, but will automatically renew for successive forty (40) year periods unless terminated
in accordance with the terms of the license. The amended and restated license requires us to pay
an annual royalty based upon sales of MacGregor® branded products, with the minimum annual royalty
set at $100,000. Through our registered trademarks and license agreements, we manufacture or
source from overseas manufacturers our proprietary products such as batting cages, bleachers,
soccer and basketball goals and volleyball standards. We generally recognize a higher profit margin from the sale of our manufactured or
imported proprietary products.
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Tennis. In February 2000, we entered into an exclusive license agreement with Edwards Sports
Products Limited to use the Edwards name in connection with manufacturing, selling and distributing
tennis nets and court equipment worldwide, except in the United Kingdom and Ireland. We are
required to pay a royalty of 4.5% of the net sales price of all Edwards products we sell. We paid
Edwards a total royalty of approximately $49 thousand in fiscal 2007. This license expires in
February 2011 unless earlier terminated in accordance with the terms of the license agreement. We
also manufacture or source golf course and tennis court maintenance equipment from overseas
manufacturers and sell them under our Rol-Dri and Tidi-Court brand names.
Baseball and Softball. Diamond, Rawlings, Easton, New Era and Wilson are leading suppliers of
baseball and softball equipment. We have non-exclusive supply arrangements with Diamond and Wilson
under which we acquire baseball caps, gloves, baseballs, softballs, batters’ helmets, catchers’ and
umpires’ protective equipment, aluminum and wooden baseball bats, batters’ gloves and miscellaneous
accessories for resale to our customers. We also manufacture or source products from overseas
manufacturers and offer them to our customers under our MarkOne brand name and MacGregor licensed
name. Under an exclusive agreement with New Era, a sports-licensed headwear company, Sport Supply
Group acts as a single-point solution for marketing, order processing, and distribution to the
institutional market on behalf of New Era. In fiscal 2007, we began to market our pitching
machines and other related pitching equipment under the name Ryan Express. During the fourth
quarter of fiscal 2006, we entered into an exclusive relationship with Nolan Ryan to design and
market existing and new pitching products. We also source baseball bases from overseas
manufacturers and sell them under our Pro Base brand name.
Football. Schutt is a leading supplier of football equipment. Under the terms of the
non-exclusive supply arrangement we have with Schutt, we purchase helmets, shoulder pads,
faceguards, chin straps and related accessories in both the youth and adult markets for resale to
our customers. We also manufacture or source football down markers and related accessories from
overseas manufacturers and sell them under our Pro Down brand name.
Basketball. Spalding sells several different models of basketballs for men and women in both
the youth and adult markets. Under the terms of the non-exclusive supply arrangement we have with
Spalding, we acquire basketballs for resale to our customers. We also manufacture or source
basketballs from overseas manufacturers and sell them under our MarkOne, Voit, and MacGregor brand
names. In December 1986 we entered into a licensing agreement with Voit Corporation which permits
us to use the Voit® trademark in connection with manufacturing, advertising, and selling specified
sports related equipment and products. We are required to pay annual royalties under the license.
Physical Education and Recreation. We own the Gamecraft and GSC trademarks. Through our
registered trademarks and license agreements we manufacture or source from overseas manufacturers
our proprietary products such as physical education, recreational game tables, coaching equipment,
and gymnastics equipment.
Exercise Equipment. We own the Champion Barbell and Brute Force trademarks. Through our
registered trademarks, we source from overseas manufacturers our proprietary products such as
barbells, dumbbells and weight lifting benches and machines.
Track and field. We own the Port-A-Pit trademark. Through our registered trademarks, we
manufacture or source from domestic and overseas manufacturers our proprietary products such as
hurdles, track and field implements like shot puts, high jump and pole-vault landing pits.
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Certain brand names, such as Adidas®, New Era®, Nike®, Rawlings®,Champion®, Schutt®,
Spalding®, Wilson®, Under Armour®, Edwards®, Rol-Dri®, Mark One®, MacGregor®, Voit®,
Alumagoal® and FunNets® are believed by Sport Supply Group to be well recognized by our customers
and therefore important to the sales of these products. The Company has various other trade names
for which it markets its products. Except for New Era, we do not have written supply agreements
with any of our suppliers. Registered and other trademarks and trade names of Sport Supply Group’s
products are italicized in this Form 10-K.
Sales and Marketing
We believe we are the fastest growing direct manufacturer, marketer and distributor of
sporting goods to the institutional sporting goods market in the United States. Through our
acquisitions of our team dealers (Kesslers, Dixie, OTS and Salkeld), each with its own road sales
professionals, we offer our complete line of sporting goods equipment, soft goods, and physical
education, recreational and leisure products to our traditional school accounts such as colleges,
universities, high schools, and all other levels of public and private schools and their athletic
and recreational departments. We continue to utilize our distinctive catalogs to offer our
complete line of sporting goods equipment, soft goods, and physical education, recreational and
leisure products to our traditional school accounts as well as non-traditional accounts such as
youth sports programs, park and recreational organizations, churches, government agencies, athletic
clubs and dealers.
Our master mailing list currently includes over 400 thousand potential customers, and we
intend to distribute approximately 3.1 million catalogs and fliers to this audience during fiscal
2008. We subdivided our mailing list into various combinations designed to place catalogs in the
hands of the individuals making the purchasing decisions. The master mailing list is also
subdivided by relevant product types, seasonal demands, and customer profiles.
In addition to promoting our products through catalogs and other direct mailings, we offer our
products directly to our team, institutional and corporate customers through our 197 person direct
sales force. Primarily focused in the Mid-Western and the Mid-Atlantic United States, our direct
sales force calls on our team, institutional and corporate accounts to promote our broad line of
soft goods and sporting goods equipment. We also market our products through trade shows,
telemarketing and the Internet.
Customers
We do not depend upon any one or a few major customers for our revenues because we enjoy a
very large and diverse customer base. Our customers include all levels of public and private
schools, youth sports programs, YMCAs, YWCAs, park and recreational organizations, churches, clubs,
camps, government agencies, military facilities, athletic teams, athletic clubs and team dealers.
Many of our institutional customers typically receive annual appropriations for sports related
equipment, which are generally spent in the period preceding the season in which the sport or
athletic activity occurs. Although institutions are subject to budget constraints, once
allocations have been made, aggregate levels of expenditures are typically not reduced.
Approximately 3.2%, 2.1% and 1.2% of our sales in fiscal 2007, 2006 and 2005, respectively,
were to agencies of the United States Government. Due to the acquisition of the capital stock of
Old SSG, we currently have two contracts with the General Services Administration that grant us an
“approved” status when attempting to make sales to military installations or other governmental
agencies. The existing contracts with the General Services Administration expire on July 31, 2009
and December 31, 2011. Under these contracts, we agree to sell approximately 250 products to
United States government agencies and departments at catalog prices or at prices consistent with
any discount provided to our other customers. Products sold to the United States Government under
the General Services Administration contracts are always sold at our lowest offered price. In
addition to the GSA Contracts, the Company has an Air Force non-appropriated funds contract that allows us to sell our entire offering of
catalog products. This contract expires September 30, 2008.
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Seasonal Nature of Business; Backlog
Historically, sales of our sporting goods have experienced seasonal fluctuations. This
seasonality causes our financial results to vary from quarter to quarter, which usually results in
higher net sales and operating profit in our first, third and fourth fiscal quarters (July through
September and January through June), with our highest net sales and operating profit usually
occurring in our first fiscal quarter, and our lowest net sales and operating profit usually
occurring in our second fiscal quarter (October through December). We attribute this seasonality
primarily to the budgeting procedures of our customers and the seasonal demand for our products,
which have historically been driven by spring and summer sports. Generally, between the months of
October and December of each fiscal year, our sales are lower due to the lower level of sports
activities at our institutional customer base, a higher degree of adverse weather conditions and a
greater number of school recesses and major holidays. We have somewhat mitigated this sales
reduction during the December quarter by marketing our products through the websites of large
retailers. Retail customers order the products from the retailer’s websites and we ship the
products to the retailer’s customers. We believe that our acquisitions of our team dealers,
Kesslers, Dixie, OTS and Salkeld, which have a greater focus on fall and winter sports, have
reduced the seasonality of our financial results. However, Old SSG’s results of operations, which
follow the selling pattern of the Company’s traditional catalog operations, have and will continue
to affect our financial results by increasing our operating profit in our third and fourth fiscal
quarters (January through June).
Our sales are made primarily pursuant to standard purchase orders. Our backlog of unfulfilled
orders as of June 30, 2007 was approximately $18.6 million as compared to $19.0 million at June 30,
2006 and is primarily attributable to an overall increase in the sale of our products.. We
anticipate our backlog will increase in fiscal 2008 and future periods as we continue to sell more
soft goods, which generally have a longer lead-time for delivery — generally six to eight weeks
between order placement and delivery. Our products are either shipped directly to our customers by
either our manufacturing vendors partners or by us upon our completion of all decorating work.
Manufacturing; Foreign Sourcing and Raw Materials
We are now sourcing many of the products previously manufactured by us, including products
such as basketball standards, certain soccer goals, volleyball systems, badminton systems, fitness
equipment, etc. Products have been sourced to both domestic and international vendors. Sourcing
these products has enabled us to (i) reduce our cost of goods in many of these products, (ii)
reduce our manufacturing facility costs, (iii) reduce many selling prices to our customers and
(iv) improve our remaining manufacturing efficiencies by focusing on longer production runs of
fewer products. Sourcing these products also requires us to carry more inventory due to the longer
lead times from overseas. We believe selling products to our customers at more competitive prices
will have a positive impact on our revenue base and our operating profits.
In addition, we believe that many of the products we purchase from our domestic suppliers are
also sourced from overseas, and we derive a significant portion of our revenues from the sale of
products purchased directly from suppliers in the Far East. Accordingly, we are subject to the
risks of this international component that may affect our ability to deliver products in a timely
and competitive manner. These risks include:
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As a result, we attempt to maintain an adequate supply of critical inventory items. We are
not dependent on any single source of supply. Although the vast majority of products we distribute
are purchased in final form, a small percentage of the items require some fabrication to complete.
We own welding machines and an assortment of tools to aid in this fabrication process. The raw
materials used in this process are in the form of shipping supplies, nuts and bolts, and other
commercially available products. We believe multiple suppliers exist for these products nationwide.
Competition
We compete principally in the institutional market with local sporting goods dealers and other
direct mail companies, which collectively dominate the institutional market. We compete on a
number of factors, including price, relationships with customers, name recognition, product
availability and quality of service. We believe we have an advantage in the institutional market
over traditional sporting goods retailers because our selling prices do not include comparable
price markups attributable to wholesalers, manufacturers, and distributors. In addition, we
believe we have an advantage over other direct mail marketers and team dealers of sporting goods
because we offer a wide array of proprietary products, coupled with prompt and accessible service,
at the most competitive prices.
Government Regulation
Some of our products are subject to regulation by the Consumer Product Safety Commission. The
Consumer Product Safety Commission has the authority to exclude from the market certain items that
are found to be hazardous and can require a manufacturer to refund the purchase price of products
that present a substantial product hazard to consumers. Similar laws exist in some states and
cities in the United States. The Company believes it is in full compliance with all applicable
regulations.
Employees
We currently employ approximately 776 people on a full-time basis compared to 863 employees on
a full-time basis at the end of fiscal 2006. In addition, we may hire temporary employees as
seasonal increases in demand occur. Our employees are not represented by any organized labor
organization or union, and we believe our relations with our employees are generally good.
ITEM 1A. RISK FACTORS.
There are many risk factors that affect Sport Supply Group’s business and the results of its
operations, some of which are beyond the Company’s control. The following is a description of some
of the important risk factors that may cause the actual results of Sport Supply Group’s operations
in future periods to differ substantially from those currently expected or desired. Also see Item
3, “Legal Proceedings.”
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Our success depends upon our ability to develop new, and enhance our existing relationships with,
customers and suppliers.
Our success depends upon our ability to develop new, and enhance our existing relationships
with, customers and suppliers. Our prospects must be considered in light of the risks, expenses,
and difficulties frequently encountered by companies in our industry. To address these risks, we
must, among other things:
We cannot assure you that we will succeed in addressing such risks. Our failure to do so
could have a material adverse effect on our business, financial condition, or results of operations
in the form of lower revenues and operating profit and higher operating costs.
We may be unable to make additional acquisitions on attractive terms or successfully integrate them
into our operations.
The substantial majority of our recent growth has been due to our acquisitions of Old SSG,
Tomark, Kesslers, Dixie, OTS, Salkeld, and Team Print. We expect to continue to evaluate and,
where appropriate, pursue acquisition opportunities on terms our management considers favorable to
us. We cannot assure you that we will be able to identify suitable acquisitions in the future, or
that we will be able to purchase or finance these acquisitions on favorable terms or at all. In
addition, we compete against other companies for acquisitions, and we cannot assure you that we
will be successful in the acquisition of any companies appropriate for our growth strategy.
Further, we cannot assure you that any future acquisitions that we make will be integrated
successfully into our operations or will achieve desired profitability objectives.
Acquisitions of these and any other companies involve a number of risks, including:
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Our success depends on our ability to manage our growth.
During recent years, we have experienced a period of rapid and significant growth, and our
continued expansion may significantly strain our management, financial and other resources. We
believe that improvements in management and operational controls, and operations, financial and
management information systems could be needed to manage future growth. We cannot assure you that:
Our failure to have these resources in sufficient form or quantity during a period of
significant growth could have an adverse affect on our operating results.
We face intense competition and potential competition from companies with greater resources and our
inability to compete effectively with these companies could harm our business.
The market for sporting goods and related equipment in which we compete is highly competitive,
especially as to product innovation and availability, performance and styling, price, customer
relationships, name recognition, marketing, delivery and quality of service. We compete
principally in the institutional market with local sporting goods dealers and other direct mail
companies. Some of our competitors may have:
In addition, our competitors may have larger technical, sales and marketing resources.
Further, there are no significant technological or capital barriers to entry into the markets for
many sporting goods and recreational products. Our competitors may be able to secure products from
vendors on terms that are more favorable, fulfill customer orders more efficiently, or adopt more aggressive pricing or
inventory availability policies. We cannot give you assurance that we will compete successfully
against our competitors in the future.
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We are dependent on competitive pricing from our suppliers.
The general economic conditions in the United States or international countries in which we do
business could affect pricing of raw materials such as metals and other commodities used by
suppliers of our finished goods. For example, recent demand for steel and aluminum has resulted in
increased prices for our products. We cannot assure you that any price increase we incur for our
products can be passed on to our customers without adversely affecting our operating results.
The weak financial conditions of some of our customers may adversely affect our business.
We monitor the credit worthiness of our customer base on an ongoing basis, and we have not
experienced an abnormal increase in losses in our accounts receivable portfolio. We believe that
allowances for losses adequately reflect the risk of loss. However, a change in the economic
condition or in the make-up of our customer base could have an adverse affect on losses associated
with the credit terms that we give to our customers that would adversely affect our cash flow and
involve significant risks of nonpayment.
Our financial results vary from quarter to quarter, which could hurt our business and the market
price of our stock.
Various factors affect our quarterly operating results and some of them are not within our
control. They include, among others:
These and other factors are likely to cause our financial results to fluctuate from quarter to
quarter. If revenue or operating results fall short of the levels expected by public market
analysts and investors, the trading price of our common stock could decline dramatically. Based on
the foregoing, we believe that quarter-to-quarter comparisons of our results of operations may not
be meaningful. Purchasers of our common stock should not view our historical results of operations
as reliable indications of our future performance.
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Seasonality of our business may adversely affect our net sales and operating income.
Seasonal demand for our products and the budgeting procedures of many of our customers cause
our financial results to vary from quarter to quarter. We generally experience lower net sales and
higher expenses as a percentage of sales in the second quarter of each fiscal year (October 1 —
December 31) due to lower customer demand during those periods of decreased sports activities,
adverse weather conditions inhibiting customer demand, holiday seasons, school recesses, and higher
sales and earnings in the remaining quarters of the fiscal year.
State and local sales tax collection may affect demand for our products.
We collect and remit sales tax in states in which we have a physical presence or in which we
believe nexus exists, which obligates us to collect sales tax. Other states may, from time to time,
claim that we have state-related activities constituting a sufficient nexus to require such
collection. Additionally, many other states seek to impose sales tax collection obligations on
companies that sell goods to customers in their state, or directly to the state and its political
subdivisions, even without a physical presence. Such efforts by states have increased recently, as
states seek to raise revenues without increasing the tax burden on residents, and one state is
currently asserting such a claim against us. We rely, as do other direct mail retailers, on United
States Supreme Court decisions which hold that, without Congressional authority, a state may not
enforce a sales tax collection obligation on a company that has no physical presence in the state
and whose only contacts with the state are through the use of interstate commerce such as the
mailing of catalogs into the state and the delivery of goods by mail or common carrier. We cannot
predict whether the nature or level of contacts we have with a particular state will be deemed
enough to require us to collect sales tax in that state nor can we be assured that Congress or
individual states will not approve legislation authorizing states to impose tax collection
obligations on all direct mail and/or e-commerce transactions. A successful assertion by one or
more states that we should collect sales tax on the sale of merchandise could result in substantial
tax liabilities related to past sales and would result in considerable administrative burdens and
costs for us and may reduce demand for our products from customers in such states when we charge
customers for such taxes.
We depend on key personnel for our future success.
Our performance is substantially dependent on the skills, experience, and performance of our
Chief Executive Officer, Adam Blumenfeld, as well as our ability to retain and motivate other
officers and key employees, especially our road sales professionals, certain of whom would be
difficult to replace. We neither have an employment agreement with Adam Blumenfeld nor do we carry
“key person” life insurance on any of our officers or employees. In addition, Michael J.
Blumenfeld, the Company’s founder and long-time Chief Executive Officer, stepped down as Chief
Executive Officer on November 13, 2006 and further reduced his operating role with the Company on
June 30, 2007 by stepping down as Chairman of the Board. Michael J. Blumenfeld was the original
founder of the Company and the departure of Mr. Blumenfeld from the role of Chief Executive
Officer may impede the Company’s future success.
Our ability to retain and expand our customer base depends on our ability to maintain strong
relationships with our road sales professionals. Consequently, the loss of one or more key road
sales professionals could result in our loss of the customer relationships maintained by the
departing road sales professionals, which could materially adversely affect our net sales and
results of operations. We believe we currently have a good relationship with our road sales
professionals.
We depend on international and domestic suppliers.
A significant amount of our revenues is dependent upon products purchased from foreign
suppliers, which are located primarily in the Far East. In addition, we believe that many of the
products we purchase from our domestic suppliers are manufactured overseas.
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Accordingly, we are subject to the risks of international business, including:
The occurrence of any one or more of the events described above could adversely affect our
business, financial condition and results of operations due to an inability to make timely
shipments to our customers.
We depend on a large number of domestic suppliers for our finished goods.
We are dependent on a large number of domestic suppliers for our finished goods. Any
significant delay in the delivery of products by our domestic suppliers combined with our inability
to obtain substitute sources for these products in a timely manner or on terms acceptable to us
could significantly increase our backlog and could result in the cancellation of customer orders,
damage our customer relationships and harm our operating results.
We depend on third-party carriers.
Our operations depend upon third-party carriers to deliver our catalogs and products to our
customers. We ship our products using common carriers, primarily UPS and ABF. The operations of
such carriers are outside our control. Accordingly, our business reputation and operations are
subject to certain risks, including:
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The occurrence of any one or more of the foregoing could adversely affect our business,
financial condition and results of operations due to an inability to make timely shipments to our
customers or by utilizing other more costly carriers or means of shipping.
We have in the past, and may continue to be subject to product liability claims if people or
property are harmed by the products we sell.
Some of the products we sell have in the past, and may continue to expose us to product
liability claims relating to personal injury, death, or property damage caused by such products,
and may require us to take actions such as product recalls. Although we maintain liability
insurance, we cannot be certain that our coverage will be adequate for liabilities actually
incurred or that insurance will continue to be available to us on economically reasonable terms, or
at all. In addition, some of our vendor agreements with our distributors, manufacturers, and third
party sellers do not indemnify us from product liability. The Company believes it has adequate
insurance coverage in the event of a product liability claim and no reserves in excess of its
insurance coverage have been established. In the event of a product liability claim exceeding the
Company’s insurance coverage, the Company could suffer financial losses which could have a material
adverse effect on the operating results of the Company.
We have a material amount of goodwill and may be required to recognize future intangible impairment
charges.
Approximately $63.0 million, or 40.2%, of our total assets as of June 30, 2007, represented
intangible assets, the significant majority of which is goodwill. Goodwill is the amount by which
the costs of an acquisition accounted for using the purchase method exceeds the fair value of the
net assets we acquired. We are required to record goodwill as an intangible asset on our balance
sheet. Pursuant to accounting principles generally accepted in the United States of America
(“US GAAP”), we are required to test goodwill and other intangible assets to determine if
they are impaired. Such tests are required to be performed annually or between annual tests if an
event occurs or circumstances change that would more likely than not reduce the fair value of the
asset below its carrying amount. Disruptions to our business, protracted economic weakness,
unexpected significant declines in operating results and market capitalization declines may result
in charges for goodwill and other intangible asset impairments. Reductions in our net income
caused by the write-down of goodwill or intangible assets could materially adversely affect our
results of operations.
Acts of war or terrorism may have an adverse effect on our business.
Acts of war or terrorism may have an adverse effect on the economy generally, and more
specifically on our business, financial condition, results of operations and prospects. Among
various other risks, such occurrences have the potential to adversely affect our ability to
consummate future debt or equity financings and negatively affect our ability to manufacture,
source and deliver products in a timely manner.
Our operations are largely dependent on our information technology systems, which require
significant expenditures and entail risk.
We rely on a variety of information technology systems in our operations and our success is
largely dependent on the accuracy and proper use of these systems. In connection with managing our
growth, we continually evaluate the adequacy of our systems and procedures, and anticipate that we
will regularly need to make capital expenditures to update and modify our management information
systems, including software and hardware, as we grow and the needs of our business change. We
recently migrated a portion of our catalog application onto the existing Old SSG SAP ERP system.
We may encounter issues with data integrity that could impact our ability to process orders,
procure product and properly record transactions. The occurrence of a significant system failure,
electrical or telecommunications outages or our failure to expand or successfully implement or
integrate new systems, including those of businesses that we have acquired or may acquire in the future, could have a
material adverse effect on our results of operations.
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In addition, our information systems networks, including our website, and applications could
be adversely affected by viruses and worms and may be vulnerable to malicious acts such as hacking.
Although we take preventative measures, these procedures may not be sufficient to avoid harm to
our operations, which could have an adverse effect on our results of operations.
Risks Related to our Corporate Structure and Stock
Our stock price could be subject to significant volatility.
The price of our common stock is determined in the marketplace and may be influenced by many
factors, including:
Historically, the weekly trading volume of our common stock has been relatively small. Any
material increase in public float could have a significant impact on the price of our common stock.
In addition, the stock market has occasionally experienced extreme price and volume fluctuations
that often affect market prices for smaller companies. These extreme price and volume fluctuations
often are unrelated or disproportionate to the operating performance of the affected companies.
Accordingly, the price of our common stock could be affected by such fluctuations.
A large number of our outstanding shares and shares to be issued upon exercise of our outstanding
options may be sold into the market in the future, which could cause the market price of our common
stock to drop significantly, even if our business is doing well.
A substantial number of shares of our common stock are reserved for issuance pursuant to stock
options. As of June 30, 2007, we had 977,950 outstanding options, each to purchase one share of
our common stock, issued to key employees, officers and directors under our 1998 Collegiate Pacific
Inc. Stock Option Plan. The options have exercise prices ranging from $3.89 per share to $14.34
per share. At our fiscal 2007 annual meeting of stockholders held on December 15, 2006, our
stockholders approved the Collegiate Pacific Inc. 2007 Stock Option Plan (the “2007 Plan”)
as adopted by our Board of Directors on November 2, 2006, and the reservation of 500,000 shares of
common stock for issuance thereunder. The 2007 Plan provides for the grant of stock options
(including nonqualified options and incentive stock options). On July 2, 2007, approximately
232,500 options were granted under the plans at an exercise price of $9.75 per option. In
addition, on August 28, 2007, our Board of Directors approved option awards under the 2007 Plan to
two executives, Terry Babilla and Adam Blumenfeld. The grant date of the option awards was
September 7, 2007, and Messrs. Babilla and Blumenfeld received 130,000 options and 150,000 options,
respectively, at an exercise price of $9.56 per option. The exercise of these outstanding options
could have a significant adverse effect on the trading price of our common stock, especially if a
significant volume were to be exercised and the stock issued was immediately sold into the public
market. Further, the exercise of these options could have a dilutive impact on other shareholders by decreasing their ownership percentage
of our outstanding common stock
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Four principal stockholders own a significant amount of our outstanding common stock.
Based on the number of outstanding shares of our common stock as of September 10, 2007, CBT
Holdings, LLC beneficially owns 1,830,000 shares of our common stock, or 15.0%, Carlson Capital LP
beneficially owns 1,467,488 shares of our common stock, or 12.0%, Skystone Advisors LLC
beneficially owns 1,808,838 shares of our common stock (including 273,078 shares issuable upon
conversion of our notes), or 14.8%, and Wellington Management Company LLP beneficially owns
1,384,507 shares of our common stock, or 11.4%. As a result, these stockholders are in a position
to influence significantly the outcome of elections of our directors, the adoption, amendment or
repeal of our bylaws and any other actions requiring the vote or consent of our stockholders.
Rights of our stockholders may be negatively affected if we issue any of the shares of preferred
stock, which our Board of Directors has authority to issue.
We have available for issuance 1,000,000 shares of preferred stock, par value $0.0l per share.
Our Board of Directors is authorized to issue any or all of this preferred stock, in one or more
series, without any further action on the part of stockholders. The rights of our stockholders may
be negatively affected if we issue a series of preferred stock in the future that has preference
over our common stock with respect to the payment of dividends or distribution upon our
liquidation, dissolution or winding up.
Risks Related to the Senior Subordinated Notes Due 2009
We significantly increased our leverage because of the sale of the notes.
In connection with the sale of the notes, we incurred $50 million of indebtedness. Because of
this indebtedness, our principal and interest payment obligations increased substantially. The
degree to which we are leveraged could materially and adversely affect our ability to obtain
financing for working capital, acquisitions or other purposes and could make us more vulnerable to
industry downturns and competitive pressures. Our ability to meet our debt service obligations is
dependent upon our future performance, which is subject to financial, business and other factors
affecting our operations, many of which are beyond our control.
The notes are subordinated and there are no financial covenants in the indenture.
The notes are unsecured and subordinated in right of payment to all of our existing and future
“senior debt” of the Company. Under the terms of the indenture, we may also incur additional
“senior debt” from time to time. In the event of our bankruptcy, liquidation or reorganization or
upon acceleration of the notes due to an event of default under the indenture and in certain other
events, we will not be able to repay the notes until after we have satisfied all of our senior debt
obligations. As a result, we may not have sufficient assets remaining to pay amounts due on any or
all of the outstanding notes.
The notes are also effectively subordinated to the liabilities, including trade payables, of
our subsidiaries. As a result, our right to receive assets of any subsidiaries upon their
liquidation or reorganization, and the rights of the holders of the notes to share in those assets,
would be subject to the claims of the creditors of the subsidiaries.
Our subsidiaries are not restricted from incurring additional debt or liabilities under the
indenture. In addition, we are not restricted from paying dividends or issuing or repurchasing our
securities under the indenture. If we or our subsidiaries were to incur additional debt or
liabilities, our ability to pay our obligations on the notes could be adversely affected. As of
June 30, 2007, we had borrowed approximately $14.2 million under our revolving line of credit,
$10.5 million under our senior term loan, $50 million from the sale of the notes, and an aggregate amount of other indebtedness and
liabilities of approximately $31.4 million (excluding intercompany liabilities which are not
required to be recorded on the balance sheet in accordance with US GAAP).
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We may be unable to repay, repurchase or redeem the notes.
At maturity, the entire outstanding principal amount of the notes will become due and payable
by us. Upon a fundamental change, as defined in the indenture, the holders may require us to
repurchase all or a portion of the notes. We may not have enough funds or be able to arrange for
additional financing to pay the principal at maturity or to repurchase the notes tendered by the
holders. Our credit facility provides that a fundamental change constitutes an event of default.
Future credit agreements or other agreements relating to our indebtedness might contain similar
provisions. If the maturity date or a fundamental change occurs at a time when we are prohibited
from repaying or repurchasing the notes, we could seek the consent of our lenders to purchase the
notes or could attempt to refinance this debt. If we do not obtain the necessary consents or
refinance the debt, we will be unable to repay or repurchase the notes. Our failure to repay the
notes at maturity or repurchase tendered notes would constitute an event of default under the
indenture, which might constitute a default under the terms of our other debt. In such
circumstances, or if a fundamental change would constitute an event of default under our senior
debt, the subordination provisions of the indenture would possibly limit or prohibit payments to
the holders of the notes. The term “fundamental change” is limited to certain specified
transactions and may not include other events that might harm our financial condition. Our
obligation to offer to purchase the notes upon a fundamental change would not necessarily afford
the holders of the notes protection in the event of a highly-leveraged transaction, reorganization,
merger or similar transaction involving us.
Provisions of the notes could discourage an acquisition of us by a third party.
Certain provisions of the notes could make it more difficult or more expensive for a third
party to acquire us. Upon the occurrence of certain transactions constituting a fundamental
change, holders of the notes will have the right, at their option, to require us to repurchase all
of their notes or any portion of the principal amount of such notes in integral multiples of $1,000
in cash at a price equal to 100% of the principal amount of notes to be repurchased, plus accrued
and unpaid interest and additional interest, if any, to, but excluding the repurchase date, plus
the make whole premium, if applicable. In addition, pursuant to the terms of the notes, we may not
enter into certain mergers or acquisitions unless, among other things, the surviving person or
entity assumes the payment of the principal of, premium, if any, and interest (including additional
interest, if any), plus the make whole premium, if applicable, on the notes.
The make whole premium on the notes tendered for repurchase upon a fundamental change may not
adequately compensate the holders for the lost option time value of notes.
If a fundamental change occurs and at least 90% of the consideration for the common stock in
the transaction or transactions constituting the fundamental change consists of cash, holders of
notes will be entitled to a make whole premium in cash in respect of notes tendered for purchase or
converted in connection with the fundamental change. The amount of the make whole premium will be
determined based on the date on which the fundamental change becomes effective and the share price
of common stock when the transaction constituting the fundamental change occurs. While the make
whole premium is designed to compensate the holders of notes for the lost option time value of
notes because of a fundamental change, the amount of the make whole premium is only an
approximation of the lost value and may not adequately compensate holders for such loss. In
addition, if the share price of common stock at the time of the transaction constituting the
fundamental change is less than $13.31 or more than $36.64, no make whole premium will be paid.
A market may not develop for the notes.
A market for the notes may not develop or, if one does develop, it may not be maintained. If
an active market for the notes fails to develop or be sustained, the trading price of the notes
could decline significantly.
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Conversion of the notes or issuance of additional securities convertible into or exercisable for
shares of our common stock could dilute the ownership of existing stockholders.
The conversion of some or all of the notes could dilute the ownership interests of existing
stockholders. Any sales in the public market of the common stock issuable upon such conversion
could adversely affect prevailing market prices of our common stock. In addition, the existence of
the notes may encourage short selling by market participants because the conversion of the notes
could depress the price of our common stock. We may, in the future, sell additional shares of our
common stock, or securities convertible into or exercisable for shares of our common stock, to
raise capital. We may also issue additional shares of our common stock, or securities convertible
into or exercisable for shares of our common stock, to finance future acquisitions.
The price at which our common stock may be purchased on the American Stock Exchange is currently
lower than the conversion price of the notes and may remain lower in the future.
Our common stock trades on the American Stock Exchange under the symbol “RBI.” On September
10, 2007, the last reported sale price of our common stock was $9.73 per share. The initial
conversion price of the notes is approximately $14.65 per share. The market prices of our
securities are subject to significant fluctuations. Such fluctuations, as well as economic
conditions generally, may adversely affect the market price of our securities, including our common
stock and the notes.
The notes are not rated.
The notes are currently not rated. If, however, one or more rating agencies rate the notes
and assign the notes a rating lower than the rating expected by investors, or reduce their rating
in the future, the market price of the notes and our common stock would be harmed.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Our facilities and those of our wholly-owned subsidiaries, each of which is included in the
table below, are generally adequate for our current and anticipated future needs. Our facilities
generally consist of executive and administrative offices, warehouses, a call center, production,
distribution and fulfillment facilities and sales offices.
We believe all of our leases are at prevailing market rates and, except as noted, with
unaffiliated parties. We believe the duration of each lease is adequate and believe our principal
properties are adequate for the purposes for which they are used and are suitably maintained and
insured for these purposes. We do not anticipate any future problems renewing or obtaining
suitable leases for our principal properties.
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The table below provides information with respect to the principal warehouse, production and
distribution facilities of the Company:
Our corporate headquarters are located within the approximately 138 thousand square feet of
leased space located at 1901 Diplomat Drive, Farmers Branch, Texas. The terms of Sport Supply
Group’s leases range from two to five years and most are renewable for additional periods. The
Richmond, Indiana location is owned by RPD Services, Inc., an Indiana corporation f/k/a Kesslers
Sport Shop, Inc., from which we acquired substantially all of its operating assets in April 2004.
RPD Services, Inc. is owned by Bob Dickman, Phil Dickman and Dan Dickman, all of whom are employed
by our wholly owned subsidiary, Kesslers. The Sanford, Florida location is owned by McWeeney Smith
Partnership, which is controlled by the former owners of OTS, each of which was formerly employed
by our wholly owned subsidiary, OTS. The Bourbonnais, Illinois embroidering and screen printing
facility is owned by Albert A. Messier, a former stockholder of Salkeld and the former owner of our
Team Print business, which we acquired in August 2005. Mr. Messier is employed by our wholly owned
subsidiary, Kesslers.
We also lease small sales offices or storage areas ranging in size from 500 square feet to 10
thousand square feet in various locations throughout the United States. Most of the leases have
lease terms ranging from one to five years.
ITEM 3. LEGAL PROCEEDINGS.
On September 21, 2006, Jeffrey S. Abraham, as Trustee of the Law Offices of Jeffrey S. Abraham
Money Purchase Plan, dated December 31, 1999, f/b/o Jeffrey S. Abraham, filed a complaint in the
Court of Chancery of the State of Delaware in and for New Castle County, C.A. No. 2435-N against
the Company, Michael J. Blumenfeld, the four directors of Old SSG, Arthur J. Coerver, Harvey
Rothenberg, Robert W. Philip and Thomas P. Treichler, and Old SSG, as a nominal defendant. The
Plaintiff is a former stockholder of Old SSG and brought the action as a class action on behalf of
all Old SSG minority stockholders in connection with the September 20, 2006 Agreement and Plan of
Merger pursuant to which the Company acquired the remaining shares of the outstanding capital stock
of Old SSG that the Company did not already own. The plaintiff alleges, among other things, that
the $8.80 cash price per share of Old SSG common stock paid to the minority stockholders in the
merger was unfair in that the purchase price failed to take into account the value of Old SSG, its
improved financial results and its value in comparison to similar companies. The plaintiff also
alleges that the process by which the merger agreement was arrived at could not have been the
product of good faith and fair dealing because the Company and Mr. Blumenfeld acted in bad faith by
taking various actions to depress the price of Old SSG common stock and dry up the market liquidity
in such shares, all in an effort to effect the merger. In addition, the plaintiff alleges that the
directors of Old SSG breached their fiduciary duties of good faith and loyalty to the plaintiff and
the other minority stockholders in the merger agreement negotiations. The plaintiff requested that
the merger be enjoined or in the alternative, damages be awarded to the Old SSG minority
stockholders. On January 31, 2007, the plaintiff amended his complaint and is requesting that the
court certify plaintiff as the class representative of the proposed class and award plaintiff and
the class compensating and/or rescissory damages. The plaintiff also seeks the costs of bringing
the action, including reasonable attorneys fees and experts’ fees. Formal discovery is on-going.
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The Company is a party to various other litigation matters, in most cases involving ordinary
and routine claims incidental to the Company’s business. We cannot estimate with certainty our
ultimate legal and financial liability with respect to such pending litigation matters. However,
we believe, based on our examination of such matters, that our ultimate liability will not have a
material adverse effect on our financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
Market
Our common stock trades on the American Stock Exchange under the symbol “RBI.” The following
table sets forth the high and low sale prices for our common stock during each of the periods
indicated, as reported on the American Stock Exchange.
Stock Price Performance Graph
The following performance graph does not constitute soliciting material and should not be
deemed filed or incorporated by reference into any other Sport Supply Group filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent Sport Supply
Group specifically incorporates this performance graph therein, or subject to the liabilities of
Section 18 of the Securities Exchange Act of 1934.
The following graph compares the cumulative total return on Sport Supply Group’s common stock
during the last five years with an AMEX Market Index and a weighted index of a peer group of
companies that in the judgment of the Company sold products similar to the Company during the same
period. The peer group is comprised of Hibbett Sporting Goods, Varsity Group, Inc., K2, Inc. and
Escalade, Inc. The graph shows the value, at the end of each of the last five fiscal years, of $100
invested in Sport Supply Group’s common stock or the indices on July 1, 2002, and assumes the
reinvestment of all dividends. The graph depicts the change in the value of common stock relative
to the indices as of the end of each fiscal year and not for any interim period. Historical stock
price performance is not necessarily indicative of future stock price performance.
Comparison of 5-Year Cumulative Total Return
(Assumes $100 Invested on July 1, 2002) 
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Holders
As of September 10, 2007, there were approximately 301 holders of record of our common stock,
and there were 12,188,160 shares of common stock issued and outstanding.
Dividends
In fiscal 2006 and 2007, the Company paid a quarterly cash dividend in the amount of $0.025
per share. Future quarterly dividends will be paid only when, as, and if declared by our Board of
Directors in its sole discretion and will be dependent upon then existing conditions, including the
Company’s financial condition, results of operations, contractual restrictions, capital
requirements, business prospects, and such other factors as the Board deems relevant.
Transfer Agent, Registrar and Dividend Disbursing Agent for Common Stock
Continental Stock Transfer and Trust Company
17 Battery Place New York, NY 10004 ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with “Item 7 —
Management’s Discussion and Analysis of Financial Condition and Results of Operation” and “Item 8
— Financial Statements and Supplementary Data,” and does not reflect the impact of the purchase of
1,830,000 shares of our common stock by CBT Holdings, LLC on July 30, 2007.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Background
Sport Supply Group is a marketer, manufacturer and distributor of sporting goods equipment,
physical education, recreational and leisure products and a marketer and distributor of soft goods,
primarily to the institutional market in the United States. The institutional market generally
consists of youth sports programs, YMCAs, YWCAs, park and recreational organizations, schools,
colleges, churches, government agencies, athletic teams, athletic clubs and dealers. We sell our
products directly to our customers primarily through the distribution of our unique, informative
catalogs and fliers, our strategically located road sales professionals, our telemarketers and the
Internet. We offer a broad line of sporting goods and equipment, soft goods and other recreational
products, as well as provide after-sale customer service. We currently market approximately 22
thousand sports related equipment products, soft goods and recreational related equipment and
products to institutional, retail, Internet, sports teams and other team dealer customers. We
market our products through the support of a customer database of over 400 thousand potential
customers, our 197 person direct sales force strategically located throughout the Mid-Western and
Mid-Atlantic United States, and our call centers located at our headquarters in Farmers Branch,
Texas, Corona, California in the Los Angeles basin, and Richmond, Virginia.
Overview
We believe a consolidation of the sporting goods industry has contributed to a shift of sales
within the institutional market from traditional, retail storefront sites to sales from catalogs,
direct marketing by road sales professionals and the Internet. Sport Supply Group believes the
most successful sporting goods companies will be those with greater financial resources and the
ability to produce or source high-quality, low cost products, deliver those products directly to
customers on a timely basis and access distribution channels with a broad array of products and
brands.
Sport Supply Group has embarked upon an aggressive program to leverage its existing operations
and to complement and diversify its product offerings within the sporting goods and recreational
products industry. We intend to implement our internal growth strategy by continuing to improve
operating efficiencies, extending our product offerings through new product launches and maximizing
our distribution channels. In addition, Sport Supply Group may continue to seek strategic
acquisitions and relationships with other sporting goods companies with well-established brands and
with complimentary distribution channels.
Sport Supply Group has begun to see results from its efforts reflected in its financial
performance. Net sales for fiscal 2007 totaled $236.9 million compared to $224.2 million in fiscal
2006, an increase of $12.7 million, or 5.7%. Gross profit increased $8.5 million to $83.6 million
in fiscal 2007. Gross profit margin increased to 35.3% in fiscal 2007 from 33.5% in fiscal 2006.
The increase in our gross profit percentage in fiscal 2007 was due primarily to our catalog
business, which experienced a gross profit margin of 37.2% through improved pricing discipline and
higher sales of products the Company manufactures, which historically carry higher margins.
Operating profit for fiscal 2007 increased to $12.7 million, or 5.4% of net sales, compared to
operating profit of $8.3 million, or 3.7% of net sales, in fiscal 2006. The increase in operating
profit and operating profit as a percentage of sales in fiscal 2007 reflects higher sales volume
and improved gross profit percentage, partially offset by higher selling and general and
administrative expenses.
Net sales for fiscal 2006 increased 110.9% to $224.2 million from $106.3 million in fiscal
2005. This increase in net sales was primarily due to the Old SSG acquisition as well as the other
acquisitions the Company completed during fiscal 2004, 2005, and 2006 as well as organic growth
from Company’s existing operations. Gross margin decreased to 33.5% in fiscal 2006 from 33.8% in
fiscal 2005. The decrease in gross profit margin for fiscal 2006, compared to fiscal 2005, was due
primarily to our acquisition of Old SSG, which experienced a gross profit margin of 32.6%. The Old SSG gross
profit margin was adversely affected by $1.2 million for goods acquired in connection with the
purchase of Old SSG. Operating profit for fiscal 2006 increased to $8.3 million, or 3.7% of net
sales, compared to operating profit of $7.3 million, or 6.9% of net sales, in fiscal 2005.
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During fiscal 2007, 2006, 2005 and 2004, Sport Supply Group made significant progress towards
achieving its strategic objectives as follows:
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Fiscal 2007 and 2006 Acquisitions and Related Developments
On July 1, 2005, the Company completed the acquisition of 53.2% of the outstanding capital
stock of Old SSG from Emerson Radio Corp and Emerson Radio (Hong Kong) Limited for $32
million in cash. Old SSG was a direct marketer and B2B e-commerce supplier of sporting
goods and physical education equipment to the institutional and youth sports market. The
acquisition of 53.2% of Old SSG was accounted for using the purchase method of accounting and,
accordingly, the net assets and results of operations of Old SSG have been included in the
Company’s consolidated financial statements since July 1, 2005. The purchase price was allocated
to assets acquired of approximately $41.3 million, which included cash of $863 thousand, plus
identifiable intangible assets, which included $3.2 million for non-compete agreements, $1.3
million for customer relationships, $660 thousand for a customer database, $327 thousand for
significant contracts, $221 thousand for contractual backlog, $43 thousand for photo library and
$14 thousand for a bid database calendar, and liabilities assumed based on their respective
estimated fair values of approximately $26.8 million at the date of acquisition. The excess of the
purchase price over the fair value of the net assets acquired has been recorded as goodwill in the
amount of approximately $11.9 million.
On September 8, 2005, the Company announced it entered into an Agreement and Plan of Merger
with Old SSG (the “Original Merger Agreement”) pursuant to which the Company would have
acquired the remaining 46.8% of the outstanding capital stock of Old SSG that it did not already
own. On November 22, 2005, however, the Company announced it had entered into an agreement with
Old SSG to terminate the Original Merger Agreement after determining the merger was unlikely to
close in a timely fashion under previously contemplated terms. Under the terms of the Termination
Agreement, dated November 22, 2005, the Company agreed to reimburse Old SSG up to $350 thousand for
the fees and expenses incurred by Old SSG in connection with the Original Merger Agreement.
Also on November 22, 2005, the Company announced its purchase of 1,661,900 shares of Old SSG,
or an additional 18% of Old SSG’s outstanding common shares, for approximately $9.2 million in cash
from an institutional holder, representing a purchase price of $5.55 per share. In addition, the
Company purchased during that same fiscal quarter an additional 155,008 shares of Old SSG for $746
thousand in open market transactions at an average price of $4.81 per share. The purchase of these
additional shares of Old SSG increased goodwill by approximately $4.3 million.
On November 13, 2006, the Company announced it had completed its acquisition of the remaining
26.8% of the capital stock of Old SSG that it did not already own for approximately $24.9 million
(the “Merger Transaction”). Under the terms of the Merger Transaction, a wholly-owned
subsidiary of the Company was merged with and into Old SSG, with Old SSG as the surviving
corporation. Each issued and outstanding share of Old SSG’s common stock was converted into the
right to receive $8.80 in cash.
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The Company acquired Old SSG after considering the historic levels of earnings achieved by Old
SSG. The consideration paid was agreed upon after the Company determined the potential impact on
future earnings of the integrated companies. For income tax purposes, the goodwill acquired by the
Company in connection with the Old SSG acquisition is not deductible.
In August 2005, the Company completed the acquisition of substantially all of the operating
assets of Team Print from Mr. Albert Messier, one of the former principal stockholders of Salkeld,
for approximately $1.0 million in cash and the issuance of 53,248 shares of the Company’s common
stock to Mr. Messier, which were valued at approximately $641 thousand based on the average closing
price of the Company’s common stock five days prior to May 10, 2005. Team Print is an embroiderer
and screen printer of sports apparel and accessories. The Company’s wholly owned subsidiary,
Kesslers employs Mr. Messier. The excess of the purchase price over the fair value of the net
assets acquired has been recorded as goodwill in the amount of $1.2 million.
The Company acquired the operating assets of Team Print from Mr. Messier after considering the
historic levels of earnings achieved by Team Print, the fact that the Company was Team Print’s
largest customer and the cost savings to be realized from owning the Team Print business and the
impact those savings could have on the future earnings of the Company. The consideration given to
Team Print was agreed upon after the Company determined the potential impact on future earnings of
owning the operating assets of Team Print.
Matters Affecting Comparability
Our operating results for fiscal 2007 and fiscal 2006 include the operating results of Tomark
and Kesslers, both of which we acquired in fiscal 2004, Dixie, which we acquired during the first
quarter of fiscal 2005, OTS, which we acquired during the second quarter of fiscal 2005, Salkeld,
which we acquired in the fourth quarter of fiscal 2005, Old SSG and Team Print, each since their
respective acquisition date. However, the consolidated statement of income for fiscal 2005 does
not include the operating results for the Old SSG and Team Print acquisitions since those
acquisitions were completed after June 30, 2005. For income tax purposes, only the goodwill
associated with the Company’s acquisition of Kesslers, OTS and Team Print is deductible over a
period of 15 years. The goodwill acquired by the Company in connection with the other acquisitions
is not deductible for income tax purposes because the Company acquired all of the outstanding
capital stock of those targets. Although the acquisition of OTS was an acquisition of stock, the
parties to the transaction made a Section 338(h)(10) election under the Internal Revenue Code to
tax the transaction as if it was an acquisition of assets.
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Consolidated Results of Operations
The following table sets forth selected financial data and certain ratios and relationships
calculated from the Consolidated Statements of Income for the fiscal years ended June 30, 2007,
2006 and 2005:
Fiscal Year Ended June 30, 2007 Compared to Fiscal Year Ended June 30, 2006
Net Sales. Net sales for fiscal 2007 totaled $236.9 million compared to $224.2 million in
fiscal 2006, an increase of $12.7 million, or 5.7%. The increase in net sales was primarily
attributable to an increase in catalog and consumer direct Internet sales of $4.4 million, an
increase in the sale of soft goods and sporting equipment through our road sales force of $5.8
million, and an increase in freight collected from our customers and install revenue of $2.4
million.
Historically, sales of our sporting goods have experienced seasonal fluctuations. This
seasonality causes our financial results to vary from quarter to quarter, which usually results in
lower net sales and operating profit in the second quarter of our fiscal year (October through
December) and higher net sales and operating profit in the remaining quarters of our fiscal year.
We attribute this seasonality primarily to the budgeting procedures of our customers and the
seasonal demand for our products, which have historically been driven by spring and summer sports.
Generally, between the months of October and December of each fiscal year, there is a lower level
of sports activities at our non-retail institutional customer base, a higher degree of adverse
weather conditions and a greater number of school recesses and major holidays. We believe the
operations of our team dealers, which have a greater focus on fall and winter sports, have reduced
the seasonality of our financial results. We have also somewhat mitigated this sales reduction
during the December quarter by marketing our products through the websites of large retailers.
Retail customers order the products from the retailers’ websites and we ship the products to the
retailers’ customers.
Gross Profit. Gross profit for fiscal 2007 increased $8.5 million to $83.6 million, or 35.3%
of net sales, compared with $75.1 million, or 33.5% of net sales, in fiscal 2006. The $8.5 million
increase in gross profit is primarily due to a combination of an increase in sales volume, and our
customer and product mix.
The acquisition and manufacturing costs of inventory, the cost of shipping and handling
(freight costs) and any decrease in the value of inventory due to obsolescence or lower of cost or
market adjustments is included in the determination of total cost of sales. Total cost of sales
for fiscal 2007 was $153.3 million, or 64.7% of net sales, compared to $149.2 million, or 66.5% of
net sales, in fiscal 2006. Total cost of sales for fiscal 2007 consisted of $131.3 million for the
acquisition cost of our inventory, $16.9 million in freight costs, $1.8 million for the write-off
of obsolete or damaged inventory and $3.3 million for labor and overhead cost associated with the
products we manufacture.
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We continue to direct a selection of our traditional catalog customers to our road sales
professionals. We believe these efforts have contributed to the growth in our net sales volume and
anticipate this trend will continue in future periods as our road sales professionals continue to
expand the number of face-to-face sales calls to our traditional institutional customers. We also
from time-to-time adjust the selling price of some of our products, which had a positive impact on
net sales in fiscal 2007.
Selling, General and Administrative Expense. Selling, general and administrative
(“SG&A”) expenses for fiscal 2007 were $70.9 million, or 29.9% of net sales, compared with
$66.8 million, or 29.8% of net sales, in fiscal 2006. During fiscal 2007, SG&A expenses primarily
consisted of the following:
The $4.1 million increase in SG&A expenses we experienced during fiscal 2007 compared to
fiscal 2006 was primarily attributable to an increase in personnel related expenses of $3.6 million
to support sales growth, an increase in advertising expenses of $421 thousand to support sales
growth and a bad debt expense increase of $104 thousand related to management’s ongoing assessment
of the quality of accounts receivable, offset by a decrease of $313 thousand in computer services
and supplies and a decrease in general insurance related expenses of $286 thousand.
Operating Profit. Operating profit for fiscal 2007 increased to $12.7 million, or 5.4% of net
sales, compared to operating profit of $8.3 million, or 3.7% of net sales, in fiscal 2006. The
increase in operating profit was primarily attributable to the increase in net sales and gross
profit, which was partially offset by the increase in SG&A expenses during the period.
Interest Expense. Interest expense for fiscal 2007 increased to $6.0 million, compared to $4.5
million in fiscal 2006. Interest expense increased due to increased borrowings under the Company’s
revolving credit facility and notes payable to purchase the additional Old SSG shares. See
“Liquidity and Capital Resources.”
Minority Interest. Minority interest of $531 thousand and $608 thousand for fiscal 2007 and
2006,
respectively, reflects income attributable to the minority ownership in Old SSG.
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Income Taxes. Income tax expense for fiscal 2007 was $2.6 million, which is approximately
37.5% of our income before income taxes, compared to $1.6 million, which was approximately 39.0% of
our income before income taxes for fiscal 2006. The increase in income tax expense was primarily
attributable to the increase in operating profits before tax during the period. The rate decrease
in fiscal 2007 as compared to fiscal 2006 was due to alternative
minimum tax in 2006 and a state
tax rate change in fiscal 2007.
Net Income. Net income for fiscal 2007 increased to $3.9 million, or 1.6% of net sales,
compared to net income of $1.9 million, or 0.8% of net sales, in fiscal 2006.
Fiscal Year Ended June 30, 2006 Compared to Fiscal Year Ended June 30, 2005
Net Sales. Net sales for fiscal 2006 totaled $224.2 million compared to $106.3 million in
fiscal 2005, an increase of $117.9 million, or 110.9%. Net sales grew by a combined $115.4 million
from the businesses we acquired during fiscal 2004, fiscal 2005 and fiscal 2006, and the growth in
our existing catalog operations of approximately $2.5 million.
Gross Profit. Gross profit for fiscal 2006 was $75.1 million, or 33.5% of net sales, compared
with $36.0 million, or 33.8% of net sales, in fiscal 2005. In fiscal 2006, Tomark, Kesslers,
Dixie, OTS, Salkeld, Old SSG and Team Print contributed a combined gross profit of $63.6 million
and gross profit margin of 32.9%.
We include the acquisition and manufacturing costs of our inventory, the cost of shipping and
handling (freight costs) and any decrease in the value of our inventory in our determination of our
total cost of sales. Our total cost of sales for fiscal 2006 was $149.2 million, or 66.5% of net
sales, compared to $70.4 million, or 66.2% of net sales, in fiscal 2005. Our total cost of sales
for fiscal 2006 consisted of $128.9 million for the acquisition cost of our inventory, $16.0
million in freight costs, $1.3 million for the write-off of obsolete or damaged inventory and $3.0
million for labor and overhead cost associated with the products we manufacture.
The increase in our gross profit was due to the increase in our net sales during fiscal 2006.
We continue to direct a selection of our traditional catalog customers to our road sales
professionals. We believe these efforts have contributed to the growth in our net sales volume and
anticipate this trend will continue in future periods as our road sales professionals continue to
expand the number of face-to-face sales calls to our traditional non-retail institutional
customers. Although we from time-to-time adjust the selling price of our products, we do not
believe any price adjustments during fiscal 2006 contributed to our increase in net sales.
The decrease in gross profit margin for fiscal 2006, compared to fiscal 2005, was primarily
due to the acquisition of Old SSG. Old SSG experienced a gross profit margin of 32.6% for fiscal
2006, which included a lower margin of $1.2 million for goods acquired in connection with the
purchase of Old SSG and was the result of the application of Statement of Financial Accounting
Standards No. 141, Business Combinations.
Selling, General and Administrative Expense. SG&A expenses for fiscal 2006 were $66.8
million, or 29.8% of net sales, compared with $28.7 million, or 26.9% of net sales, in fiscal 2005.
During fiscal 2006, SG&A expenses primarily consisted of the following:
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The $38.1 million increase in SG&A expenses we experienced in fiscal 2006 compared to fiscal 2005 was primarily attributable to the acquisitions we completed in fiscal 2006, which contributed $26.1 million to our total SG&A expenses. These expenses included $5.8 million in sales compensation expenses, $4.0 in general and administrative compensation expenses, $3.9 million
in advertising expenses and $2.4 million in amortization and depreciation expenses. Also contributing to the increase in SG&A expenses in fiscal 2006 were:
Operating Profit. Operating profit for fiscal 2006 increased to $8.3 million, or 3.7% of net
sales, compared to operating profit of $7.3 million, or 6.9% of net sales, in fiscal 2005. The
increase in operating profit is primarily attributable to higher sales volume, which was partially
offset by an increase in SG&A expenses as a percentage of net sales.
Interest Expense. Interest expense for fiscal 2006 increased to $4.5 million, compared to $2.2
million in fiscal 2005. The increase in interest expense was primarily attributable to the
interest expense under the terms of our convertible senior subordinated notes of approximately $1.5
million and interest expense of $0.8 million from borrowings under the terms of our credit
facilities to acquire the additional 20% of Old SSG the Company acquired during the second quarter
of fiscal 2006. See “Liquidity and Capital Resources.”
Income Taxes. Income tax expense for fiscal 2006 decreased to $1.6 million, which is
approximately 39.0% of our income before minority interest and income taxes. In fiscal 2005, the
provision for income taxes was $2.3 million, or approximately 39.0% of income before income taxes.
The decrease in our income tax expense in fiscal 2006 was attributable to our decreased operating
profits.
Net Income. Net income for fiscal 2006 decreased to $1.9 million, or 0.8% of net sales,
compared to net income of $3.6 million, or 3.4% of net sales, in fiscal 2005. The decrease in net
income was attributable to an increase in SG&A expenses and the increase in interest expense, which
was partially offset by a decrease in income tax expense.
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Liquidity and Capital Resources
Liquidity
The following table summarizes our ending cash and cash equivalents and the results of our
consolidated statements of cash flows for the past three fiscal years:
The increase in cash for fiscal 2007 was primarily attributable to increased net income,
improved inventory management, and borrowings against the line of credit. This was partially
offset by subsequent repayment of funds borrowed to consummate the Merger Transaction. The
decrease in cash in fiscal 2006 was primarily attributable to the acquisitions of Old SSG and Team
Print. The increase in cash in fiscal 2005 was due to the completion of our senior note offering
in November 2004.
Operating Activities. Cash flows from operating activities during fiscal 2007, 2006 and 2005
resulted primarily from net income, which represents our principal source of cash. In fiscal 2007,
the increase in operating cash flows compared to the operating cash flows in fiscal 2006 was
attributable to:
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During fiscal 2007, we continued integrating the Company’s operations. In that regard, the
Company plans to continue its efforts to consolidate its Farmers Branch, Texas distribution,
warehouse and assembly facilities during fiscal 2008. The Company anticipates completing this
project in large part by December 31, 2007. A byproduct of consolidating our Farmers Branch, Texas
facilities will be a reduction in the number of like SKUs we currently carry, which we anticipate
will reduce our inventory levels and corresponding carrying costs, as well as improve inventory
turns. In addition, as we combine some of our catalog brands and divisions, we intend to reduce
the number of paper catalogs we distribute by as much as twenty-five percent and rely more heavily
on our CRM-driven telesales and road sales professionals to grow our net sales. We believe these
integration efforts will enhance our cash flows in future periods.
Investing Activities. Cash used in investing activities during fiscal 2007 was $27.9 million,
compared to $46.1 million of cash used in investing activities during fiscal 2006. During fiscal
2007, the Company used approximately $24.9 million to complete its acquisition of the 26.8% of the
capital stock of Old SSG that it did not already own, compared to the same period in fiscal 2006,
when $44.4 million (net of cash acquired) was used to acquire outstanding capital stock of Old SSG
and Team Print. Purchases of property and equipment during fiscal 2007 were $3.0 million and
included computer equipment, software and leasehold improvements. The Company estimates it will
spend approximately $600 thousand in additional funds for capital expenditures in fiscal 2008
primarily related to the integration of the catalog operations to a single IT platform. Although
we continue to incur expenditures for the integration project, the Company substantially completed
the integration project on June 30, 2007.
Financing Activities. Net cash provided by financing activities during fiscal 2007 was $10.6
million, compared to $10.0 million during fiscal 2006. The net increase in cash provided by
financing activities during fiscal 2007 was due to:
Increases in cash provided by financing activities were partially offset by:
Current assets as of June 30, 2007 were approximately $77.4 million and current liabilities
were approximately $30.8 million, thereby providing the Company with working capital of
approximately $46.6 million.
Capital Resources
During the fiscal quarter ended December 31, 2004, we sold $50.0 million principal amount of
5.75% Convertible Senior Subordinated Notes due 2009 (the “Notes”). The Notes were sold to
qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.
The issuance of the Notes resulted in aggregate proceeds of $46.6 million to the Company, net of
issuance costs.
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The Notes are governed by the Indenture dated as of November 26, 2004 between the Company and
The Bank of New York Trust Company N.A., as trustee (the “Indenture”). The Indenture
provides,
among other things, that the Notes will bear interest of 5.75% per year, payable
semi-annually, and will be convertible at the option of the holder of the Notes into the Company’s
common stock at a conversion rate of 68.2594 shares per $1 thousand principal amount of Notes,
subject to certain adjustments. This is equivalent to a conversion price of approximately $14.65
per share. On or after December 31, 2005, the Company may redeem the Notes, in whole or in part,
at the redemption price, which is 100% of the principal amount, plus accrued and unpaid interest
and additional interest, if any, to, but excluding, the redemption date only if the closing price
of the Company’s common stock exceeds 150% of the conversion price for at least 20 trading days in
any consecutive 30-day trading period. If the Company calls the Notes for redemption on or before
December 10, 2007, the Company will be required to make an additional payment in cash in an amount
equal to $172.50 per $1 thousand principal amount of the Notes, less the amount of any interest
actually paid on the Notes before the redemption date. In addition, upon the occurrence of a
change in control of the Company, holders may require the Company to purchase all or a portion of
the Notes in cash at a price equal to 100% of the principal amount of Notes to be repurchased, plus
accrued and unpaid interest and additional interest, if any, to, but excluding, the repurchase
date, plus the make whole premium, if applicable.
Under the terms of a Registration Rights Agreement the Company entered into with the holders
of the Notes, the Company was required to file a registration statement on Form S-3 with the
Securities and Exchange Commission (“SEC”) for the registration of the Notes and the shares
issuable upon conversion of the Notes (the “Registration Statement”). On February 28,
2006, the SEC declared the Registration Statement effective.
The Company’s principal external source of liquidity is its amended and restated senior
secured credit facility (the “Senior Credit Agreement”) with Merrill Lynch Business
Financial Services, Inc. (“MLBFS”), individually as a lender, as administrative agent, sole
book runner and sole lead manager, which is collateralized by all of the assets of the Company and
its wholly-owned subsidiaries.
On November 13, 2006, the Company entered into the Senior Credit Agreement with MLBFS to fund
the Company’s acquisition of the remaining 26.8% of the capital stock of Old SSG that it did not
already own for approximately $24.9 million, to provide on-going financing for working capital,
capital expenditures and other general corporate purposes of the Company and its subsidiaries. The
Senior Credit Agreement replaced the Company’s June 29, 2006, Credit Agreement with Merrill Lynch
Capital, a division of MLBFS. The Senior Credit Agreement establishes a commitment to the Company
to provide up to $55.0 million in the aggregate of loans and other financial accommodations
consisting of (a) a thirty-month senior secured loan in the aggregate principal amount of $20.0
million (the “Term Loan”) and (b) a thirty-month secured revolving credit facility in an
aggregate principal amount of $35.0 million (the “Revolving Facility” and, together with
the Term Loan, the “Senior Credit Facility”). The Senior Credit Facility includes a
sub-limit of up to an aggregate amount of $4.0 million in letters of credit.
Total availability under the Senior Credit Facility is determined by a borrowing formula based
on eligible trade receivables and inventories that provides for borrowings against up to 85% of the
Company’s eligible trade receivables and 50% of the Company’s eligible inventories, not to exceed
in the aggregate the total availability under the Senior Credit Facility. As of June 30, 2007, the
Company had $10.5 million outstanding under the Term Loan and approximately $14.2 million
outstanding under the Revolving Facility, thereby leaving the Company with approximately $15.6
million of availability under the terms of the borrowing base formula of the Senior Credit
Facility.
All borrowings under the Senior Credit Facility will bear interest at either (a) the London
Inter-Bank Offered Rate (“LIBOR”) plus a spread ranging from 1.25% to 2.00% for all
borrowings under the Revolving Facility and 1.75% to 3.25% for all borrowings under the Term Loan,
with the amount of the spread at any time based on the Company’s ratio of total debt, excluding
subordinated debt, to the Company’s earnings before interest, taxes, depreciation and amortization
(“EBITDA”) on a trailing 12-month basis (the “Senior Leverage Ratio”) or (b) an
alternative base rate equal to the higher of (i) the
Federal Funds Rate plus 0.50% or (ii) the MLBFS prime rate, plus an additional spread ranging from
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0.25% to 0.50% for all borrowings under the Revolving Facility and 0.25% to 1.75% for all
borrowings under the Term Loan, with the amount of the spread at any time based on the Company’s
Senior Leverage Ratio on a trailing 12-month basis. Until April 1, 2007, the interest rate spreads
were 2.00% for LIBOR loans under the Revolving Facility and 3.25% for LIBOR loans under the Term
Loan, and 0.50% for base rate loans under the Revolving Facility and 1.75% for base rate loans
under the Term Loan. After April 1, 2007, the interest rate spreads are 1.75% for LIBOR loans
under the Revolving Facility and 2.75% for LIBOR loans under the Term Loan, and 0.25% for base rate
loans under the Revolving Facility and 1.25% for base rate loans under the Term Loan. The rate
decrease is due to an improved Senior Leverage Ratio in a tiered pricing structure. The effective
interest rate on borrowings under the Senior Credit Facility at June 30, 2007 was 7.5%.
The Senior Credit Facility includes covenants that require the Company to maintain certain
financial ratios. The Company’s Senior Leverage Ratio on a trailing 12-month basis may not exceed
2.75 to 1.00 at March 31, 2007, 2.50 to 1.00 at June 30, 2007, 2.25 to 1.00 at September 30 and
December 31, 2007 and March 31, 2008, and 2.00 to 1.00 at June 30, 2008 and the last day of each
calendar quarter thereafter. The Company’s ratio of EBITDA to the sum of the Company’s fixed
charges (interest expense, taxes, cash dividends and scheduled principal payments) on a trailing
12-month basis (the “Fixed Charge Coverage Ratio”) must be at least 1.15 to 1.00 through
June 30, 2008, and 1.20 to 1.00 at all times thereafter. At June 30, 2007, the Company was in
compliance with all of its financial covenants under the Senior Credit Facility.
The Senior Credit Facility is guaranteed by each of the Company’s wholly-owned subsidiaries
and is secured by, among other things, a pledge of all of the issued and outstanding shares of
stock of each of the Company’s wholly-owned subsidiaries and a first priority perfected security
interest on all of the assets of the Company and each of its wholly-owned subsidiaries.
The Senior Credit Facility contains customary representations, warranties and covenants
(affirmative and negative) and the Senior Credit Facility is subject to customary rights of the
lenders and the administrative agent upon the occurrence and during the continuance of an event of
default, including, under certain circumstances, the right to accelerate payment of the loans made
under the Senior Credit Facility and the right to charge a default rate of interest on amounts
outstanding under the Senior Credit Facility. The Notes are subordinated in right of payment to
the prior payment in full, in cash, of all amounts payable under the Senior Credit Facility.
On June 30, 2007, the Company entered into a letter agreement (the “Letter Agreement”) with
MLBFS. The Letter Agreement amended the Company’s Amended and Restated Credit Agreement, dated as
of November 13, 2006, to (i) modify the delivery deadlines for certain reports, certificates and
information, (ii) modify provisions related to the Company’s Fixed Charge Coverage Ratio and
permitted capital expenditures, (iii) reflect the change of the Company’s name to Sport Supply
Group, Inc., and (iv) provide Merrill Lynch’s consent to the Merger Transactions.
On July 26, 2007, the Company entered into a purchase agreement (the “Purchase
Agreement”) with CBT Holdings, LLC (the “Purchaser”) whereby the Company privately sold
1,830,000 shares (the “Shares”) of its common stock, par value $0.01 per share (the
“Common Stock”) for $18,300,000. The transaction was consummated on July 30, 2007. The
Company used the proceeds from the private placement for the prepayment of outstanding
indebtedness under the Company’s senior secured credit facility and the payment of out-of-pocket
costs and expenses incurred in connection with the private placement.
The Company has agreed to file a registration statement on Form S-3, registering the Shares
for resale, and will be subject to certain penalties if the registration statement is not declared
effective within 270 days of July 30, 2007 or is otherwise unavailable under certain conditions.
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In addition, for so long as the Purchaser owns not less than 600,000 of the Shares, it will
have certain rights with respect to access to Company management, the ability to designate a
representative who is reasonably acceptable to the Company to attend in a non-voting, observer
capacity, the meetings of the Company’s Board of Directors and its committees, and the ability to
require that the Company’s Board of Directors nominate a designee chosen by the Purchaser and who
is otherwise reasonably acceptable to the Company and further recommend to the Company’s
stockholders the election of such nominee to the Company’s Board of Directors.
On July 26, 2004, the Company issued promissory notes to the former stockholders of Dixie in
the aggregate amount of $500 thousand. Payments of principal are paid monthly and interest accrues
at the rate of 4% per annum on any past due principal amount of the notes. The notes mature on
July 31, 2009. Principal payments made in fiscal year 2007 were $93 thousand and the remaining
principal payments of $202 thousand are due through the fiscal year ending June 30, 2010.
On May 11, 2005, the Company issued promissory notes to the former stockholders of Salkeld in
the aggregate amount of $230 thousand. The notes matured on April 30, 2007. Principal payments
made in fiscal year 2007 were $97 thousand.
Long-Term Financial Obligations and Other Commercial Commitments
The following table summarizes the outstanding borrowings and long-term contractual
obligations of the Company at June 30, 2007, and the effects such obligations are expected to have
on liquidity and cash flows in future periods.
Long-Term Debt and Advances Under Credit Facilities. As of June 30, 2007, we had outstanding
$50 million in 5.75% Convertible Senior Subordinated Notes due 2009. We maintain the Senior Credit
Facility with Merrill Lynch. Outstanding advances under the Senior Credit Facility totaled $24.7
million as of June 30, 2007, which consisted of $14.2 million outstanding under the Revolving
Facility and $10.5 million under the Term Note, and are included in other current and non-current
liabilities in our consolidated balance sheets.
Operating Leases. We lease property and equipment, manufacturing and warehouse facilities,
and office space under non-cancellable leases. Certain of these leases obligate us to pay taxes,
maintenance and repair costs.
Off-Balance Sheet Arrangements. We do not utilize off-balance sheet financing arrangements.
We do, however, finance the use of certain facilities, office and computer equipment, and
automobiles under various non-cancellable operating lease agreements. At June 30, 2007, the total
future minimum lease payments under various operating leases we are a party to totaled $7.5 million
and, as indicated in the table above, are payable through fiscal 2012.
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We believe the Company’s borrowings under the Senior Credit Facility, cash on hand and cash flows
from operations will satisfy its respective short-term and long-term liquidity requirements. The
maturity date on our 5.75% Convertible Senior Subordinated Notes is November 2009. In the absence
of these notes converting into shares of the Company’s common stock, it is our intent to pay off as
much of the debt as possible with cash flow from operations and refinance the remaining balance, if
any, with additional borrowings under a credit facility to be negotiated with a lender prior to
November 2009. We do not have a commitment for replacing our current lender. There can be no
assurance that such financing will be available prior to November 2009 or that, if available, such
financing will be available on acceptable terms.
The Company may experience periods of higher borrowing under the Senior Credit Facility due to
the seasonal nature of its business cycle. If the Company was to actively seek expansion through
future acquisitions and/or joint ventures, then the success of such efforts may require additional
bank debt, or public or private sales of debt or equity securities.
Subsequent Events
At the fiscal 2007 annual meeting of stockholders of the Company held on December 15, 2006,
the stockholders of the Company approved the Collegiate Pacific Inc. 2007 Stock Option Plan (the
“2007 Plan”) as adopted by the Company’s Board of Directors (the “Board”) on
November 2, 2006, and the reservation of 500,000 shares of common stock for issuance thereunder.
The 2007 Plan provides for the grant of stock options (including nonqualified options and incentive
stock options). On July 2, 2007, approximately 232,500 options were granted under the 1998 Plan
and the 2007 Plan. In addition, on August 28, 2007, our Board of Directors approved option awards
under the 2007 Plan to two executives, Terry Babilla and Adam Blumenfeld. The grant date of the
option awards was September 7, 2007, and Messrs. Babilla and Blumenfeld received 130,000 options
and 150,000 options, respectively, at an exercise price of $9.56 per
option.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with
the FASB’s Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for
Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return and also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We will adopt FIN 48 as of July 1, 2007. We expect the adoption
of FIN 48 will not have a significant impact on our consolidated financial position, results of
operations, or effective tax rate.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”).
The provisions of SFAS 157 define fair value, establish a framework for measuring fair value in
generally accepted accounting principles, and expand disclosures about fair value measurements.
The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007. The
Company does not believe the adoption of SFAS 157 will have a significant effect on its
consolidated financial position, results of operations, or cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS
159 permits entities to choose to measure many financial instruments and certain other items at
fair value. The provisions of SFAS 159 are effective for fiscal years beginning after November 15,
2007. The Company has not determined the effect, if any, the adoption of SFAS 159 will have on the
Company’s consolidated financial position or results of operations.
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Risk Factors Affecting Sport Supply Group’s Business and Prospects
There are numerous risk factors that affect our business and the results of our operations.
These risk factors include general economic and business conditions; the level of demand for our
products and services; the level and intensity of competition in the sporting goods industry; our
ability to timely and effectively manage the introduction of new products and the market’s
acceptance of those products; our ability to develop new and enhance our existing relationships
with customers and suppliers; our ability to effectively manage our growth; and the effect of armed
hostilities and terrorism on the economy generally, on the level of demand for our products and
services, and our ability to manage our supply and delivery logistics in such an environment. For
a discussion of these and other risk factors affecting Sport Supply Group’s business and prospects,
see “Item 1A – Risk Factors.”
Critical Accounting Policies
Sport Supply Group’s discussion and analysis of its financial condition and results of
operations is based upon the Company’s consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, expenses, and related disclosures of contingent assets
and liabilities.
Discussed below are several significant accounting policies, which require the use of
judgments and estimates that may materially affect the consolidated financial statements. The
estimates described below are reviewed from time to time and are subject to change if the
circumstances so indicate. The effect of any such change is reflected in results of operations for
the period in which the change is made.
Inventories. Inventories are valued at the lower of cost or market. Cost is determined using
the average cost method for items manufactured by us and the weighted-average cost method for items
purchased for resale. We record adjustments to our inventories for estimated obsolescence or
diminution in market value equal to the difference between the cost of inventory and the estimated
market value, based on market conditions from time to time. These adjustments are estimates, which
could vary significantly, either favorably or unfavorably, from actual experience if future
economic conditions, levels of customer demand or competitive conditions differ from expectations.
Because valuing our inventories at lower of cost or market requires significant management
judgment, we believe the accounting estimate related to our inventories is a “critical accounting
estimate.” Management of the Company has discussed this critical accounting estimate with the
audit committee of our Board of Directors, and the audit committee has reviewed the Company’s
disclosure relating to this estimate in this Annual Report on Form 10-K.
Allowance for Doubtful Accounts. We evaluate the collectibility of accounts receivable based
on a combination of factors. In circumstances where there is knowledge of a specific customer’s
inability to meet its financial obligations, a specific allowance is provided to reduce the net
receivable to the amount that is reasonably believed to be collectable. For all other customers,
allowances are established based on historical bad debts, customer payment patterns and current
economic conditions. The establishment of these allowances requires the use of judgment and
assumptions regarding the potential for losses on receivable balances. If the financial condition
of our customers deteriorates, resulting in an impairment of their ability to make payments,
additional allowances may be required resulting in an additional charge to expenses when made.
Because estimating our uncollectible accounts requires significant management judgment, we believe
the accounting estimate related to our allowance for doubtful accounts is a “critical accounting
estimate.” Management of the Company has discussed this critical accounting estimate with the
audit committee of our Board of Directors, and the audit committee has reviewed the Company’s
disclosure relating to this estimate in this Annual Report on Form 10-K.
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At June 30, 2007, our total allowance for doubtful accounts was approximately $1.3 million,
compared to $1.5 million as of June 30, 2006 and $1.0 million as of June 30, 2005. The decrease in
our
allowance for doubtful accounts for fiscal 2007 was attributable to a reduction in accounts
receivable days sales outstanding to 54 days at June 30, 2007 from 57 days at June 30, 2006. On an
ongoing basis, management continues to assess the quality of accounts receivable. See Note 2 in
Notes to Consolidated Financial Statements.
Goodwill, Intangibles and Long-lived Assets. We assess the recoverability of the carrying
value of goodwill, intangibles and long-lived assets periodically. If circumstances suggest that
long-lived assets may be impaired, and a review indicates the carrying value will not be
recoverable, the carrying value is reduced to its estimated fair value. As of June 30, 2007, the
balance sheet includes approximately $63.0 million of goodwill and intangible assets, net, $10.7
million of fixed assets, net, and $2.3 million of deferred debt issuance costs. The Company has
concluded that no impairment exists. Because estimating the recoverability of the carrying value
of long-lived assets requires significant management judgment and our use of different estimates
that we reasonably could have used would have an impact on our reported net long-lived assets, we
believe the accounting estimates related to our impairment testing are “critical accounting
estimates.” Management of the Company has discussed this critical accounting estimate with the
audit committee of our Board of Directors, and the audit committee has reviewed the Company’s
disclosure relating to this estimate in this Annual Report on Form 10-K.
Accounting for Business Combinations. Whenever we acquire a business, significant estimates
are required to complete the accounting for the transaction. We hire independent valuation experts
familiar with purchase accounting issues and we work with them to ensure that all identifiable
intangibles are properly identified and assigned appropriate values. Because estimating the fair
value of certain assets acquired requires significant management judgment and our use of different
estimates than we reasonably could have used would have an impact on our reported assets, we
believe the accounting estimates related to purchase accounting are “critical accounting
estimates.” Management of the Company has discussed this critical accounting estimate with the
audit committee of our Board of Directors, and the audit committee has reviewed the Company’s
disclosure relating to this estimate in this Annual Report on Form 10-K.
Impact of Inflation and Changing Prices
The inflation rate, as measured by the U.S. Consumer Price Index, has been relatively low in
the last few years and, therefore, pricing decisions by Sport Supply Group have largely been
influenced by competitive market conditions. Depreciation expense is based on the historical cost
to Sport Supply Group of its fixed assets and, therefore, is considerably less than it would be if
it were based on current replacement cost. While buildings, machinery and equipment acquired in
prior years will ultimately have to be replaced at significantly higher prices, it is expected this
will be a gradual process over many years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rates
Sport Supply Group is exposed to interest rate risk in connection with its borrowings under
the Senior Credit Facility, which bear interest at floating rates based on LIBOR or the
prime rate plus an applicable borrowing margin. For our $50 million of Notes, interest rate
changes affect the fair market value but do not impact earnings or cash flows. Conversely, for
variable rate debt, interest rate changes generally do not affect the fair market value but do
impact future earnings and cash flows, assuming other factors are held constant.
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As of June 30, 2007, Sport Supply Group had $50 million in principal amount of fixed rate debt
represented by the Notes and $24.7 million of variable rate debt represented by borrowings under
the Senior Credit Facility. Based on the balance outstanding under the variable rate facilities as
of June 30, 2007, an immediate change of one percentage point in the applicable interest rate would
have caused an increase or decrease in interest expense of approximately $247 thousand on an annual
basis. At June 30, 2007, up to $15.6 million of variable rate borrowings were available under the Revolving
Facility. We may use derivative financial instruments, where appropriate, to manage our interest
rate risks. However, as a matter of policy, Sport Supply Group does not enter into derivative or
other financial investments for trading or speculative purposes. At June 30 2007, Sport Supply
Group had no such derivative financial instruments outstanding.
Foreign Currency and Derivatives
We do not use derivative financial instruments to manage foreign currency risk related to the
procurement of merchandise inventories from foreign sources and we do not earn income denominated
in foreign currencies. We recognize all of our revenue and pay all of our obligations in U.S.
dollars.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining effective internal
control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934. The Company’s internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Therefore, even those systems determined to be effective can provide only
reasonable assurance, as opposed to absolute assurance, of achieving their internal control
objectives.
Management assessed the effectiveness of the Company’s internal control over financial
reporting as of June 30, 2007. In making this assessment, management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control
— Integrated Framework. Based on our assessment, we believe that, as of June 30, 2007, the
Company’s internal control over financial reporting is effective based on those criteria.
Internal control over financial reporting as of June 30, 2007, has been audited by Grant
Thornton LLP, the independent registered public accounting firm who also audited the Company’s
consolidated financial statements. Grant Thornton’s attestation report on the Company’s internal
control over financial reporting is included herein.
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Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Sport Supply Group, Inc. and Subsidiaries We have audited Sport Supply Group, Inc. (a Delaware Corporation) and Subsidiaries’ (the “Company”)
internal control over financial reporting as of June 30, 2007, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Sport Supply Group, Inc. and Subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of June 30, 2007, based on criteria
established in Internal Control—Integrated Framework issued by the COSO.
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We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of the Company as of June 30, 2007 and 2006,
and the related consolidated statements of income, stockholders’ equity, and cash flows for each of
the three years in the period ended June 30, 2007 and our report dated September 13, 2007 expressed
an unqualified opinion on those financial statements.
/s/ Grant
Thornton LLP
Dallas, Texas
September 13, 2007
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Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors
Sport Supply Group, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Sport Supply Group, Inc. (f/k/a
Collegiate Pacific Inc.) and Subsidiaries as of June 30, 2007 and 2006, and the related
consolidated statements of income, stockholders’ equity, and cash flows for each of the three years
in the period ended June 30, 2007. 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 the standards of the Public Company Accounting Oversight
Board (United States). 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 Subsidiaries as of June
30, 2007 and 2006, and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 2007 in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company recorded a cumulative
effect adjustment as of July 1, 2006, in connection with the adoption of SEC Staff Accounting
Bulletin No. 108, “Considering the Effect of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.”
Our audit was conducted for the purpose of forming an opinion on the basic financial statements
taken as a whole. Schedule II is presented for purposes of additional analysis and is not a
required part of the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements taken as a whole.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Sport Supply Group, Inc. and Subsidiaries’ internal control over financial
reporting as of June 30, 2007, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our report dated September 13, 2007 expressed an unqualified opinion on the effectiveness of Sport
Supply Group, Inc. and Subsidiaries’ internal control over financial reporting.
/s/ Grant Thornton LLP
Dallas, Texas
September 13, 2007
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these consolidated financial statements.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the fiscal years ended June 30, 2007, 2006 and 2005
The accompanying notes are an integral part of these consolidated financial statements.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007, 2006, and 2005 1. General:
Sport Supply Group, Inc. (“Sport Supply Group, ” f.k.a. Collegiate Pacific Inc.) was
incorporated on April 10, 1997 and commenced business in February 1998. Sport Supply Group is a
Delaware corporation and is a marketer, manufacturer and distributor of sporting goods equipment,
soft good athletic apparel and footwear products (“soft goods”), physical education,
recreational and leisure products primarily to the institutional market in the United States. The
institutional market generally consists of youth sports programs, park and recreational
organizations, schools, colleges, churches, government agencies, athletic teams, athletic clubs and
dealers. Products are sold directly to customers primarily through the distribution of unique,
informative catalogs and fliers, strategically located road sales professionals, telemarketers and
the Internet. On June 30, 2007, Sport Supply Group changed its name from Collegiate Pacific Inc.
to Sport Supply Group, Inc. and changed its stock ticker symbol from “BOO” to “RBI” effective July
1, 2007.
2. Summary of Significant Accounting Policies:
Consolidation. The consolidated financial statements include the balances and results of
operations of Sport Supply Group and its subsidiaries, Kesslers Team Sports, Inc.
(“Kesslers”) and Dixie Sporting Goods Co., Inc. (“Dixie”). (Sport Supply Group,
together with Kesslers and Dixie are generally referred to herein as the “Company.”) All
intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents. The Company includes as cash and cash equivalents all investments
with maturities of three months or less at the date of purchase.
Financial Instruments and Credit Risk Concentrations. Financial instruments, which are
potentially subject to concentrations of credit risk, consist principally of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt. The Company places cash
deposits with high credit, quality financial institutions to minimize risk. Accounts receivable
are unsecured. The carrying value of these financial instruments approximates their fair value due
to their short-term nature or their index tied to market rates. The fair value of the Convertible
Senior Subordinated Notes due 2009 exceeded the carrying value of such debt by $9.5 million and
$12.8 million at June 30, 2007 and 2006, respectively.
Accounts Receivable. The Company’s accounts receivable are due primarily from customers in
the institutional and sporting goods dealer market. Credit is extended based on evaluation of each
customer’s financial condition and, generally, collateral is not required. Accounts receivable
generally are due within 30 days and are stated in amounts due from customers net of an allowance
for doubtful accounts. Accounts outstanding longer than contractual payment terms are considered
past due. The Company records allowances by considering a number of factors, including the length
of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s
current ability to pay its obligation to the Company, and the condition of the general economy and
the industry as a whole. The Company writes-off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are credited to the allowance
in the period the payment is received.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007, 2006, and 2005 Changes in the Company’s allowance for doubtful accounts for the fiscal years ended June 30,
2007 and 2006 are as follows:
Inventories. Inventories are valued at the lower of cost or market value. Cost is determined
using the average cost method for items manufactured by the Company and the weighted-average cost
method for items purchased for resale. The Company records adjustments to its inventories for
estimated obsolescence or diminution in market value equal to the difference between the cost of
inventory and the estimated market value, based on market conditions from time to time. These
adjustments are estimates, which could vary significantly, either favorably or unfavorably, from
actual experience if future economic conditions, levels of customer demand or competitive
conditions differ from expectations.
Property and Equipment. Property and equipment includes office equipment, furniture and
fixtures, warehouse and manufacturing equipment, leasehold improvements and vehicles. These assets
are stated at cost and are depreciated over their estimated useful lives of 2 to 15 years using the
straight-line method. The cost of maintenance and repairs is expensed as incurred and significant
renewals and betterments that extend the assets’ useful lives are capitalized.
Intangible Assets. The Company has made significant acquisitions and as a result has acquired
certain identifiable intangible assets in conjunction with those acquisitions. Intangibles, such
as license agreements, customer relationships, contractual backlog, and non-compete covenants, with
a definite life are amortized over 3 months to 10 years using the straight-line basis, except
customer relationships related to previous acquisitions, which are amortized on a double declining
basis over 10 years.
Trademarks represent amounts paid to acquire the rights to brand specific products or
categories of products with recognizable brands in certain sporting goods categories. Trademarks
with a definite life are amortized on a straight line basis over 10 to 15 years. Trademarks
acquired as part of the Company’s acquisition of Old SSG have an indefinite life and thus are not
subject to periodic amortization. In support of the assessment that the trademarks have an
indefinite life, the Company took into account the 40-year term of the trademark agreement under
which Old SSG has the rights to use the trademarks, which includes an automatic renewal option for
an additional 40-year term.
Goodwill. Goodwill represents the excess of the purchase price paid and liabilities assumed
over the estimated fair market value of assets acquired and identifiable intangible assets.
Goodwill is tested for impairment annually and whenever impairment indicators are present. If the
fair value of goodwill is less than the carrying amount of goodwill, an impairment charge is
recorded. There have been no impairments of recorded goodwill.
Impairment of Long-Lived Assets. The Company periodically evaluates the carrying value of
depreciable and amortizable long-lived assets whenever events or changes in circumstances indicate
the carrying amount may not be fully recoverable. If the total of the expected future undiscounted
cash flows is less than the carrying amount of the assets, a loss is recognized in the amount the
carrying value of the assets exceeds their fair value, which is determined based on quoted market
prices in active markets, if available, prices of other similar assets, or other valuation
techniques. There has been no impairment charge recorded by the Company.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 Revenue Recognition. The Company recognizes revenue from product sales when title passes and
the risks and rewards of ownership have passed to the customer. Title passes generally upon
shipment or upon receipt by the customer, based on the terms of sale, except for sports equipment
that requires installation and related services. If installation or other post-shipment services
are required, title passes
upon the completion of all installation and related services and the acceptance of the
installed product by the customer. In the fiscal years ended June 30, 2007, 2006 and 2005, 1%,
less than 1% and 2%, respectively, of the Company’s consolidated revenues were from the sale of
sports equipment that required installation or other post-shipment services.
Shipping and Handling Costs and Fees. Shipping and handling costs are included in cost of
sales, while amounts billed to customers are included in net sales.
Advertising. Advertising costs are expensed as incurred. Advertising expenses for the fiscal
years ended June 30, 2007, 2006 and 2005 were approximately $7.6 million, $7.2 million and $2.9
million, respectively.
Stock Based Compensation. Prior to fiscal 2006 (beginning July 1, 2005), the Company
accounted for its stock options under the recognition and measurement provisions of Accounting
Principles Board Opinion No. 25 and related interpretations (“APB 25”). Effective July 1,
2005, the Company adopted the provisions of Statement of Financial Accounting Standards
(“SFAS”) No. 123 (Revised 2004), Share-Based Payment (“SFAS 123(R)”) and selected
the modified prospective method to initially report stock-based compensation amounts in the
consolidated financial statements. The Company is currently using the Black-Scholes option pricing
model to determine the fair value of all option grants. See Note 12 below. Stock-based
compensation expense in the amount of $60 thousand is reflected in net income for fiscal 2006. The
following table illustrates the effect on net income and income per share if the Company had
applied the fair value recognition provisions of SFAS 123(R) to prior periods:
Income Taxes. The Company utilizes the asset and liability approach in its reporting for
income taxes. Deferred income tax assets and liabilities are computed for differences between the
financial statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount more likely than not to be realized.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 Income Per Share. Basic income per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted income per share is
computed based on the weighted average number of shares outstanding increased by the effect of
stock options, warrants and common stock underlying the convertible senior subordinated notes when
dilutive.
Segment Reporting. The Company and its subsidiaries are all engaged in the business of
marketing, manufacturing and distributing sporting goods equipment, soft goods, physical education,
recreational and leisure products to the institutional market in the United States. The Company’s
operations consist of two operating segments, which the Company refers to as the Catalog Group and
the Team Dealer Group. Both of the Company’s operating segments offer the same line of products,
which are acquired from the same resources, to a common customer base. Both of the Company’s
operating segments also have similar economic characteristics. The segments meet the aggregation
criteria of paragraph 17 of SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information and, accordingly, for disclosure purposes, the Company has aggregated its operating
segments into one reportable segment.
Use of Estimates in Financial Statements. The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Staff Accounting Bulletin 108 (“SAB 108”). In September 2006, the Staff of the SEC
issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 requires
registrants to use a combination of two approaches to evaluate the materiality of identified
unadjusted errors: the “rollover” approach, which quantifies an error based on the amount of the
error originating in the current year income statement, and the “iron curtain” approach, which
quantifies an error based on the effects of correcting the misstatement existing in the balance
sheet at the end of the current year. This new method is referred to as the “dual approach.” The Company adopted SAB 108 during fiscal 2007.
As allowed by SAB 108, the cummulative effect of initial application of SAB 108 has been reported
in the opening amounts in the asset and liabilities as of
July 1, 2006, with the offsetting balance
to retained earnings. The Company recorded an increase to goodwill of $552 thousand, an increase
in accrued liabilities of $1.9 million, an increase in deferred tax assets of $734 thousand, and a
decrease in retained earnings of $646 thousand related to adopting the dual approach under SAB 108.
The errors in prior years arose due to the collections and
remittances of sales taxes that were incorrect, including the effect
such unaccrued liabilities had on the allocation of the purchase
price for acquired companies. The Company did not consider these misstatements
material to any year in which they arose. The time period over which
the errors occurred was approximately four years.
Recent Accounting Pronouncements:
In July 2006, the Financial Accounting Standards Board (“FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with
the FASB’s SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 as of
July 1, 2007. The Company expects the adoption of FIN 48 will not have a significant impact on its
consolidated financial position, results of operations, or effective tax rate.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”).
The provisions of SFAS 157 define fair value, establish a framework for measuring fair value in
generally accepted accounting principles, and expand disclosures about fair value measurements.
The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007. The
Company does not believe the adoption of SFAS 157 will have a significant effect on its
consolidated financial position, results of operations, or cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS
159 permits entities to choose to measure many financial instruments and certain other items at
fair value. The provisions of SFAS 159 are effective for fiscal years beginning after November 15,
2007. The Company has not determined the effect, if any, the adoption of SFAS 159 will have on the
Company’s consolidated financial position or results of operations.
3. Business Combinations:
On July 26, 2004, the Company completed its acquisition of all of the outstanding capital
stock of Dixie. Dixie is a supplier of soft goods and sporting goods equipment throughout the
Mid-Atlantic United States. The Company paid the former stockholders of Dixie a total of
approximately $7.0 million, which consisted of $4.0 million in cash, $500 thousand in promissory
notes, up to an additional $1.0 million in the form of an earnout if the net income of Dixie
exceeded certain target levels in the 17-month period ended December 31, 2005, and 148,662 shares
of the Company’s common stock valued at $1.5 million. The Company’s wholly-owned subsidiary,
Dixie, employs the former Dixie management team. During the fiscal quarter ended September 30,
2005, the earnout target was achieved and the Company paid the former Dixie stockholders an
additional $1.0 million. Consequently, goodwill related to the Dixie acquisition increased by $1.0
million.
The acquisition of Dixie was accounted for using the purchase method of accounting and,
accordingly, the net assets and results of operations of Dixie have been included in the Company’s
consolidated financial statements since the date of acquisition. Identifiable intangible assets
acquired included customer relationships valued at $57 thousand, which are being amortized on a
straight-line basis over their estimated useful lives of 10 years, and contractual backlog valued
at $10 thousand, which was amortized on a straight-line basis over its estimated useful life of 3
months. The purchase price was allocated to assets acquired, which included the identifiable
intangible assets, and liabilities assumed, based on their respective estimated fair values at the
date of acquisition. The excess of the purchase price over the fair value of the net assets
acquired was recorded as goodwill in the amount of $4.1 million.
On December 10, 2004, the Company completed its acquisition of all of the outstanding capital
stock of CMS of Central Florida d/b/a Orlando Team Sports (“OTS”). OTS is a supplier of
soft goods and sporting goods equipment in the State of Florida. The Company paid the former OTS
stockholders a total of approximately $3.7 million, which consisted of $1.8 million in cash, $100
thousand in a promissory note, and 83,126 shares of the Company’s common stock valued at $1.2
million, which was based on the average closing price of the Company’s common stock three days
before and three days after the date the acquisition was announced. The Company also paid certain
liabilities of OTS at closing in the approximate amount of $600 thousand. The Company entered into a lease with McWeeney Smith
Partnership (the “Partnership”) for its 12 thousand square foot warehouse and distribution
facility in Sanford, Florida. The former OTS stockholders are partners in the Partnership. The
term of the lease runs through June 2010, and the monthly rental rate is approximately $6,400.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 The acquisition of OTS was accounted for using the purchase method of accounting, and
accordingly, the net assets and results of operations of OTS have been included in the Company’s
consolidated financial statements since the date of acquisition. Identifiable intangible assets
acquired included customer relationships valued at $363 thousand, which are being amortized on a
double declining value basis over their estimated useful lives of 10 years, and contractual backlog
valued at $13 thousand, which was amortized on a straight-line basis over an estimated useful life
of 3 months. The purchase price was allocated to assets acquired, which includes the identifiable
intangible assets, and liabilities assumed based on their respective estimated fair values at the
date of acquisition. The excess of the purchase price over the fair value of the net assets
acquired was recorded as goodwill in the amount of $3.0 million.
On May 11, 2005, the Company completed its acquisition of all of the outstanding capital stock
of Salkeld & Sons, Inc. (“Salkeld”) . Salkeld is a supplier of soft goods and sporting
goods equipment in the State of Illinois. The Company paid the former Salkeld stockholders total
consideration of approximately $2.9 million, exclusive of transaction related costs, which
consisted of approximately $2.5 million in cash and $230 thousand in promissory notes. The Company
also paid certain liabilities of Salkeld at closing in the amount of approximately $126 thousand.
In addition, the Company agreed to pay the former Salkeld stockholders up to an additional $1.1
million in the form of an earnout if Salkeld’s gross profit exceeded a certain target level during
the 12-month period ending April 30, 2006. The earnout target was achieved in February 2006 and
two-thirds of the $1.1 million earnout was paid in cash and one-third by the issuance of 33,213
shares of the Company’s common stock. The Company’s wholly owned subsidiary, Salkeld, employs the
former Salkeld management team.
The acquisition of Salkeld was accounted for using the purchase method of accounting, and
accordingly, the net assets and results of operations of Salkeld have been included in the
Company’s consolidated financial statements since the date of acquisition. Identifiable intangible
assets acquired included customer relationships valued at $433 thousand, which are being amortized
on a double declining value basis over their estimated useful lives of 10 years, and contractual
backlog valued at $42 thousand, which was amortized on a straight-line basis over an estimated
useful life of 3 months. The purchase price was allocated to assets acquired, which includes the
identifiable intangible assets, and liabilities assumed based on their respective estimated fair
values at the date of acquisition. The excess of the purchase price over the fair value of the net
assets acquired was recorded as goodwill in the amount of approximately $2.8 million.
On July 1, 2005, the Company completed the acquisition of 53.2% of the outstanding capital
stock of Old SSG from Emerson Radio Corp and Emerson Radio (Hong Kong) Limited for $32 million in
cash. Old SSG was a direct marketer and Business-To-Business (“B2B”) e-commerce supplier of
sporting goods and physical education equipment to the institutional and youth sports market. The
acquisition of 53.2% of Old SSG was accounted for using the purchase method of accounting and,
accordingly, the net assets and results of operations of Old SSG have been included in the
Company’s consolidated financial statements since the date of acquisition. The purchase price was
allocated to assets acquired of approximately $40.5 million, plus identifiable intangible assets
acquired, which included $3.2 million for non-compete agreements, $1.3 million for customer
relationships, $660 thousand for a customer database, $327 thousand for significant contracts, $221
thousand for contractual backlog, $43 thousand for photo library and $14 thousand for bid database
calendar, and liabilities assumed based on their respective
estimated fair values of approximately $26.8 million at the date of acquisition. The excess of
the purchase price over the fair value of the net assets acquired was recorded as goodwill in the
amount of approximately $11.9 million.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 On September 8, 2005, the Company announced it entered into an Agreement and Plan of Merger
(the “Merger Agreement”) pursuant to which the Company would have acquired the remaining
46.8% of the outstanding capital stock of Old SSG that it did not already own. Under the terms of
the merger agreement, each Old SSG stockholder would have receive 0.56 shares of the Company’s
common stock for each share of Old SSG common stock, which valued each Old SSG share at $6.74 per
share, which is the same per share price the Company paid in cash for its purchase of 53.2% of the
outstanding capital stock of Old SSG on July 1, 2005. On November 22, 2005, however, the Company
announced it had entered into an agreement with Old SSG to terminate the Merger Agreement after
determining the merger was unlikely to close in a timely fashion under previously contemplated
terms. Under the terms of the Termination Agreement, dated November 22, 2005, the Company agreed
to reimburse Old SSG for up to $350 thousand for the fees and expenses incurred by Old SSG in
connection with the Merger Agreement.
On November 22, 2005, the Company announced its purchase of 1,661,900 shares of Old SSG, or an
additional 18% of Old SSG’s outstanding common shares, for approximately $9.2 million in cash from
an institutional holder, representing a purchase price of $5.55 per share, as well as purchased an
additional 155,008 shares of Old SSG for $746 thousand in open market transactions at an average
price of $4.81 per share. The Company’s ownership interest in Old SSG increased to approximately
73.2%. The purchase of these additional shares of Old SSG increased goodwill by approximately $4.3
million.
On November 13, 2006, the Company announced it had completed its acquisition of the remaining
26.8% of the capital stock of Old SSG that it did not already own for approximately $24.9 million
(the “Merger Transaction”). Under the terms of the Merger Transaction, a wholly-owned
subsidiary of the Company was merged with and into Old SSG, with Old SSG as the surviving
corporation. Each issued and outstanding share of Old SSG’s common stock was converted into the
right to receive $8.80 in cash.
On August 1, 2005, the Company completed the acquisition of substantially all of the operating
assets of Team Print from Mr. Albert Messier, one of the former principal stockholders of Salkeld,
for approximately $1.0 million in cash and the issuance of 53,248 shares of the Company’s common
stock to Mr. Messier, which were valued at approximately $641 thousand, which was based on the
average closing price of the Company’s common stock three days before and three days after the date
the acquisition was announced. Team Print is an embroiderer and screen printer of sports apparel
and accessories. The Company entered into leases for a 28 thousand square foot screen print and
distribution facility and an 8 thousand square foot warehouse facility owned by Mr. Messier and
located in Bourbonnais, Illinois. The terms of the leases run through July 2010 and May 2008,
respectively, and the monthly rental rate is approximately $11 thousand and $3 thousand,
respectively. The Company’s wholly owned subsidiary, Kesslers, employs Mr. Messier. The excess of
the purchase price over the fair value of the net assets acquired was recorded as goodwill in the
amount of $1.2 million.
The Company acquired Tomark, Kesslers, Dixie, OTS, Salkeld and Old SSG, as well as the
operating assets of Team Print after considering the historic levels of earnings achieved by the
acquired companies. The consideration paid was agreed upon after the Company determined the
potential impact on future earnings of the integrated companies or operating assets acquired.
For income tax purposes, only the goodwill associated with the Company’s acquisition of
Kesslers, OTS and Team Print is deductible over a period of 15 years. The goodwill acquired by the
Company in connection with the other acquisitions, each of which was an acquisition of stock, is
not deductible for
income tax purposes. Although the acquisition of OTS was an acquisition of stock, the parties
to the transaction made a Section 338(h)(10) election under the Internal Revenue Code to tax the
transaction as if it was an acquisition of assets.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 In an effort to streamline the organizational structure of the Company’s team dealers, on
January 1, 2007, the Company caused to be effected the merger of Salkeld with and into Kesslers,
and the merger of OTS with and into Dixie. As a result of these mergers, the Company now conducts
its team dealer business through Kesslers and Dixie, each of which is a wholly-owned subsidiary of
the Company.
On June 30, 2007, the Company merged its wholly-owned subsidiary Tomark into itself, with the
Company surviving such merger. Also on June 30, 2007, the Company merged its wholly-owned
subsidiary Old SSG into itself, with the Company surviving such merger and changing its name to
“Sport Supply Group, Inc.”
The following presents the unaudited pro forma results for the Company for the fiscal years
ended June 30, 2006 and 2005, as if the acquisitions of Dixie (July 2004), OTS (December 2004),
Salkeld (May 2005), Old SSG (July 2005) and Team Print (August 2005) had been consummated at July
1, 2004. The pro forma results are prepared for comparative purposes only and do not necessarily
reflect the results that would have occurred had the acquisitions occurred at the beginning of the
periods presented or the results that may occur in the future.
The following table summarizes the estimated fair value of the assets acquired and liabilities
assumed as of the respective acquisition dates with respect to the acquisitions completed during
the years ended June 30, 2006 and 2005:
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 4. Net Sales:
The Company’s net sales to external customers are attributable to sales of sporting goods
equipment and soft goods. The following table details the Company’s consolidated net sales by
these product lines for the fiscal years ended June 30, 2007, 2006 and 2005:
5. Inventories:
Inventories at June 30, 2007 and 2006 consisted of the following:
6. Property and Equipment:
Property and equipment at June 30, 2007 and 2006 consisted of the following:
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 7. Intangible Assets:
Intangible assets at June 30, 2007 and 2006 consisted of the following:
Amortization expense related to intangible assets totaled approximately $1.1 million, $1.4
million and $700 thousand during the fiscal years ended June 30, 2007, 2006 and 2005,
respectively. The aggregate estimated amortization expense for intangible assets for each of the
years ending June 30 is as follows:
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 8. Accrued Liabilities:
Accrued liabilities at June 30, 2007 and 2006 included the following:
9. Long-Term Debt and Line of Credit:
On November 26, 2004, the Company announced the completion of its sale of $40.0 million
principal amount of 5.75% Convertible Senior Subordinated Notes due 2009 (the “Notes”).
The Notes were sold to qualified institutional buyers pursuant to Rule 144A under the Securities
Act of 1933, as amended (the “Securities Act”). Thomas Weisel Partners LLC (“Thomas
Weisel”) was the initial purchaser of the Notes. On December 3, 2004, the Company announced
the completion of its sale of an additional $10.0 million principal amount of Notes pursuant to the
exercise by Thomas Weisel of the option granted to it in connection with the initial offering of
the Notes. The issuance of the Notes resulted in aggregate proceeds of $46.6 million to the
Company, net of issuance costs.
The Notes are governed by the Indenture dated as of November 26, 2004 between the Company and
The Bank of New York Trust Company N.A., as trustee (the “Indenture”). The Indenture
provides, among other things, that the Notes will bear interest of 5.75% per year, payable
semi-annually, and will be convertible at the option of the holder of the Notes into the Company’s
common stock at a conversion rate of 68.2594 shares per $1 thousand principal amount of Notes,
subject to certain adjustments. This is equivalent to a conversion price of approximately $14.65
per share. On or after December 31, 2005, the Company may redeem the Notes, in whole or in part,
at the redemption price, which is 100% of the principal amount, plus accrued and unpaid interest
and additional interest, if any, to, but excluding, the redemption date only if the closing price
of the Company’s common stock exceeds 150% of the conversion price for at least 20 trading days in
any consecutive 30-day trading period. If the Company calls the Notes for redemption on or before
December 10, 2007, the Company will be required to make an additional payment in cash in an amount
equal to $172.50 per $1 thousand principal amount of the Notes, less the amount of any interest
actually paid on the Notes before the redemption date. In addition, upon the occurrence of a
change in control of the Company, holders may require the Company to purchase all or a portion of
the Notes in cash at a price equal to 100% of the principal amount of Notes to be repurchased, plus
accrued and unpaid interest and additional interest, if any, to, but excluding, the repurchase
date, plus the make whole premium, if applicable.
In connection with the completion of the sale of the Notes, on November 26, 2004, the Company
entered into a registration rights agreement with Thomas Weisel (the “Registration Rights
Agreement”). Under the terms of the Registration Rights Agreement, the Company was required to
file a registration statement on Form S-3 (the “Registration Statement”) with the SEC for
the registration of the Notes and the shares issuable upon conversion of the Notes. On February
28, 2006, the SEC declared effective the Registration Statement.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 The Company’s principal external source of liquidity is its amended and restated senior
secured credit facility (the “Senior Credit Agreement”) with Merrill Lynch Business
Financial Services, Inc. (“MLBFS”), individually as a lender, as administrative agent, sole
book runner and sole lead manager, which is collateralized by all of the assets of the Company and
its wholly-owned subsidiaries.
On November 13, 2006, the Company entered into the Senior Credit Agreement with MLBFS to fund
the Company’s acquisition of the remaining 26.8% of the capital stock of Old SSG that it did not
already own for approximately $24.9 million, to provide on-going financing for working capital,
capital expenditures and other general corporate purposes of the Company and its subsidiaries. The
Senior Credit Agreement replaced the Company’s June 29, 2006 Credit Agreement with Merrill Lynch
Capital, a division of MLBFS. The Senior Credit Agreement establishes a commitment to the Company
to provide up to $55.0 million in the aggregate of loans and other financial accommodations
consisting of (a) a thirty-month senior secured loan in the aggregate principal amount of $20.0
million (the “Term Loan”) and (b) a thirty-month secured revolving credit facility in an
aggregate principal amount of $35.0 million (the “Revolving Facility” and, together with
the Term Loan, the “Senior Credit Facility”). The Senior Credit Facility includes a
sub-limit of up to an aggregate amount of $4.0 million in letters of credit.
Total availability under the Senior Credit Facility is determined by a borrowing formula based
on eligible trade receivables and inventories that provides for borrowings against up to 85% of the
Company’s eligible trade receivables and 50% of the Company’s eligible inventories, not to exceed
in the aggregate the total availability under the Senior Credit Facility. As of June 30, 2007, the
Company had $10.5 million outstanding under the Term Loan and approximately $14.2 million
outstanding under the Revolving Facility, thereby leaving the Company with approximately $15.6
million of availability under the terms of the borrowing base formula of the Senior Credit
Facility.
All borrowings under the Senior Credit Facility will bear interest at either (a) the London
Inter-Bank Offered Rate (“LIBOR”) plus a spread ranging from 1.25% to 2.00% for all
borrowings under the Revolving Facility and 1.75% to 3.25% for all borrowings under the Term Loan,
with the amount of the spread at any time based on the Company’s ratio of total debt, excluding
subordinated debt, to the Company’s earnings before interest, taxes, depreciation and amortization
(“EBITDA”) on a trailing 12-month basis (the “Senior Leverage Ratio”) or (b) an
alternative base rate equal to the higher of (i) the Federal Funds Rate plus 0.50% or (ii) the
MLBFS prime rate, plus an additional spread ranging from 0.25% to 0.50% for all borrowings under
the Revolving Facility and 0.25% to 1.75% for all borrowings under the Term Loan, with the amount
of the spread at any time based on the Company’s Senior Leverage Ratio on a trailing 12-month
basis. Until April 1, 2007, the interest rate spreads were 2.00% for LIBOR loans under the
Revolving Facility and 3.25% for LIBOR loans under the Term Loan, and 0.50% for base rate loans
under the Revolving Facility and 1.75% for base rate loans under the Term Loan. After April 1,
2007, the interest rate spreads are 1.75% for LIBOR loans under the Revolving Facility and 2.75%
for LIBOR loans under the Term Loan, and 0.25% for base rate loans under the Revolving Facility and
1.25% for base rate loans under the Term Loan. The effective interest rate on borrowings under the
Senior Credit Facility at June 30, 2007 was 7.5%.
The Senior Credit Facility includes covenants that require the Company to maintain certain
financial ratios. The Company’s Senior Leverage Ratio on a trailing 12-month basis may not exceed
2.75 to 1.00 at March 31, 2007, 2.50 to 1.00 at June 30, 2007, 2.25 to 1.00 at September 30 and
December 31, 2007 and March 31, 2008, and 2.00 to 1.00 at June 30, 2008 and the last day of each
calendar quarter thereafter. The Company’s ratio of EBITDA to the sum of the Company’s fixed
charges (interest expense, taxes, cash dividends and scheduled principal payments) on a trailing
12-month basis (the “Fixed Charge Coverage Ratio”) must be at least 1.15 to 1.00 through
June 30, 2008, and 1.20 to 1.00 at all times thereafter. At June 30, 2007, the Company was in
compliance with all of its financial covenants under the Senior Credit Facility.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 The Senior Credit Facility is guaranteed by each of the Company’s wholly-owned subsidiaries
and is secured by, among other things, a pledge of all of the issued and outstanding shares of
stock of each of the Company’s wholly-owned subsidiaries and a first priority perfected security
interest on all of the assets of the Company and each of its wholly-owned subsidiaries.
The Senior Credit Facility contains customary representations, warranties and covenants
(affirmative and negative) and the Senior Credit Facility is subject to customary rights of the
lenders and the administrative agent upon the occurrence and during the continuance of an event of
default, including, under certain circumstances, the right to accelerate payment of the loans made
under the Senior Credit Facility and the right to charge a default rate of interest on amounts
outstanding under the Senior Credit Facility. The Notes are subordinated in right of payment to
the prior payment in full, in cash, of all amounts payable under the Senior Credit Facility.
On June 30, 2007, the Company entered into a letter agreement (the “Letter Agreement”) with
MLBFS. The Letter Agreement amended the Company’s Amended and Restated Credit Agreement, dated as
of November 13, 2006, to (i) modify the delivery deadlines for certain reports, certificates and
information, (ii) modify provisions related to the Company’s Fixed Charge Coverage Ratio and
permitted capital expenditures, (iii) reflect the change of the Company’s name to Sport Supply
Group, Inc., and (iv) provide Merrill Lynch’s consent to the merger transactions. The Company was
in compliance with the previous covenants under the terms of the agreement prior to the amendment.
On July 26, 2004, the Company issued promissory notes to the former stockholders of Dixie in
the aggregate amount of $500 thousand. Payments of principal are paid monthly and interest accrues
at the rate of 4% per annum on any past due principal amount of the notes. The notes mature on
July 31, 2009. Principal payments made in fiscal year 2007 were $93 thousand and the remaining
principal payments of $202 thousand are due through the fiscal year ending June 30, 2010.
On May 11, 2005, the Company issued promissory notes to the former stockholders of Salkeld in
the aggregate amount of $230 thousand. The notes matured on April 30, 2007. Principal payments
made in the fiscal year 2007 were $97 thousand.
Future payments on long-term debt are as follows:
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 10. Income Taxes:
Significant components of the Company’s net deferred income taxes are as follows:
Deferred tax assets and liabilities at June 30, 2007 and 2006 are as follows:
Changes in the deferred tax asset valuation allowance for the year ended June 30, 2007 were
as follows:
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 The components of the income tax provision (benefit) are as follows:
Following is a reconciliation of income taxes at the federal statutory rate to income tax
provision for the years ended June 30, 2007, 2006 and 2005:
The Company has available at June 30, 2007, unused net operating loss carryforwards of
approximately $6.4 million that may be applied against future taxable income and approximately $772
thousand of tax credits that may be applied against future income taxes. The net operating loss
carryforwards will expire in various years from 2012 through 2023. The valuation
allowance of $233 thousand relates to tax benefits that cannot be utilized until after existing net operating loss
carryforwards are exhausted. These tax benefits principally relate to acquired companies and when
realized will reduce goodwill.
11. Related Party Transactions:
During the years ended June 30, 2007, 2006 and 2005, the Company paid approximately $152
thousand, $137 thousand and $137 thousand, respectively, in rent for the Kesslers facility located
in Richmond, Indiana. This location is owned by RPD Services, Inc., an Indiana corporation f/k/a
Kesslers Sport Shop, Inc., from which the Company acquired substantially all of its operating
assets in April 2004. Bob Dickman, Phil Dickman and Dan Dickman, all of whom are employed by the
Company’s wholly-owned subsidiary, Kesslers, own RPD Services, Inc. The lease term for the facility
expires in March 2009.
During the years ended June 30, 2007, 2006, and 2005, the Company paid approximately $111
thousand, $77 thousand and $43 thousand, respectively, in rent for the OTS facility located in
Sanford, Florida. This location is owned by McWeeney Smith Partnership, a Florida general
partnership, and is controlled by the former stockholders of OTS, from which the Company acquired
all of the outstanding capital stock in December 2004. The former OTS stockholders were employed
by the Company’s wholly-owned subsidiary, OTS, for a portion of fiscal 2007. The lease term for
the facility expires in June 2010.
During the years ended June 30, 2007 and 2006, the Company paid approximately $162 thousand
and $116, thousand, respectively, in rent for the Team Print facility located in Bourbonnais,
Illinois. This location is owned by Albert A. Messier, a former Salkeld stockholder and the former
owner of the Team Print business. Mr. Messier is employed by the Company’s wholly-owned
subsidiary, Kesslers. The lease term for the facility expires in July 2010.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 During the year ended June 30, 2007, the Company paid approximately $27 thousand in rent to
Old SSG, which was a 73.2% majority owned subsidiary until November 13, 2006, for additional office
and warehouse storage space in Old SSG’s Farmers Branch, Texas facilities. During the year ended
June 30, 2006, the Company paid approximately $58 thousand in rent to Old SSG, which was a 73.2%
majority owned subsidiary. The Company paid $99 thousand and $132 thousand to Old SSG for other
management services during the fiscal years ended June 30, 2007 and 2006, respectively. On August
14, 2006, the Company entered into a Services Agreement with Old SSG. Under the terms of the
Services Agreement, Old SSG provided the Company with additional warehouse storage and office space
at Old SSG’s Farmers Branch, Texas facilities, as well as provided the Company and its wholly-owned
subsidiaries with various payroll processing, human resource and risk management services. Prior
to August 14, 2006, services provided to the Company by Old SSG were on a month-to-month basis.
The effects of these transactions are eliminated in the consolidation of subsidiary results of
operations. Upon the completion of the Merger Transaction, the Services Agreement was terminated.
12. Stock Options and Warrants:
On December 11, 1998, the Company’s stockholders approved a stock option plan, (the “1998
Plan”). The 1998 Plan authorized the Company’s Board of Directors to grant employees,
directors and consultants of the Company up to an aggregate of 400,000 shares of the Company’s
common stock, $0.01 par value per share. The options vest in full upon the employee’s one-year
anniversary date of employment with the Company or the award date if the employee has been employed
for at least one year on the grant date. The number of shares available under the 1998 Plan was
increased to 1,000,000 upon approval by the Company’s stockholders on March 20, 2001, and increased
to 1,500,000 upon approval by the Company’s stockholders on January 15, 2004. The remaining
outstanding options expire at various dates through June 2015. As of June 30, 2007, there are
46,550 options available for grant under the 1998 Plan.
At the fiscal 2007 annual meeting of stockholders of the Company held on December 15, 2006,
the stockholders of the Company approved the Collegiate Pacific Inc. 2007 Stock Option Plan (the
“2007 Plan”) as adopted by the Company’s Board of Directors (the “Board”) on
November 2, 2006, and the reservation of 500,000 shares of common stock for issuance thereunder.
The 2007 Plan provides for the grant of stock options (including nonqualified options and incentive
stock options). On July 2, 2007, approximately 232,500 options were granted under the 1998 Plan
and the 2007 Plan.
Prior to fiscal 2006, the Company accounted for its stock options under the recognition and
measurement provisions of APB 25. Effective July 1, 2005, the Company adopted the provisions of
SFAS 123(R) and selected the modified prospective method to initially report stock-based
compensation amounts in the consolidated financial statements. The Company is currently using the
Black-Scholes option pricing model to determine the fair value of all option grants.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 For the fiscal years ended June 30, 2007 and 2006, the Company recorded approximately $0 and
$60 thousand for stock-based compensation expense related to the vesting of stock options
previously granted. The Company recorded these amounts in selling, general and administrative
expenses. The Company did not grant any stock options in fiscal 2007 or fiscal 2006. The
financial statement impact of recording approximately $60 thousand of stock-based compensation
expense in the fiscal year ended June 30, 2006 is as follows:
At June 30, 2007 and 2006, there was no unrecognized compensation costs related to unvested
stock options remaining to be recognized.
A summary of the Company’s stock option activity for the three fiscal years ended June 30,
2007 is as follows:
The Company utilized the following assumptions in calculating the estimated fair value of each
stock option grant on the date of grant using the Black-Scholes option-pricing model:
The weighted average fair value of options granted in the fiscal year ended June 30, 2005 was
$3.73.
The total intrinsic value of options exercised in the fiscal years ended June 30, 2007, 2006
and 2005 was approximately $528 thousand, $68 thousand, and $491 thousand, respectively. The total
fair value of options vested during the fiscal years ended June 30, 2007, 2006 and 2005 was
approximately $0, $60 thousand and $1,867 thousand, respectively. The total intrinsic value of
unexercised options at June 30, 2007, was approximately $1,509 thousand.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 The following table summarizes additional information about stock options at June 30, 2007:
13. Leases:
The Company leases office and warehouse facilities under the terms of operating leases, which
expire at various dates through December 2010. Rent expense for the fiscal years ended June 30,
2007, 2006 and 2005 was approximately $3.2 million, $3.1 million and $1.5 million, respectively.
Future minimum lease commitments on all operating leases with terms in excess of one year are
as follows:
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 14. Income Per Share:
The table below outlines the determination of the number of diluted shares of common stock
used in the calculation of diluted earnings per share as well as the calculation of diluted
earnings per share for the periods presented:
For the fiscal years ended June 30, 2007, 2006 and 2005, stock options of 499,800, 433,900 and
150,975 shares, respectively, were excluded in the computations of diluted income per share because
their effect was anti-dilutive. During the fiscal years ended June 30, 2007, 2006 and 2005, the
assumed conversion of 3,412,969 shares from the convertible senior subordinated notes was
anti-dilutive.
15. Employee Benefit Plan
The Company implemented an employee savings plan (the “plan”) during fiscal 2005
pursuant to Section 401(k) of the Internal Revenue Code. All employees who have been credited with
at least 520 hours of service are eligible to participate in the plan. Employees may elect to
contribute to the plan through payroll deductions in an amount not to exceed the amount permitted
under the Internal Revenue Code. The Company has the discretion to make matching contributions on
behalf of the participants. Employees are fully vested in their contributions. Company
contributions are not vested until after completion of two years of service. Thereafter,
contributions vest at a rate of 20% per year on each participant’s anniversary date in the plan if
the participant has completed 1,000 hours of service with the Company as of such date. The Company
contributed $137 thousand to the plan during fiscal 2007. During fiscal 2006 and 2005, the Company
did not contribute to the plan.
Due to the corporate reorganization, Sport Supply Group, Inc. (f.k.a. Collegiate Pacific Inc.)
will change its retirement plan from the Collegiate Pacific 401(k) Plan to the Sport Supply Group,
Inc. 401(k) Plan (“SSG 401(k) Plan”) and will adopt and continue the Sport Supply Group, Inc.
Employees’ Savings Plan (“SSG Employees’ Savings Plan”). Former employees of Old SSG who were also
participants in the SSG Employees’ Savings Plan will continue in the SSG Employees’ Savings Plan.
Former employees of Old SSG who were not participants in the SSG Employees’ Savings Plan will
become eligible instead to participate in the SSG 401(k) Plan.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 16. Legal Proceedings:
On September 21, 2006, Jeffrey S. Abraham, as Trustee of the Law Offices of Jeffrey S. Abraham
Money Purchase Plan, dated December 31, 1999, f/b/o Jeffrey S. Abraham, filed a complaint in the
Court of Chancery of the State of Delaware in and for New Castle County, C.A. No. 2435-N against
the Company, Michael J. Blumenfeld, the four directors of Old SSG, Arthur J. Coerver, Harvey
Rothenberg, Robert W. Philip and Thomas P. Treichler, and Old SSG, as a nominal defendant. The
Plaintiff is a former stockholder of Old SSG and brought the action as a class action on behalf of
all Old SSG minority stockholders in connection with the September 20, 2006 Agreement and Plan of
Merger pursuant to which the Company acquired the remaining shares of the outstanding capital stock
of Old SSG that the Company did not already own. The plaintiff alleges, among other things, that
the $8.80 cash price per share of Old SSG common stock paid to the minority stockholders in the
merger was unfair in that the purchase price failed to take into account the value of Old SSG, its
improved financial results and its value in comparison to similar companies. The plaintiff also
alleges that the process by which the merger agreement was arrived at could not have been the
product of good faith and fair dealing because the Company and Mr. Blumenfeld acted in bad faith by
taking various actions to depress the price of Old SSG common stock and dry up the market liquidity
in such shares, all in an effort to effect the merger. In addition, the plaintiff alleges that the
directors of Old SSG breached their fiduciary duties of good faith and loyalty to the plaintiff and
the other minority stockholders in the merger agreement negotiations. The plaintiff requested that
the merger be enjoined or in the alternative, damages be awarded to the Old SSG minority
stockholders. On January 31, 2007, the plaintiff amended his complaint and is requesting that the
court certify plaintiff as the class representative of the proposed class and award plaintiff and
the class compensating and /or rescissory damages. The plaintiff also seeks the costs of bringing
the action, including reasonable attorneys fees and experts’ fees.
In addition to the above mentioned litigation, the Company is a party to various other
litigation matters, in most cases involving ordinary and routine claims incidental to the Company’s
business. The Company cannot estimate with certainty its ultimate legal and financial liability
with respect to such pending litigation matters. However, the Company believes, based on its
examination of such matters, that its ultimate liability will not have a material adverse effect on
its financial position, results of operations or cash flows.
17. Subsequent Events:
At the fiscal 2007 annual meeting of stockholders of the Company held on December 15, 2006,
the stockholders of the Company approved the Collegiate Pacific Inc. 2007 Stock Option Plan as
adopted by the Company’s Board of Directors on November 2, 2006, and the reservation of 500,000
shares of common stock for issuance thereunder. The 2007 Plan provides for the grant of stock
options (including nonqualified options and incentive stock options). On July 2, 2007, 232,500
options were granted under the 1998 Plan and the 2007 Plan. In addition, on August 28, 2007, the
Board of Directors approved option awards under the 2007 Plan to two executives, Terry Babilla and
Adam Blumenfeld. The grant date of the option awards was September 7, 2007, and Messrs. Babilla
and Blumenfeld received 130,000 options and 150,000 options,
respectively, at an exercise price of
$9.56 per option.
On July 26, 2007, the Company entered into a purchase agreement (the “Purchase
Agreement”) with CBT Holdings, LLC (the “Purchaser”) whereby the Company privately sold
1,830,000 shares (the “Shares”) of its common stock, par value $0.01 per share (the
“Common Stock”) for $18,300,000. The transaction was consummated on July 30, 2007. The
Company used the proceeds from the private placement for the prepayment of outstanding
indebtedness under the Company’s senior secured credit facility and the payment of out-of-pocket
costs and expenses incurred in connection with the private placement.
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SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007, 2006, and 2005 The Company has agreed to file a registration statement on Form S-3, registering the Shares
for resale, and will be subject to certain penalties if the registration statement is not declared
effective within 270 days of July 30, 2007 or is otherwise unavailable under certain conditions.
In addition, for so long as the Purchaser owns not less than 600,000 of the Shares, it will
have certain rights with respect to access to Company management, the ability to designate a
representative who is reasonably acceptable to the Company to attend in a non-voting, observer
capacity, the meetings of the Company’s Board of Directors and its committees, and the ability to
require that the Company’s Board of Directors nominate a designee chosen by the Purchaser and who
is otherwise reasonably acceptable to the Company and further recommend to the Company’s
stockholders the election of such nominee to the Company’s Board of Directors.
18. Quarterly Operating Data (unaudited):
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. An evaluation was carried out under the
supervision and with the participation of the Company’s management, including the Chief Executive
Officer (“CEO”) and Chief Financial Officer “(CFO”), of the effectiveness of the
Company’s disclosure controls and procedures (as defined in §240.13a–15(e) or §240.15d–15(e) of the
General Rules and Regulations of the Securities Exchange Act of 1934, as amended (the “1934
Act”) as of the end of the period covered by this Annual Report. Based on that evaluation,
management, including the CEO and CFO, has concluded that, as of June 30, 2007, the Company’s
disclosure controls and procedures were effective.
(b) Changes in Internal Controls Over Financial Reporting. Sport Supply Group’s management,
with the participation of Sport Supply Group’s CEO and CFO, has evaluated whether any change in
Sport Supply Group’s internal control over financial reporting occurred during the fourth quarter
of fiscal 2007. During 2007, the Company undertook a nexus study to determine if the Company’s
acquisition activity over the last several years had an effect on the Company’s nexus regarding the
collection and remittance of sales taxes in various states. The result of the study revealed the
Company may have nexus for states in which certain entities had not previously collected or
remitted sales tax. The Company has addressed the issue by implementing new sales tax software
which will allow the Company to charge sales taxes to all applicable
customers, taking steps to
ensure customers have applicable sales tax exemption certificates on file with the Company, and by
consulting with outside firms to identify potential exposure and
comply with respective state laws related to sales taxes.
Based on its evaluation, management including the CEO and CFO, has concluded that there has been
no change, other than described above, in Sport Supply Group’s internal control over financial
reporting during the fourth quarter of fiscal 2007 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial reporting.
(c) Management’s Report on Internal Control over Financial Reporting. Refer to “Management’s
Report on Internal Control Over Financial Reporting” in Item 8 of this Form 10-K.
ITEM 9B. OTHER INFORMATION.
In connection with the Company’s annual review of executive and director compensation, the
Compensation Committee of the Board of Directors approved option awards to the Company’s
non-employee directors and to certain of the Company’s key employees, which options were granted on
July 2, 2007. Each of the Company’s non-employee directors received 5,000 options to purchase
shares of the Company’s common stock. Three of the named executive officers listed in the
Company’s fiscal 2007 proxy statement also received such option grants. Art Coerver was awarded
7,500 options to purchase shares of the Company’s common stock, Kurt Hagen was awarded 50,000
options to purchase shares of the Company’s common stock and Tevis Martin was awarded 25,000
options to purchase shares of the Company’s common stock. The exercise price of each such option
is $9.75, which is equal to the Company’s opening sales price on the grant date. The options vest
in equal installments over three years and expire on July 2, 2017. In addition, the options will
accelerate in the event of a change in control of the Company. Disclosure of these option grants
was inadvertently omitted from the Company’s July 2, 2007 Form 8-K filing and as such, is being
reported pursuant to this Item 9B.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item 10 will be included in the Proxy Statement, and such
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item 11 will be included in the Proxy Statement, and such
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
The information required by this Item 12 will be included in the Proxy Statement, and such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item 13 will be included in the Proxy Statement, and such
information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item 14 will be included in the Proxy Statement, and such
information is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as part of this report.
(a-1) Financial Statements (for the three fiscal years ended June 30, 2007, unless otherwise
stated):
(a-2) Consolidated financial statement schedule:
II
– Valuation and qualifying accounts
82
All other schedules are omitted because they are not applicable or the required information is
shown in the financial statements or notes.
(a-3) Exhibits
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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.
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below
by the following persons on behalf of the registrant and in the capacities indicated on September
13, 2007.
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SPORT SUPPLY GROUP, INC.
Schedule II – VALUATION AND QUALIFYING ACCOUNTS (In thousands)
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EXHIBIT INDEX
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