-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IMXMLig7N3uYNwF+B0MpUkGd3KMVtPjadF77gXkbh3mLl81t444gjqvf8n/Paqk9 TxQDpsnUzfK06gAo2hsB8w== 0000872855-97-000013.txt : 19971127 0000872855-97-000013.hdr.sgml : 19971127 ACCESSION NUMBER: 0000872855-97-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970926 FILED AS OF DATE: 19971126 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPORT SUPPLY GROUP INC CENTRAL INDEX KEY: 0000872855 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 752241783 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10704 FILM NUMBER: 97729709 BUSINESS ADDRESS: STREET 1: 1901 DIPLOMAT DR CITY: FARMERS BRANCH STATE: TX ZIP: 75234 BUSINESS PHONE: 2144849484 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 26, 1997. OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File number 1-10704 Sport Supply Group, Inc. (Exact name of registrant as specified in its charter) Delaware 75-2241783 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1901 Diplomat Drive, Farmers Branch, Texas 75234 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 484-9484 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Common Stock, $ .01 Par Value New York Stock Exchange Common Stock Purchase Warrants American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non- affiliates of the registrant on November 18, 1997 based on the closing price of the common stock on the New York Stock Exchange on such date, was approximately $44,801,223. Indicated below is the number of outstanding shares of each class of the registrant's common stock, as of November 18, 1997. Title of Each Class of Common Stock Number Outstanding Common Stock, $.01 par value 8,085,759 DOCUMENTS INCORPORATED BY REFERENCE Document Part of the Form 10-K Proxy Statement for Annual Meeting of Stockholders to be held January 13, 1998 Part III TABLE OF CONTENTS Item Page PART I 1 Business.......................................... 2 Properties........................................ 3 Legal Proceedings................................. 4 Submission of Matters to a Vote of Security Holders PART II 5 Market for Registrant's Common Equity and Related Stockholder Matters......................................... 6 Selected Financial Data........................... 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................. 8 Financial Statements and Supplementary Data....... 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................... PART III 10 Directors and Executive Officers of the Registrant 11 Executive Compensation............................ 12 Security Ownership of Certain Beneficial Owners and Management ............................................. 13 Certain Relationships and Related Transactions.... PART IV 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K PART I Item 1. Business. General Sport Supply Group, Inc. (the "Company" or "SSG") believes it is the largest direct mail marketer of sports related equipment and leisure products to the institutional market in the United States. The Company principally serves the institutional market, which is comprised primarily of schools, colleges, universities, government agencies, military facilities, athletic clubs, youth sports leagues and recreational organizations. SSG offers a broad line of institutional-grade equipment and provides after-sale customer service through the use of sales personnel strategically located in certain large metropolitan areas (the "Metro Marketing Group"). See Item 1. -- "Business - Sales and Marketing." The Company believes that prompt delivery of a broad range of institutional-grade products at competitive prices differentiates it from the retail sporting goods stores that primarily serve the consumer market. The Company also serves the local sporting goods team dealer market principally with its MacGregor brand products. The Company markets approximately 8,000 sports related equipment products to over 100,000 institutional, retail, mass merchant and team dealer customers and maintains over 200,000 names in mailing lists. In May 1996, the Company made the strategic decision to dispose of its golf operations to focus on its core institutional business. On May 20, 1996 as part of this plan of disposal, the Company sold virtually all of the assets of its Gold Eagle Professional Golf Products Division, which sold golf accessory products to the retail market. In addition to the sale of Gold Eagle, the Company adopted a plan to dispose of the remaining operations of its retail golf segment and classified these operations as discontinued. On March 28, 1997, the Company disposed of substantially all of the remaining assets of the discontinued operation to Nitro Leisure Products, Inc., a Delaware corporation. The discussion in this Report on Form 10-K regarding the Company's business, unless otherwise noted, relates only to the Company's continuing operations (i.e., core institutional business). Consequently, the Company will no longer report segment information about this operation. For a discussion regarding the Company's discontinued operations, see Note 10 to the consolidated financial statements included in Item 8. -- "Financial Statements and Supplementary Data." The Company's net revenues have increased from $47 million in 1991 to $79.1 million for the eleven month period ended September 26, 1997. The Company attributes its high level of growth to the successful development of an effective mail order marketing program and competitive pricing that have led to greater market penetration and to the development of, and increase in, the Company's manufacturing capabilities. On December 10, 1996, pursuant to a Securities Purchase Agreement dated November 27, 1996 between Emerson Radio Corp. ("Emerson") and the Company (the "Purchase Agreement"), Emerson acquired directly from the Company (i) 1,600,000 shares of newly- issued Common Stock (the "Emerson Shares") for an aggregate cash consideration of $11,500,000, or approximately $7.19 per share, and (ii) 5-year warrants (the "Emerson Warrants") to acquire an additional 1,000,000 shares of Common Stock at an exercise price of $7.50 per share, subject to standard anti-dilution adjustments, for an aggregate cash consideration of $500,000. In addition, Emerson agreed to arrange for foreign trade credit financing of $2 million for the benefit of the Company to supplement the Company's existing credit facilities. If all of the Emerson Warrants are exercised, Emerson will own approximately 36% of the issued and outstanding shares of Common Stock. See Item 12 -- Security Ownership of Certain Beneficial Owners and Management" and Item 13 -- "Certain Relationships and Related Transactions." The Company is a Delaware corporation incorporated in 1982 and in 1988 became the successor of an operating division of Aurora Electronics, Inc. (f/k/a BSN Corp. and referred to herein as "Aurora"). Prior to the completion of the initial public offering of 3,500,000 shares of the Company's common stock in April, 1991, the Company was a wholly-owned subsidiary of Aurora. The Company has one wholly-owned subsidiary, Sport Supply Group International Holdings, Inc., a shell corporation that formerly held the operations of the Gold Eagle Canada Division that was sold in May 1996. The Company's executive offices are located at 1901 Diplomat Drive, Farmers Branch, Texas 75234 and its telephone number is (972) 484-9484. Products The Company believes it manufactures and distributes one of the broadest lines of sports related equipment and leisure products for the institutional market. SSG offers approximately 8,000 sporting goods and sports related products, over 3,000 of which it manufactures. The product lines offered by SSG include archery, baseball and softball, basketball, camping, football, tennis and other racquet sports, gymnastics, indoor recreation, physical education, soccer, field hockey, lacrosse, track and field, volleyball, weight lifting, and exercise equipment. The Company believes brand recognition is important in the institutional and team dealer markets. Most of SSG's products are marketed under trade names or trademarks owned or licensed by the Company. SSG believes its trade names and trademarks are well recognized among institutional purchasers of sports related equipment. SSG intends to continue to expand its product and brand name offerings by actively pursuing product, trademark and trade name licensing arrangements and acquisitions. The Company's trademarks, service marks, and trade names include the following: . Official Factory Direct Equipment Supplier of Little League Baseball (See discussion below). . Voit[R] -- institutional sports related equipment and products, including inflated balls and baseball and softball products (licensed from Voit Corporation - see discussion below). . MacGregor[R] -- certain equipment and accessories relating to baseball, softball, basketball, soccer, football, volleyball, and general exercise (e.g., dumbbells, curling bars, etc.) (licensed from MacMark Corporation - see discussion below). . Alumagoal[R] -- track and field equipment, including starting blocks, hurdles, pole vault and high jump standards and crossbars. . AMF -- gymnastics equipment (licensed from AMF Bowling, Inc. - see discussion below). . BSN[R] -- sport balls and mail order catalogs. . Champion -- barbells, dumbbells and weight lifting benches. . Curvemaster[R] -- baseball and softball pitching machines. . Fibersport -- pole vaulting equipment. . Gamecraft -- field and floor hockey equipment, soccer equipment, scorebooks, coaching equipment, and table tennis equipment. . GSC Sports -- gymnastics equipment. . Hammett & Sons -- indoor table-top games. . Maxpro[R] -- products include, among others, football practice dummies, baseball, and other protective helmets and pads (other than football protective equipment), baseball chest protectors and baseball mitts and gloves (licensed from Proacq Corp., a subsidiary of Riddell Sports Inc.). . New England Camp and Supply -- camping and outdoor recreational equipment and accessories. . North American Recreation[R] -- billiard, table tennis and other game tables. . Passon's Sports -- mail order catalogs. . Pillo Polo[R] -- recreational polo and hockey games. . Port-A-Pit[R] -- high jump and pole vault landing pits. . Pro Base[R] -- baseball bases. . Pro Down -- football down markers. . Pro Net -- nets, net assemblies and frames and practice cages. . Rol-Dri[R] and Tidi-Court -- golf course and tennis court maintenance equipment. . Safe-Squat -- specialty weight lifting squat machines. . Toppleball[R] -- recreational ball games. . U.S. Games, Inc.[R] -- goals, nets, playing equipment for physical exercise games and mail order catalogs. The Voit license permits the Company to use the Voit[R] trademark in connection with the manufacture, advertisement, and sale to institutional customers and sporting goods dealers of specified institutional sports related equipment and products, including inflated balls for all sports and baseball and softball products. The Company is required to pay annual royalties under the license equal to the greater of a certain percentage of revenues from the sale of Voit products or a minimum royalty as set forth in the License Agreement. The initial term of the Voit license expired on December 31, 1989, and was subject to three renewal options for consecutive terms of five years each. SSG has exercised two renewal periods, and currently is permitted to use the Voit trademark through December 31, 1999. In February, 1992, the Company acquired two separate licenses to use several trade names, styles, and trademarks (including, but not limited to, MacGregor[R]). Each license permits the Company to manufacture, promote, sell, and distribute to institutional sporting goods customers (subject to certain exceptions) in the United States, Canada, and Mexico, specified institutional sports related equipment and products relating to baseball, softball, basketball, soccer, football, volleyball, and general exercise. Each license is royalty- free and exclusive with respect to certain customers and non- exclusive with respect to others. Each license is perpetual provided the Company generates a predetermined minimum amount of revenues each year from the sale of products bearing the MacGregor trademark, maintains certain quality standards for such products and services, and does not commit any default under the license agreements that remains uncured for a period of 30 days after the Company receives notice of such default. The Company has converted a substantial portion of its products to the MacGregor[R] brand, which is believed to be one of the most widely recognized trade names in the industry. These products are being sold to customers using the Company's existing marketing channels. See Item 1. -- "Business - Sales and Marketing." On August 19, 1993, the Company entered into an exclusive license agreement with AMF Bowling, Inc. to use the AMF name in connection with the promotion and sale of certain gymnastics equipment in the United States and Canada. The Company is required to pay an annual royalty under the license equal to the greater of: (i) a certain percentage of net revenues from the sale of AMF products; or (ii) a minimum royalty as set forth in the license agreement. The minimum royalty increases by a predetermined percentage each year the license agreement is in effect. The initial term of the agreement expired on December 31, 1995, and was subject to three renewal options for consecutive terms of one year each through December 31, 1998. SSG exercised its first two renewal options, and currently is permitted to use the AMF name through December 31, 1997. The Company may also renew the license agreement after December 31, 1997, subject to certain provisions contained in the license agreement. On December 15, 1995, the Company entered into a three year agreement with Little League Baseball, Incorporated that, among other things, names the Company as the "Official Factory Direct Equipment Supplier of Little League Baseball." On August 15, 1997, the Company and Little League Baseball extended the expiration of this agreement to December 31, 2001. The Company is required to pay an annual fee to keep the agreement in effect each year. In addition to the foregoing, the Company has acquired (or had issued) a number of patents relating to products sold by the Company. The following is a list of some of the patents owned by the Company: (i) 2 separate patents relating to a Power Squat/Weight Lifting Apparatus (expire May 20, 2003 and June 23, 2004, respectively); (ii) Baseball Hitting Practice Device (expires May 9, 2006); (iii) 2 separate patents relating to Football Digital Display Markers (expire June 27, 2006 and November 28, 2006, respectively); (iv) Tennis Net and Method of Making (expires October 1, 2008); (v) Rotator Cuff Exercise Machine (expires January 29, 2008); (vi) Portable Balance Beam (expires July 28, 2009); and (vii) Holder for Beverage Containers (expires August 16, 2011). Sales and Marketing The Company markets its products through four primary marketing divisions: 1) Sport Supply Group; 2) The Athletic Connection; 3) Youth Sports; and 4) U.S. Games. The Sport Supply Group marketing division markets SSG's products to institutional customers through catalogs, outbound telemarketing, and bid related sales efforts. SSG publishes two primary catalogs designed for institutional customers: BSN[R] Sports, and New England Camp and Recreation. Master catalogs containing a broad variety of the Company's products are sent to all customers and potential customers on the Company's mailing lists. Seasonal or specialty supplements are prepared and mailed periodically to certain accounts that pertain to particular sports, such as weight training, baseball or track and field. SSG services its existing accounts and solicits new customers with a total of over 2.2 million pieces of mail each year, including approximately 2.0 million catalogs. The Company's mailing lists, developed over 20 years, are carefully maintained, screened, and cross-checked. SSG frequently buys and rents lists that it attempts to screen, improve, and cross reference before incorporating them into the Company's master list. The master list is subdivided into various combinations designed to place catalogs in the hands of individual purchase decision makers. The master list is also subdivided by relevant product types, seasons, and customer profiles. While SSG maintains a strong institutional customer base in rural and small metropolitan areas, the institutional markets in large metropolitan areas have historically been dominated by local sporting goods dealers and retailers. Over the last several years, there has been a growing trend of large metropolitan area school districts, city recreation departments, and other institutions submitting proposed purchases through competitive bids. In response to this trend, SSG intensified its bid related sales efforts by having its Metro Marketing Group target large metropolitan area school districts and institutions in an effort to include SSG's products among those specified on bid invitations. The U.S. Games marketing division was established to market certain of the Company's products to elementary schools and the preschool market. The Athletic Connection marketing division was established in 1992 to market certain of the Company's products, principally MacGregor brand products, to sporting goods team dealers who also market these products to institutional customers. Products are marketed through annual catalogs and commissioned sales representatives to team dealers as opposed to institutional customers targeted by the Sport Supply Group marketing division. The Youth Sports marketing division concentrates on selling team sports products to independent youth leagues. The Youth Sports division utilizes outbound telemarketing, outside salesmen and a master catalog in conjunction with a supplier contract with Little League Baseball, Inc. to reach this marketplace. In addition to equipment and uniforms, the Youth Sports division also provides trophies and fund raising products. On May 15, 1996, SSG entered into a five-year Advertising and Distribution Agreement with Hershey Chocolate U.S.A. Pursuant to this Agreement, SSG advertises and distributes promotional materials featuring Hershey fund raising programs and products to youth sports leagues and teams and also sells Hershey Chocolate products to its customers. The Youth Sports division has entered into Promotional Agreements with Pizza Hut, Lever Brothers, Lionel Trains, and Warner-Lambert (Bubbilicious) in an effort to leverage SSG's direct marketing and distribution network. These relationships help offset marketing costs and create valuable brand-name recognition. Customers The Company's revenues are not dependent upon any one or a few major customers. Instead, the Company enjoys a very large and diverse customer base. The Company's customers include all levels of public and private schools, colleges, universities and military academies, municipal and governmental agencies, military facilities, churches, clubs, camps, hospitals, youth sports leagues, non-profit organizations and team dealer suppliers. SSG believes its customer base in the United States is the largest in the institutional direct mail market. The Company's institutional customers typically receive annual appropriations for sports related equipment, which appropriations are generally spent in the period preceding the season in which the sport or athletic activity occurs. While institutions are subject to budget constraints, once allocations have been made, aggregate levels of expenditures are typically not reduced. Approximately 7%, 8%, and 10% of the Company's sales in fiscal 1997 (which consisted of the eleven months ending September 26, 1997), 1996, and 1995 (which consisted of the 10 months ending October 31, 1995), respectively, were to the United States Government, a majority of which sales were to military installations. SSG has a contract with the General Services Administration (the "GSA Contract") that grants the Company an "approved" status when attempting to make sales to military installations or other governmental agencies. The existing GSA Contract expires in December 2001. Under the GSA Contract, the Company agrees to sell approximately 700 products to United States Government agencies and departments at catalog prices or at prices consistent with any discount provided to other customers of the Company. Products sold to the United States Government under the GSA Contract are always sold at the Company's lowest offered price. The Company also has a contract with the General Services Administration for the sale of approximately 40 camp related products with terms similar to the GSA Contract. This contract expires in August 2002. SSG also sells products not covered by the GSA Contract to United States Government customers, although the appropriation process for purchases of these products differs. These sales are made through a U.S. Government non-appropriated fund contract. This contract is administered by the United States Air Force and is scheduled to expire on September 30, 1999. See Note 6 to the consolidated financial statements included in Item 8. -- "Financial Statements and Supplementary Data." Seasonal Factors and Backlog Historically, SSG's revenues have peaked in the second and third calendar quarters of each year due primarily to the budgeting procedures of many of its customers and the seasonal demand for product offered by the Company. Less revenues are generated in the first and fourth calendar quarters because of the reduced demand arising from decreased sports activities, adverse weather conditions inhibiting customer demand, holiday seasons and school recesses. See Note 12 to the consolidated financial statements included in Item 8. -- "Financial Statements and Supplementary Data." SSG had a backlog for continuing operations of approximately $2,526,000 at September 26, 1997, compared to approximately $2,174,000 at November 1, 1996. Manufacturing and Suppliers The Company manufactures many of the products it distributes at its four manufacturing facilities. See Item 2. -- "Properties." Game tables, gym mats, netting, and tennis and baseball equipment are manufactured in the Company's two Anniston, Alabama plants. Gymnastics equipment is manufactured at SSG's facility in Cerritos, California. Items of steel and aluminum construction, such as soccer field equipment and weight room equipment, are principally manufactured at SSG's facilities in Farmers Branch, Texas. Certain products manufactured by the Company are custom-made (such as tumbling mats ordered in color or size specifications), while others are standardized. The principal raw materials used by the Company in manufacturing are, for the most part, readily available from several different sources. Such raw materials include foam, vinyl, nylon thread, steel and aluminum tubing, wood, slate, and cloth. Except as noted above, items not manufactured by SSG are purchased from various suppliers primarily located in the United States, the Republic of China (Taiwan), South Korea, Australia, the Philippines, Thailand, the People's Republic of China, Pakistan, and Germany. SSG has no significant purchase contracts with any major supplier of finished products, and most products purchased from suppliers are readily available from other sources. The Company purchases most of its finished product in U.S. dollars and is therefore not subject to exchange rate differences. Competition SSG competes in the institutional market principally with local sporting goods dealers and retail sporting goods stores, which collectively dominate the institutional market. Dealers and retail stores occasionally fill institutional orders with Company products. The Company has identified approximately 15 other direct mail companies in the institutional market. SSG believes that most of these competitors are substantially smaller than SSG in terms of geographic coverage, products offered, and revenues. The Company competes in the institutional market principally on the basis of price, product availability and customer service. SSG believes it has an advantage in the institutional market over traditional sporting goods retailers and team dealers because its selling prices do not include comparable price markups attributable to wholesalers, manufacturers, and/or distributors. In addition, the Company's ability to control the availability of goods it manufactures enables it to respond more rapidly to customer demand. SSG believes its direct mail competitors operate primarily as wholesalers and distributors, with little or no manufacturing capability. While large sporting goods companies such as Wilson Sporting Goods Co., Spalding Sporting Goods, a division of Evenflo, Inc., Rawlings Sporting Goods, and Russell Athletic Company dominate the marketing of sports related equipment in the United States, SSG does not compete directly with such companies. Rather, certain of these companies supply products to SSG as well as retail sporting goods stores and team dealers, the Company's primary competitors in the institutional market. Government Regulation Many of the Company's products are subject to 15 U.S.C. SS 2051- 2084 (1992 and Supp. 1996), among other laws, which empowers the Consumer Product Safety Commission (the "CPSC") to protect consumers from hazardous sporting goods and other articles. The CPSC has the authority to exclude from the market certain articles which are found to be hazardous, and can require a manufacturer to refund the purchase price of products that present a substantial product hazard. CPSC determinations are subject to court review. Similar laws exist in some states and cities in the United States. Product Liability and Insurance Because of the nature of the Company's products, SSG is periodically subject to product liability claims resulting from personal injuries. The Company from time to time may become involved in various lawsuits incidental to the Company's business, some of which will relate to claims of injuries allegedly resulting in substantial permanent paralysis. Significantly increased product liability claims continue to be asserted successfully against manufacturers and distributors throughout the United States resulting in general uncertainty as to the nature and extent of manufacturers' and distributors' liability for personal injuries. See Item 3 -- "Legal Proceedings." There can be no assurance that the Company's general product liability insurance will be sufficient to cover any successful product liability claims made against the Company. Any claims substantially in excess of the Company's insurance coverage, or any substantial claim not covered by insurance, could have a material adverse effect on the Company's results of operations and financial condition. Employees On September 26, 1997, SSG had approximately 395 full-time employees in its core institutional business, 146 of whom were involved in the Company's manufacturing operations. SSG also hires part-time and temporary employees primarily during the summer months. None of the Company's employees are represented by a union, and the Company believes its relations with employees is good. EXECUTIVE OFFICERS OF THE COMPANY Year First Became Name Age Present Position Officer Geoffrey P. 57 Chairman of the Board and 1996 Jurick Chief Executive Officer Peter S. 49 President and Chief 1991 Blumenfeld Operating Officer John P. Walker 34 Executive Vice President 1996 and Chief Financial Officer Terrence M. 35 General Counsel and 1995 Babilla Secretary All officers are elected for a term of one year or until their successors are duly elected. Item 2. Properties. The Company leases (i) a 135,000 square foot corporate headquarters and manufacturing facility and (ii) a 181,000 square foot warehouse facility, each of which is located in Farmers Branch, Texas. The 135,000 square foot facility is under a lease expiring in July 1999, with a five year renewal option. The 181,000 square foot warehouse facility is under a lease expiring in December 2004, with two (2) five year renewal options. The Company also leases a 45,000 square foot gymnastics equipment manufacturing facility in Cerritos, California. The Company's lease in California expires in December 2001. The Company owns (i) a 35,000 square foot foam product and netting manufacturing plant and (ii) a 45,000 square foot game table manufacturing plant, both of which are located in Anniston, Alabama. Item 3. Legal Proceedings. The Company from time to time becomes involved in various claims and lawsuits incidental to its business. In management's opinion, any ultimate liability arising out of currently pending product liability claims will not have a material adverse effect on the Company's financial condition or results of operations. However, any claims substantially in excess of the Company's insurance coverage, or any substantial claim not covered by insurance, could have a material adverse effect on the Company's results of operations and financial condition. See Item 1. -- "Business-- Product Liability and Insurance." On September 29, 1997, the Company terminated Mr. Eugene Davis as Vice Chairman and a Consultant and requested that Mr. Davis resign as a director of the Company. The circumstances surrounding such termination are the subject of two proceedings. On September 30, 1997, the Company filed a complaint in the United States District Court for the Northern District of Texas, Dallas Division, seeking a declaration as to the existence of an alleged consulting agreement and as to the Company's continuing obligations to make payments to Mr. Davis. Thereafter, Mr. Davis filed a complaint in the Law Division of the Superior Court of New Jersey, against the Company for breach of an alleged consulting agreement and against certain unnamed "John Does" of the Company for tortious interference with contractual relationships. The Company intends to vigorously defend itself against Mr. Davis' complaint. Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable. PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. SSG's common stock, par value $.01 per share (the "Common Stock") is traded on the New York Stock Exchange, Inc. ("NYSE") under the symbol GYM. SSG's Common Stock Purchase Warrants, which were distributed as a special dividend to the Company's stockholders on December 27, 1993 (the "1993 Warrants"), are traded on the American Stock Exchange, Inc. ("AMEX") under the symbol GYMW. As of October 28, 1997, there were 2,247 holders of the Common Stock (including individual security position listings). The following table sets forth the range for the periods indicated of the high and low sales prices for the Common Stock and the 1993 Warrants (after giving effect to the 5 for 4 stock split declared by the Company on January 26, 1994). There is no fourth quarter 1997 information set forth in the following table due to the Company's change in its fiscal year end from October 31 to September 30. Common Stock 1993 Warrants High Low High Low 1996 First 8-5/8 6-3/4 1-1/4 3/8 Quarter Second 8-1/8 6-1/8 11/16 3/8 Quarter Third 8-1/4 4-5/8 13/16 1/8 Quarter Fourth 7-7/8 5-1/8 1/2 3/16 Quarter 1997 First 6-7/8 4-5/8 5/16 1/16 Quarter Second 6-1/2 5-1/8 5/16 1/64 Quarter Third 8-7/8 5-3/8 1/8 1/32 Quarter The Company announced on January 2, 1996 that it terminated its annual cash dividend policy effective immediately. The Company currently intends to retain any earnings for use in its business and does not anticipate paying any cash dividends on its capital stock in the foreseeable future. On December 10, 1996, pursuant to a Securities Purchase Agreement dated November 27, 1996 between Emerson and the Company (the "Purchase Agreement"), Emerson acquired directly from the Company (i) 1,600,000 shares of newly-issued Common Stock (the "Emerson Shares") for an aggregate cash consideration of $11,500,000, or approximately $7.19 per share, and (ii) 5-year warrants (the "Emerson Warrants") to acquire an additional 1,000,000 shares of Common Stock at an exercise price of $7.50 per share, subject to standard anti-dilution adjustments, for an aggregate cash consideration of $500,000. In addition, Emerson agreed to arrange for foreign trade credit financing of $2 million for the benefit of the Company to supplement the Company's existing credit facilities. See Item 12 -- "Security Ownership of Certain Beneficial Owners and Management" and Item 13 -- "Certain Relationships and Related Transactions". The Emerson Shares and Emerson Warrants were sold in a privately negotiated transaction pursuant to Section 4(2) of the Securities Act of 1933, as amended (i.e., a transaction by an issuer not involving a public offering). On May 28, 1997, the Company approved the repurchase of up to 1,000,000 shares of its issued and outstanding common stock in the open market and/or privately negotiated transactions. Such purchases are subject to price and availability of shares, working capital availability and any alternative capital spending programs of the Company. As of September 26, 1997, the Company had repurchased approximately 287,000 of its issued and outstanding common stock in the open market. Item 6. Selected Financial Data. The following tables set forth certain historical financial data for the Company. The historical financial data has been derived from the audited financial statements of the Company. The historical data below should be read in conjunction with Item 7. -- "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's financial statements and notes thereto included in Item 8. -- "Financial Statements and Supplementary Data." (4) SELECTED FINANCIAL DATA (Amounts in thousands, except per share amounts) Eleven Months Year Ended Ten Months Year Ended Ended Sep. 26 Nov. 1 Ended Oct. 31 Dec. 31 1997 1996 1995 1994 1993 Statement of Earnings Data: Net revenues $79,109 $80,521 $65,134 $66,920 $58,817 Gross profit 31,404 29,955 25,259 26,326 23,551 Operating profit (loss) 4,226 (65) 3,894 5,162 5,694 Interest expense 757 1,372 1,126 973 1,039 Other income (expense), net 83 38 209 (5) 24 Cumulative effect of accounting change -- -- -- -- 50 Earnings (loss) from continuing operations 2,576 (964) 1,847 2,802 3,324 Earnings (loss) from discontinued operations (2,574) (17,773) (457) 1,900 482 Net earnings (loss) 2 (18,737) 1,390 4,702 3,806 Net earnings (loss) per common share from continuing operations(1) 0.32 (0.14) 0.27 0.42 0.65 Net earnings (loss) per common share from discontinued operations(1)(3) (0.32) (2.63) (0.07) 0.28 0.09 Net earnings (loss) per common share(1) $0.00 $(2.77) $ .20 $ .70 $ .74 Weighted average common shares outstanding(1) 8,151 6,768 6,950 6,760 5,154 Cash dividends declared per common share (2) -- -- $ .12 $ .13 $ .16 At Sept. 26 At Nov. 1 At Oct. 31 At Dec. 31 Balance Sheet Data: 1997 1996 1995 1994 1993 Working capital $24,006 $21,322 $42,231 $32,886 $25,840 Total assets 50,484 70,009 86,355 71,616 45,574 Long-term obligations, net 4,418 24,338 29,199 16,698 5,578 Total liabilities 11,527 40,846 38,745 25,143 10,618 Stockholders' equity 38,957 29,163 47,610 46,473 34,956
(1) Reflects the 5 for 4 stock split declared during January, 1994. (2) Dividends declared in 1995 consisted of a $0.03 per share dividend for the first three quarters. Dividends declared in 1994 consisted of a $0.04 per share dividend for the fourth quarter of 1993 and a $0.03 per share dividend for the first, second and third quarters of 1994. (3) See Note 10 to the consolidated financial statements included in Item 8. - "Financial Statements and Supplementary Data." (4) During 1995, the Company changed its financial reporting year end from December 31 to October 31. Consequently, the fiscal year ended October 31, 1995 is a transition period consisting of ten calendar months. During 1997, the Company changed its financial reporting year end from October 31 to September 30. Therefore, the fiscal year ended September 26, 1997 is a transition period consisting of eleven calendar months. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following table sets forth, for the periods indicated, certain items related to the Company's continuing operations as a percentage of net revenues. During 1995, the Company changed its financial reporting year end from December 31 to October 31. Consequently, the fiscal year ended October 31, 1995 is a transition period consisting of ten calendar months. During 1997, the Company changed its financial reporting year end from October 31 to September 30. Therefore, the fiscal year ended September 26, 1997 is a transition period consisting of eleven calendar months. See Note 1 to the consolidated financial statements included in Item 8. - "Financial Statements and Supplementary Data". For the For the For the 11 Months 12 Months 10 Months Ended Ended Ended Sep. 26, Nov. 1, Oct. 31, 1997 1996 1995 Net revenues (in $79,109 $80,521 $65,134 thousands) 100.0% 100.0% 100.0% Cost of sales 60.3% 62.8% 61.2% Selling, general and administrative expenses 32.7% 37.3% 32.8% Operating profit (loss) 5.3% (0.1)% 6.0% In May 1996, the Company sold substantially all of the assets of its Gold Eagle Professional Golf Products Division ("the Gold Eagle Division") and approved a formal plan to dispose of its remaining retail segment operations comprised of golf balls and golf related accessories. In March 1997, the Company sold its remaining retail segment operations. See Note 10 to the consolidated financial statements included in Item 8. - "Financial Statements and Supplementary Data". As a result, the accompanying consolidated financial statements present SSG's retail segment as a discontinued operation through the date of disposal. Due to the change in the Company's fiscal year end from October 31 to September 30, the fiscal year ended September 26, 1997 is comprised only of an 11 month period. Therefore, certain financial data for 1997 and 1996 presented within this section also includes (where indicated) comparative information relative to the eleven months ended September 30, 1996 (which information is unaudited) to provide a more meaningful discussion of comparable operating results. The following discussion regarding 1997 as compared to 1996 and 1996 as compared to 1995, unless otherwise indicated, relates to the Company's continuing operations only. 1997 Compared to 1996 The following table summarizes certain financial information relating to the Company's results of continuing operations for the eleven month period ended September 26, 1997 and the comparable eleven month period of 1996: 1996 1997 (unaudited) Net Revenues $79,109,063 $73,604,273 Gross Profit $31,403,655 $28,110,058 Provision for Income Taxes $975,569 $171,906 Net Earnings $2,576,000 $305,611 Net Revenues. Net revenues for the eleven month period ended September 26, 1997 decreased by approximately $1.4 million (1.8%) as compared to the fiscal year ended November 1, 1996. Net revenues for the eleven month period ended September 26, 1997 increased by approximately $5.5 million (7.5%) as compared to the eleven month comparable period ended September 30, 1996. The increase in net revenues reflects increases in revenues associated primarily with youth sports league customers. These increases were partially offset by a decrease in Government sales. As the Government continues to reduce its spending, the Company expects to experience a decrease in Government sales in future periods. The Company's revenues were also adversely affected by the United Parcel Services ("UPS") strike that occurred in August of 1997. The Company was unable to ship the entire balance of its order backlog, which resulted in cancellation of some orders. Gross Profit. Gross profit for the eleven month period ended September 26, 1997 increased by approximately $1.4 million (4.8%) as compared to the fiscal year ended November 1, 1996 and $3.3 million (11.7%) as compared to the eleven month period ended September 30, 1996. As a percentage of net revenues, gross profit increased to 39.7% in 1997 from 37.2% for the fiscal year ended November 1, 1996. The dollar increase as well as the increase in gross profit as a percentage of net revenues is primarily attributable to the increase in sales related to SSG's youth league division. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the eleven month period ended September 26, 1997 decreased by approximately $4.1 million (13.8%) as compared to the fiscal year ended November 1, 1996 and $537,000 (2.0%) as compared to the eleven month period ended September 30, 1996. As a percentage of net revenues, operating expenses decreased from 37.3% to 32.7% for the fiscal year ended September 26, 1997 as compared to the fiscal year ended November 1, 1996. The decrease in these expenses as a percentage of net revenues was primarily due to the following factors: (i) A decrease in bad debt expense associated with the Company's successful collection efforts and better credit evaluations potential customers. (ii) A decrease in expenses relating to the Company's participation in the 1996 Olympic games, as all expenses related to royalties and travel were incurred and paid in fiscal year 1996. (iii) A decrease in depreciation and amortization related to the write-offs of certain software and forecasting systems recorded in the fourth quarter of fiscal year 1996. (iv) A decrease in other expenses such as office supplies, postage, paper and forms, delivery service, and telephone as a result of management's efforts to reduce overall general and administrative expenses. These decreases in operating expenses were partially offset by additional freight costs associated with the UPS strike as the Company had to utilize other more expensive carriers in order to ship products. Operating expenses were also offset by the increase in advertising expenses due to the expansion of the Company's marketing efforts, primarily expenses relating to catalogs mailed to customers. Since the Company has combined its BSN, GSC, and Passons' catalogs, the Company anticipates a decrease in catalog expenses for fiscal year 1998. Nonrecurring Charges. A majority of the nonrecurring pre-tax charge of $1.3 million for the fiscal year ended September 26, 1997 related to the "change in control" of the Company that occurred on December 10, 1996 (including severance payments to the former CEO of approximately $680,000). The change in control was the result of a stock purchase agreement with Emerson. As part of the agreement, Emerson purchased 1,600,000 shares of SSG common stock and 1,000,000 common stock purchase warrants and caused a majority of the members of SSG's Board of Directors to consist of Emerson's designees. Operating Profit (Loss). Operating profit increased by approximately $4.3 million to a profit of $4.2 million in fiscal 1997 from a loss of approximately $65,000 for the fiscal year ended November 1, 1996 and increased by $2.5 million as compared to the eleven month period ended September 30, 1996. As a percentage of net revenues, operating profit increased to 5.3% in fiscal 1997 from (0.1%) for the fiscal year ended November 1, 1996. The increase in operating profit, both in dollar amount and as a percentage of net revenues, reflects the impact of the increase in gross profit percentages related to sales and the decrease in operating expenses as discussed above. Interest Expense. Interest expense decreased approximately $615,000 (44.8%) to $757,000 in fiscal 1997 from $1.4 million for the fiscal year ended November 1, 1996 and by $500,000 (39.7%) as compared to the eleven month period ended September 30, 1996. The decrease in interest expense resulted from lower borrowing levels as a result of the equity infusion by Emerson and the proceeds received from the sale of the discontinued operations. Other Income, Net. Other income increased approximately $45,000 in fiscal 1997 as compared to the fiscal year ended November 1, 1996. The increase in other income resulted from services provided to Emerson such as human resources, advertising, warehousing/distribution, and banking functions as provided in a Management Services Agreement between the Company and Emerson effective May 1997. Other income is expected to increase in future periods as a result of a full year benefit being realized from this agreement. See Item 13 - "Certain Relationships and Related Transactions". Provision (Benefit) for Income Taxes. The provision for income taxes increased approximately $1.4 million to a provision of $976,000 in fiscal 1997 from a benefit of $436,000 in fiscal 1996. The Company's effective tax rate decreased to 27.5% in fiscal 1997 from 31.1% in fiscal 1996. See Note 4 to the consolidated financial statements included in Item 8 -- "Financial Statements and Supplementary Data". Earnings (Loss) from Continuing Operations. Earnings (loss) from continuing operations increased approximately $3.5 million to $2.6 million in 1997 from a loss of $964,000 in fiscal 1996. As a percentage of the net revenues, net earnings increased to 3.3% in 1997 from a loss of 1.2% in fiscal 1996. Earnings (loss) per share from continuing operations increased to $.32 per share in 1997 from a loss of $(0.14) per share in fiscal 1996. This reflects a 20.4% increase in weighted average shares outstanding related to the sale to Emerson of 1,600,000 shares of SSG's newly-issued common stock offset by approximately 287,000 shares of its issued and outstanding common stock purchased in the open market. 1996 Compared to 1995 Net Revenues. Net revenues for the fiscal year ended November 1, 1996 increased by approximately $15.4 million (23.6%) as compared to the fiscal year ended October 31, 1995 and $7.0 million (9.5%) as compared to the twelve month period ended October 31, 1995. The increase in net revenues reflects increased sales in substantially all operating divisions, including increases in revenues associated with youth sports league customers, partially offset by declines in revenues associated with the United States Government. The Company believes these declines are attributable to the continued downsizing of military installations and work stoppages of various government agencies during fiscal 1996. Gross Profit. Gross profit for the fiscal year ended November 1, 1996 increased by approximately $4.7 million (18.6%) as compared to the fiscal year ended October 31, 1995 and $1.5 million (5.2%) as compared to the twelve month period ended October 31, 1995. As a percentage of net revenues, gross profit decreased to 37.2% in 1996 from 38.8% for the fiscal year ended October 31, 1995. The decrease in gross profit as a percentage of net revenues is primarily attributable to a $950,000 charge to the inventory reserve recorded in the fourth quarter of 1996 and higher sales mix related to youth sports leagues which are at lower margins than the Company's institutional business. The inventory reserve reflects management's periodic assessment of the carrying value of the Company's inventory and the Company's strategy to dispose of slow-moving or obsolete inventory. During fiscal year 1996, the Company intensified its marketing efforts relating to youth sports leagues with new product offerings and very aggressive pricing strategies designed to increase its market penetration. As a result of these efforts, revenues associated with youth sports league customers increased as a percentage of total revenues but contributed to the decrease in gross profit as a percentage of net revenues. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the fiscal year ended November 1, 1996 increased by approximately $8.7 million (40.5%) as compared to the fiscal year ended October 31, 1995 and $4.9 million (19.5%) as compared to the twelve month period ended October 31, 1995. The increase in these expenses was primarily due to the following factors: (i) An increase in expenses relating to the Company's primary distribution facility for the twelve months ended November 1, 1996 as compared to the twelve month period ended October 31, 1995. This facility was opened during April 1995 and therefore was not operational for the entire twelve month period ended October 31, 1995. Such expenses include labor, rent and depreciation. (ii) An increase in payroll costs associated with an increase in employees. (iii) An increase in freight costs associated with the increase in net revenues. Historically, the Company has not billed the U.S. Government or bid customers freight. As a percentage of net revenues, freight costs (net of freight costs recovered from customers) increased for fiscal year 1996 compared to the twelve months ended October 31, 1995. This increase was due primarily to revenues associated with youth sports leagues. As a result of the Company's pricing strategy with respect to youth sports leagues discussed above, billable freight costs from sales to youth sports league customers are lower than SSG's historical institutional business. In addition, during 1996 the Company strategically elected to change its primary freight carrier in order to improve customer service. Average shipping rates of the new carrier were higher than SSG's previous carrier. (iv) Expenses relating to the Company's participation in the 1996 Olympic summer games. These expenses include royalties, travel, and miscellaneous advertisements incurred during fiscal 1996, which expenses were partially offset by the sale of products used in the Olympic games. (v) An increase in the provision for receivables relating primarily to SSG's youth sports league customers based upon on-going credit evaluations. (vi) An increase in advertising expenses due to the expansion of the Company's marketing efforts, primarily expenses relating to catalogs mailed to customers and additional advertising relating to the youth sports league division. (vii) An increase in professional fees and expenses relating to legal and financial services provided to the Company. Such fees and expenses were incurred in connection with the Company's efforts to arrange additional debt and equity financing, including fees and expenses relating to the Emerson transaction. (viii) The write-off of software and forecasting systems because the Company determined these assets would have no future benefit. Operating Profit (Loss). Operating profit decreased by approximately $3.9 million to a loss of $65,165 in fiscal 1996 from a profit of $3.9 million for the fiscal year ended October 31, 1995 and decreased $3.4 million (101.9%) as compared to the twelve month period ended October 31, 1995. As a percentage of net revenues, operating profit decreased to (0.1)% in fiscal 1996 from 6.0% for the fiscal year ended October 31, 1995. The decrease in operating profit, both in dollar amount and as a percentage of net revenues, reflects the impact of the increase in operating expenses and the decrease in gross profit percentages as discussed above. Interest Expense. Interest expense increased approximately $246,000 (21.8%) to $1.4 million in fiscal 1996 from $1.1 million for the fiscal year ended October 31, 1995 and $31,000 (2.3%) as compared to the twelve month period ended October 31, 1995. The increase in interest expense reflects higher borrowing rates associated with the Company's senior credit facility as compared to the Company's borrowing rates in 1995, partially offset by a decrease in average borrowing levels. The decrease in average borrowing levels was associated primarily with the proceeds generated from the sale of the Gold Eagle Division. Provision (Benefit) for Income Taxes. The provision for income taxes decreased approximately $1.6 million to a benefit of $436,000 in fiscal 1996 from a provision of $1.1 million in fiscal 1995. The Company's effective tax rate decreased to 31.1% in fiscal 1996 from 38.0% in fiscal 1995. Earnings (Loss) from Continuing Operations. Earnings (loss) from continuing operations decreased approximately $2.8 million to $(964,000) in 1996 from $1.8 million in fiscal 1995. As a percentage of net revenues, net earnings decreased to (1.2)% in 1996 from a profit of 2.8% in fiscal 1995. Earnings (loss) per common share decreased to $(0.14) per share in 1996 from earnings of $0.27 per share in fiscal 1995, which reflects the reduction in earnings (loss) offset by a slight decrease in weighted average shares outstanding. Liquidity and Capital Resources The Company's working capital increased approximately $7.3 million during the fiscal year ended September 26, 1997, from $16.7 million at November 1, 1996 to $24.0 million at September 26, 1997. The increase in working capital is primarily a result of: (i) a $5.0 million decrease in accounts payable; (ii) a $1.6 million increase in trade receivables due to higher revenues; and (iii) a $6.3 million decrease in net current liabilities of discontinued operations due to the sale of the remaining discontinued operations on March 28, 1997. This increase is partially offset by a $3.0 million decrease in inventories resulting from the Company's working capital reduction program. As of September 26, 1997, the Company had total borrowings under its senior credit facility of approximately $4.6 million including a term loan of $1,625,000 which is payable in quarterly installments of principal and accrued interest of $125,000 through October 31, 2000, outstanding letters of credit for foreign purchases of inventory of approximately $1.3 million, and availability of approximately $13.6 million. The net decrease of $19.8 million in borrowings under the senior credit facility and the net decrease of $5.0 million in trade payables compared to November 1, 1996 reflects (i) a payment of approximately $12.0 million using the proceeds received by the Company from the sale of 1,600,000 shares of the Company's common stock and 1.0 million common stock purchase warrants to Emerson Radio Corp. ("Emerson"), (ii) a payment of approximately $8.2 million using the proceeds received from the sale of the remaining assets of the discontinued retail segment, and (iii) a payment of approximately $3.0 million using the amount received from tax refunds. On September 9, 1997, the Company entered into a Second Amended and Restated Loan and Security Agreement ("Agreement") which includes a senior credit facility of $25,000,000 with a maturity date of October 31, 2000. This Agreement provides for additional loans to be made to SSG for the cost of certain capital expenditures (up to a maximum of $4,000,000) and reduced interest rates. The Agreement also contains financial and net worth covenants in addition to limits on capital expenditures. The Company believes it will satisfy its short-term and long-term liquidity needs from borrowings under its senior credit facility and cash flows from operations. The proceeds from the sale of the discontinued operations and proceeds from the Emerson transaction were used to reduce the Company's outstanding borrowings. As a result of the sale and the reduced interest rates included in the new credit agreement, interest expense is expected to be less in future operating periods. On May 28, 1997, the Company approved the repurchase of up to 1,000,000 shares of its issued and outstanding common stock in the open market and/or privately negotiated transactions. Such purchases are subject to price and availability of shares, working capital availability and any alternative capital spending programs of the Company. As of September 26, 1997, the Company had repurchased approximately 287,000 of its issued and outstanding common stock in the open market. In addition, the Company will need to address the Year 2000 issues relating to its current management information system. At this time, the Company is in the process of evaluating all of its options that may result in a new system implementation. As of September 26, 1997, the Company had no material capital requirements. However, the Company believes it will be able to satisfy any projected capital requirements that may arise in the foreseeable future from borrowings under the senior credit facility and cash flows from operations. Certain Factors that May Affect the Company's Business or Future Operating Results This report contains various forward looking statements and information that are based on Management's beliefs as well as assumptions made by and information currently available to Management. When used in this report, the words "anticipate", "estimate", "expect", "predict", "project", and similar expressions are intended to identify forward looking statements. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, expected or projected. Among the key factors that may have a direct bearing on the Company's results are set forth below. Future trends for revenues and profitability remain difficult to predict. The Company continues to face many risks and uncertainties, including: general and specific market economic conditions, United States Government sales, risk of nonpayment of accounts receivable, competitive factors, and foreign supplier related issues. The general economic condition in the U.S. could affect pricing on raw materials such as metals and other commodities used in the manufacturing of certain products. The Company believes it will be able to pass any significant price increases on to its customers; however, any price increases could have an adverse effect on revenues and costs. Approximately 7% of the Company's institutional sales are made to the U.S. Government, a majority of which are made to military installations. Anticipated reductions in U.S. Government spending could reduce funds available to various government customers for sports related equipment, which could adversely affect the Company's results of operations. The Company ships approximately 80% of its products using UPS. As experienced earlier this year, a strike by any of its major carriers could adversely affect the Company's results of operations due to not being able to deliver its products in a timely manner and using other more expensive freight carriers. Although the Company has analyzed the cost benefit effect of using other carriers, they will continue to rely on UPS for the majority of its small package shipments. Management continues to closely monitor orders and the creditworthiness of its customers. The Company has not experienced abnormal increases in losses associated with accounts receivable; however, credit risks associated with the youth league division are considered by the Company to be greater than any other division. The Company has made allowances for the amount it believes to be adequate to properly reflect the risk to accounts receivable; however, unforeseen market conditions may compel the Company to increase the allowances. The sports related equipment market in which the Company participates is highly competitive. SSG competes principally in the institutional market with local sporting goods dealers, as well as other direct mail companies. While large sporting goods companies dominate the market of sporting goods in the United States, the Company does not compete with such companies. The Company derives a significant portion of its revenues from sales of products purchased directly from foreign suppliers located primarily in the Far East. In addition, the Company believes many of the products it purchases from domestic suppliers are produced by foreign manufacturers. The Company is subject to risks of doing business abroad, including delays in shipments, adverse fluctuations in currency exchange rates, increases in import duties, decreases in quotas, changes in custom regulations and political turmoil. The occurrence of any one or more of the foregoing could adversely affect the Company's operations. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not Applicable Item 8. Financial Statements and Supplementary Data. Sport Supply Group, Inc. Index to Financial Statements Page Report of Independent Auditors Consolidated Balance Sheets as of September 26, 1997 and November 1, 1996 Consolidated Statements of Operations for the Eleven Month Period Ended September 26, 1997, the Year Ended November 1, 1996, and the Ten Month Period Ended October 31, 1995 Consolidated Statements of Stockholders' Equity for the Eleven Month Period Ended September 26, 1997, the Year Ended November 1, 1997, and the Ten Month Period Ended October 31, 1995 Consolidated Statements of Cash Flows for the Eleven Month Period Ended September 26, 1997, the Year Ended November 1, 1996, and for the Ten Month Period Ended October 31, 1995 Notes to Consolidated Financial Statements Financial statement schedules are omitted as the required information is presented in the consolidated financial statements or the notes thereto or is not necessary. REPORT OF INDEPENDENT AUDITORS To the Board of Directors of Sport Supply Group, Inc.: We have audited the accompanying consolidated balance sheet of Sport Supply Group, Inc. and subsidiary as of September 26, 1997, and the related consolidated statement of operations, stockholders' equity, and cash flow for the eleven month period ended September 26, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sport Supply Group, Inc. and subsidiary as of September 26, 1997, and the consolidated results of its operation and its cash flow for the eleven month period ended September 26, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Dallas, Texas November 11, 1997 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Sport Supply Group, Inc.: We have audited the accompanying consolidated balance sheet of Sport Supply Group, Inc. (a Delaware corporation) and subsidiary as of November 1, 1996 and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended November 1, 1996, and the ten month period ended October 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sport Supply Group, Inc. and subsidiary as of November 1, 1996 and the results of their operations and their cash flows for the year ended November 1, 1996 and the ten month period ended October 31, 1995 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas January 29, 1997 SPORT SUPPLY GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 26, 1997 AND NOVEMBER 1, 1996 September 26, November 1, 1997 1996 CURRENT ASSETS : Cash $ 602,779 $ 435,213 Accounts receivable - Trade, less allowance for doubtful accounts of $797,000 in 1997 and 13,452,286 11,836,173 $552,000 in 1996 Other 467,661 138,994 Income taxes receivable 1,653,875 1,343,579 Inventories,net 12,284,425 15,320,505 Other current assets 583,414 899,588 Deferred tax assets 2,069,678 5,883,341 Total current assets 31,114,118 35,857,393 DEFERRED CATALOG EXPENSES 1,150,514 2,367,875 PROPERTY, PLANT AND EQUIPMENT : Land 8,663 8,663 Buildings 1,595,228 1,551,723 Machinery and equipment 5,661,315 6,029,845 Furniture and fixtures 2,427,527 2,900,870 Leasehold improvements 2,277,372 2,365,821 11,970,105 12,856,922 Less -- Accumulated depreciation (6,638,319) (6,779,589) and amortization 5,331,786 6,077,333 DEFERRED TAX ASSETS 5,838,895 4,492,847 COST IN EXCESS OF TANGIBLE NET ASSETS ACQUIRED, less accumulated amortization of $1,130,000 in 1997 and $1,036,000 in 1996 2,959,114 3,053,780 TRADEMARKS, less accumulated amortization of $935,000 in 1997 and $748,000 in 1996 3,364,046 3,551,801 OTHER ASSETS, less accumulated amortization of $1,119,000 in 1997 and $1,078,000 in 725,624 761,826 1996 NET NONCURRENT ASSETS OF DISCONTINUED -- 16,365,572 OPERATIONS $50,484,097 $72,528,427
CURRENT LIABILITIES : Accounts $4,956,830 $9,993,049 payable Accrued property taxes 294,882 370,789 Other accrued liabilities 1,292,247 1,806,334 Notes payable and capital lease 564,638 696,955 obligations, current portion Net current liabilities of -- 6,329,927 discontinued operations 7,108,597 19,197,054 DEFERRED GAIN 22,091 33,137 NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS, net of current portion 4,396,090 24,135,267
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS - CONTINUED AS OF SEPTEMBER 26, 1997 AND NOVEMBER 1, 1996 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, par value $0.01, 100,000 shares authorized, no shares - - outstanding in 1997 or 1996 Common stock, par value $0.01, 20,000,000 shares authorized, 9,158,749 and 7,551,899 shares issued in 1997 and 1996, 8,084,384 and 6,764,834 shares outstanding in 1997 91,588 75,519 and 1996 Paid-in capital 58,574,218 46,543,19 Retained deficit (9,709,357) (9,711,357) Treasury stock, at cost, 1,074,365 shares in 1997 and 787,065 shares in 1996 (9,999,130) (7,744,386) 38,957,319 29,162,969 $50,484,097 $72,528,427 The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For The Eleven Month Period Ended September 26, 1997, The Year Ended November 1, 1996 and The Ten Month Period Ended October 31, 1995 (See Note 1) 1997 1996 1995 NET REVENUES $79,109,063 $80,520,837 $65,133,959 COST OF SALES 47,705,408 50,566,008 39,874,637 GROSS PROFIT 31,403,655 29,954,829 25,259,322 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 25,877,428 30,019,994 21,365,188 NONRECURRING CHARGES 1,300,000 -- -- Operating profit (loss) 4,226,227 (65,165) 3,894,134 OTHER INCOME (EXPENSE): Interest expense (757,181) (1,371,990) (1,126,024) Other income, net 82,523 37,962 208,895 (674,658) (1,334,028) (917,129) Earnings (loss) from continuing operations before (provision) 3,551,569 (1,399,193) 2,977,005 benefit for income taxes (PROVISION) BENEFIT FOR (975,569) 435,536 (1,130,250) INCOME TAXES EARNINGS (LOSS) FROM 2,576,000 (963,657) 1,846,755 CONTINUING OPERATIONS DISCONTINUED OPERATIONS: Loss from operations, net -- (2,242,143) (456,534) of income tax benefit Loss on disposal, net of (2,574,000) (15,530,697) - income tax benefit Loss from discontinued (2,574,000) (17,772,840) (456,534) operations NET EARNINGS (LOSS) $2,000 $(18,736,497) $1,390,221 EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE: Continuing operations $0.32 $(0.14) $0.27 Discontinued operations (0.32) (2.63) (0.07) Net earnings (loss) $0.00 $(2.77) $0.20 WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES 8,151,414 6,768,488 6,949,984 OUTSTANDING The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY or The Years Ended September 26, 1997, November 1, 1996, And October 31, 1995 (See Note 1) Unrealized Retained Holding Common Stock Preferred Stock Paid in Earnings Treasury Stock Period Gain Shares Amount Shares Amount Capital (Deficit) Amount (Loss) Total Balance, January 1, 7,534,899 75,349 -- $ -- $46,490,254 $8,440,348 842,065 $(8,285,563) $(247,500) $46,472,888 1995 Issuances of common stock upon exercises of outstanding stock 16,438 164 137,551 137,715 options Tax benefit from exercises of stock options 19,300 19,300 Dividends declared to stockholders (805,429) (805,429) Reissuances of treasury stock 1,990 (12,401) 122,020 124,010 Change in unrealized holding period gain 271,260 271,260 Net earnings 1,390,221 1,390,221 Balance, October 31, 1995 7,551,337 75,519 -- $ - $46,649,095 $9,025,140 829,664 $(8,163,543) $23,760 $47,609,965 Issuances of common stock upon exercises of outstanding stock options 562 6 3,872 3,878 Reissuances of treasury stock (109,774) (42,599) 419,157 309,383 Change in unrealized holding period gain (loss) (23,760) (23,760) Net loss (18,736,497) (18,736,497) Balance, November 1, 1996 7,551,899 $75.519 -- $ - $46,543,193 (9,711,357) 787,065 $(7,744,386) $ - $29,162,969 Issuances of common stock upon exercises of outstanding stock 6,850 69 47,025 47,094 Issuances of common stock 1,600,000 16,000 11,984,000 12,000,000 Purchase of treasury stock 287,300 (2,254,744) (2,254,744) Net earnings 2,000 2,000 Balance, September 26, 1997 9,158,749 $ 91,588 -- $- $58,574,218 $(9,709,357) 1,074,365 $(9,999,130) $ - $38,957,319
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For The Eleven Month Period Ended September 26, 1997, The Year Ended November 1, 1996, And The Ten Month Period Ended October 31, 1995 (See Note 1) 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES : Net earnings (loss) $ 2,000 $(18,736,497) $ 1,390,221 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities -- Loss on disposal of 2,574,000 15,530,697 -- discontinued operations Depreciation and amortization 1,284,156 2,528,716 1,821,768 Provision for (recovery of) allowances for accounts receivable (244,730) 895,716 538,311 Changes in assets and liabilities -- Increase in receivables (2,010,346) (330,706) (5,456,837) (Increase) decrease in inventories 3,036,080 1,309,650 (2,598,262) (Increase) decrease in deferred catalogs and other current assets 1,533,535 (403,562) (70,468) (Increase) decrease in 3,813,663 (3,756,306) (1,195,035) current deferred tax assets Increase (decrease) in (5,036,219) 2,777,383 2,607,183 accounts payable Increase (decrease) in (589,994) 603,017 409,969 accrued liabilities (Increase) decrease in (64,547) 313,305 (15,452) other assets Increase in noncurrent (1,346,048) (4,755,852) -- deferred tax assets Other (11,046) (4,646) (5,205) Discontinued operations - noncash charges and working capital changes (697,524) 11,135,347 (4,167,157) Net cash provided by (used in) 2,242,980 7,106,262 (6,740,964) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES : Acquisitions of property, plant (155,439) (631,562) (1,585,820) and equipment Proceeds from sale of -- 9,300 1,177,761 investments Investing activities of discontinued operations (1,657) 734,982 (3,471,567) Proceeds from sale of discontinued operations 8,160,826 -- Net cash provided by (used in) 8,003,730 112,720 (3,879,626) investing activities CASH FLOWS FROM FINANCING ACTIVITIES : Proceeds from issuances of 1,159,560 3,245,046 13,252,769 notes payable Payments of notes payable and capital lease obligations (21,031,054) (7,853,698) (591,225) Proceeds from common stock 12,047,094 3,877 157,015 issuances Dividends paid to stockholders -- (201,650) (603,779) Purchase of (2,254,744) -- -- treasury stock Financing activities of -- (2,547,811) (1,259,900) discontinued operations Net cash provided by (used in) (10,079,144) (7,354,236) 10,954,880 financing activities Net change in cash 167,566 (135,254) 334,290 Cash, beginning of period 435,213 570,467 236,177 Cash, end of period $602,779 $435,213 $570,467 The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED For The Eleven Month Period Ended September 26, 1997, The Year Ended November 1, 1996, And The Ten Month Period Ended October 31, 1997 (See Note 1) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION : 1997 1996 1995 Cash paid during the period for interest $ 1,297,675 $ 2,448,631 $ 1,608,665 Cash paid during the period for income taxes $ 10,825 $ 134,735 $ 1,870,950 During 1995, the Company acquired the assets of several entities. In connection with these acquisitions, liabilities were assumed as follows : Fair value of -- -- $6,793,652 assets acquired Cash paid for the acquisitions, net -- -- (2,651,697) Debt issued for the -- -- (3,779,700) acquisitions Liabilities assumed $ - $ - $ 362,255 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES : During 1996, the Company reissued 42,599 shares of its common stock previously held in treasury in connection with an acquisition completed in 1994 $ -- $ 309,383 $ --
SPORT SUPPLY GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 26, 1997 1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Background Sport Supply Group, Inc. (the "Company" or "SSG") was incorporated in 1982. The assets of the Sports & Recreation Division of Aurora Electronics, Inc. (f/k/a BSN Corp., "Aurora") were contributed to the Company effective September 30, 1988. Prior to its initial public offering completed in April, 1991, the Company was a wholly-owned subsidiary of Aurora. The Company is engaged principally in the direct mail marketing of sports related equipment and leisure products to institutional and sporting goods team dealer customers in the United States. The Company manufactures many of the products it sells, including tennis, volleyball, and other sports nets; items of steel and aluminum construction, such as soccer and field hockey goals and volleyball, pole vault, and high jump standards; other track and field equipment; gymnastic and exercise mats; weight lifting equipment; tabletop games and various plastic items. Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of SSG and its wholly-owned subsidiary, Sport Supply Group International Holdings, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements also include estimates and assumptions made by management that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses, provisions for and the disclosure of contingent assets and liabilities. Actual results could materially differ from those estimates. During May 1996, the Company sold substantially all of the assets (other than cash and accounts receivable) of its Gold Eagle Professional Golf Products Division (the "Gold Eagle Division"). Subsequent to the sale of the Gold Eagle Division, the Company adopted a formal plan to dispose of the remaining operations of the Company's retail segment (which previously included the Gold Eagle Division) and therefore has classified these operations as discontinued. On March 28, 1997, SSG disposed of substantially all of the remaining assets of the discontinued operation to Nitro Leisure Products, Inc., a Delaware corporation. As a result, the Company's retail segment is being reported as a discontinued operation through the date of disposal in the accompanying consolidated financial statements. Change in Fiscal Year In January 1997, the Company changed its financial reporting year end from October 31 to September 30. Accordingly, the fiscal year ended September 26, 1997 is a transition period consisting of eleven months. The Company will operate on a 52/53 week year ending on the Friday closest to September 30. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out and weighted-average cost methods for items manufactured by the Company and weighted-average cost for items purchased for resale. As of September 26, 1997 and November 1, 1996 inventories (excluding inventories related to discontinued operations) consisted of the following: 1997 1996 Raw materials $ 2,410,009 $ 2,255,675 Work-in-process 113,170 146,751 Finished and purchased goods 10,471,262 13,868,079 12,994,441 16,270,505 Less inventory reserve for obsolete or (710,016) (950,000) slow moving items $12,284,425 $15,320,505 The Company recorded a $950,000 provision for the year ended November 1, 1996 to establish an inventory reserve. This reserve reflects management's periodic assessment of the carrying value of the Company's inventory. For the year ended September 26, 1997, the Company recorded approximately $240,000 against the reserve for the disposal of certain slow-moving inventory. As of September 26, 1997 and November 1, 1996, approximately 34% and 32% of total ending inventories were products manufactured by the Company with the balance being products purchased from outside suppliers. Sales of products manufactured by SSG accounted for approximately 35% and 36% of total net revenues in 1997 and 1996, respectively. Costs included in products manufactured by SSG include raw materials, direct labor, and manufacturing overhead. Advertising and Deferred Catalog Expenses The Company expenses the production costs of advertising as incurred, except for production costs related to direct-response advertising activities which are capitalized. Direct response advertising consists primarily of catalogs which include order forms for the Company's products. Production costs, primarily printing and postage, associated with catalogs are amortized over twelve months. Property, Plant, and Equipment Property, plant, and equipment is stated at cost and depreciated over the estimated useful lives of the related assets using the straight- line method. Leasehold improvements and property and equipment leased under capital lease obligations are amortized over the terms of the related leases or their estimated useful lives, whichever is shorter. The cost of maintenance and repairs is charged to expense as incurred; significant renewals and betterments are capitalized and depreciated over the remaining estimated useful lives of the related assets. Depreciation of property, plant and equipment is provided by the straight-line method as follows: Buildings Thirty to Forty years Machinery and Equipment Five years Furniture and Fixtures Five years Intangible Assets Cost in excess of tangible net assets acquired relates to acquisitions made by the Company. Trademarks relate to costs incurred in connection with the licensing agreements for the use of certain trademarks in conjunction with the sale of the Company's products. Other intangible assets are classified as other assets and consist principally of patents. Amortization of intangible assets is provided by the straight- line method as follows: Cost in excess of tangible net assets acquired -- principally forty years Trademarks -- five to forty years Patents -- seven to eleven years Management periodically assesses the recoverability of the carrying value of intangible assets in relation to current and anticipated net earnings and cash flows. Based on management's assessment, the Company believes its investments in intangible assets are fully realizable as of September 26, 1997. The cost of intangible assets and related accumulated amortization are removed from the Company's accounts during the year in which they become fully amortized. Long-Lived Assets Effective November 2, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of." The adoption of this new accounting standard did not have a material effect on the Company's Consolidated Statements of Operations. Other Accrued Liabilities As of September 26, 1997, other accrued liabilities consisted of $682,000 of bonuses, $381,000 of payroll, and $229,000 of other. Investment in Equity Securities During 1994, the Company entered into an Exchange Agreement with Aurora whereby SSG exchanged 105,769 shares of its common stock (previously held in treasury) for 500,000 common shares of Riddell Sports Inc. ("Riddell") held by Aurora. In accordance with the provisions of Statement of Financial Accounting Standards No.115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"), the Company determined that this investment should be classified as "available-for-sale securities" and reported at fair value. During the ten month period ended October 31, 1995, the Company sold 356,000 Riddell shares resulting in proceeds of approximately $1,178,000 and a related gain of approximately $199,000 which is included in other income in the accompanying statement of operations for the ten month period ended October 31, 1995. The fair value of SSG's remaining investment in Riddell common stock (144,000 shares) was approximately $432,000 as of October 31, 1995. During the fiscal year ended November 1, 1996, the Company sold the remaining Riddell shares resulting in proceeds of approximately $427,520 and a related gain of approximately $31,520 which is included in other income in the accompanying statement of operations for the twelve month period ended November 1, 1996. Income Taxes Deferred tax assets and liabilities are determined annually based upon the estimated future tax effects of the differences in the tax bases of existing assets and liabilities and the related financial statement carrying amounts, using currently enacted tax laws and rates in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (See Note 4). Net Earnings (Loss) Per Share of Common Stock Net earnings (loss) per share of common stock is based upon the weighted average number of common and common equivalent shares outstanding. Outstanding stock options and common stock purchase warrants are treated as common stock equivalents when dilution results from their assumed exercise. Revenue Recognition Revenue is generally recognized when inventory is shipped to the customer. Recently Issued Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share," which is required to be adopted in the first quarter of fiscal year 1998. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements, the dilutive effect of stock options will be excluded for basic earnings per share. The impact is not expected to be material for the eleven month period ended September 26, 1997 and the year ended November 1, 1996. 2. STOCKHOLDERS' EQUITY: Stock Options The Company maintains a stock option plan that provides up to 2,000,000 shares of common stock for awards of incentive and non- qualified stock options to directors and employees of the Company. Under the stock option plan, the exercise price of options will not be less than the fair market value of the common stock at the date of grant or not less than 110% of the fair market value for incentive stock options granted to certain employees, as more fully described in the Amended and Restated Stock Option Plan. Options expire 10 years from the grant date, or 5 years from the grant date for incentive stock options granted to certain employees, or such earlier date as determined by the Board of Directors of the Company. Transactions under the plan are summarized as follows: Exercise Prices/ Shares Weighted Avg. Price Outstanding at December 627,925 $4.80 - $13.38 31, 1994 Granted 261,900 $10.63 - $14.25 Exercised (16,438) $6.60 - $10.63 Forfeited (61,615) $6.60 - $13.13 Outstanding at October 811,772 $4.80 - $14.25 31, 1995 Granted 29,125 $6.50 - $7.13 Exercised (562) $6.90 Forfeited (154,862) $6.88 - $14.25 Outstanding at November 685,473 $8.85 1, 1996 Granted 594,375 $7.49 Exercised (6,850) $6.88 Forfeited (232,425) $7.92 Outstanding at September 1,040,573 $7.26 26, 1997 Stock Options Outstanding Stock Options Exercisable Wtd. Avg. Wtd. Avg. Wtd. Avg. Range of Remaining Exercise Exercise Exercise Prices Shares Life Price Shares Price $4.80 - $12.13 1,040,573 7.6 yrs. $7.26 490,573 $7.75 All options granted under the stock option plan during the eleven month period ended September 26, 1997, the year ended November 1, 1996, and the ten month period ended October 31, 1995 were at exercise prices equal to or greater than the fair market value of the Company's stock on the date of the grant. On May 13, 1996, the Company repriced the exercise price to the current fair market value of certain employees' (excluding officers and directors) stock options that were granted pursuant to the stock option plan and that had an original exercise price in excess of the fair market value of the common stock on May 13, 1996 of $6.875. The exercise price of these options was lowered to $6.875. On January 23, 1997, certain officers' options were repriced to an amount above the current fair market value. The exercise price of these options were lowered to $7.50. As of September 26, 1997, there were 959,427 shares available for option grants under the stock option plan. In addition to options granted pursuant to the stock option plan, the Company periodically grants options to purchase shares of SSG's common stock that are not reserved for issuance under the stock option plan ("non-Plan options"). During the year ended November 1, 1996, and the ten month period ended October 31, 1995, the Company granted 20,000 and 264,380 non-Plan options, respectively. All non- Plan options granted were at exercise prices ranging from $6.88 to $15.00 per share. Such exercise prices were equal to or greater than the fair market value of the Company's common stock on the dates of grant. As of September 26, 1997, there were a total of 1,285,703 options (including non-Plan options) outstanding with exercise prices ranging from $4.80 per share to $15.00 per share. As of September 26, 1997, 735,703 of the total options outstanding were fully vested with 550,000 options vesting in January of 2000. As of November 1, 1996 and October 31, 1995, all outstanding options were fully vested. The Company has adopted the pro forma disclosure provisions of SFAS No. 123 "Accounting for Stock Based Compensation". As required by SFAS 123, pro forma information regarding net income and net income per share has been determined as if the Company had accounted for employee stock options subsequent to December 31, 1995 under the fair value method provided for under SFAS 123. The fair value for those options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rates ranging from 6.01% to 6.24%; a dividend yield of 0%; expected volatility of 51%; and a weighted average expected life for each option of three years. The weighted average exercise prices and the weighted average fair values of employee stock options are as follows: For the Eleven For the Fiscal Month Year Ended Period Ended September 26, 1997 November 1, 1996 Weighted Weighted Weighted Weighted Average Average Average Average Exercise Fair Exercise Fair Price Value Price Value Exercise price of stock option on grant date equals market value - $- $- $6.89 $2.77 exceeds market value - $7.49 $3.01 - - For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period; therefore, its proforma effect will not be fully realized until the completion of one full vesting cycle. The Company's pro forma information is as follows: For the Eleven For the Fiscal Month Year Period Ended Ended September 26, November 1, 1997 1996 Net income (loss): As reported $2,000 ($18,736,497) Pro forma ($804,809) ($19,163,574) Earnings (loss) per share: As reported $0.00 ($2.77) Pro forma ($0.10) ($2.83) Dividends Historically, the Company had a $0.16 per share annual cash dividend policy payable quarterly at $.04 per share of common stock. After the effective date of the 5 for 4 stock split declared in 1994, the Company's Board of Directors revised the annual cash dividend to $0.12 per share payable quarterly at $0.03 per share of common stock. Total cash dividends paid in fiscal 1996 and 1995 were $201,650 and $603,779, respectively. During October 1995, a $.03 per share dividend was declared which was paid subsequent to October 31, 1995. Accordingly, the total dividend payment of approximately $201,650 was recorded as a charge to retained earnings during the ten month period ended October 31, 1995. During January 1996, the Company terminated its annual cash dividend policy. Common Stock Purchase Warrants On December 27, 1993, the Company issued 1,224,459 warrants to purchase 1,224,459 shares of SSG's common stock at an exercise price of $25.00 per share which may be exercised on or before December 27, 1998. As a result of the 5 for 4 stock split declared in 1994, each warrantholder will be entitled to 1 1/4 shares of common stock upon the exercise of each warrant at an exercise price of $20 per share. Repurchase of Common Stock On May 28, 1997, the Company approved the repurchase of up to 1,000,000 shares of its issued and outstanding common stock in the open market and/or privately negotiated transactions. Such purchases are subject to price and availability of shares, working capital availability and any alternative capital spending programs of the Company, and maintaining compliance with the senior credit facility. As of September 26, 1997, the Company had repurchased approximately 287,000 shares of its issued and outstanding common stock in the open market. The Company will evaluate purchases of common stock based upon day to day market conditions. 3. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS: As of September 26, 1997 and November 1, 1996, notes payable and capital lease obligations consisted of the following: 1997 1996 Note payable under revolving line of credit, interest at prime plus 3/4% (9.25% at September 26, 1997 and 11.0% at November 1, 1996) or LIBOR plus 2-1/2% (8.16% at September 26, 1997 and 9.375% at November 1, 1996), due October 31, 2000 collateralized by substantially $3,000,000 $21,811,339 all assets Term loan, interest at LIBOR plus 2-1/2% (8.16% at September 26, 1997 and 9.625% at November 1, 1996), payable in quarterly installments of $125,000 plus accrued interest through October 31, 2000 collateralized by 1,625,000 2,628,126 substantially all assets Capital lease obligation, interest at 7.4%, payable in monthly installments of principal and interest totaling $3,159 45,129 75,694 through December 1998 Capital lease obligation, interest at 9%, payable in annual installments of principal and interest totaling $55,000 290,599 317,063 through August 2005 Total 4,960,728 24,832,222 Less - current portion (564,638) (696,955) Long-term debt and capital $4,396,090 $24,135,267 lease obligations, net Credit Facilities The Company has a senior secured credit facility to finance its working capital requirements. The Company's ability to borrow funds under its revolving credit facility is based upon certain percentages of eligible trade accounts receivable and eligible inventories. On September 9, 1997, the Company entered into a Second Amended and Restated Loan and Security Agreement ("Agreement"), which includes a senior credit facility of $25,000,000 with a maturity date of October 31, 2000. This Agreement provides for additional loans to be made to SSG for the cost of certain capital expenditures (up to a maximum of $4,000,000) and reduced interest rates and fees. The Agreement also contains financial and net worth covenants in addition to limits on capital expenditures. As of September 26, 1997, the Company was in compliance with the covenants in the senior credit facility. Amounts outstanding under the senior credit facility are collateralized by substantially all assets of the Company. As of September 26, 1997, the Company had the option of electing the revolving credit facility and the term loan to bear interest at the prevailing LIBOR rate plus 2-1/2% (8.16% at September 26, 1997) or the lender's prime rate plus .75% (9.25% at September 26, 1997). Historically, the Company has elected the lower of the interest rates available under the facility. As of September 26, 1997, the Company had borrowings of approximately $3,000,000 outstanding under the revolver, approximately $1,321,797 of letters of credit outstanding for foreign purchases of inventory, and availability of approximately $13,640,623. In addition, as of September 26, 1997, SSG had borrowings of $1,625,000 under the term loan which is payable in quarterly installments of principal and accrued interest of $125,000 through October 31, 2000. Maturities of the Company's capital lease obligations and borrowings under the senior credit facility as of September 26, 1997, by fiscal year and in the aggregate, are as follows: 1998 $ 564,638 1999 540,779 2000 534,272 2001 3,162,357 2002 40,719 Thereafter 117,963 Total maturities $4,960,728 4. INCOME TAXES: As of September 26, 1997 and November 1, 1996, the components of the net deferred tax assets and liabilities are as follows: 1997 1996 Current deferred tax assets -- Allowances for $373,000 $385,000 doubtful accounts Inventories 1,514,000 1,600,000 Reserve for estimated loss on disposal 183,000 3,898,000 and other accrued liabilities Total current $2,070,000 $5,883,000 deferred tax assets Noncurrent deferred tax assets (liabilities) Cost in excess of tangible net assets acquired $232,000 ($329,000) Other intangible (1,348,000) (235,000) assets Reserve for estimated -- 4,851,000 loss on disposal Depreciation/other -- 206,000 Net operating loss 6,768,000 -- carryforward Minimum tax credit 187,000 -- carryforward Total noncurrent deferred tax assets (liabilities) $5,839,000 $4,493,000 The Company's net operating loss carryforward can be used to offset future taxable income and can be carried forward for 15 years. No valuation allowance has been recorded for the Company's deferred tax assets because management believes it is more likely than not such assets will be realized. Management believes that the deferred tax assets will be realized through prior taxes paid and by future profitable operating results. Historically, the Company has been profitable. The net loss reported for the fiscal year ended November 1, 1996 is primarily the result of the retail segment which has been discontinued. Management believes the Company's continuing operations will continue to be profitable. The income tax provision (benefit) consisted of the following: 1997 1996 1995 Current $(2,074,117) $(1,830,600) $2,082,348 Deferred 1,723,686 (8,512,158) (1,208,898) Income tax provision $(350,431) $(10,342,758) $873,450 (benefit) The provision (benefit) for income taxes related to continuing operations in the accompanying statements of operations for the eleven months ended September 26, 1997, the year ended November 1, 1996, and the ten months ended October 31, 1995 differ from the statutory federal rate (34%) as follows: 1997 1996 1995 Income tax provision (benefit) at statutory federal rate of 34% $1,207,533 ($475,726) $1,012,182 State income taxes, net of federal benefit (306,611) -- 82,801 Other for income taxes 74,647 40,190 35,267 Total provision (benefit) $975,569 ($435,536) $1,130,250 5. ACQUISITIONS: During June 1995, the Company acquired certain assets of the Nitro golf division from Prince Golf International, Ltd. ("Nitro"), a manufacturer and distributor of new golf balls, for $1,000,000 in cash, a noninterest bearing promissory note in the amount of approximately $3,800,000 and the assumption of certain liabilities. The results of operations of this acquisition have been included in discontinued operations since the acquisition was related to the retail segment operations. 6. MAJOR CUSTOMERS AND CONCENTRATION OF BUSINESS RISK: The Company's customers for continuing operations are primarily public and private schools, state and local governments, and the United States Government. Sales to these customers for the eleven month period ended September 26, 1997, the year ended November 1, 1996, and the ten month period ended October 31, 1995 were as follows: 1997 1996 1995 Public and private schools 33% 36% 33% State and local governments 12% 15% 10% United States Government 7% 8% 10% With the exception of the United States Government during the ten month period ended October 31, 1995, the Company did not have any individual customers that accounted for more than 10% of net revenues. The majority of the Company's sales are to institutional customers that are publicly funded. The Company extends credit based upon an evaluation of a customer's financial condition and provides for any anticipated credit losses in its financial statements based upon management's estimates and ongoing reviews of recorded allowances. 7. COMMITMENTS AND CONTINGENCIES: Leases The Company leases a portion of its office, warehouse, computer equipment and manufacturing locations under noncancelable operating leases with terms ranging from one to ten years. The majority of the Company's leases contain renewal options that extend the leases beyond the current lease terms. Future minimum lease payments under noncancelable operating leases for office, warehouse, computer equipment and manufacturing locations, with remaining terms in excess of one year are as follows: 1998 $1,583,171 1999 1,246,598 2000 743,642 2001 743,642 2002 596,420 Thereafter 1,277,141 $6,190,614 Rent expense was approximately $1,485,000, $1,609,000 and $1,328,000 for fiscal 1997, 1996 and 1995, respectively. Severance Agreements During 1991, the Company entered into Severance Agreements with two executive officers of the Company providing that these officers would be entitled to receive up to approximately three times their annual salary if there is both a change in control and a termination or resignation (as defined therein) of such officers. During 1995, the Company entered into Severance Agreements with two additional executive officers and an employee having substantially the same terms as those described above. In 1996, two of these Severance Agreements were cancelled without payments due to the resignation of these designated employees. Subsequent to November 1, 1996, an officer resigned pursuant to a Purchase Agreement whereby Emerson Radio Corp. acquired 1,600,000 shares of SSG's common stock and warrants to acquire an additional 1,000,000 shares. The officer was paid approximately $680,000 pursuant to the Severance Agreement on December 10, 1996. This expense is charged to earnings in fiscal year 1997. Consequently, only two Severance Agreements remain. Product Liability and Other Claims Because of the nature of the Company's products, SSG is periodically subject to product liability claims resulting from personal injuries. The Company from time to time may become involved in various lawsuits incidental to the Company's business, some of which will relate to claims of injuries allegedly resulting in substantial permanent paralysis. Significantly increased product liability claims continue to be asserted successfully against manufacturers throughout the United States resulting in general uncertainty as to the nature and extent of manufacturer's and distributors' liability for personal injuries. There can be no assurance that the Company's general product liability insurance will be sufficient to cover any successful product liability claims made against the Company. In management's opinion, any ultimate liability arising out of currently pending product liability claims will not have a material adverse effect on the Company's financial condition or results of operations. However, any claims substantially in excess of the Company's insurance coverage, or any substantial claim not covered by insurance, could have a material adverse effect on the Company's results of operations and financial condition. Indemnification Agreements with Aurora In connection with the transfer of all of the assets of Aurora's Sports and Recreation Division to the Company on September 30, 1988, the Company assumed all liabilities of the Sports and Recreation Division associated with such assets and agreed to indemnify Aurora and hold Aurora harmless from such liabilities and liabilities relating to the Sports and Recreation Division's operations prior to such date. Although Aurora has not formally made any claims under this indemnity agreement, a plaintiff in a product liability suit has received a judgment against Aurora in the approximate amount of $100,000 and the Company has paid the judgment. In addition, the Company is currently litigating one product liability claim that names the Company and Aurora as co-defendants. In connection with the Company's initial public offering, the Company and Aurora entered into an indemnification agreement relating to certain tax liabilities that may arise with respect to periods beginning prior to the initial public offering. Aurora has not made any claims under this indemnity agreement. Except as described above, Management is not aware of any claims intended to be made by Aurora relating to the above indemnity agreements. 8. EMPLOYEES' SAVINGS PLAN AND EMPLOYEE STOCK PURCHASE PLAN Effective June 1, 1993, the Company established a defined contribution profit sharing plan (the "401(k) Plan") for the benefit of eligible employees. All employees with one year of service and who have attained the age of 21 are eligible to participate in the 401(k) Plan. Employees may contribute up to 15% of their compensation, subject to certain limitations, which qualifies under the compensation deferral provisions of Section 401(k) of the Internal Revenue Code. The 401(k) Plan contains provisions that allow the Company to make discretionary contributions during each plan year. Employer contributions for the eleven month period ended September 26, 1997 were $36,425. All administrative expenses of the 401(k) Plan are paid by the Company. Effective July 1, 1997, the Company established an Employee Stock Purchase Plan for the benefit of eligible employees. All eligible employees are allowed to purchase shares of SSG Common Stock at a 15% discount from the market price. 9. CHANGE IN CONTROL OF MANAGEMENT On December 10, 1996, pursuant to a Securities Purchase Agreement dated November 27, 1996 between Emerson Radio Corp. and SSG ("the Purchase Agreement"), Emerson acquired directly from SSG 1,600,000 shares of newly issued Common Stock for an aggregate consideration of $11,500,000 and five-year warrants to acquire an additional 1,000,000 shares of Common Stock at an exercise price of $7.50 per share for an aggregate consideration of $500,000. In addition, Emerson agreed to arrange for foreign trade credit financing of $2,000,000 for the benefit of SSG to supplement SSG's existing credit facilities. This currently has not been utilized. Pursuant to the Purchase Agreement, SSG caused a majority of the members of SSG's Board of Directors to consist of Emerson's designees. A nonrecurring pre-tax charge of $1.3 million was recorded in the first quarter of the fiscal year ended September 26, 1997 for compensation payments relating to the "change in control" of the Company (including severance payments to the former CEO of approximately $680,000). 10. DISCONTINUED OPERATIONS On May 20, 1996, SSG disposed of substantially all of the assets (other than cash and accounts receivable) of the Gold Eagle Division to Morris Rosenbloom & Co., Inc., a privately-held corporation. The sale of the Gold Eagle Division resulted in a pretax loss of approximately $750,000. Subsequent to the sale of the Gold Eagle Division, the Company adopted a formal plan to dispose of the remaining operations of the Company's retail segment (which previously included the Gold Eagle Division) and therefore has classified these operations as discontinued. On March 28, 1997, SSG disposed of substantially all of the remaining assets of the discontinued operations to Nitro Leisure Products, Inc., a Delaware corporation. Pursuant to the Asset Acquisition Agreement, the total consideration paid to SSG was $8,161,000 in cash. The following represents net current assets and liabilities as well as net noncurrent assets of discontinued operations as of November 1, 1996 and the results of operations for the period from November 2, 1996 through the disposal date of March 28, 1997, the year ended November 1, 1996, and the ten month period ended October 31, 1995. November 1, 1996 Current assets $14,188,152 Current liabilities (20,518,079) Net current liabilities $ (6,329,927) Noncurrent assets $16,365,572 Noncurrent liabilities -- Net noncurrent assets $16,365,572 For the period For the Year For the Ten from Nov. 2, Ended November Months Ended 1996 to March 28, 1, 1996 Oct. 31, 1995 1997 Net revenues $ 1,790,395 $ 18,725,955 $23,857,372 Earnings(loss) from operations, net of income taxes -- (2,242,143) (456,534) Loss on disposal, net of (2,574,000) (15,530,697) - income taxes The net loss from operations for the year ended November 1, 1996 includes allocated interest expense of approximately $1,090,000 related to borrowings under the Company's senior credit facility. Interest expense charged to discontinued operations was based upon the amount of borrowings that management estimated would be repaid from the proceeds of the disposal of the Company's retail segment operations. The net loss on disposal includes a charge recorded during the quarterly period ended May 3, 1996 of approximately $9.3 million ($5.9 million after estimated income tax benefit) to record the net assets at estimated realizable value based upon a proposed rights offering pursuant to the Company's plan of disposal. During the quarterly period ended May 3, 1996, the Company also recorded a reserve of approximately $3.9 million ($2.5 million after estimated tax benefit) for anticipated operating losses during the estimated twelve month disposal period, including interest expense. As a result of certain factors, including, among others, management's assessment of the ultimate success of the proposed rights offering and estimates of the time required to effect such transaction, as well as the Company's projected liquidity requirements, the Company determined that a private sale of the remaining assets of its retail segment was a preferable and more expeditious method of disposal. Based upon management's estimates of the net proceeds to be received pursuant to such disposal, the Company recorded an additional charge of $5.8 million ($3.7 million after estimated income tax benefit) during the quarter ended August 2, 1996 and a charge of $5.2 million ($3.4 million after estimated income tax benefit) during the quarter ended November 1, 1996 to record the net assets at estimated net realizable value. On March 4, 1997, the Company signed a letter of intent for the sale of the discontinued retail segment. Based upon management's estimates at that time of the net proceeds to be received pursuant to such disposal, the Company recorded a pre-tax charge of $3.9 million ($2.6 million after estimated income tax benefit) during the quarter ended January 31, 1997. This charge was provided to record the net assets at estimated net realizable value in accordance with the purchase price set forth in the letter of intent. On March 28, 1997, the Company sold the remaining assets of the discontinued segment for approximately $8.2 million and used the sale proceeds to reduce the Company's outstanding debt. 11. SELECTED FINANCIAL DATA (UNAUDITED) The following sets forth certain historical financial information for the Company for each of the last 5 years (amounts in thousands, except per share amounts): Eleven Months Year Ended Ten Months Year Ended Ended Sep. 26 Nov. 1 Ended Oct. 31 Dec. 31 1997 1996 1995 1994 1993 Statement of Earnings Data: Net revenues $79,109 $80,521 $65,134 $66,920 $58,817 Gross profit 31,404 29,955 25,259 26,326 23,551 Operating profit (loss) 4,226 (65) 3,894 5,162 5,694 Interest expense 757 1,372 1,126 973 1,039 Other income (expense), net 83 38 209 (5) 24 Cumulative effect of accounting change -- -- -- -- 50 Earnings (loss) from continuing operations 2,576 (964) 1,847 2,802 3,324 Earnings (loss) from discontinued operations (2,574) (17,773) (457) 1,900 482 Net earnings (loss) 2 (18,737) 1,390 4,702 3,806 Net earnings (loss) per common share from (1) continuing operations 0.32 (0.14) 0.27 0.42 0.65 Net earnings (loss) per common share from (1)(3) discontinued operations (0.32) (2.63) (0.07) 0.28 0.09 Net earnings (loss) per (1) common share $0.00 $(2.77) $ .20 $ .70 $ .74 Weighted average common(1) shares outstanding 8,151 6,768 6,950 6,760 5,154 Cash dividends declared per (2) common share -- -- $ .12 $ .13 $ .16 At Sept. 26 At Nov. 1 At Oct. 31 At Dec. 31, Balance Sheet Data: 1997 1996 1995 1994 1993 Working capital $24,006 $21,322 $42,231 $32,886 $25,840 Total assets 50,484 70,009 86,355 71,616 45,574 Long-term obligations, net 4,418 24,338 29,199 16,698 5,578 Total liabilities 11,527 40,846 38,745 25,143 10,618 Stockholders' equity 38,957 29,163 47,610 46,473 34,956 (1)Reflects the 5 for 4 stock split declared during January, 1994. (2)Dividends declared in 1995 consisted of a $0.03 per share dividend for the first three quarters. Dividends declared in 1994 consisted of a $0.04 per share dividend for the fourth quarter of 1993 and a $0.03 per share dividend for the first, second and third quarters of 1994. (3)See Note 10 to the consolidated financial statements included in Item 8. - "Financial Statements and Supplementary Data." (4) During 1995, the Company changed its financial reporting year end from December 31 to October 31. Consequently, the fiscal year ended October 31, 1995 is a transition period consisting of ten calendar months. During 1997, the Company changed its financial reporting year end from October 31 to September 30. Therefore, the fiscal year ended September 26, 1997 is a transition period consisting of eleven calendar months. 12. QUARTERLY INFORMATION (UNAUDITED): The following table sets forth certain information regarding the Company's results of operations for each full quarter within year ended September 26, 1997, and November 1, 1996. The fourth quarter of 1997 is not presented since it consisted of two calendar months. 1997 1996 1st 2nd 3rd 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Quarter Quarter Quarter Statement of Earnings Data Net revenues $14,580 $28,312 $23,224 $13,216 $25,521 $21,920 $19,864 Gross profit 5,905 10,717 9,522 5,112 9,451 8,352 7,040 Operating (1,933) 3,238 2,875 (1,034) 1,827 981 (1,839) profit (loss) Interest 196 273 179 458 314 290 310 expense Other income, 7 26 16 25 7 3 3 net Net earnings (loss) from (1,356) 1,974 1,976 (933) 967 444 (1,442) continuing operations Net earnings (loss) from (2,574) -- -- (151) (10,369) (3,733) (3,520) discontinued operations Net earnings (3,930) 1,974 1,976 (1,084) (9,402) (3,289) (4,962) (loss) Net earnings (loss) per $(0.51) $0.24 $0.24 $(0.16) $(1.39) $(0.49) $(0.73) common share Weighted average 7,698 8,367 8,334 6,737 6,749 6,777 6,779 shares outstanding
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Effective June 20, 1997, the Company appointed Ernst & Young LLP as its independent auditors for the fiscal year ending September 26, 1997, to replace the firm of Arthur Andersen LLP, who was dismissed as auditors of the Company effective June 20, 1997. The decision to change auditors was recommended by the Audit Committee of the Board of Directors and approved by the Company's Board of Directors. The reports of Arthur Andersen LLP on the Company's financial statements for the ten month period ended October 31, 1995 and the year ended November 1, 1996 (which financial statements are included in the Company's Annual Report on Form 10-K for the fiscal year ended September 26, 1997) did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the ten month period ended October 31, 1995, the year ended November 1, 1996, and the subsequent interim period prior to June 20, 1997, there were no disagreements with Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Arthur Andersen LLP, would have caused it to make a reference to the subject matter of the disagreements in connection with its reports. The Company had not consulted with Ernst & Young LLP during the ten month period ended October 31, 1995 and the fiscal year ended November 1, 1996, or subsequent interim periods prior to June 20, 1997, on either the application of accounting principles or the type of opinion Ernst & Young LLP might issue on the Company's financial statements. PART III Item 10. Directors and Executive Officers of the Registrant. See the discussion under the captions "Election of Directors" and "Executive Compensation and Other Information" contained in the Proxy Statement for the Annual Meeting of Stockholders to be held January 13, 1998, which information is incorporated herein by reference, and Item 1. "Business - Executive Officers of the Company." Item 11. Executive Compensation. See the discussion under the caption "Executive Compensation and Other Information" contained in the Proxy Statement for the Annual Meeting of Stockholders to be held January 13, 1998, which information, except the Performance Graph and the Report of the Compensation Committee and Stock Option Committee on Executive Compensation, is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. See the discussion under the caption "Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement for the Annual Meeting of Stockholders to be held January 13, 1998, which information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. See the discussion under the caption "Certain Relationships and Related Transactions" contained in the Proxy Statement for the Annual Meeting of Stockholders to be held on January 13, 1998, which information is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(1) Financial Statements. See Item 8. (a)(2) Supplemental Schedule Supporting Financial Statements. See Item 8. (a)(3) Management Contract or Compensatory Plan. See Index. Each of the following Exhibits described on the Index to Exhibits is a management contract or compensatory plan: Exhibits 10.1, 10.1.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.7, 10.8, 10.10, 10.11 and 10.30. (b) Reports on Form 8-K. None. (c) Exhibits. See Index to Exhibits on pages ___ through ____. (d) Financial Statement Schedules SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 26, 1997 SPORT SUPPLY GROUP, INC. By: /s/ Geoffrey P. Jurick Geoffrey P. Jurick Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on November 17, 1997 by the following persons on behalf of the registrant and in the capacities indicated. Signature Title /s/ Geoffrey P. Jurick Chairman of the Board Geoffrey P. Jurick and Chief Executive Officer /s/ Peter S. Blumenfeld Director Peter S. Blumenfeld /s/ John P. Walker Executive Vice President, Chief John P. Walker Financial Officer and Director Eugene I. Davis Director /s/ Johnson C. S. Ko Director Johnson C.S. Ko /s/ Peter G. Bunger Director Peter G. Bunger /s/ Thomas P. Treichler Director Thomas P. Treichler INDEX TO EXHIBITS Exhibit Number Description of Exhibits 2.1 Securities Purchase Agreement dated November 27, 1996 by and between the Company and Emerson Radio Corp. ("Emerson") (incorporated by reference from Exhibit 2 to the Company's Report on Form 8-K filed on December 12, 1996). 2.2 Asset Acquisition Agreement dated as of March 28, 1997 by and between the Company and Nitro Leisure Products, Inc. (incorporated by reference from Exhibit 2.1 to the Company's Report on Form 8-K dated April 11, 1997). 3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-80028)). 3.1.1 Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company (incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-80028)). 3.2 Amended and Restated Bylaws of the Company (incorporated by reference from Exhibit 3.2 to the Company's Report on Form 10-K for the Fiscal Year ended November 1, 1996.) 4.1 Specimen of Common Stock Certificate (incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-39218)). 4.2 Warrant Agreement entered into between the Company and Warrant Agent, including form of Warrant, relating to the purchase of up to 1,300,000 shares of the Company's common stock for $25.00 per share, which expires on December 15, 1998 (incorporated by reference from Exhibit 4.2 to the Company's Registration Statement on Form S-3 (Registration No. 33-71574)). 4.3 Warrant Agreement entered into between the Company and Emerson relating to the purchase of up to 1,000,000 shares of the Company's common stock for $7.50 per share, which expires on December 10, 2001 (incorporated by reference from Exhibit 4(a) to the Company's Report on Form 8-K dated December 12, 1996.) 10.1 Employment Agreement entered into by and between the Company and Peter S. Blumenfeld (incorporated by reference from Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-39218)). 10.1.1 Amendment No. 1 to Employment and Severance Agreement by and between the Company and Peter S. Blumenfeld (incorporated by reference from Exhibit 10.3 to the Company's Report on Form 10-Q for the quarter ended August 1, 1997). Exhibit Number Description of Exhibits 10.2 Employment Agreement entered into by and between the Company and Terrence M. Babilla (incorporated by reference from Exhibit 10.5 to the Company's Report on Form 10-K for the fiscal year ended October 31, 1995). 10.3 Employment Agreement by and between the Company and John P. Walker (incorporated by reference from Exhibit 10.4 to the Company's Report on Form 10-Q for the quarter ended August 1, 1997). *10.4 Employment Agreement by and between the Company and Geoffrey P. Jurick 10.5 Non-Qualified Stock Option Agreement by and between the Company and Geoffrey P. Jurick (incorporated by reference from Exhibit 10.5 to the Company's Report on Form 10-Q for the quarter ended August 1,1997). 10.6 Non-Qualified Stock Option Agreement by and between the Company and John P. Walker (incorporated by reference from Exhibit 10.6 to the Company's Report on Form 10-Q for the quarter ended August 1, 1997). 10.7 Consulting and Separation Agreement dated as of September 16, 1994 by and between the Company and Jerry L. Gunderson. 10.8 Form of Severance Agreement entered into between the Company and each of Messrs. Peter S. Blumenfeld and Terrence M. Babilla (incorporated by reference from Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No. 33-39218)). 10.9 Form of Indemnification Agreement entered into between the Company and each of the directors of the Company and the Company's General Counsel (incorporated by reference from Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration No. 33-39218)). 10.10 Sport Supply Group, Inc. Employee Stock Purchase Plan (incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-27191)). 10.11 Sport Supply Group, Inc. Amended and Restated Stock Option Plan (incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-27193)). 10.12 Registration Rights Agreement by and among the Company, Emerson and Emerson Radio (Hong Kong) Limited (incorporated by reference from Exhibit 4(b) to the Company's Report on Form 8-K filed on December 12, 1996) Exhibit Number Description of Exhibits 10.13 Assignment of Agreement and Inventory Purchase Agreement to Affiliate by Aurora (incorporated by reference from Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 33-39218)). 10.14 Form of Tax Indemnity Agreement by and between the Company and Aurora (incorporated by reference from Exhibit 10.16 to the Company's Registration Statement on Form S-1 (Registration No. 33-39218)). 10.15 Master Agreement, dated as of February 19, 1992, by and between MacMark Corporation, MacGregor Sports Products, Inc. and Aurora (incorporated by reference from Exhibit 10.21 to the Company's Report on Form 10-K for the year ended 1991). 10.16 Perpetual License Agreement, dated as of February 19, 1992, by and between MacMark Corporation, Equilink Licensing Corporation, and Aurora (incorporated by reference from Exhibit 10.22 to the Company's Report on Form 10-K for the year ended 1991). 10.17 Perpetual License Agreement, dated as of February 19, 1992, by and between MacGregor Sports Products, Inc. and Aurora (incorporated by reference from Exhibit 10.23 to the Company's Report on Form 10-K for the year ended 1991). 10.18 Trademark Maintenance Agreement, dated as of February 19, 1992, by and between MacMark Corporation, Equilink Licensing Corporation, and Aurora (incorporated by reference from Exhibit 10.24 to the Company's Report on Form 10-K for the year ended 1991). 10.19 Trademark Maintenance Agreement, dated as of February 19, 1992, by and between MacGregor Sports Products, Inc. and Aurora (incorporated by reference from Exhibit 10.25 to the Company's Report on Form 10-K for the year ended 1991). 10.20 Trademark Security Agreement, dated as of February 19, 1992, by and between MacGregor Sports Products, Inc. and Aurora (incorporated by reference from Exhibit 10.26 to the Company's Report on Form 10-K for the year ended 1991). 10.21 Amendment No. 1 to Perpetual License Agreement and Trademark Maintenance Agreement dated as of November 1, 1992, by and between MacMark Corporation, Equilink Licensing Corporation and the Company (incorporated by reference from Exhibit 10.24 to the Company's Report on Form 10-K for the year ended 1992). Exhibit Number Description of Exhibits 10.22 Amendment No. 1 to Perpetual License Agreement and Trademark Maintenance Agreement dated as of November 1, 1992, by and between MacGregor Sports Products, Inc. and the Company (incorporated by reference from Exhibit 10.25 to the Company's Report on Form 10-K for the year ended 1992). 10.23 Assignment and Assumption Agreement, dated to be effective as of February 28, 1992, by and between Aurora and the Company (incorporated by reference from Exhibit 10.27 to the Company's Report on Form 10-K for the year ended 1991). 10.24 Second Amended and Restated Loan and Security Agreement between the Company and LaSalle Business Credit, Inc. dated as of September 9, 1997 (incorporated by reference from Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended August 1, 1997). 10.25 Lease, dated July 28, 1989, by and between Merit Investment Partners, L.P. and the Company (incorporated by reference from Exhibit 10.14 to the Company's Registration Statement on Form S-1 (Registration No. 33-39218)). 10.26 Industrial Lease Agreement, dated April 25, 1994, by and between the Company and Centre Development Co. (incorporated by reference from Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 1994). 10.26.1 Amendment to Industrial Lease Agreement, dated July 8, 1994, by and between the Company and Centre Development Co. (incorporated by reference from Exhibit 10.19.1 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1994). 10.27 Lease, dated December 2, 1991, by and between Injans Investments and the Company (incorporated by reference from Exhibit 10.20 to the Company's Report on Form 10-K for the year ended December 31, 1991). 10.27.1 First Amendment to Standard Industrial Lease dated September 12, 1996 by and between Injans Investments and the Company (incorporated by reference from Exhibit 10.23.1 to the Company's Report on Form 10-K for the year ended November 1, 1996). 10.28 Office Building Lease, dated November 20, 1992, by and between the Company and Benson Associates (incorporated by reference from Exhibit 10.30 to the Company's Report on Form 10-K for the year ended 1992). Exhibit Number Description of Exhibits 10.28.1 First Amendment to Office Building Lease, by and between the Company and Benson Associates dated April 25, 1994 (incorporated by reference from Exhibit 10.2 to the Company's Report on Form 10-Q for the quarter ended June 30, 1994) 10.29 License Agreement, dated as of September 23, 1991, by and between Proacq Corp. and the Company (incorporated by reference from Exhibit 10.17 to the Company's Report on Form 10-K for the year ended 1991). 10.30 Sport Supply Group Employees' Savings Plan dated June 1, 1993 (incorporated by reference from Exhibit 10.27 to the Company's Report on Form 10-K for the year ended 1993). 10.31 Management Services Agreement dated July 1, 1997 to be effective as of March 7, 1997 by and between the Company and Emerson (incorporated by reference from Exhibit 10.2 to the Company's Report on Form 10-Q for the quarter ended August 1, 1997). *10.31.1 Letter Agreement dated October 18, 1997 amending the Management Services Agreement. * 11 Earnings Per Common and Common Equivalent Share 16 Letter from Arthur Andersen LLP to the Securities and Exchange Commission dated June 24, 1997 regarding change in certifying accountants (incorporated by reference from Exhibit 16.1 to the Company's Report on Form 8-K dated June 26, 1997). * 23.1 Consent of Independent Auditors. *27.1 Financial Data Schedule 99 Pledge and Security Agreement, dated December 10, 1996 by Emerson in favor of Congress Financial Corporation (incorporated by reference from Exhibit 99 to the Company's Report on Form 8-K filed on December 12, 1996. * Filed Herewith. EX-10.4 2 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") dated October 18, 1997 is by and between Sport Supply Group, Inc., a Delaware corporation ("Employer"), and Geoffrey P. Jurick ("Employee"). RECITALS: WHEREAS, Employer desires to retain the services of Employee, and Employee desires to provide services to Employer in accordance with the terms, conditions, and provisions of this Agreement; and NOW, THEREFORE, in consideration of the covenants and agreements of the parties herein contained, the parties to this Agreement agree as follows: 1. Term. Subject to the terms and conditions set forth in this Agreement, Employer hereby employs Employee, and Employee hereby accepts such employment from Employer, for a period commencing on October 18, 1997 (the "Effective Date") and expiring on March 31, 2000, except as otherwise provided herein. 2. Duties. Employee will be employed as Chairman of the Board and Chief Executive Officer of Employer, and in such capacity will perform the normal duties associated with such positions and such other reasonable duties as may be assigned from time to time by the Board of Directors of Employer consistent with that of a Chairman of the Board and Chief Executive Officer. Employer acknowledges that Employee currently is serving as Chairman of the Board and Chief Executive Officer to Emerson Radio Corp. ("Emerson"), and that Employee will devote certain of his time, attention, and energies, not to exceed 50% of his working time during the term of this Agreement, to such responsibilities. During the term of this Agreement, Employee shall devote his full time, attention, and energies (except for those devoted to the business of Emerson as contemplated in the immediately preceding sentence hereto) to the business of Employer to discharge his duties faithfully, diligently, to the best of his abilities, and in a manner consistent with any and all policies and guidelines as may be established by Employer from time to time. 3. Compensation. (a) Subject to the terms and conditions of this Agreement and as compensation for the performance of his services hereunder, Employer will pay Employee a fixed salary at a minimum annual rate of $250,000 (such initial rate as it may be adjusted upward from time to time as provided by the Board of Directors of Employer, is referred to herein as "Salary"). Employee's Salary will accrue and be payable to Employee in accordance with the payroll practices of Employer for senior executives in effect from time to time during the term of this Agreement. (b) Employee shall be entitled to receive an annual formula bonus equal to an amount up to thirty percent (30%) of the Salary based upon attainment of objectives identified in a business plan for Employer adopted by the Board of Employer. At its sole discretion the Board of Directors of Employer may develop such other incentive compensation arrangements, including but not limited to additional bonus incentives, as may be determined to be appropriate for the conduct of Employer's business and Employee's duties in connection therewith. (c) All payments to Employee pursuant to this Agreement will be subject to deduction and withholding authorized or required by applicable law. Employee shall also be paid amounts as shall equal the federal and state, if applicable, income taxes (i.e., gross-up for income taxes) which will be payable by Employee relating to the reimbursement of expenses as set forth in Section 4 hereof. 4. Employee Benefits; Reimbursement of Expenses. During the term of this Agreement, Employer shall provide such fringe benefits, including paid sick leave, paid holidays, participation in health, dental, and life insurance plans, and other employee benefit plans which are regularly maintained by Employer for its senior executive officers in accordance with the policies of Employer in effect from time to time. Notwithstanding the foregoing, Employee shall be entitled to a minimum of four (4) weeks of paid vacation each year of this Agreement. In addition, during the term of this Agreement, Employer shall provide an automobile to Employee while he is in Dallas, Texas and reimburse Employee for the cost of liability and collision insurance on such automobile and all gasoline purchases. Employer will also reimburse Employee for his travel , entertainment, and other business expenses incurred in connection with his employment under this Agreement in accordance with the policies of Employer in effect from time to time. 5. Confidentiality. (a) From the Effective Date of this Agreement and in consideration for the promises made by Employee herein, including promises made by Employee in Section 6 below, Employer promises and agrees to provide Employee certain confidential information consistent with the job duties of an individual in his position including, without limitation, customer, supplier, product and distributor lists, trade secrets, plans, manufacturing techniques, sales, marketing and expansion strategies, financial records (including business plans, financial statements, etc.), and technology and processes of Employer and/or its affiliates, as they may exist from time to time, and information concerning the products, services, production, development, technology and all technical information, procurement and sales activities and procedures, promotion and pricing techniques and credit and financial data concerning customers of, and suppliers to, Employer and/or its affiliates (collectively ``Confidential Information ''). In consideration for Employer's promises herein, Employee acknowledges and agrees that all Confidential Information previously provided or known to Employee in the course of his employment with Employer and all such Confidential Information made available and provided to Employee pursuant to the terms of this Agreement will be received in strict confidence and will be used only for the purposes of performing his duties pursuant to this Agreement and that no such Confidential Information will otherwise be used or disclosed by Employee during or after the term of this Agreement without the prior written consent of Employer. Employee acknowledges and agrees that upon termination of Employee's employment hereunder for any reason, Employee will leave and/or return all Confidential Information and other documents, records, notebooks, customer lists, mailing lists, business proposals, contracts, agreements, and other repositories containing information concerning Employer or its financial condition or business (including all copies thereof) in Employee's possession, whether prepared by Employee or others, will remain with or be returned to Employer. Notwithstanding the foregoing, this Section shall be inoperative as to any portion of the Confidential Information which (i) is or becomes generally available to the public other than as a result of a disclosure by Employee or (ii) becomes available to Employee on a non-confidential basis and not in contravention of Employer's rights or applicable law from a source (other than Employer) which Employee reasonably believes is entitled to possess and disclose it. (b) Employee acknowledges and agrees that all manuals, drawings, blueprints, letters, notes, notebooks, financial records (including, without limitation, budgets, business plans and financial statements), reports, computers, computer equipment, computer disks, hard drives, electronic storage devices, books, procedures, forms, documents, records or paper, or copies thereof, pertaining to the operations or business of Employer made or received by Employee or made known to him in any way in connection with his employment activities or otherwise and any other Confidential Information are and will be the exclusive property of Employer. Employee agrees not to copy or remove any of the above from the premises and custody of Employer, or disclose the contents thereof to any other person or entity, except in the ordinary course of business consistent with Employer's policies. Employee acknowledges that all such papers and records will at all times be subject to the control of Employer, and Employee agrees to surrender the same upon request of Employer, and will surrender such no later than any termination or expiration of this Agreement. 6. Noncompetition. Employee covenants and agrees that, during the period Employee is employed by Employer, and if Employee's employment is terminated pursuant to Section 8(a) or Employee resigns for any reason (other than as a result of a Constructive Discharge), for a period of one year thereafter, Employee will not directly or indirectly compete with Employer in the United States . For the purposes of this Section 6, the following terms shall have the meanings indicated below: (a) The term "compete" shall mean, with respect to the business of Employer, engaging in or attempting to engage in the direct mail marketing with the use of a catalog of sports related equipment to institutional customers or any other business which generates more than 10% of Employer's revenues at the time of termination, either alone or with any individual, partnership, corporation, or association. (b) The words "directly or indirectly" as they modify the word "compete" shall mean: (i) acting as an agent, representative, consultant, officer, director, or employee of any entity or enterprise which is competing (as defined in this Section 6) with the business of Employer; (ii) participating in any such competing entity or enterprise as an owner, partner, limited partner, joint venturer, creditor, or stockholder (except as a stockholder holding less than a five percent (5%) interest in a corporation whose shares are actively traded on a regional or national securities exchange or in the over-the-counter market); (iii) communicating to any such competing entity or enterprise any competitive non-public information concerning any past, present, or identified prospective client or customer of, or supplier to, Employer; (iv) soliciting the customers, distributors, dealers, or independent sales persons of Employer or its Affiliates (as defined below) as of Employee's termination date; or (v) recruiting, hiring, or assisting others in recruiting or hiring (collectively referred to as "Recruiting Activity") any person who is, or within the 12-month period immediately preceding the date of any such Recruiting Activity was, an employee of Employer or its Affiliates. For the purposes of this Agreement, the term "Affiliates" shall mean all subsidiaries of Employer and each entity in which Employer is an equity investor (or was an equity investor within the 12-month period preceding the date Affiliate status is determined) which controls, is controlled by, or under common control with Employer. (c) Employee understands and agrees that the scope of this covenant by Employee contained in this Section is reasonable as to time, area, and persons and is necessary to protect the proprietary and legitimate business interest of the Employer, and but for such covenant by Employee the Employer would not have agreed to enter into the transactions contemplated by this Agreement. Employee agrees that this covenant is reasonable in light of the compensation and other consideration Employer has agreed to provide Employee pursuant to this Agreement. It is further agreed that such covenant will be regarded as divisible and will be operative as to time, area, and persons to the extent that it may be so operative. 7. Injunctive Relief. If Employee breaches any of the provisions of Sections 5 or 6 hereof, Employer shall be entitled to specific performance, injunctive relief, or such other legal and/or equitable remedies as may be appropriate. Nothing contained herein shall be construed as prohibiting Employer from pursuing any other remedies available to it for such breach of any of the terms and provisions of this Agreement, nor limiting its right to the recovery of damages from Employee or any other person or entity for the breach or violation of any provision of this Agreement, whether such remedy be at law or in equity. 8. Termination. (a) Employer may terminate Employee's employment for Cause (as defined herein). Notwithstanding the foregoing and with respect to Section 8(g)(iv), Employer may terminate Employee's employment for Cause only if such Cause is not cured within 10 days following Employee's receipt of written notice thereof by Employer to Employee. If Employee's employment is terminated for Cause, Employee will be paid Salary to the date of such termination notice and shall be paid Salary for all accrued but unused personal, vacation, and sick days (less all amounts required to be withheld or deducted therefrom and all undisputed amounts owed or due by Employee to Employer). (b) If Employer terminates Employee other than for Cause or in the event of a Constructive Discharge of Employee (as hereinafter defined) during the term hereof, Employer shall (i) pay Employee his Salary through the stated term of this Agreement (Employee shall also receive all accrued but unused personal, vacation, and sick days and less all amounts required to be withheld or deducted therefrom and all amounts owed or due by Employee to Employer), and (ii) continue to provide Employee, during the period through which his Salary will be paid, health insurance with coverage no less than the coverage available during such period to Employer's senior executive officers, and Employer shall have no other obligation hereunder. (c) If Employee terminates his employment with Employer other than as a result of a Constructive Discharge and, if during the term of this Agreement set forth in Section 1 Employer has not materially breached any provision of this Agreement, Employee will be paid only Salary as has been earned to the date of termination and for all accrued but unused personal, vacation, and sick days (less all amounts required to be withheld or deducted therefrom and all amounts owed or due by Employee to Employer). (d) If no other provision in this Section 8 is applicable and if this Agreement terminates pursuant to the expiration of the term set forth in Section 1, Employee will be paid only Salary as has been earned to the date of termination and for all accrued but unused personal, vacation, and sick days (less all amounts required to be withheld or deducted therefrom and all amounts owed or due by Employee to Employer). (e) If Employee dies or is disabled, as determined by his physician, so that he is unable to work for six consecutive months during the term hereof, this Agreement will terminate, and Employer will (i) pay to the estate of Employee, or Employee, as the case may be, the Salary which would otherwise be payable to Employee up to the end of the month in which his death or such six-month period occurs and for all accrued but unused personal, vacation, and sick days (less all amounts required to be withheld or deducted therefrom and all amounts owed or due by Employee to Employer), and (ii) provide to Employee's legal dependents (including his spouse) and to Employee, in the case of such a disability, for a period of at least two years after Employee's death or disability and at no charge to such dependents or Employee, health and accident insurance with coverage no less than the coverage available during such time to Employer's senior executive officers. Notwithstanding the foregoing, Employer's obligations under this Section shall be reduced by the amounts obtained by Employee under any applicable disability insurance policy. (f) If this Agreement or the employment of Employee is terminated, except as otherwise specifically set forth herein, Employee will not be obligated to mitigate his damages nor the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and the acceptance of employment elsewhere after termination shall in no way reduce the amount of Salary due hereunder. (g) For the purposes of this Agreement, "Cause" shall mean that Employee shall have committed: (i) an intentional material act of fraud or embezzlement in connection with his duties or in the course of his employment with Employer; (ii) an intentional wrongful material damage to property of Employer; (iii) an intentional wrongful disclosure of material secret processes or material confidential information of Employer; or (iv) an intentional and continued failure to perform his duties as Chairman of the Board and Chief Executive Officer (other than any such failure resulting from incapacity due to physical injury or illness or mental illness as such is provided for in Section 9). For purposes of this Agreement, no act or failure to act, on the part of Employee, shall be deemed ``intentional'' unless done, or omitted to be done, by the Employee in bad faith and without reasonable belief that his action or omission was in the best interest of the Employer. (h) For the purposes of this Agreement, "Constructive Discharge" means a change in office, title, or position from that reasonably associated with being a Chief Executive Officer and Chairman of the Board, other than a promotion; a change in reporting of Employee to any person other than the Board of Directors of Employer; a reduced Salary; a material diminution in responsibilities; or any other material breach of this Agreement by Employer. (i) The provisions of this Section 8 shall survive the termination of this Agreement. 9. Disability. If Employee is unable to perform his assigned duties by reason of illness, injury, or incapacity (other than as a result of abuse of drugs, alcohol, or other substances), he will be entitled to receive such disability benefits as are provided by Employer's disability policies for its other senior executive officers. 10. Binding Nature. (a) Employer will require any successor and any corporation or other legal person which is in control of such successor (as "control" is defined in Regulation 230.405 or any successor rule or regulation promulgated under the Securities Act of 1933, as amended) to all or substantially all of the business and/or assets of Employer (by purchase, merger, consolidation, or otherwise), by agreement in form and substance reasonably satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform it if no such succession had taken place. Failure of Employer to obtain such agreement prior to the effectiveness of any such succession will be a material breach of this Agreement by Employer. Notwithstanding the foregoing, any such assumption shall not, in any way, affect or limit the liability of the Employer under the terms of this Agreement or release the Employer from any obligations hereunder. As used in this Agreement, "Employer" shall mean Employer as hereinbefore defined and any successor to its business and/or all or part of its assets as aforesaid which executes and delivers the agreement provided for in this Section 10 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement and all the rights of Employee under this Agreement will inure to the benefit of and will be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. (c) Except as set forth above, neither this Agreement, nor any of the rights, interests or obligations hereunder shall be assigned by either party hereto, whether by operation of law or otherwise, without the prior written consent of the other party, nor is this Agreement intended to confer upon any other person other than the parties hereto any rights or remedies hereunder. 11 . Severability. If any provision of this Agreement is declared or found to be illegal, unenforceable, or void, in whole or in part, then both parties will be relieved of all obligations arising under such provision, but only to the extent of the portion of the provision which is illegal, unenforceable, or void. The intent and agreement of the parties to this Agreement is that this Agreement will be deemed amended by modifying and/or reforming any such illegal, unenforceable, or void provision to the extent necessary to make it legal and enforceable while preserving its intent, or if such is not possible, by substituting therefor another provision which is legal and enforceable and achieves the same objectives. Notwithstanding the foregoing, if the remainder of this Agreement will not be affected by such declaration or finding and is capable of substantial performance, then each provision not so affected will be enforced to the extent permitted by law. 12 . Waiver. No delay or omission by either party to this Agreement to exercise any right or power under this Agreement will impair such right or power or be construed as a waiver thereof. A waiver by either of the parties to this Agreement of any of the covenants to be performed by the other or any breach thereof will not be construed to be a waiver of any succeeding breach thereof or of any other covenant contained in this Agreement. All remedies provided for in this Agreement will be cumulative and in addition to and not in lieu of any other remedies available to either party at law, in equity, or otherwise. 13 . Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of Texas without giving effect to any principle of conflict-of-laws which would require the application of the law of any other jurisdiction. All parties hereto hereby irrevocably submit to the nonexclusive jurisdiction of the state and federal courts of the State of Texas and agree and consent that service of process may be made upon it in any proceeding arising out of this Agreement by service of process as provided by Texas law. All parties hereto agree that the venue for any and all suits, actions or proceedings arising out of or relating to this Agreement shall be brought solely in a Court of competent jurisdiction sitting in Dallas, Dallas County, Texas. All parties hereto hereby irrevocably waive, to the fullest extent permitted by law, any objection which such party may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement brought in the District Court of Dallas County, State of Texas, or in the United States District Court for the Northern District of Texas, and hereby further irrevocably waive any claims that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. 14 . Notices. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to Employee: Geoffrey P. Jurick 20 Salisbury Road Apt. A 1026 Kowloon, TST, Hong Kong If to Employer: Sport Supply Group, Inc. Attention: President 1901 Diplomat Drive Farmers Branch, Texas 75234 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 15 . Attorneys' Fees. If any arbitration or civil action, whether at law or in equity, is necessary to enforce or interpret any of the terms of this Agreement, the prevailing party will be entitled to reasonable attorneys' fees, court costs, and other reasonable expenses of litigation, in addition to any other relief to which such party may be entitled. 16 . Arbitration. Any dispute arising under this Agreement shall be submitted to arbitration in Dallas, Texas, in accordance with the rules of the American Arbitration Association. The decision of the arbitrator(s) will be binding, conclusive, and nonappealable. 17 . Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 18 . Entire Agreement. This Agreement constitutes the entire agreement between the parties to this Agreement with respect to the subject matter of this Agreement and there are no understandings or agreements relative to this Agreement which are not fully expressed in this Agreement. All prior agreements between the parties with respect to the subject matter of this Agreement, whether oral or written, are expressly superseded by this Agreement. No change, waiver, or discharge of this Agreement will be valid unless in writing and signed by the party against which such change, waiver, or discharge is to be enforced. In addition, the parties hereto expressly acknowledge and agree that no other agreement nor any breach of or default under any other agreement shall have any effect on the rights and obligations of the parties hereto, including, without limitation, under any employment or other agreement between Employee and Emerson. IN WITNESS WHEREOF, the parties of this Agreement have executed and delivered this Agreement on the date first above written. EMPLOYER: SPORT SUPPLY GROUP, INC. By: /s/ Peter S. Blumenfeld Peter S. Blumenfeld, President and Chief Operating Officer EMPLOYEE: /s/ Geoffrey P. Jurick Geoffrey P. Jurick EX-11 3 EXHIBIT 11 Earnings Per Common and Common Equivalent Share Adjusted net earnings and adjusted number of common shares used in the computation of net earnings per common share were determined as follows : Eleven Months Ended September 26, 1997 Full Adjusted Net Earnings Primary Dilution (1) Net earnings $ 2,000 $ 2,000 Add: reduction in interest expense, net of income taxes -- -- Adjusted net earnings $ 2,000 $ 2,000 Adjusted Number of Common Shares Weighted Average Common Shares Outstanding 8,146,014 8,146,014 Incremental shares for assumed exercise of outstanding stock options and warrants 5,400 95,425 Adjusted number of common shares 8,151,41 8,241,439 Net loss per common share $ 0.00 $ 0.00
NOTE (1) These calculations are submitted in accordance with: Regulation S-K Item 601(b)(11) although the calculations are not required pursuant to Paragraph 40 of APB Opinion No.15 because the effects are less than 3%. EX-10.31.1 4 October 18, 1997 Mr. Geoffrey P. Jurick Emerson Radio Corp. Nine Entin Road Parsippany, New Jersey 07054 Dear Mr. Jurick: The purpose of this letter is to memorialize the agreement between Sport Supply Group, Inc. ("SSG") and Emerson Radio Corp. ("Emerson") to delete Section 2.2 of that certain Management Services Agreement dated July 1, 1997 to be effective as of March 7, 1997 by and between SSG and Emerson (the "Services Agreement"). The parties hereto agree that, effective as of October 18, 1997, SSG will begin paying Geoffrey P. Jurick directly as an employee of SSG and will cease paying Emerson $20,833.33 per month, as contemplated by the Services Agreement. Consequently, Section 2.2 of the Services Agreement is deleted in its entirety as of October 18, 1997 and shall be of no further force or effect. If the foregoing sets forth your understanding with respect to this matter, please sign this letter in the space provided below and return such copy to the undersigned. SPORT SUPPLY GROUP, INC. /s/ Peter S. Blumenfeld Peter S. Blumenfeld President and Chief Operating Officer ACCEPTED AND AGREED TO this 18th day of October, 1997. EMERSON RADIO CORP. /s/ Geoffrey P. Jurick Geoffrey P. Jurick Chairman of the Board and Chief Executive Officer cc: John P. Walker Elizabeth Calianese Jennifer E. Thomas EX-23.1 5 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement Form S-3 No. 33-71574 of Sport Supply Group, Inc. and in the related Prospectus and in the Registration Statements on Form S-8 No. 33-42056, 33-48514, 33-64470, 33-80028, 333-27191, and 333-27193 of our report dated November 11, 1997, with respect to the consolidated financial statements of Sport Supply Group, Inc. included in this Form 10-K for the eleven month period ended Septmber 26, 1997. ERNST & YOUNG LLP Dallas, Texas November 21, 1997 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 29, 1997, included in this Form 10-K into the Company's previously filed Registration Statements on Form S-8, File Nos. 33-42056, 33-48514, 33-64470 and 33-80028, and Registration Statements on Form S3, File Nos. 33-71574, 33-76900 and 33-85516. ARTHUR ANDERSEN LLP Dallas, Texas November 21, 1997 EX-27.1 6
5 11-MOS SEP-26-1997 SEP-26-1997 602,779 0 16,370,822 (797,000) 12,284,425 31,114,118 11,970,105 (6,638,319) 50,484,097 7,108,597 0 0 0 91,588 38,865,731 50,484,097 79,109,063 79,109,063 47,705,408 27,177,428 82,523 0 757,181 3,551,569 975,569 2,576,000 (2,574,000) 0 0 2,000 0.00 0.00
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